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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 29, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________ .
0-21488
(Commission File Number)
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CATALYST SEMICONDUCTOR, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 77-0083129
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 BORREGAS AVENUE
SUNNYVALE, CALIFORNIA 94089
(Address of Registrant's principal executive offices) (Zip Code)
(408) 542-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of
August 31, 2001 was 17,818,053.
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CATALYST SEMICONDUCTOR, INC.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................. 3
Unaudited Condensed Consolidated Balance Sheets
at July 31, 2001 and April 30, 2001................................ 3
Unaudited Condensed Consolidated Statements of Income for the three
month periods ended July 31, 2001 and 2000......................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the
three month periods ended July 31, 2001 and 2000..................... 5
Notes to Unaudited Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................. 22
Item 6. Exhibits and Reports on Form 8-K..................................... 22
SIGNATURES...................................................................... 23
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JULY 31, APRIL 30,
2001 2001
---------- ----------
ASSETS
Current assets:
Cash ...................................................... $ 28,474 $ 30,534
Accounts receivable, net .................................. 9,914 10,811
Inventories ............................................... 9,038 8,349
Other assets .............................................. 894 895
---------- ----------
Total current assets .................................. 48,320 50,589
Property and equipment, net .................................. 2,503 2,589
---------- ----------
Total assets .......................................... $ 50,823 $ 53,178
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ............................................ $ --- $ 2,025
Accounts payable .......................................... 2,966 3,970
Accounts payable--related parties ......................... 705 291
Accrued expenses .......................................... 5,767 5,749
Deferred gross profit on shipments to distributors ........ 1,801 1,972
Lease obligations ......................................... 19 58
---------- ----------
Total liabilities ..................................... 11,258 14,065
Stockholders' equity ......................................... 39,565 39,113
---------- ----------
Total liabilities and stockholders' equity ............ $ 50,823 $ 53,178
========== ==========
See accompanying notes to the unaudited condensed consolidated financial
statements.
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CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended
------------------------
July 31, July 31,
2001 2000
--------- ---------
Net revenues ........................... $ 10,516 $ 25,441
Cost of revenues ....................... 6,478 12,386
--------- ---------
Gross profit ........................... 4,038 13,055
Research and development ............... 1,065 1,154
Selling, general and administrative .... 2,817 3,288
--------- ---------
Income from operations ................. 156 8,613
Interest income, net ................... 264 30
--------- ---------
Income before income taxes ............. 420 8,643
Income tax provision ................... 49 450
--------- ---------
Net income ............................. $ 371 $ 8,193
========= =========
Net income per share:
Basic ............................... $ 0.02 $ 0.51
========= =========
Diluted ............................. $ 0.02 $ 0.40
========= =========
Weighted average common shares:
Basic ............................... 17,654 16,166
========= =========
Diluted ............................. 20,073 20,537
========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements.
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CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
-------------------------
July 31, July 31,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 371 $ 8,193
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation of property and equipment ................................ 267 233
Provision for excess and obsolete inventory ........................... (16) 31
Changes in assets and liabilities:
Accounts receivable ................................................ 897 (2,814)
Inventories ........................................................ (673) (859)
Other assets ....................................................... 1 40
Accounts payable (including related parties) ....................... (590) 3,363
Accrued expenses ................................................... 59 969
Deferred gross profit on shipments to distributors ................. (171) 1,122
--------- ---------
Net cash provided by operating activities ....................... 145 10,278
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for the acquisition of fixed assets .......................... (181) (897)
--------- ---------
Cash used in investing activities ............................... (181) (897)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issuances ................................................. 40 194
Payment of line of credit .............................................. (2,025) (3)
Payment of long-term debt and capital lease obligations ................ (39) (48)
--------- ---------
Net cash provided by (used in) financing activities ............. (2,024) 143
--------- ---------
Net increase (decrease) in cash and cash equivalents ...................... (2,060) 9,524
Cash at beginning of the period ........................................... 30,534 6,205
--------- ---------
Cash at end of the period ................................................. $ 28,474 $ 15,729
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SUPPLEMENTAL NON-CASH INFORMATION:
Deferred compensation on exercised stock options ....................... $ 41 $ 199
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid .......................................................... $ 29 $ 99
========= =========
Income taxes paid ...................................................... $ 50 $ 375
========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements.
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CATALYST SEMICONDUCTOR, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of the management of Catalyst Semiconductor, Inc.
(Company), the unaudited condensed consolidated interim financial statements
included herein have been prepared on the same basis as the April 30, 2001
audited consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary to fairly state the
information set forth herein. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (SEC), but omit
certain information and footnote disclosures necessary to present the statements
in accordance with accounting principles generally accepted in the United
States. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended April 30, 2001. The results of operations for the three month
period ended July 31, 2001 are not necessarily indicative of the results to be
expected for the entire year.
The Company's business is highly cyclical and has been subject to
significant downturns at various times which have been characterized by reduced
product demand, production overcapacity and significant erosion of average
selling prices. Throughout fiscal 1998 and 1999, the market for certain FLASH
and EEPROM devices, which comprise the majority of Catalyst's business,
experienced an excess market supply relative to demand which resulted in a
significant downward trend in prices. During fiscal 2000, the semiconductor
market rebounded from a cyclical decline which had a favorable impact on the
Company's revenues and gross margins into fiscal 2001 through the quarter ended
October 2000. However, during the three fiscal quarters from November 2000
through July 2001, the market for the Company's products has become more
competitive as a result of the increased availability of products when demand
was decreasing. The Company could experience other such downward trends in
product pricing in the future which could further adversely affect the Company's
operating results.
The Company's fiscal year and its first, second and third fiscal
quarters end on the Sunday closest to April 30, July 31, October 31 and January
31, respectively. For purposes of financial statement presentation, the year end
date is expressed as April 30 and the quarter end dates are expressed as July
31, October 31 or January 31.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Through July 31, 2001, the Company has not had any items
of comprehensive income other than net income.
NOTE 2 - INCOME PER SHARE:
Basic net income per share is computed by dividing net income available
to common shareholders (numerator) by the weighted average number of common
shares outstanding (denominator) during the period and excludes the dilutive
effect of stock options. Diluted net income per share gives effect to all
dilutive potential common shares outstanding during a period. In computing
diluted net income per share, the average stock price for the period is used in
determining the number of shares assumed to be purchased from exercise of stock
options.
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A reconciliation of the numerators and denominators of the basic and
diluted income per share is presented below:
Three Months Ended
--------------------------
July 31, July 31,
2001 2000
---------- ----------
Net income ....................................... $ 371 $ 8,193
========== ==========
Shares calculation:
Weighted average shares outstanding--basic .... 17,654 16,166
Effect of dilutive securities:
Stock options ................................. 2,419 4,371
---------- ----------
Weighted average shares outstanding--diluted ..... 20,073 20,537
========== ==========
Net income per share:
Basic ......................................... $ 0.02 $ 0.51
========== ==========
Diluted ....................................... $ 0.02 $ 0.40
========== ==========
Options to purchase 1,700,999 shares of common stock at prices from
$4.63 to $9.50 per share outstanding during the quarter ended July 31, 2001 and
options to purchase 100,000 shares of common stock at prices from $8.22 to $9.50
per share outstanding during the quarter ended July 31, 2000 were not included
in the computation of diluted income per share because the inclusion of such
options would have been antidilutive.
NOTE 3 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
July 31, April 30,
2001 2001
--------- ---------
Accounts receivable:
Accounts receivable ................................ $ 10,664 $ 11,561
Less: Allowance for doubtful accounts .............. (750) (750)
--------- ---------
$ 9,914 $ 10,811
========= =========
Inventories:
Work-in-process .................................... $ 6,422 $ 6,113
Finished goods ..................................... 2,616 2,236
--------- ---------
$ 9,038 $ 8,349
========= =========
Property and equipment:
Engineering and test equipment ..................... $ 9,777 $ 9,658
Computer hardware and software ..................... 3,631 3,597
Furniture and office equipment ..................... 1,372 1,344
--------- ---------
14,780 14,599
Less: accumulated depreciation and amortization .... (12,277) (12,010)
--------- ---------
$ 2,503 $ 2,589
========= =========
Accrued expenses:
Accrued income taxes ............................... $ 2,082 $ 2,083
Accrued employee compensation ...................... 1,439 1,612
Other .............................................. 2,246 2,054
--------- ---------
$ 5,767 $ 5,749
========= =========
NOTE 4 - LINE OF CREDIT:
As of April 30, 2001, the Company had approximately $2.0 million of secured
loans owed to a bank. As of the same date, the Company had $2.0 million cash
deposited at the same bank in an interest bearing account to serve as
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collateral. As of April 30, 2001, under the terms of its borrowing agreement,
the Company was eligible to borrow approximately $3.0 million. Also, under the
terms of the borrowing agreement, the Company could borrow the lesser of $5.0
million or an amount determined by a formula applied to eligible accounts
receivable. Amounts borrowed under the borrowing agreement were secured by
accounts receivable and were subject to compliance with loan covenants. The
borrowing agreement bore interest at a variable rate equal to the bank's prime
lending rate (7.5% at April 30, 2001) plus 2.5%. On June 30, 2001, the Company
repaid the outstanding balance and cancelled the agreement.
NOTE 5 - 1998 SPECIAL EQUITY INCENTIVE PLAN:
In December 1998, the Company adopted an additional stock option plan
entitled the Special Equity Incentive Plan (Special Option Plan) for incentive
stock options and non-statutory stock options for certain directors, officers
and consultants of the Company. A total of 3.5 million shares of Common Stock
have been reserved for issuance under the Special Option Plan. Options granted
under the Special Option Plan are for periods not to exceed ten years. Options
generally vest over four year periods. During fiscal 1999, options totaling 3.0
million shares were granted under the plan at a price of $0.125 per share when
the market was at $0.26 per share. As a result, an aggregate of $517,000 of
compensation expense will be recognized over the four year vesting period of the
options, $28,000 of which was recognized during the three month period ended
July 31, 2001. An aggregate of $341,000 of such expense has been recognized
through July 31, 2001 and $176,000 remains to be recognized in future periods.
NOTE 6 - CONTINGENCIES:
On April 17, 2001, Xicor Corporation (Xicor) filed a complaint against
the Company in the United States District Court for the District of Delaware.
The complaint alleges that certain products that the Company has recently
introduced infringe on a patent that Xicor obtained in 1988 relating to the
design of a certain type of digital potentiometer. Xicor is seeking royalties on
past revenues in addition to enjoining the Company from any further sales of the
products in question. The Company does not agree with such allegations and
intends to vigorously defend itself against the suit. Since the products
included in the suit have only recently been introduced, revenues from those
products have not been material.
In 1989, the Company entered into a license agreement with Philips
Export B.V. and U.S. Philips Corporation (Philips) to license technology
relating to their I(2)C bus technology. The Company has recently received a
communication from Philips suggesting that royalties may be due and owing on
past sales of certain products. The Company is currently investigating this
claim.
In the normal course of business, the Company receives notification of
threats of legal action in relation to claims of patent infringement by the
Company. Although no assurances can be given to the results of these claims,
management does not believe that any such results will have a material adverse
impact on the Company's financial condition, results of operations or cash
flows.
NOTE 7 - RELATED PARTY TRANSACTIONS:
During the fourth quarter of fiscal 2000, the Company began taking
delivery of wafers fabricated at X-fab Texas, Inc. (Xfab), a wholly owned
subsidiary of Elex NV, a Belgian holding company that owns 30.9% of the
outstanding shares of the Company. The wafers provided by Xfab supplement the
same designs fabricated at Oki Semiconductor in Japan, the Company's principal
wafer fab since 1985. The Company believes that the cost of such wafers is no
greater than comparable materials available from alternative foundry services.
During the three months ended July 31, 2001, the Company's purchases from Xfab
totaled $384,000. As of July 31, 2001, the total amount owed Xfab was $383,000.
Mr. Roland Duchatelet, the Chairman and CEO of Elex NV, serves as a member of
the Company's Board of Directors.
The Company has had an arrangement since 1995 to obtain engineering
services from Lxi Corporation, a California corporation (Lxi), a provider of
engineering services through Essex com SRL (Essex), its wholly owned subsidiary
in Romania. As of July 31, 2001, Essex employed the equivalent of approximately
11 full-time engineers to perform the services on behalf of Catalyst. The
services relate to key development projects of the Company including
development, design, layout and test program development services. Officers of
the Company, Messrs. Vanco, Voicu and Gay own approximately 91%, 3% and 1%,
respectively, of Lxi. The fees for such engineering
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services are on terms believed by the Company to be fair to the Company and no
less favorable to the Company than arms length commercial terms. During the
three months ended July 31, 2001 the Company recorded $200,000 of engineering
fees from Lxi for engineering design services. As of July 31, 2001 the total
amount owed to Lxi was $322,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements that are subject
to risks and uncertainties. For such statements, we desire to take advantage of
the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995 and of Section 21E of and Rule 3b-6 under the Securities Exchange Act of
1934. Such forward-looking statements include, without limitation, statements
regarding our expectations, intentions or future strategies and involve known
and unknown risks, uncertainties and other factors. All forward-looking
statements included in this report are based on information available to us on
the date of filing, and we assume no obligation to update such forward-looking
statements.
OVERVIEW
Catalyst Semiconductor, Inc. (Catalyst, us, we, our), incorporated
October 8, 1985, designs, develops and markets nonvolatile memory semiconductor
products including Serial and Parallel EEPROMs, Flash memory and Mixed Signal
devices. Revenues are derived from sales of semiconductor products designed by
us and manufactured by other companies.
Our business is highly cyclical and has been subject to significant
downturns at various times which have been characterized by reduced product
demand, production overcapacity, and significant erosion of average selling
prices. Throughout fiscal 1998 and fiscal 1999, the market for certain FLASH and
EEPROM devices, which comprise the majority of our business, experienced an
excess market supply relative to demand which resulted in a significant downward
trend in prices. During fiscal 2000 and the first half of fiscal 2001, we
reduced our manufacturing costs, increased the efficiency of our manufacturing
operations and the selling prices for certain of our products increased,
contributing to increased gross margin percentages. During the second half of
fiscal 2001 and the first quarter of fiscal 2002, we experienced cancellations
of orders by our customers, increased supplies of competitive products and
decreasing revenues. Although cancellations have diminished from the prior two
quarters, the results for the quarter ended July 31, 2001 reflect the continuing
competitive pressures on our revenues, gross margins and net profits. We could
experience increases in our manufacturing costs and further downward trends in
product pricing in the future which could adversely affect our operating
results.
RESULTS OF OPERATIONS
Revenues. Total revenues consist primarily of net product sales. A
substantial portion of net product sales has been made through independent
distributors. Revenue from product sales to original equipment manufacturers and
from sales to distributors who have no, or limited, product return rights and no
price protection rights, is recognized upon shipment net of allowances for
estimated returns. When distributors have rights to return products or price
protection rights, we defer revenue recognition until the distributor sells the
product to the end customer. Total revenues decreased 59% to $10.5 million for
the quarter ended July 31, 2001 from $25.4 million for the quarter ended July
31, 2000. The decrease is primarily attributable to a decrease in the number of
units shipped and, to a lesser degree, to a decrease in the average selling
price of our products. Total revenues of $10.5 million for the quarter ended
July 31, 2001 decreased by 39% from $17.2 million for the quarter ended April
30, 2001. The decrease is primarily attributable to a decrease in units shipped.
For the three months ended July 31, 2001, approximately 62% of our net product
shipments were to international customers compared with 60% of net product
shipments during fiscal 2001. All sales of our products are in US dollars,
minimizing the effects of currency fluctuations.
Gross Profit. Gross profit for the quarter ended July 31, 2001 was $4.0
million, or 38% of revenues, compared to a gross profit of $13.1 million, or 52%
of revenues, for the quarter ended July 31, 2000, a decrease of 69%. The
decrease in gross profit percentage is primarily due to decreased selling prices
in the market for our products and decreased unit sales. Gross profits of $4.0
million for the quarter ended July 31, 2001 decreased by 38% from $6.4 million
or 37% of revenues for the quarter ended April 30, 2001. The decrease is
primarily attributable to deteriorating market conditions for our products.
During fiscal 2001, we paid $10.0 million to our principal wafer supplier, Oki,
to obtain increased wafer supplies. Such payments were added to the cost of the
inventory acquired during that period and
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included in the cost of sales as the inventory is sold. As of April 30, 2001,
our inventory valuation included a portion of such costs to be charged to cost
of sales as the relevant inventory is sold. During the quarter ended July 31,
2001, we had a lower gross profit caused by our shipments of the more expensive
wafers purchased under the Oki agreement. We currently expect most of the
remaining inventory of the more expensive products to be charged to cost of
sales in the next quarter. It is our policy to fully reserve all inventory that
is not expected to be sold within a reasonable period of time following the
balance sheet date, generally within the ensuing twelve months. We pay certain
foreign manufacturing expenses in local currency, primarily Baht in Thailand and
Yen in Japan. Such expenses are not material to us and the majority are paid
within 30 days, minimizing the effects of currency fluctuations.
Research and Development. Research and development (R&D) expenses
consist principally of salaries for engineering, technical and support
personnel, depreciation of equipment, and the cost of wafers used to evaluate
new products and new versions of current products. R&D expenses decreased by 8%
to $1.1 million, or 10% of revenues, for the quarter ended July 31, 2001, from
$1.2 million, or 5% of revenues for the quarter ended July 31, 2000. The
decrease in R&D spending from the comparable quarter of the prior fiscal year is
primarily attributable to production work performed by engineering personnel.
R&D expenses decreased by 8% to $1.1 million, or 10% of revenues, for the
quarter ended July 31, 2001, from $1.2 million, or 7% of revenues for the
quarter ended April 30, 2001. The decrease in R&D spending from the previous
quarter is primarily attributable to production work performed by engineering
personnel.
Selling, General and Administrative. Selling, general and administrative
(SG&A) expenses consist principally of salaries for sales, marketing and
administrative personnel, commissions and promotional activities. SG&A expenses
decreased by 15% to $2.8 million, or 27% of revenues, for the quarter ended July
31, 2001, from $3.3 million, or 13% of revenues, for the quarter ended July 31,
2000. The decrease from last year is primarily attributable to decreased
expenses for sales and administrative personnel and decreased commission
expenses to outside representatives. SG&A expenses decreased by 24% to $2.8
million, or 27% of revenues, for the quarter ended July 31, 2001, from $3.7
million, or 22% of revenues, for the quarter ended April 30, 2001. The decrease
from the previous quarter is primarily attributable to decreased commission
expenses to outside representatives, decreased bad debt expenses and decreased
expenses for sales and administrative personnel.
Net Interest Income/Expense. Net interest income was $264,000 for the
quarter ended July 31, 2001, compared to net interest income of $30,000 for the
quarter ended July 31, 2000. The increase from a year ago is primarily related
to the interest earned on our increased cash balance and decreased average
outstanding borrowings. Net interest income of $264,000 for the quarter ended
July 31, 2001 decreased from $309,000 for the quarter ended April 30, 2001. The
decrease from the previous quarter is primarily due to lower interest rates paid
on our cash balance.
Income Tax Provision. We recorded a provision for income taxes of
$49,000 or 12% of income before income taxes for the quarter ended July 31,
2001, compared to a provision of $450,000 or 5% for the quarter ended July 31,
2000. The provision for income tax primarily represents the estimated
proportional share of income tax liability for the fiscal year after deductions
for available income tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $145,000 for the three months ended
July 31, 2001, which was due primarily to net income of $371,000, adjusted for
depreciation and amortization of $267,000 and a decrease in accounts payable and
other liabilities of $702,000 related to the decreased sales and manufacturing
activity. This was partially offset by a decrease in net accounts receivable of
$897,000 and an increase in inventories of $673,000 which were also related to
the decrease in sales activity. For the three month period ended July 31, 2000,
net cash of $10.3 million was provided by operations, principally by net income
of $8.2 million plus $3.4 million from the increase in accounts payable due to
the increasing manufacturing activity and $1.0 million from the increase in
accrued expenses and $1.1 million from the increase in deferred gross profit on
shipments to distributors. Such increase was partially offset by $2.8 million
used by the increase in accounts receivable due to the increased sales activity
and $0.9 million used for the increase in inventory.
Our investing activities used $181,000 during the three months ended
July 31, 2001 and were related primarily to the acquisition of equipment for
manufacturing activities. Cash used in investing activities for the three months
ended July 31, 2000 was $897,000 which was primarily related to the purchase of
equipment for manufacturing activities.
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Financing activities consumed $2.0 million during the three months ended
July 31, 2001, consisting primarily of the payoff of our bank credit line.
During the three months ended July 31, 2000, the cash provided by financing
activities was $143,000, principally from the proceeds of stock option
exercises.
On June 30, 2001, we paid off the $2.0 million balance due on the line
of credit with our bank and ended the agreement. As of July 31, 2001, we were
also indebted to other creditors in the amount of approximately $3.7 million.
This amount is comprised of approximately $2.9 million for wafers and inventory
processing and approximately $0.8 million for other goods and services.
Although management believes we have sufficient working capital
resources to continue our operations for at least the next twelve months, we may
decide to seek additional equity or debt financing to address our working
capital needs and to provide funding for capital expenditures. There can be no
assurances, however, that financing will be available on terms acceptable to us,
if at all.
CERTAIN RISKS THAT MAY AFFECT OUR FUTURE RESULTS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO MANY FACTORS AND ARE
DIFFICULT TO FORECAST.
Our operating results have historically been and in future quarters may
be adversely affected or otherwise fluctuate due to factors such as:
- fluctuations in customer demand for our products,
- the timing of new product introductions and significant orders of our
products,
- volatility in supply and demand affecting market prices generally (such as
the increases in supply of competitive products and significant declines in
average selling prices experienced by us in the quarter ended July 31,
2001, the two quarters ended April 30, 2001, and during the fiscal years
April 30, 1999 and 1998),
- increased expenses associated with new product introductions, process
changes and/or expanding our sales channels,
- gains or losses of significant customers,
- fluctuations in manufacturing yields,
- changes in our product mix,
- increases in wafer prices due to increased market demand,
- prices charged by our suppliers,
- foreign currency fluctuations, and
- general economic conditions.
We anticipate that a significant portion of our revenue will be derived from a
limited number of large orders, and we expect that the timing of receipt and
fulfillment of these orders will cause fluctuations which could be material to
our operating results, particularly on a quarterly basis.
Our quarterly revenue and operating results are difficult to forecast
due to the previously described factors. We base our expense levels, in
significant part, on our expectations as to future revenue and our expenses are
therefore relatively fixed in the short term. If our expected revenue levels
fall below our forecasts, as has occurred during the most recent three fiscal
quarters and during fiscal years ended April 30, 1999 and 1998, net income is
likely to be disproportionately adversely affected because a proportionately
smaller amount of our expenses vary with our revenue.
Our operating results may fall below the expectations of investors due
to the factors described above and could have a material adverse effect on the
market price of our Common Stock. Reductions in revenue expectations may also
require us to take additional reserves against inventory valuations based upon
the reduced likelihood that we will be able to liquidate our inventories within
a reasonable period of time at profitable prices. We may therefore experience
substantial period-to-period fluctuations in our operating results.
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THE SEMICONDUCTOR INDUSTRY IS HIGHLY CYCLICAL IN NATURE.
We operate in a highly cyclical industry that has been subject to
significant economic downturns often in connection with, or in anticipation of,
maturing product cycles and declines in general economic conditions. This type
of downturn occurred in calendar years 1997 and 1998 and again during 2001. We
currently face and in the future may face diminished product demand, accelerated
erosion of average selling prices and gross margins, and production overcapacity
during such downturns, which may last for more than a year. Accordingly, we may
experience substantial period to period fluctuations in future operating results
due to general semiconductor industry conditions, overall economic conditions or
other factors.
For example, we experienced accelerated erosion of average selling
prices caused by adverse industry-wide conditions during fiscal 1998 and
throughout calendar year 1999 and incurred substantial losses during that
period. During fiscal 2000, the semiconductor market rebounded from its cyclical
decline which had a favorable impact on both our revenues and our gross margins
into fiscal 2001 through the quarter ended October 2000. During each of the
fiscal quarters ended January 2001, April 2001 and July 2001, however, the
market for our products became more competitive as a result of increased
availability of products when demand was decreasing. Thus we anticipate
continued price and other competitive pressures to adversely affect our future
operating results similar to the adverse affects to our 1998 and 1999 operating
results.
Our continued success depends in large part on the continued growth of
various electronics industries that use semiconductors. The improved market
conditions we experienced in calendar year 1999 and the first ten months of
calendar year 2000 have declined significantly. During the latter half of the
fiscal year ended April 30, 2001 and in the first quarter of fiscal 2002, we
experienced decreases in orders from customers and found that lower selling
prices were necessary to remain competitive in the market. During the last two
months of calendar 2000 and the first seven months of calendar 2001, we
experienced decreases in the number of units sold and the unit selling prices,
which we believe to be indicative of a downturn in our industry. We expect that
trend to continue further into fiscal 2002. We attempt to identify changes in
market conditions as soon as possible; however, market dynamics make our
prediction of and timely reaction to such events difficult. Our business could
be harmed in the future by additional cyclical downturns in the semiconductor
industry or by slower growth by any of the markets served by our customers'
products.
OUR QUARTERLY OPERATING RESULTS ARE VARIABLE.
Our operating results vary from quarter to quarter. For example, our
operating results for the fiscal quarter ended July 31, 2001 would have resulted
in a profit before taxes of $0.2 million instead of a profit of $0.4 million if
they had not included $0.2 million profit from the sale of inventory previously
reserved. Additionally, our operating results for the fiscal year ended April
30, 2001 would have resulted in a profit before taxes of $27.9 million instead
of a profit of $29.9 million if they had not included $2.0 million profit from
the sale of inventory previously reserved and our operating results for fiscal
1999 would have resulted in a loss of $1.5 million instead of a profit of $0.2
million if they had not included $1.7 million of credits received from vendors
as a result of various negotiations. Further, our operating results in fiscal
1998 resulted in losses of $18.9 million. We experienced significant negative
cash flow from operations during fiscal 1998 through most of fiscal 1999. We may
not be able to generate revenue growth and any revenue growth that is achieved
may not be sustained. Our business, results of operations and financial
condition would be materially adversely affected if operating expenses increase
and are not subsequently followed by increased revenues. Although we have
reported profits for the ten most recent consecutive quarters, we may not be
able to sustain such profitability in the future.
IF OUR PRODUCTS FAIL TO KEEP PACE WITH THE RAPID TECHNOLOGICAL CHANGES IN THE
SEMICONDUCTOR INDUSTRY, WE COULD LOSE CUSTOMERS AND REVENUE.
Our product markets are characterized by rapidly changing technology and
product obsolescence. A key factor to our business success is the timely
introduction of new products at competitive price and performance levels. In
particular, our future success will depend on our ability to develop and
implement new design and process technologies which enable us to achieve higher
product densities and thereby reduce product costs. For example, most of our
products are currently designed and manufactured using a 0.8 micron CMOS EEPROM
process or a 0.6 micron Flash memory process. We may not be able to select and
develop new products and technologies and
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introduce them to the market in a timely manner and with acceptable fabrication
yields and production costs. Furthermore, our products may not achieve market
acceptance. Our failure to complete and introduce new products at competitive
price/performance levels could materially and adversely affect our business,
financial condition and operating results. Our business, financial condition and
results of operations could be materially adversely affected by delays in
developing new products, achievement of volume production of new products,
successful completion of technology transitions with acceptable yields and
reliability, or the lack of commercial acceptance of new products we introduce
to the market.
WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR THE SUPPLY OF WAFERS.
We do not manufacture the semiconductor wafers used for our products.
Oki Electric Industry, Co., Ltd. (Oki) in Japan has supplied wafers to us since
1987 and was our sole foundry source until the quarter ended April 30, 2000. At
this time, an additional foundry, Xfab, provides a limited number of products to
us and the volumes are considerably less than Oki currently provides. We do not
presently have a wafer supply agreement with Xfab and instead purchase wafers on
a purchase order and acceptance basis. Our almost exclusive reliance on these
independent foundries involves a number of risks, including:
- the risk of inadequate wafer supplies to meet our production needs,
- increased prices charged by those independent foundries,
- the unavailability of or interruption in access to required or more cost
effective process technologies,
- reduced control over delivery schedules,
- manufacturing yields and costs, and
- the risks associated with international operations more fully described
below.
We are not always able to obtain sufficient increased quantities of wafers from
Oki to fulfill some of the current customer demand. Although we have a wafer
purchase agreement with UMC for certain Flash products which runs through
February 2006, due to declining Flash bookings and other circumstances, we have
not ordered any wafers from UMC since December 1997.
On September 6, 2000, we announced an agreement with Oki that will
result in a significant increase in foundry capacity available to us for a one
year period that commenced in September 2000 in return for two payments totaling
$10.0 million. These payments were added to the cost of inventories purchased
during the ten month period ended March 2001 and was reflected in our cost of
sales as it was sold or will be reflected in our future cost of sales as the
associated inventory is sold. As of April 30, 2001, our inventory valuation
included a portion of such costs to be charged to cost of sales as the relevant
inventory is sold. During the quarter ended July 31, 2001, we had a lower gross
profit caused by our shipments of the more expensive wafers purchased under the
Oki agreement. We currently expect most of the remaining inventory of the more
expensive products to be included in our cost of sales in the quarter ending
October 31, 2001. If market conditions were to deteriorate significantly before
this inventory is sold, we could be expensing a portion of such payments during
a period in which the selling price of that product has decreased. We would
experience an increase to cost of sales, decreased gross profits and decreased
net income under those conditions.
To address our wafer supply concerns, we plan to continue working on
expanding our primary foundry capability at Oki and our secondary foundry
capability with Xfab at that foundry's facility in Lubbock, Texas. Xfab is owned
by Elex NV which is a 30.9% shareholder of Catalyst. The addition of Xfab as a
second foundry source has enabled us to reduce the risks associated with the
sourcing and quantity of our wafer supply and thereby improve control over an
important component of our business; however, sufficient capacity may not be
available from Xfab. Additionally, Oki may not continue to provide sufficient
capacity in the future and that capacity may not be available from another
manufacturer at prices acceptable to us. Even if such capacity is available, the
qualification process and time required to make the foundry fully operational
for us could take many months, or longer, and be subject to other factors
described below. Our business, financial condition and results of operations
could be materially adversely effected by:
- the loss of Oki as a supplier,
- our inability to obtain additional capacity at Oki,
- our inability to qualify Xfab for additional products,
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- our ability to qualify other wafer manufacturers for desired foundry
capacity, or
- any other circumstances causing a significant interruption in our supply of
semiconductor wafers.
WE HAVE INCURRED SIGNIFICANT LOSSES OR EXPERIENCED SIGNIFICANT NEGATIVE CASH
FLOW FROM OPERATIONS DURING SEVERAL RECENT FISCAL YEARS.
We have incurred significant losses or experienced significant negative
cash flow from operations during several recent years. Such negative cash flow
during fiscal 1999 and 1998 significantly reduced our available capital. During
fiscal 1999, we successfully took steps to address and/or resolve issues
relating to our poor cash flow position. Although as of July 31, 2001, we had
cash on hand of $28.5 million, we may not continue to generate sufficient
revenue and profits to fund our operations. We have pursued many measures
designed to reduce expenses and conserve our cash in prior periods when we
experienced decreased or negative cash flow and we continue to monitor expenses
and to conserve our available cash. Furthermore, to the extent we suffer any
adverse effects to our revenues or margins because of delays in new product
introductions, price competition or other competitive factors, our cash position
and our business, operating results and financial condition will be adversely
affected.
We may seek additional equity or debt financing to address our working
capital needs and to provide funding for capital expenditures. Additional
funding may not be available at acceptable terms, if at all. If we are
successful in raising additional funds through the issuance of equity
securities, our existing stockholders could experience significant dilution or
the securities may have rights, preferences or privileges senior to those of our
Common Stock. If adequate funds are not available to us or are not available on
acceptable terms, further reductions in our operating expenses and capital
expenditures may be required to continue operations, either of which could have
a material adverse effect on our business, operating results and financial
condition.
THE TRADING PRICE OF OUR COMMON STOCK COULD BE SUBJECT TO WIDE FLUCTUATIONS IN
RESPONSE TO A VARIETY OF FACTORS.
Our stock price has been and may continue to be subject to significant
volatility. Any shortfall in revenues or earnings from levels expected or
projected by investors or others could have an immediate and significant adverse
effect on the trading price of our Common Stock in any given period. In
addition, the stock market in general has experienced extreme price and volume
fluctuations particularly affecting the market prices for many high technology
companies and small capitalization companies, and these fluctuations have often
been unrelated to the operating performance of the specific companies. These
broad fluctuations may adversely affect the market price for our Common Stock.
THE MANUFACTURE OF SEMICONDUCTOR WAFERS IS HIGHLY COMPLEX AND SENSITIVE TO A
WIDE VARIETY OF FACTORS THAT MAY ADVERSELY AFFECT OUR ABILITY TO GENERATE FUTURE
REVENUES.
The manufacture of semiconductor wafers for our products is highly
complex and sensitive to a wide variety of factors typical in the semiconductor
industry such as:
- lower than anticipated production yields experienced by outside wafer
foundries from time to time,
- incurring the time and expense to develop alternative foundry sources,
- experiencing substandard yield during the initial developmental stages of a
new process,
- inability to receive sufficient quantities of wafers at favorable prices on
a timely basis, especially in periods of increased demand,
- material disruptions in the supply of wafers as a result of low
manufacturing yield or other manufacturing problems, and
- production transition delays.
Our ability to generate future revenues may be adversely effected by such delays
and reductions that result in cancellation of customer orders. Thus, any of the
following events could delay shipments, result in the loss of customers and have
a material adverse effect on our business and operating results:
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- the loss of Oki as a supplier,
- the failure to further develop Xfab as a reliable foundry in an expeditious
and cost-effective manner,
- any prolonged inability to obtain adequate yields or deliveries from Oki or
Xfab, and
- any other circumstance that would require us to seek and qualify
alternative sources of supply of such products.
Although we are exploring and seeking to develop alternative wafer supply
sources such as Xfab, we may not be able to obtain such alternative sources nor
may we have adequate facilities available. Failure to have such supplies
available would have a material adverse effect on our business, financial
condition and results of operations.
WE PERIODICALLY EXPERIENCE AN OVERSUPPLY OR SHORTAGE OF WAFER FABRICATION
CAPACITY DUE TO VOLATILE DEMAND AND THUS WE RISK FORECASTING INCORRECTLY AND
PRODUCING EXCESS OR INSUFFICIENT INVENTORIES OF PARTICULAR PRODUCTS, WHICH MAY
ADVERSELY AFFECT OUR RESULTS.
We have previously experienced periodic oversupply or shortages of wafer
fabrication capacity due to the cyclical nature of the semiconductor industry.
Since we must order products and build inventory substantially in advance of
product shipments, we risk forecasting incorrectly and producing excess or
insufficient inventories of particular products. Demand for our products is
volatile and customers often place orders with short lead times. The ability of
our customers to reschedule or cancel orders without significant penalty could
adversely affect our liquidity, as we may be unable to adjust our purchases from
our wafer suppliers to match any customer changes and cancellations. Our
inventory may not be reduced by the fulfillment of customer orders and in the
future we may produce excess quantities of our products. To the extent we
produce excess inventories of particular products, our operating results could
be adversely affected by charges that we could recognize due to significant
reductions in demand for our products and/or rapid declines in the market value
of inventory, resulting in inventory writedowns or other related factors.
For example, during the last half of fiscal 1998, we recorded charges of
approximately $7.5 million due to the rapid decrease in demand for and the
selling prices of our products. Such adjustments amounted to less than $0.5
million in fiscal 1999 and were not material in fiscal 2000. Inventory reserve
adjustments in fiscal 2001 totaled $4.7 million which were offset by the release
of $2.0 million of inventory reserves taken in previous periods relating to
products that were sold during fiscal 2001. For the quarter ended July 2001, we
reserved inventory of $0.2 million which was offset by the release of $0.2
million of inventory reserves taken in previous periods relating to products
that were sold during the quarter.
In addition, in fiscal 1998 and to some extent during fiscal 2001, our
ability to forecast future demand and selling prices diminished. It is our
policy to fully reserve all inventory that we do not expect to be sold in a
reasonable period of time from the balance sheet date, generally within the
ensuing six months. As a result of a reduction in estimated demand for our
products, we provided additional reserves for excess quantities and obsolescence
for certain products, primarily our Flash and EEPROM products. The rapid erosion
of selling prices also left us with significant amounts of inventory with a
carrying value that exceeded its current selling price resulting in adjustments
to the carrying value of the inventory to the lower of cost or market value. We
may suffer similar reductions in values of our inventories in the future and we
may be unable to liquidate our inventory at acceptable prices.
OUR ABILITY TO OPERATE SUCCESSFULLY DEPENDS UPON THE CONTINUED SERVICE OF
CERTAIN KEY EMPLOYEES AND THE CONTINUED ABILITY TO ATTRACT AND RETAIN ADDITIONAL
HIGHLY QUALIFIED PERSONNEL.
Our ability to operate successfully will depend, to a large extent, upon
the continued service of certain key employees, and the continued ability to
attract and retain additional highly qualified personnel. Competition for such
personnel, particularly for highly skilled design, process and test engineers,
is intense and we may not be able to retain such personnel or attract other
highly qualified personnel. Our business, financial condition and results of
operations could be materially adversely effected by the loss of or failure to
attract and retain any such highly qualified personnel.
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WE MAY NOT BE ABLE TO SUSTAIN MARKET ACCEPTANCE FOR OUR FLASH MEMORY PRODUCTS.
A significant amount of our net revenues during fiscal 2001, 2000, 1999 and 1998
were derived from sales of Flash memory products. The market for Flash memory
products has been characterized by intense price competition, long production
cycles, inconsistent yields, competing technologies, rapidly declining average
selling prices, declines in gross margins and intense overall competition. Our
operating results in fiscal 1999 and 1998 were adversely affected by intense
price competition caused by increased supplies of products and other adverse
industry-wide conditions. Intel and other competitors (which include Advanced
Micro Devices, Atmel, Fujitsu, Hitachi, Micron, Mitsubishi, STMicroelectronics,
Sharp, Texas Instruments and Toshiba) are expected to further increase Flash
memory production. Most of these competitors are manufacturing and selling
devices with larger memories which are utilized in more recently developed
products such as digital cameras. Due to intense competition, limited
development resources and other factors, we have decided not to develop any of
the higher density Flash memory devices at this time. We may not be able to
sustain the market acceptance for our Flash memory products. We anticipate
continued price and other competitive pressures, which adversely affected fiscal
1998 and 1999 operating results, to adversely affect our future operating
results.
WE RELY ON OUTSIDE PROVIDERS OF ENGINEERING SERVICES AND THE LOSS OF THESE
SERVICES MAY CAUSE A SIGNIFICANT INTERRUPTION IN OUR SUPPLY OF ENGINEERING
RESOURCES.
To supplement our limited engineering staff dedicated to product
research and development activities, we utilize the services of various outside
semiconductor design services. The most significant is an arrangement we have
had since 1995 to obtain engineering services from Lxi Corporation (Lxi), of
which our officers Messrs. Vanco, Voicu and Gay own approximately 91%, 3% and
1%, respectively. Lxi provides these services through Essex com SRL (Essex), its
wholly owned subsidiary in Romania. The aggregate number of hours of engineering
services provided to us varies by quarter. As of July 31, 2001, Essex employed
the equivalent of approximately 11 full-time engineers to perform services
relating to key development projects including development, design, layout and
test program development services. Lxi may not continue to supply a sufficient
number of engineers to fulfill our requirements for outsourced engineering
services and we may not be able to procure engineering services from an
additional source in a timely manner. Our business, financial condition and
results of operations could be materially adversely effected by the loss of Lxi
as a supplier of outsourced engineering services and to a lesser extent the loss
of our other providers of outsourced engineering services, our inability to
obtain a comparable new supplier of such services, or any other circumstances
causing a significant interruption in our supply of engineering resources.
WE RELY ON THIRD-PARTY SUBCONTRACTORS TO SORT, ASSEMBLE, TEST AND SHIP OUR
PRODUCTS TO CUSTOMERS.
We outsource portions of our planning, finish work and test functions
for certain products, as well as our inventory management (shipping and
receiving) function to subcontractors who are primarily located in The
Philippines and Thailand. This reliance on third parties subjects us to risks
such as reduced control over delivery schedules and quality, a potential lack of
adequate capacity during periods when demand is high and potential increases in
product costs due to factors outside our control such as capacity shortages.
Such risks could lead to delays in product deliveries, lost sales and increased
costs which could harm our customer relationships and result in lower
profitability.
INTERNATIONAL SALES COMPRISE A SIGNIFICANT PORTION OF OUR PRODUCT SALES, WHICH
EXPOSES US TO FOREIGN POLITICAL AND ECONOMIC RISKS.
For the fiscal quarter ended July 31, 2001, international sales
comprised 62% of our product sales. Additionally, for fiscal 2001, 2000 and
1999, international sales accounted for approximately 60%, 61% and 45%,
respectively, of our product sales. The lower percentage in international sales
in 1999 was primarily attributable to the transition in Japan from Marubun
Corporation, our former distributor which resigned in fiscal 1998, to various
smaller alternative distributors that serve similar markets and our inability to
compete with the low selling prices in certain Far East markets. In fiscal 2000,
we were able to reenter certain Far East markets, contributing to the increased
international sales. We expect that international sales will continue to
represent a significant portion of our product sales in the future. However, our
international operations may be adversely affected by the following factors:
- fluctuations in exchange rates,
- imposition of government controls,
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- political and financial instability,
- trade restrictions,
- changes in regulatory requirements,
- difficulties in staffing international operations and
- longer payment cycles.
All sales are invoiced and paid in dollars, reducing our direct exposure to
currency fluctuations. Except for Yoshikawa Semiconductor in Japan, a provider
of wafer sorting services, and certain contract personnel costs and incidental
manufacturing supply purchases in Thailand, over 98% of our purchases are in US
dollars, minimizing any direct currency fluctuation risk. In addition, our
business is subject to other risks generally associated with doing business with
foreign subcontractors including, but not limited to foreign government
regulations and political and financial unrest which may cause disruptions or
delays in shipments to our customers or access to our inventories. Our business,
financial condition and results of operations may be materially adversely
effected by these or other factors related to our international operations.
INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED AVERAGE SELLING PRICES OF
OUR PRODUCTS, REDUCED SALES OF OUR PRODUCTS AND REDUCED GROSS MARGINS.
The semiconductor industry is intensely competitive and has been
characterized by rapid price erosion, declining gross margins, rapid
technological change, product obsolescence and heightened international
competition in many markets. Average selling prices in the semiconductor
industry generally, and for our products in particular, have decreased
significantly and rapidly over the life of each product. We expect that average
selling prices for our existing products will decline rapidly in the future and
that average selling prices for each new product will decline significantly over
the life of the product. Declines in average selling prices for our products, if
not offset by reductions in the cost of producing those products or by sales of
new products with higher gross margins, would decrease our overall gross
margins, could cause a negative adjustment to the valuation of our inventories
and could materially and adversely affect the our operating results.
We compete with major domestic and international semiconductor
companies, many of which have substantially greater financial, technical, sales,
marketing, production, distribution and other resources. We may not be able to
compete successfully in the future. Our more mature products, such as Serial and
Parallel EEPROM devices, compete on the basis of product performance, price and
customer service. We believe that we compete successfully with respect to each
of these factors; however price competition is significant and expected to
continue. Principal competitors with respect to our EEPROM products currently
include STMicroelectronics, Atmel, Microchip, Fairchild Semiconductor and Xicor,
all of which have substantially greater resources than us.
The market for Flash memory products has been characterized by long
production cycles, irregular yields, competing technologies and, particularly
since the first quarter of fiscal 1997, intense price competition resulting in
major reductions in average selling prices and corresponding reductions in
margins. Our Flash memory products compete on the basis of product performance,
price and customer service. However, given the development of higher
density/lower cost products and the intense price competition prevalent for
these products, we may not be able to compete successfully in the future against
its competitors on the bases of these or other competitive factors.
A RELATIVELY SMALL NUMBER OF CUSTOMERS HAVE ACCOUNTED FOR A SIGNIFICANT PORTION
OF OUR NET REVENUE IN THE PAST AND THE LOSS OF ONE OR MORE OF OUR CURRENT
CUSTOMERS, ADDITIONAL VOLUME PRICING ARRANGEMENTS OR AN EARLY TERMINATION OR
DELAY IN SHIPMENTS CAN AFFECT OUR RESULTS ADVERSELY.
A relatively small number of customers have accounted for a significant
portion of our net revenue in the past. For the quarter ended July 31, 2001, no
single customer represented more than ten percent of our revenues. For the
fiscal year ended April 30, 2001, shipments to Future Electronics, Inc.
represented 14% of our revenues. For the year ended April 30, 2000, shipments to
Memec (Asia Pacific) Ltd., a distributor in Asia, Future Electronics, Inc. and
Yosun Industrial Corp., resellers located in Taiwan, each represented more than
10% of our revenues (13%, 12% and 11% respectively). During fiscal 1999, no
customer represented more than 10% of our product revenue.
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In addition, we have experienced and may continue to experience lower
margins on sales to significant customers as a result of volume pricing
arrangements. We also do not typically enter into long-term contracts with our
customers and we cannot be certain as to future order levels from our customers.
When we do enter into a long-term contact, the contract is generally terminable
at the convenience of the customer and difficult to replace that revenue source
in the short-term upon cancellation.
Our business, operating results and financial condition could be
materially adversely effected by the loss of one or more of our current
customers, additional volume pricing arrangements, an early termination or delay
in shipments by one of our major customers.
WE HAVE BEEN UNABLE TO FULFILL ALL OUR CUSTOMERS' ORDERS ACCORDING TO THE
SCHEDULE ORIGINALLY REQUESTED DUE TO THE CONSTRAINTS IN OUR WAFER SUPPLY.
Due to the constraints in our wafer supply, from time to time we have
been unable to fulfill all our customers' orders according to the schedule
originally requested. Although we are striving to increase our supply of wafers
and communicate to our customers the scheduled delivery dates that we believe
that we can reasonably expect to meet, our customers may not accept the
alternative delivery date or may seek to cancel their outstanding orders. Our
operating results have historically been and in future quarters may be adversely
affected or otherwise fluctuate due to factors such as timing of new product
introductions and announcements by us and our competitors, fluctuations in
customer demand for our products, volatility in supply and demand affecting
market prices generally (such as the increases in supply of competitive products
and significant declines in average selling prices experienced by us in recent
fiscal years).
WE RELY UPON OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY AND MAY
RECEIVE NOTICES FROM TIME TO TIME THAT ALLEGE WE HAVE INFRINGED THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS.
In the semiconductor industry, companies place extensive reliance upon
their intellectual property and proprietary technology and it is typical for
companies to receive notices from time to time that allege infringement of
patents or other intellectual property rights of others. For example, we were
served with a Complaint alleging that we are infringing the intellectual
property rights of Xicor, Inc., a maker of nonvolatile memory products. We have
answered the Complaint denying the allegations. We may receive other notices
and/or become a party to proceedings alleging our infringement of intellectual
property rights in the future. Such claims, if successful, could require us to
pay royalties on previous sales of the products which are alleged to infringe.
Additionally, in such event, we may not be able to obtain any required licenses
of third party intellectual property rights or be able to obtain such licenses
on commercially reasonable terms. Failure to obtain such a license in any event
could require us to cease production of our products until we develop a
non-infringing design or process. Our business, financial condition and results
of operations could be materially adversely effected by the cost of litigation
of any such claim or resulting damage award. Please see Note 6 -"Contingencies"
contained in Item 1 of this Report on Form 10-Q and "Item 3. Legal Proceedings"
in our Report on Form 10-K for the fiscal year ended April 30, 2001 as filed
with the SEC on July 26, 2001 for additional information.
OUR SECURITIES ARE TRADED IN A LIMITED MARKET.
Our common stock was traded on the NASDAQ National Market from May 1993
until it was delisted in August 1998 for sustained trading below the minimum
level of $1.00 per share required by the NASDAQ stock exchange for continued
listing. Our stock was traded on the Over-The-Counter Bulletin Board market
until September 6, 2000 when we were re-listed on the NASDAQ SmallCap Market.
The over-the-counter market was generally less visible to investors and
therefore we were unable to meet the liquidity requirements of some major
commercial, institutional and private investors thus limiting the market for our
securities. We submitted a request on October 16, 2000 that our securities be
listed on the National Market, but due to general market and other conditions,
our stock closed below the $5.00 price per share which is required to qualify
for National Market listing and NASDAQ closed the listing application. We intend
to apply again for NASDAQ National Market listing if and when our shares trade
for an extended period above the $5.00 level, but we are unable to ascertain the
amount of time NASDAQ will take to consider such application, if NASDAQ will
reply favorably to such application or, if additional information is requested,
how much time and effort will be required on our part to adequately demonstrate
and verify our qualifications.
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OUR BACKLOG MAY NOT RESULT IN FUTURE REVENUE, WHICH MAY ADVERSELY AFFECT OUR
BUSINESS.
Due to possible customer changes in delivery schedules and cancellations
of orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period. A reduction of backlog during any
particular period or the failure of our backlog to result in future revenue
could harm our business.
WE DEPEND ON MANUFACTURERS' REPRESENTATIVES AND DISTRIBUTORS TO DISTRIBUTE OUR
PRODUCTS.
We market and distribute our products primarily through manufacturers'
representatives and independent distributors. Our distributors typically offer
competing products. The distribution channels have been characterized by rapid
change, including consolidations and financial difficulties. Our operating
results could be materially adversely effected by the loss of one or more
manufacturers' representatives or distributors, or the decision by one or more
distributors to reduce the number of our products offered by such distributors
or to carry the product lines of our competitors.
OUR OPERATIONS COULD BE HARMED BY EARTHQUAKES AND OTHER NATURAL DISASTERS.
Our corporate headquarters are located in California near major
earthquake faults. In addition, one of our foundries is located near fault
lines. Our operations could be harmed in the event of a major earthquake or
other natural disaster near our headquarters.
WE MAY NOT CARRY ADEQUATE INSURANCE COVERAGE TO PROTECT OUR BUSINESS FROM
CERTAIN TYPES OF LOSS.
Although we carry general comprehensive liability insurance and other
types of insurance coverages typical for most publicly-traded companies, the
insurance coverage we retain may not cover the specific damages that we incur.
For example, we do not carry earthquake insurance coverage and our commercial
coverage does not include protection for lost profits. Consequently, our
business may not be protected if we incur losses of a type for which we do not
retain coverage. Additionally, disputes with our carriers regarding policy
coverages might occur which could mean that we are unable to recover all of our
damages in the event of a loss. Such occurrences could negatively affect our
business, financial condition and results of operations.
A CHANGE OF CONTROL MAY BE DELAYED BY RESISTIVE MEASURES ADOPTED BY US.
Our Stockholder Rights Plan, which provides stockholders with certain
rights to acquire shares of Common Stock in the event a third party acquires
more than 15% of our stock, our Board's ability to issue "blank check" Preferred
Stock without stockholder approval and our staggered terms for our directors,
could have the effect of delaying or preventing a change in control of us.
GENERAL ECONOMIC CONDITIONS MAY REDUCE OUR REVENUES AND HARM OUR BUSINESS.
As our business grows, we have become increasingly subject to the risks
arising from adverse changes in domestic and global economic conditions. Because
of the recent worldwide economic slowdown, and in the United States in
particular, many industries are delaying or reducing technology purchases. The
impact of this slowdown on us is difficult to predict, but it may result in
reductions in purchases of our products by our customers, longer sales cycles
and increased price competition. As a result, if the current economic slowdown
continues or worsens, we may fall short of our revenue expectations for any
given quarter in fiscal 2002 or for the entire year. These conditions would
negatively affect our business, financial condition and results of operations.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND THE CURRENT
ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California has recently experienced an energy crisis that could disrupt
our operations and increase our expenses. In the event of an acute power
shortage, that is, when power reserves for the State of California fall below
1.5%, California has on some occasions implemented, and may in the future
continue to implement, rolling blackouts throughout the state, with or without
advance notice. If blackouts interrupt our power supply, we may be temporarily
unable to operate. Any such interruption in our ability to continue operations
could delay the
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development of our products. Future interruptions could damage our reputation,
harm our ability to promote our products and could result in lost revenue, any
of which could substantially harm our business and results of operations. In
addition, we do not carry sufficient business interruption insurance to
compensate us for losses that may occur and any losses or damages incurred by us
could have a material adverse effect on our business, financial condition and
results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996
by the California government and shortages in wholesale electricity supplies
have caused power prices to increase dramatically, and these prices will likely
continue to increase or the foreseeable future. If wholesale prices continue to
increase, our operating expenses will likely increase, as our headquarters and
most of our employees are based in California.
WE MAY NOT BE ABLE TO EXPAND OUR PROPRIETARY TECHNOLOGY IF WE DO NOT CONSUMMATE
POTENTIAL ACQUISITIONS OR INVESTMENTS OR SUCCESSFULLY INTEGRATE THEM WITH OUR
BUSINESS.
To expand our proprietary technologies, we may acquire or make
investments in complementary businesses, technologies or products if appropriate
opportunities arise. We may be unable to identify suitable acquisition or
investment candidates at reasonable prices or on reasonable terms, or consummate
future acquisition or investment candidates at reasonable prices or on
reasonable terms, or consummate future acquisitions or investments, each of
which could slow our growth strategy. We may have difficulty integrating the
acquired products, personnel or technologies of any acquisition we might make.
These difficulties could disrupt our ongoing business, distract our management
and employees and increase our expenses.
RECENTLY ISSUED ACCOUNTING STANDARDS.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow and foreign currency
hedges, and establishes respective accounting standards for reporting changes in
the fair value of the instruments. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Upon adoption of SFAS
No. 133 on May 1, 2001, we were required to adjust hedging instruments to fair
value in the balance sheet, and recognize the offsetting gain or loss as
transition adjustments to be reported in net income or other comprehensive
income, as appropriate, and presented in a manner similar to the cumulative
effect of a change in accounting principle. The adoption of this statement did
not have a significant effect on the results of our operations.
In July 2001, FASB issued SFAS No. 141, "Business Conditions" and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
business combinations initiated after June 30, 2001 be accounted for under the
purchase method of accounting. The use of the pooling-of-interest method of
accounting is no longer allowed. SFAS No. 142 requires that goodwill and other
intangible assets will no longer be amortized but shall be reviewed and tested
annually for impairment. SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001, and early adoption is permitted for companies
with a fiscal beginning after March 15, 2001. We expect that the adoption of
SFAS No. 141 and 142 on May 1, 2002 will not have a material effect on our
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. We do not use derivative financial instruments in
our investment portfolio. Our investment portfolio is generally comprised of
cash deposits. Our policy is to place these investments in instruments that meet
high credit quality standards. These securities are subject to interest rate
risk, and could decline in value if interest rates fluctuate. Due to the short
duration and conservative nature of our investment portfolio, we do not expect
any material loss with respect to our investment portfolio.
Foreign Currency Exchange Rate Risk. The majority of our sales, cost of
manufacturing and marketing are transacted in US dollars. Accordingly, our
results of operations are not subject to foreign exchange rate fluctuations.
Gains and losses from such fluctuations have not been incurred by us to date.
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PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on August 23, 2001,
the following proposals were adopted by the margins indicated.
NUMBER OF
VOTED SHARES
PROPOSAL FOR WITHHELD
-------- ---------- ----------
1. To elect two Class III Directors to
serve for a three-year term expiring
upon the Annual Meeting of Stockholders
next following April 30, 2004, or until
such directors' respective successors
are duly elected and qualified
Roland Duchatelet--Class III Director 10,576,333 495,224
Lionel M. Allan--Class III Director 10,185,805 885,752
VOTED VOTE
FOR AGAINST ABSTAIN
---------- ---------- ---------
2. To ratify the appointment of
PricewaterhouseCoopers LLP as
independent accountants of the Company
for the fiscal year ending April 30, 2002 10,758,223 169,684 143,650
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
None.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by Catalyst during the three months
ended July 31, 2001.
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CATALYST SEMICONDUCTOR, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Sunnyvale and State of
California.
Date: September 14, 2001 By: /s/ Radu M. Vanco
---------------------------------------------
Radu M. Vanco
Chairman of the Board of Directors, President
and Chief Executive Officer
Date: September 14, 2001 By: /s/ Thomas E. Gay III
---------------------------------------------
Thomas E. Gay III
Vice President of Finance and Administration
and Chief Financial Officer
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