<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended January 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______.
COMMISSION FILE NUMBER: 0-21488
CATALYST SEMICONDUCTOR, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0083129
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 BORREGAS AVENUE,
SUNNYVALE, CALIFORNIA 94089
(Address, including zip code, of
Registrant's principal executive offices)
(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 March 1,
1998 was 8,445,443
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CATALYST SEMICONDUCTOR, INC.
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets
at January 31, 1998 and April 30, 1997 ............................................... Page 3
Unaudited Condensed Consolidated Statements of Operations for the three and nine month
periods ended January 31, 1998 and 1997 .............................................. Page 4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine month periods
ended January 31, 1998 and 1997 ...................................................... Page 5
Notes to Unaudited Condensed Consolidated Financial Statements ....................... Pages 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION ................................................... Pages 7-13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................................... Page 14
SIGNATURES .................................................................................. Page 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Jan. 31, April 30,
1998 1997
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 1,231 $ 2,695
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . 5,250 5,250
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . 7,177 7,074
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,192 12,732
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,018 895
------- -------
Total current assets . . . . . . . . . . . . . . . . . . . . 21,868 28,646
Property and equipment, net. . . . . . . . . . . . . . . . . . . . 3,212 3,907
------- -------
$25,080 $32,553
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank and other short-term debt . . . . . . . . . . . . . . . . . $ 4,626 $ 3,449
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 11,582 10,942
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,568 1,269
Deferred gross profit on shipments to distributors . . . . . . . 232 378
Current portion of long-term debt and capital lease obligations 378 593
------- -------
Total current liabilities. . . . . . . . . . . . . . . . . . 18,386 16,631
Long-term debt and capital lease obligations.. . . . . . . . . . . 525 1,885
------- -------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 18,911 18,516
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 6,169 14,037
------- -------
$25,080 $32,553
======= =======
See accompanying notes to the unaudited condensed consolidated financial statements.
</TABLE>
3
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CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Jan. 31, 1998 Jan. 31, 1997 Jan. 31, 1998 Jan. 31, 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . $10,034 $10,178 $29,757 $38,088
Cost of revenues . . . . . . . . . . . . . . 11,989 8,434 28,183 29,693
------- ------- ------- -------
Gross profit (loss) . . . . . . . . . . . . (1,955) 1,744 1,574 8,395
Research and development . . . . . . . . . . 1,299 1,451 3,527 4,441
Selling, general and administrative . . . . 2,625 1,750 6,268 6,695
------- ------- ------- -------
Income (loss) from operations . . . . . . . (5,879) (1,457) (8,221) (2,741)
Interest income (expense), net . . . . . . . (161) (106) (549) (73)
------- ------- ------- -------
Income (loss) before income taxes . . . . . (6,040) (1,563) (8,770) (2,814)
Income tax provision . . . . . . . . . . . . --- 12 --- 90
------- ------- ------- -------
Net income (loss) . . . . . . . . . . . . . $(6,040) $(1,575) $(8,770) $(2,904)
======= ======= ======= =======
Basic and diluted (loss) per share . . . . . $ (0.72) $ (0.20) $ (1.07) $ (0.37)
======= ======= ======= =======
Shares used in basic and diluted per share
calculation . . . . . . . . . . . . . . . . 8,417 7,933 8,188 7,900
======= ======= ======= =======
See accompanying notes to the unaudited condensed consolidated financial statements.
</TABLE>
4
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CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
Jan. 31, 1998 Jan. 31, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $(8,770) $ (2,904)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 1,491 1,286
Loss on impairment of equipment . . . . . . . . . . . . . . . . . 855 ---
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . (103) 2,510
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 5,540 1,959
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (123) 374
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 1,315 (4,610)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 299 (335)
Deferred gross profit on shipments to distributors (146) (607)
------- -------
Net cash used in operating activities . . . . . . . . . . . . 358 (2,327)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for the acquisition of equipment . . . . . . . . . . . . . (1,652) (2,429)
------- -------
Cash used in investing activities . . . . . . . . . . . . . . (1,652) (2,429)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock transactions, net . . . . . . . . . . . . . . . . . . . 228 495
Net proceeds from line of credit . . . . . . . . . . . . . . . . . . (12) 4,750
Proceeds from new long-term debt . . . . . . . . . . . . . . . . . . --- 617
Payment of long-term debt and capital lease obligations (386) (491)
------- -------
Cash provided by financing activities . . . . . . . . . . . . (170) 5,371
------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . (1,464) 615
Cash and cash equivalents at beginning of the period . . . . . . . . . 2,695 2,966
------- -------
Cash and cash equivalents at end of the period . . . . . . . . . . . . $ 1,231 $ 3,581
======= =======
Non-cash activity:
Issuance of common stock in settlement of
accounts payable for $675,000.
See accompanying notes to the unaudited condensed consolidated financial statements.
</TABLE>
5
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CATALYST SEMICONDUCTOR, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the unaudited condensed consolidated interim
financial statements included herein have been prepared on the same basis as the
April 30, 1997 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,
but omit certain information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles. 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, 1997. The results of operations for the three and nine
month periods ended January 31, 1998 are not necessarily indicative of the
results to be expected for the entire year.
The Company's fiscal year and its first, second and third fiscal quarters end
the Sunday closest to April 30, July 31, October 30 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.
NOTE 2 - NET INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" during the first third
quarter of 1998. SFAS No. 128 requires presentation of both basic and diluted
net income per share on the fact of the income statement. All prior period net
income per share data presented has been restated in accordance with SFAS No.
128. 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. A
reconciliation of the numerator and denominators of the basic and diluted income
per share is presented below.
NOTE 3 - CERTAIN BALANCE SHEET CAPTIONS (IN THOUSANDS):
<TABLE>
<CAPTION>
Jan. 31, April 30,
1998 1997
------- -------
<S> <C> <C>
Inventories:
Work-in-process................................. $ 3,361 $ 5,123
Finished goods.................................. 3,831 7,609
-------- --------
$ 7,192 $ 12,732
======== ========
</TABLE>
The decreased in absolute dollar were primarily attributable to reduced
revenues and $3.5 million in charges taken in the quarter ended January 31,
1998. These charges were taken primarily to adjust the value of certain
inventories to reflect reductions in current market pricing below the cost to
produce the inventory and to adjust the value of certain inventories for which
the Company has quantities that exceed six months of supply.
<TABLE>
<CAPTION>
Jan. 31, April 30,
1998 1997
------- -------
<S> <C> <C>
Property and equipment:
Engineering and test equipment.................. $ 7,694 $ 9,392
Computer hardware and software.................. 3,469 3,364
Furniture and office equipment.................. 1,272 1,183
-------- --------
12,435 13,939
Less: accumulated depreciation and amortization (9,223) (10,032)
-------- --------
$ 3,212 $ 3,907
======== ========
</TABLE>
NOTE 4 - DEBT:
Under the terms of a bank revolving line of credit, the Company can borrow the
lesser of $13.5 million or an amount determined by a formula applied to eligible
accounts receivable, local inventory and backlog from certain foreign customers,
at a variable interest rate of prime plus 2.25%. The revolving line of credit is
subject to compliance with loan covenants. At January 31, 1998, the Company was
not in compliance with certain of the loan covenants and received a waiver from
the bank for the non-compliance position.
On February 15, 1997, a vendor loaned $1.2 million to the Company in
settlement of billings for assembly and test services totaling the same. The
loan which bears interest at 18% is payable on May 15, 1998.
6
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CATALYST SEMICONDUCTOR, INC.
As of January 31, 1998, the Company owed approximately $0.5 million on
equipment loans. The loans which bear interest at 9.57% and 9.87% are payable in
fixed monthly installments through August, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and notes thereto included in this
report. In addition, the Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
Specifically, the Company wishes to alert readers that the factors set forth in
"Certain Factors that May Affect the Company's Future Results" as set forth
below in this Item 2, as well as other factors, in the past have affected and in
the future could affect the Company's actual results, and could cause the
Company's results for future quarters to differ materially from those expressed
in any forward looking statements made by or on behalf of the Company.
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. The
Company generally does not recognize revenues on such sales until the
distributor resells the Company's products. Total revenues decreased by 1% to
$10.0 million for the quarter ended January 31, 1998 from $10.2 million for the
quarter ended January 31, 1997. For the nine months ended January 31, 1998,
total revenues decreased 21% to $30 million from $38.1 million for the nine
months ended January 31, 1997. The decrease was primarily attributable to price
erosion caused by excess supply and other adverse industry-wide conditions. For
the nine months ended January 31, 1998, approximately 51% of the Company's
revenues were derived from sales of its Flash memory devices primarily used in
personal computer and disk drive applications and approximately 70% of the
Company's revenues were derived from shipments to international customers.
Gross Profit (Loss). Gross loss for the quarter ended January 31, 1998 was
$2.0 million, or 19% of revenues, compared to gross profit of $1.7 million, or
17% of revenues, for the quarter ended January 31, 1997. For the nine months
ended January 31, 1998, gross profit decreased by 81% to $1.6 million, or 5% of
revenues, from $8.4 million, or 22% of revenues, for the nine months ended
January 31, 1997. The decreases in absolute dollars were primarily attributable
to reduced revenues and $3.5 million in charges taken in the quarter ended
January 31, 1998. These charges were taken primarily to adjust the value of
certain inventories to reflect reductions in current market pricing below the
cost to produce the inventory and to adjust the value of certain inventories for
which the Company has quantities that exceed six months of supply. In addition,
the Company wrote down the value of certain assets (primarily photomasks) for
which products are no longer being built. The decreases as a percentage of
revenues were also primarily attributable to these charges. Gross margins were
also adversely affected by excess supply of competitive products and other
adverse industry-wide conditions, lower than anticipated yields achieved on the
Company's 0.6 micron version of its Flash memory devices, rework charges
7
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CATALYST SEMICONDUCTOR, INC.
incurred to re-mark and re-test certain products in preparation of shipping
those products to customers of the Company, and expedite charges incurred to
ensure that delivery was made in time to meet customer schedules.
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 10% to $1.3
million, or 13% of revenues, for the quarter ended January 31, 1998 from $1.5
million, or 14% of revenues, for the quarter ended January 31, 1997. The quarter
ended January 31, 1998, included $0.2 million in charges for the write down in
value of certain assets and the accrual of severance expenses related to a
reduction in force. For the nine months ended January 31, 1998, R&D expenses
decreased by 21% to $3.5 million, or 12% of revenues, from $4.4 million, or 12%
of revenues, for the nine months ended January 31, 1997. The primary reason for
the decreases in absolute dollars spent was lower material costs for wafers
being evaluated for new products and new versions of current products.
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
increased by 50% to $2.6 million, or 26% of revenues, for the quarter ended
January 31, 1998 from $1.8 million, or 17% of revenues, for the quarter ended
January 31, 1997. The quarter ended January 31, 1998, included $0.6 million in
charges for the accrual of severance expenses related to a reduction in force
and for the provision of bad debt on certain customer receivables. For the nine
months ended January 31, 1998, SG&A expenses decreased by 6% to $6.3 million, or
21% of revenues, from $6.7 million, or 18% of revenues, for the nine months
ended January 31, 1997. The primary reason for the decreases in absolute dollars
spent was decreased personnel costs, due to reductions in headcount including
the Company's reduction in workforce in November 1996.
Net Interest Income (Expense.) Net interest expense increased by 52% to
$161,000 for the quarter ended January 31, 1998 from $106,000 for the quarter
ended January 31, 1997. Net interest expense increased by 652% to $549,000 for
the nine months ended January 31, 1998 from $73,000 for the nine months ended
January 31, 1997. The changes were primarily attributable to increased average
outstanding borrowings.
Income Tax Provision. As a result of the Company's losses, the provision
for income taxes decreased to zero in fiscal 1998.
As of April 30, 1997 the Company had available net operating loss
carryforwards of approximately $21.0 million and credit carryforwards of
approximately $1.0 million for federal tax purposes, expiring from 2001 to 2008.
Availability of the net operating loss and general business credit carryforwards
may potentially be reduced in the event of substantial changes in equity
ownership.
LIQUIDITY AND CAPITAL RESOURCES
Total cash (including $5.3 million of restricted cash) decreased $1.4 million
to $6.5 million as of January 31, 1998 from $7.9 million as of April 30, 1997.
The decrease was primarily attributable to net cash used for the acquisition of
equipment and by operating activities. As of January 31, 1998, $5.3 million of
the total cash was pledged as security on letters of credit required by certain
of the Company's wafer foundries. Net cash used by operating activities totaled
$0.3 million for the nine months ended January 31, 1998. This net use of cash
was primarily attributable to net operating losses, offset in part by a decrease
in inventories and non-cash amounts (depreciation and loss on impairment of
equipment) included in the net operating loss.
Under the terms of a bank revolving line of credit, the Company can borrow the
lesser of $13.5 million or an amount determined by a formula applied to eligible
accounts receivable, local inventory and backlog from certain foreign customers,
at a variable interest rate of prime plus 2.25%. The revolving line of credit is
subject to compliance with loan covenants. At January 31, 1998, the Company was
not in compliance with certain of the loan covenants and received a waiver from
the bank for the non-compliance position.
On February 15, 1997, a vendor loaned $1.2 million to the Company in settlement
of billings for assembly and test services totaling the same. The loan which
bears interest at 18% is payable on May 15, 1998.
8
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CATALYST SEMICONDUCTOR, INC.
The Company is currently seeking additional equity or debt financing to
address its 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 the Company, if at all. If the Company is not
successful in raising additional capital, it believes that current cash
balances, cash generated from operations and borrowings available under the
Company's bank line of credit and from equipment financing, together with
substantial reductions in operating expenses and capital expenditures will
permit the Company to fund operations through fiscal 1999.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS
The Company desires to take advantage of certain provisions of the Private
Securities Litigation Reform Act of 1995, that provides a "safe harbor" for
forward-looking statements made by or on behalf of the Company. The Company
hereby cautions shareholders, prospective investors in the Company and other
readers that the following important factors, among others, in some cases have
affected, and in the future could affect, the Company's stock price or cause the
Company's actual results for the fiscal quarter and the fiscal year ending April
30, 1998, and future fiscal quarters and years to differ materially from those
expressed in any forward-looking statements, oral or written, made by or on
behalf of the Company.
The Company's business and future operating results are subject to potential
fluctuations due to a number of factors including the following:
Future Capital Needs. The Company has incurred significant losses and
experienced significant negative cash flow from operations and investing
activities for over two years. Based upon its current operating plan, the
Company believes it has adequate cash balances to fund operations through fiscal
1999. There can be no assurance, however, that the Company's actual cash
requirements will not exceed anticipated levels, or that the Company will
generate sufficient revenue to fund its operations in the absence of additional
funding sources. The Company has pursued and continues to pursue other measures
designed to reduce expenses and conserve cash such as deferring payments to
vendors and other suppliers, headcount reductions, deferrals of planned
expenditures, other expense reductions and other measures. Such activities can
have a material, adverse affect on the Company's business, financial condition
and operating results. Furthermore, to the extent the Company suffers further
adverse effects to its revenues or margins because of delays in new product
introductions, price competition or other competitive factors, the Company's
cash position and its business, operating results and financial condition will
be further adversely affected.
The Company is currently seeking additional equity or debt financing to
address its working capital needs and to provide funding for capital
expenditures. The Company's fund raising efforts to date have not been
successful and there can be no assurance that such funding will be available at
acceptable terms, if at all. If the Company is successful in raising funds
through the issuance of equity securities, existing stockholders of the Company
would likely experience substantial dilution, or the securities may have rights,
preferences or privileges senior to those of the Company's Common Stock. If
adequate funds are not available or are not available on acceptable terms,
further reductions in its operating expenses and capital expenditures would be
required to continue operations either of which could have a material adverse
effect on the Company's business, operating results and financial condition.
9
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CATALYST SEMICONDUCTOR, INC.
Recent Operating Results; Anticipated Future Losses. The Company's recent
operating results have been lower than expected. Total revenues for the quarter
and for the nine-month period ended January 31, 1998 were $10.2 million and
$30.0 million, respectively, compared to revenues of $10.2 million and $38.1
million for the comparable periods in the prior year. In addition, the Company
incurred net losses for the quarter and for the nine-month period ended January
31, 1998 of $6.0 million and $8.8 million, respectively, compared to net losses
of $1.6 million and $2.9 million for the comparable periods in the prior year.
The Company's last profitable year was the fiscal year ended April 30, 1996. For
over two years, the Company has experienced significant negative cash flow from
operations and investing activities. The Company has taken many steps to reduce
its operating expenses including reducing its headcount from 71 in December,
1996 to 54 in February, 1998. Although reductions in headcount could help the
Company meet its operating expense objectives, such reductions could adversely
impact the Company's sales, marketing and product development efforts. The
Company anticipates that negative cash flow from operations will continue for
the foreseeable future. There can be no assurance that the Company can generate
revenue growth, or that any revenue growth that is achieved can be sustained. To
the extent that increases in such operating expenses precede and are not
subsequently followed by increased revenues, the Company's business, results of
operations and financial condition would be materially adversely affected. There
can be no assurance that the Company will ever achieve or sustain profitability.
Fluctuations in Operating Results. The Company's 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 the Company and its competitors, fluctuations in customer
demand for the Company's 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 the Company in
the fiscal year ended April 30, 1997 and the nine-month period ended January 31,
1998), increased expenses associated with new product introductions or process
changes, increased expenditures related to expanding the Company's sales
channels, gains or losses of significant customers, timing of significant orders
of the Company's products, fluctuations in manufacturing yields, changes in
product mix, wafer price increases due to foreign currency fluctuations and
general economic conditions. The Company anticipates that a significant portion
of its revenue will be derived from a limited number of large orders, and the
timing of receipt and fulfillment of any such orders is expected to cause
material fluctuations in the Company's operating results, particularly on a
quarterly basis.
Due to the foregoing factors, quarterly revenue and operating results are
difficult to forecast. The Company's expense levels are based, in significant
part, on the Company's expectations as to future revenue and are therefore
relatively fixed in the short term. If revenue levels fall below expectations,
as has occurred during the year ended April 30, 1997 and the nine-months ended
January 31, 1998, net income is likely to be disproportionately adversely
affected because a proportionately smaller amount of the Company's expenses
varies with its revenue. There can be no assurance that the Company will be able
to achieve or maintain profitability on a quarterly or annual basis in the
future. Due to the foregoing factors, the Company's operating results may fall
below the expectations of securities analysts and investors, which could have a
material adverse effect on the market price of the Company's Common Stock.
Competition. 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 the Company's products in particular, have decreased
significantly and rapidly over the life of each product. The Company expects
that average selling prices for its existing products will continue to decline
rapidly for the foreseeable 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 the Company's 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 the Company's overall gross margins, could cause a
negative adjustment to the valuation of the Company's inventories and could
materially and adversely affect the Company's operating results.
The Company competes with major domestic and international semiconductor
companies, many of which have substantially greater financial, technical, sales,
marketing, production, distribution and other resources than the Company. The
can be no assurance that the Company will be able to compete successfully in the
future. The
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CATALYST SEMICONDUCTOR, INC.
Company's more mature products, such as Serial and Parallel EEPROM devices,
compete on the basis of product performance, price and customer service. The
Company believes it competes successfully with respect to each of these
competitive attributes; however price competition is significant and expected to
continue. Principal competitors with respect to the Company's EEPROM products
currently include SGS-Thomson, National Semiconductor, Atmel and Xicor, as well
as the Company's strategic manufacturing partner Oki, all of which have
substantially greater resources than the Company.
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. The Company's Flash
memory products compete on the basis of product performance, price and customer.
The Company guarantees that all of its Flash memory products will provide
100,000 cycle read/write endurance. However, given the development of higher
density/lower cost products and the intense price competition prevalent for
these products, there can be no assurance that the Company will be able to
compete successfully in the future against its competitors on the bases of these
or other competitive factors.
Dependence on Independent Foreign Manufacturers and Subcontractors;
Manufacturing Risks. The Company does not manufacture the semiconductor wafers
used for its products. The Company principally utilizes facilities of Oki
Electric Industry Co., Ltd. ("OKI") in Japan, and United Microelectronics
Corporation ("UMC") in Taiwan, to fabricate and test the Company's wafers and
subcontractors in Southeast Asia to assemble and test its integrated circuits.
To date, a majority of these wafers have been manufactured by OKI. The
manufacture of semiconductor products is highly complex and sensitive to a wide
variety of factors and, as is typical in the semiconductor industry, the
Company's outside wafer foundries from time to time have experienced lower than
anticipated production yields. While the Company believes it has an adequate
wafer supply to meet its currently anticipated needs, there can be no assurance
that the Company will continue to receive sufficient quantities of wafers at
favorable prices on a timely basis, if at all, or that the Company will be able
to attain higher levels of wafer supply as demand requires. Material disruptions
in the supply of wafers as a result of manufacturing yield or other
manufacturing problems are not uncommon in the semiconductor industry. The
Company may also be subject to production transition delays. There can be no
assurance that the Company will not experience such problems in the future.
Moreover, delays in the Company's payments to wafer suppliers resulting from the
Company's current cash constraints can often result in delays or reductions in
wafer deliveries and assembly and test services from the Company's suppliers.
Such delays and reductions can result in cancellations of customer orders
thereby adversely affecting the Company's ability to generate future revenues.
The loss of OKI as a supplier, any prolonged inability to obtain adequate yields
or deliveries from OKI or other subcontractor manufacturers, or any other
circumstance that would require the Company to seek and qualify alternative
sources of supply of products or services, could delay shipments, result in the
loss of customers and have a material adverse effect on the Company's business
and operating results. Moreover, the inability to procure supplies and services
from these foreign subcontractor manufacturers on commercially reasonable terms
as a result of foreign currency exchange rate fluctuations may have a material
adverse effect on the Company's operating results. The Company has a wafer
purchase agreement with OKI that is based upon the exchange rate between the US
Dollar and Japanese Yen. As a result, exchange rate fluctuations may cause the
Company's cost per die to fluctuate in the future and gross profit could be
adversely affected. In addition, the Company's business is subject to other
risks generally associated with doing business with foreign subcontractors
including, but not limited to, foreign government regulations, political and
financial unrest which may cause disruptions or delays in shipments to the
Company's customers or access to the Company's inventories.
International Operations. For the nine months ended January 31, 1998,
international sales accounted for 70% of the Company's product sales. In fiscal
1997, 1996 and 1995, international sales accounted for 65%, 60% and 61%,
respectively, of the Company's product sales. The Company expects that
international sales will continue to represent a significant portion of its
product sales in the future. The Company's international operations may be
adversely affected by fluctuations in exchange rates, imposition of government
controls, political and financial instability, trade restrictions, changes in
regulatory requirements, difficulties in staffing international operations and
longer payment cycles. There can be no assurance these or other factors related
to international operations will not have a material adverse affect on the
Company's business, financial condition and results of operations.
11
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CATALYST SEMICONDUCTOR, INC.
Inventory. The cyclical nature of the semiconductor industry periodically
results in shortages and oversupply of wafer fabrication capacity such as the
Company has experienced from time to time. Since the Company must order products
and build inventory substantially in advance of product shipments, there is a
risk that the Company will forecast incorrectly and produce excess or
insufficient inventories of particular products because demand for the Company's
products is volatile and customers place orders with short lead times. The
ability of the Company's customers to reschedule or cancel orders without
significant penalty could adversely affect the Company's liquidity, as the
Company may be unable to adjust its purchases from its wafer suppliers to match
such customer changes and cancellations. During the nine months ended January
31, 1998, the Company's inventory decreased by $5.5 million to $7.2 million from
$12.7 million. There can be no assurance that the Company's inventory will be
reduced further by the fulfillment of customer orders or that in the future the
Company will not produce excess quantities of its products. To the extent the
Company produces excess inventories of particular products, the Company's
operating results could be adversely affected by charges that the Company could
recognize due to significant reductions in demand for its products, rapid
declines in the market value of inventory resulting in inventory writedowns
(such as the Company experienced in the current and previous quarters) or other
related factors.
New Product Development and Technological Change. The markets for the
Company's products are characterized by rapidly changing technology and product
obsolescence. The timely introduction of new products at competitive
price/performance levels is a key factor to the success of the Company's
business. In particular, the Company's future success will depend on its ability
to develop and implement new design and process technologies which enable the
Company to achieve higher product densities and thereby reduce product costs.
For example, most of the Company's products are currently designed and
manufactured using a 0.8 micron CMOS EEPROM process or a 0.5 micron Flash memory
process. There can be no assurance that the Company will be able to select and
develop new products and technologies and introduce them to the market in a
timely manner and with acceptable fabrication yields and production costs.
Furthermore, there can be no assurance that the Company's products will achieve
market acceptance. The failure of the Company to complete and introduce new
products at competitive price/performance levels could materially and adversely
affect the Company's business, financial condition and operating results. Delays
in developing new products, achieving volume production of new products,
successfully completing technology transitions with acceptable yields and
reliability or the lack of commercial acceptance of new products introduced by
the Company, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Flash Memory Market. A significant amount of the Company's net revenues are
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. The
Company's fiscal 1997 and fiscal 1998 to date operating results 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,
SGS-Thomson, Sharp, Texas Instruments and Toshiba) are expected to further
increase Flash memory production. There can be no assurance that the Company
will be able to sustain the market acceptance for its Flash memory products. The
Company anticipates continued price and other competitive pressures, which
adversely affected fiscal 1997 and fiscal 1998 operating results to adversely
affect the Company's future operating results.
Semiconductor Industry. The semiconductor industry is highly cyclical and has
been subject to significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
gross margins, and production overcapacity. Accordingly, the Company 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, the Company experienced and continues to experience
accelerated erosion of average selling prices caused by adverse industry-wide
conditions in fiscal 1997 and fiscal 1998.
Dependence on Proprietary Technology; Risk of Intellectual Property
Litigation. 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. There can be no
assurance that the Company will not receive any such notification or that
12
<PAGE> 13
CATALYST SEMICONDUCTOR, INC.
proceedings alleging infringement of intellectual property rights will not be
commenced against the Company in the future. In such event, there can be no
assurances that the Company could obtain any required licenses of third party
intellectual property rights or could obtain such licenses on commercially
reasonable terms. Failure to obtain such a license in any event could require
the Company to cease production of its products until the Company develops a
non-infringing design or process. Moreover, the cost of litigation of any such
claim or damages resulting therefore could be substantial and could materially
and adversely affect the Company's business, financial condition and results of
operations.
Dependence upon Key Personnel. The Company's 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 there can be no
assurance that the Company can retain such personnel or that it can attract
other highly qualified personnel. The loss of or failure to attract and retain
any such highly qualified personnel could have a material adverse affect on the
Company's business, financial condition and results of operations.
Customer Concentration. A relatively small number of customers have accounted
for a significant portion of the Company's net revenue in the past. Loss of one
or more of the Company's current customers could materially and adversely affect
the Company's business, operating results and financial condition. In addition,
the Company has experienced and may continue to experience lower margins on
sales to significant customers as a result of volume pricing arrangements.
Dependence on Manufacturer Representatives and Distributors. The Company
markets and distributes its products primarily through manufacturers'
representatives and independent distributors. The Company's distributors
typically offer competing products. The distribution channels have been
characterized by rapid change, including consolidations and financial
difficulties. The loss of one or more manufacturers' representatives or
distributors, or the decision by one or more distributors to reduce the number
of the Company's products offered by such distributors or to carry the product
lines of the Company's competitors, could have a material, adverse effect on the
Company's operating results.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, in approximately two years, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with such compliance. Any Year 2000 compliance problem of either the
Company, its suppliers, its service providers or its customers could result in a
materially adverse effect on the Company's business, financial condition and
operating results.
Takeover Resistive Measures. The Company's 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 the Company's stock, the
Board's ability to issue "blank check" Preferred Stock without stockholder
approval and the Company's staggered terms for its directors, could have the
effect of delaying or preventing a change in control of the Company.
Volatility of Stock Price. The Company's 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 securities analysts or others could have an
immediate and significant adverse effect on the trading price of the Company's
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 the Company's Common Stock.
13
<PAGE> 14
CATALYST SEMICONDUCTOR, INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended January
31, 1998.
14
<PAGE> 15
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: March 18, 1998 By: /s/ C. Michael Powell
-------------- -----------------------------------
C. Michael Powell
Chairman of the Board of Directors,
President and Chief Executive
Officer
Date: March 18, 1998 By: /s/ Daryl E. Stemm
-------------- -----------------------------------
Daryl E. Stemm
Vice President of Finance and
Administration and Chief
Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AS OF JANUARY 31, 1998 AND APRIL 30, 1997, STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS FOR THE THREE AND NINE MONTH PERIODS ENDED JANUARY 31,
1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> APR-30-1998 APR-30-1997 APR-30-1998 APR-30-1997
<PERIOD-START> NOV-01-1997 NOV-01-1996 MAY-01-1997 MAY-01-1996
<PERIOD-END> JAN-31-1998 JAN-31-1997 JAN-31-1998 JAN-31-1997
<CASH> 6,481 6,481 7,945 7,945
<SECURITIES> 0 0 0 0
<RECEIVABLES> 7,790 7,791 7,199 7,199
<ALLOWANCES> 613 613 125 125
<INVENTORY> 7,192 7,190 12,732 12,732
<CURRENT-ASSETS> 21,868 21,867 28,646 28,646
<PP&E> 12,436 12,436 13,939 13,839
<DEPRECIATION> (9,223) (9,223) (10,032) (10,032)
<TOTAL-ASSETS> 25,080 25,079 32,553 32,553
<CURRENT-LIABILITIES> 18,386 18,387 16,631 16,631
<BONDS> 525 525 1,885 1,885
0 0 0 0
0 0 0 0
<COMMON> 42,729 42,719 41,829 41,829
<OTHER-SE> (36,559) (36,561) (27,792) (27,792)
<TOTAL-LIABILITY-AND-EQUITY> 25,080 25,079 32,553 32,553
<SALES> 10,234 10,178 29,957 38,088
<TOTAL-REVENUES> 10,234 10,178 29,957 38,088
<CGS> 12,189 8,434 28,383 29,693
<TOTAL-COSTS> 12,189 8,434 28,383 29,693
<OTHER-EXPENSES> 3,924 3,201 9,795 11,136
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 161 106 549 73
<INCOME-PRETAX> (6,040) (1,583) (8,770) (2,814)
<INCOME-TAX> 0 12 0 90
<INCOME-CONTINUING> (6,040) (1,575) (8,770) (2,904)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (6,040) (1,575) (8,770) (2,904)
<EPS-PRIMARY> (0.72) (0.20) (1.07) (0.37)
<EPS-DILUTED> (0.72) (0.20) (1.07) (0.37)
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