<PAGE> 1
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 October 31, 1999 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 December
6, 1999 was 14,078,756
Page 1 of 20
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CATALYST SEMICONDUCTOR, INC.
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets
at October 31, 1999 and April 30, 1999................................... Page 3
Unaudited Condensed Consolidated Statements of Operations for the three and six month
periods ended October 31, 1999 and 1998.................................. Page 4
Unaudited Condensed Consolidated Statements of Cash Flows for the six month periods
ended October 31, 1999 and 1998.......................................... Page 5
Notes to Unaudited Condensed Consolidated Financial Statements............. Pages 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION......................................... Pages 9-18
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................ Page 19
ITEM 5. OTHER INFORMATION.......................................................... Page 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................... Page 19
SIGNATURES......................................................................... Page 20
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
October 31, April 30,
1999 1999
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................... $ 1,563 $ 1,852
Accounts receivable, net ................................ 5,727 5,119
Inventories ............................................. 2,603 1,914
Other assets ............................................ 559 742
-------- --------
Total current assets ................................ 10,452 9,627
Property and equipment, net ............................. 1,976 1,939
-------- --------
$ 12,428 $ 11,566
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .......................................... $ 2,891 $ 2,942
Accounts payable ........................................ 4,241 5,770
Accounts payable - related party ........................ 98 275
Accrued expenses ........................................ 1,980 1,508
Deferred gross profit on shipments to distributors ...... 983 1,061
Current portion of long-term debt and capital lease
obligations........................................... 455 1,141
-------- --------
Total current liabilities ........................... 10,648 12,697
Long-term debt and capital lease obligations ................ 169 81
-------- --------
Total liabilities ................................... 10,817 12,778
Total stockholders' equity (deficit) ........................ 1,611 (1,212)
-------- --------
$ 12,428 $ 11,566
======== ========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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<PAGE> 4
CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ------------------------------
Oct. 31, 1999 Oct. 31, 1998 Oct. 31, 1999 Oct. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues .................................. $ 10,700 $ 8,126 $ 19,896 $ 15,431
Cost of revenues .............................. 5,552 5,776 10,928 10,841
-------- -------- -------- --------
Gross profit .................................. 5,148 2,350 8,968 4,590
Research and development ...................... 698 583 1,305 1,150
Selling, general and administrative ........... 2,355 1,921 4,567 4,017
-------- -------- -------- --------
Income (loss) from operations ................. 2,095 (154) 3,096 (577)
Interest income (expense), net ................ (141) (266) (289) (488)
-------- -------- -------- --------
Net income (loss) ............................. $ 1,954 $ (420) $ 2,807 $ (1,065)
======== ======== ======== ========
Net income (loss) per share:
Basic ..................................... $ 0.14 $ (0.04) $ 0.20 $ (0.08)
======== ======== ======== ========
Diluted ................................... $ 0.10 $ (0.04) $ 0.15 $ (0.08)
======== ======== ======== ========
Weighted average common shares:
Basic ..................................... 14,033 11,726 13,998 10,637
======== ======== ======== ========
Diluted ................................... 19,114 11,726 18,484 10,637
======== ======== ======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
Oct. 31, 1999 Oct. 31, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ 2,807 $(1,065)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ...................... 506 668
Changes in assets and liabilities:
Restricted cash ................................. - - - 5,750
Accounts receivable ............................. (608) (79)
Inventories ..................................... (689) 1,333
Other assets .................................... 183 (179)
Accounts payable (including related party) ...... (1,706) (7,013)
Accrued expenses ................................ 472 (120)
Deferred gross profit on shipments to
distributors ............................ (78) 629
------- -------
Net cash provided by (used in) operating activities ........ 887 (76)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for the acquisition of equipment ............. (543) (15)
------- -------
Cash used in investing activities ............... (543) (15)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock transactions, net ......................... 16 2,438
Net payment of line of credit .......................... (51) (50)
Payment of long-term debt and capital lease
obligations ............................. (598) (98)
------- -------
Cash provided by (used in) financing activities .... (633) 2,290
------- -------
Net increase (decrease) in cash and cash equivalents ....... (289) 2,199
Cash at beginning of the period ............................ 1,852 534
------- -------
Cash at end of the period .................................. $ 1,563 $ 2,733
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid (net) ............................. $ 289 $ 488
======= =======
</TABLE>
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 management, the unaudited condensed consolidated
interim financial statements included herein have been prepared on the same
basis as the April 30, 1999 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, 1999. The results of operations for the six
month period ended October 31, 1999 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 much of fiscal 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. The Company could experience a
resumption of the downward trend in product pricing which could adversely affect
the Company's operating results.
The Company's operating results in past years have consumed substantial
amounts of cash. The reduction in cash has also placed restrictions on wafer
purchases which, during the fourth quarter of fiscal 1998, resulted in the
cancellation of some customer sales orders. In fiscal 1999, the Company received
gross proceeds of $2.5 million from the sale of 5,500,000 shares of its Common
Stock in two private placements to the same investor, Elex, NV. Management
believes, however, that it may require additional cash from similar or related
private placements or other sources of liquidity to meet the Company's projected
working capital and other cash requirements for fiscal 2000 and is currently
considering other sources of liquidity.
As a result of these circumstances, the Company's independent
accountants' opinion on the Company's April 30, 1999 consolidated financial
statements includes an explanatory paragraph indicating that these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's fiscal year and its first, second and third fiscal
quarters end 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.
NOTE 2 - INCOME (LOSS) 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.
A reconciliation of the numerators and denominators of the basic diluted
income per share is presented below:
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
Oct. 31, 1999 Oct. 31, 1998 Oct. 31, 1999 Oct. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) ................. $ 1,954 $ (420) $ 2,807 $ (1,065)
======== ======= ======== ========
Shares calculation:
Weighted avg shares
outstanding-basic.............. 14,033 11,726 13,998 10,637
Effect of dilutive securities:
Stock options ................. 5,081 -- 4,486 --
-------- ------- -------- --------
Weighted average shares
outstanding-diluted............ 19,114 11,726 18,484 10,637
======== ======= ======== ========
Net income (loss) per share:
Basic ......................... $ 0.14 $ (0.04) $ 0.20 $ (0.08)
======== ======= ======== ========
Diluted ....................... $ 0.10 $ (0.04) $ 0.15 $ (0.08)
======== ======= ======== ========
</TABLE>
Options to purchase 410,000 shares of common stock at prices ranging
from $1.69 to $6.30 per share outstanding during the quarter ended October 31,
1999 and options to purchase 3,026,000 shares of common stock at prices from
$0.13 to $6.30 per share outstanding during the quarter ended October 31, 1998
were not included in the computation of diluted EPS because the inclusion of
such options would have been antidilutive.
Options to purchase 695,000 shares of common stock at prices ranging
from $0.91 to $6.30 per share outstanding during the six-month period ended
October 31, 1999 and options to purchase 3,026,000 shares of common stock at
prices from $0.13 to $6.30 per share outstanding during the six-month period
ended October 31, 1998 were not included in the computation of diluted EPS
because the inclusion of such options would have been antidilutive.
NOTE 3 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
October 31, April 30,
1999 1999
----------- ---------
<S> <C> <C>
Accounts receivable:
Accounts receivable ................................ $ 6,013 $ 5,405
Less: Allowance for doubtful accounts ............. (286) (286)
-------- --------
$ 5,727 $ 5,119
======== ========
Inventories:
Work-in-process .................................... $ 1,475 $ 1,507
Finished goods ..................................... 1,128 407
-------- --------
$ 2,603 $ 1,914
======== ========
Property and equipment:
Engineering and test equipment ..................... $ 7,729 $ 7,193
Computer hardware and software ..................... 3,491 3,485
Furniture and office equipment ..................... 1,282 1,281
-------- --------
12,502 11,959
Less: accumulated depreciation and amortization .... (10,526) (10,020)
-------- --------
$ 1,976 $ 1,939
======== ========
</TABLE>
NOTE 4 - DEBT:
Under the terms of a bank revolving line of credit, the Company can
borrow the lesser of $5.0 million or an amount determined by a formula applied
to eligible accounts receivable at a variable interest rate of prime plus 4.5%
(12.75% at October 31, 1999). At October 31, 1999, the balance outstanding under
this line was $2,891,000. As of October 31, 1999, under the terms of its
borrowing agreement, the Company was eligible to borrow approximately $1.7
million additional cash.
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 amount.
The loan bore interest at 18% and was originally due and payable on May 15,
1998. During fiscal 1999, the interest payments were kept current and the
principal was reduced by $0.4 million. The loan was classified under the current
portion of long-term debt at April 30, 1999. In May 1999, the
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<PAGE> 8
note was paid in full and a new note for $0.7 million was issued bearing
interest at 12.25% and requiring monthly payments of $75,000. As of October 31,
1999, the balance remaining under the loan was $0.3 million. The remaining
balance was paid in full in November 1999.
NOTE 5 - SALE OF COMMON STOCK:
In May and September 1998, a private investor purchased 1,500,000 and
4,000,000 shares of the Company's common stock in private placements for $1.00
and $0.25 per share, respectively. Both offers and sales of the securities were
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 4(2) of such Act. In connection with such issuance, the investor
agreed to various standstill and voting provisions including not acquiring
additional shares of Company Stock or taking actions to control the Company.
NOTE 6 - 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 1999, options totaling 3.3 million
shares were granted under the plan at a price of $0.125 per share when the
market was at $0.26 per share. During the six month period ended October 31,
1999, options for 309,000 shares were cancelled by the Company. As a result, an
aggregate of $536,000 of compensation expense will be recognized over the four
year vesting period of the options, $120,000 of which was recognized during the
six-month period ended October 31, 1999 and $292,000 remains to be recognized as
of October 31, 1999.
NOTE 8 - RELATED PARTY TRANSACTIONS
During the six month period ended October 31, 1999, the Company recorded
$339,000 of engineering expenses that were from a related party. As of October
31, 1999, the Company owes this related party $98,000.
NOTE 9 - ONE TIME TRANSACTIONS
In the quarter ended July 31, 1999, the Company received the benefit of
approximately $0.5 million credit from the sale of inventory which was
previously reserved. In the quarter ended October 31, 1999, the Company received
the benefit of a $0.8 million credit as a result of the successful completion of
payments required in settlement of claims for amounts due to a vendor. The
amounts were recorded as credits to cost of sales in the respective periods of
fiscal 2000.
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<PAGE> 9
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.
OVERVIEW
Catalyst Semiconductor, Inc., incorporated October 8, 1985, designs,
develops and markets nonvolatile memory semiconductor products including Serial
and Parallel EEPROMs and Flash memory. Revenues are derived from sales of
semiconductor products designed by the Company and manufactured by other
companies.
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 fiscal 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. The Company could experience a resumption
of the downward trend in product pricing which could adversely affect the
Company's operating results.
The Company's recent operating results have consumed substantial amounts
of cash. The reduction in cash has also placed restrictions on wafer purchases
which, during the fourth quarter of fiscal 1998 and the first quarter of fiscal
1999, resulted in the cancellation of some customer sales orders. In May 1998,
the Company received gross proceeds of $1.5 million from the sale of 1,500,000
shares of its Common Stock in a private placement and in September 1998,
received gross proceeds of $1.0 million from the sale of 4,000,000 additional
shares of its Common Stock to the same investor in a private placement.
Management believes, however, that it may require additional cash from similar
or related private placements or other sources of liquidity to meet the
Company's projected working capital and other cash requirements for fiscal 2000
and may pursue such sources of liquidity.
As a result of these circumstances, the Company's independent
accountants' opinion on the Company's April 30, 1999 consolidated financial
statements includes an explanatory paragraph indicating that these matters raise
substantial doubt about the Company's ability to continue as a going concern.
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, the Company defers revenue recognition until the distributor
sells the product to the end customer. Total revenues increased 32% to $10.7
million for the quarter ended October 31, 1999 from $8.1 million for the quarter
ended October 31, 1998. The increase was primarily attributable to an increase
in sales of the Company's EEPROM products. Total revenues of $10.7 million for
the quarter ended October 31, 1999 increased by 16% from $9.2 million for the
quarter ended July 31, 1999. The increase is primarily attributable to an
increase in units shipped that exceeded the effects of average sales price
erosion experienced during the quarter. For the six months ended October 31,
1999, total revenues increased 29% to $19.9 million from $15.4 million for the
six months ended October 31, 1998. The increase is primarily attributable to
increased shipments into certain markets in the Far East and Japan. The Company
is reliant upon receiving and fulfilling a significant quantity of orders within
the same quarter to meet or exceed its current revenue levels. A resumption of
weak demand, capital deficiencies and price erosion for the Company's products
could lead to a resumption of the poor operating results experienced in previous
fiscal years. For the six months ended October 31, 1999, approximately 74% of
the Company's revenues were derived from shipments to international customers
compared with 41% of net product sales in fiscal 1999. The increase in
international revenues is attributable to an improvement in the Company's
ability to compete effectively at the low prices prevalent in certain markets in
the Far East and increased shipments
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<PAGE> 10
to the Company's distributors in Japan. All sales of the Company's products are
in US dollars, minimizing the effects of currency fluctuations.
Gross Profit. Gross profit for the quarter ended October 31, 1999 was
$5.1 million, or 48% of revenues, compared to a gross profit of $2.4 million, or
30% of revenues, for the quarter ended October 31, 1998. The increase in gross
profit percentage is primarily due to decreased per unit wafer, assembly and
testing costs and the Company reducing the level of sales of products with lower
gross margins. Additionally, certain manufacturing overhead expenses do not
increase in direct proportion to increases in the Company's revenues. In
addition, in the quarter ended October 31, 1999, the Company received the
benefit of a $0.8 million credit from the settlement of claims for amounts due
to a vendor which reduced cost of sales for that quarter. In the first quarter
of fiscal 2000, the Company also received the benefit of approximately $0.5
million credit from the sale of inventory which was previously reserved. For the
six months ended October 31, 1999, gross profits increased by 96% to $9.0
million or 45% of revenues, from $4.6 Million, or 30% of revenues for the six
months ended October 31, 1998. The increase is primarily attributable to the
decreases in the Company's product costs and increases in the selling prices of
its lowest cost products. The fiscal 1999 results benefited from $1.2 million in
credits and vendor debt reductions negotiated by management compared to $1.2
million in nonrecurring credits of a similar nature in fiscal 1999. In the first
quarter of fiscal 1999, renegotiation of amounts due under a licensing agreement
resulted in a $0.5 million reduction in cost of sales. In the second quarter of
fiscal 1999, the Company received a credit of $0.7 million from a vendor in
return for certain payments made under an agreement. It is the policy of the
Company 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 six months. The Company pays certain foreign manufacturing expenses in
local currency, primarily Baht in Thailand and Yen in Japan. Such expenses are
not material to the Company 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 were $0.7
million, which represented 7% of revenues for the quarter ended October 31, 1999
in comparison to $0.6 million or 7% of revenues for the quarter ended October
31, 1998. For the six months ended October 31, 1999, R&D expenses increased 8%
to $1.3 million or 7% of revenues from $1.2 million or 8% of revenues for the
six months ended October 31, 1998. The increase is primarily attributable to
increased costs for 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
increased by 26% to $2.4 million, or 22% of revenues, for the quarter ended
October 31, 1999, from $1.9 million, or 29% of revenues, for the quarter ended
October 31, 1998. The increase is primarily attributable to increased expenses
for sales and administrative personnel and increased commissions to sales
representatives. For the six months ended October 31, 1999, SG&A expenses
increased 15% to $4.6 million, or 23% of revenues from $4.0 million, or 26% of
revenues for the six months ended October 31, 1998. The increase is primarily
attributable to increased salary expenses for sales and administrative personnel
and increased commissions to sales representatives.
Net Interest Income (Expense), Net. Net interest expense decreased by
47% to $141,000 for the quarter ended October 31, 1999 from $266,000 for the
quarter ended October 31, 1998. The decrease is primarily related to the
decreased average outstanding borrowings and reductions in the effective
interest rate. Net interest expense for the six months ended October 31, 1999
decreased 41% to $289,000 from the net interest expense of $488,000 for the six
months ended October 31, 1998. The decrease is primarily related to the
decreased average outstanding borrowings and reductions in the effective
interest rate.
Income Tax Provision. As a result of the Company's losses in previous
fiscal years, the provision for income taxes remained at zero for the quarter
ended October 31, 1999.
As of April 30, 1999 the Company had available net operating loss
carryforwards of approximately $37.0 million and credit carryforwards of
approximately $1.0 million for federal tax purposes, which begin to expire in
fiscal 2001. Availability of the net operating loss and general business credit
carryforwards may potentially be reduced in the event of substantial changes in
equity ownership.
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<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased $0.3 million to $1.6 million as of October 31, 1999 from
$1.9 million as of April 30, 1999. The decrease was primarily attributable to
reductions in the Company's vendor obligations.
Under the terms of a bank revolving line of credit, the Company can
borrow the lesser of $5.0 million or an amount determined by a formula applied
to eligible accounts receivable at a variable interest rate of prime plus 4.5%
(12.75% at October 31, 1999). As of October 31, 1999, the Company had
approximately $2.9 million of secured loans owed to its bank. As of October 31,
1999, under the terms of its borrowing agreement, the Company was eligible to
borrow approximately $1.7 million additional cash and had cash on hand of $1.6
million. The Company is also indebted to other creditors in the amount of
approximately $4.4 million. This amount is comprised of approximately $3.9
million for wafers and inventory processing and approximately $0.5 million for
other goods and services. Additionally, although the Company is current on its
lease payments under the lease of its headquarters facility, as a result of its
financial condition, the Company has been in violation of certain terms of its
lease. Similar violations have resulted under certain equipment lease agreements
and the Company has obtained a letter of forbearance from the principal
equipment lessor agreeing to not take any action on the existing condition of
default through April 2000. As a result of its recent operating results, the
Company is no longer in violation of any of its loan or lease covenants and it
does not presently appear that the Company will need to negotiate an extension
of any forbearance agreement.
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 amount.
The loan bore interest at 18% and was originally due and payable on May 15,
1998. During fiscal 1999, the interest payments were kept current and the
principal was reduced by $0.4 million. In May 1999, the note was paid in full
and a new note for $0.7 million was issued bearing interest at a rate of 12.25%
and requiring monthly payments of $75,000. In November 1999, the Company paid
the balance of the note in advance of the agreed schedule.
The Company's operating results in past years have consumed substantial
amounts of cash. The reduction in cash has also placed restrictions on wafer
purchases which, during the fourth quarter of fiscal 1998, resulted in the
cancellation of some customer sales orders. In fiscal 1999, the Company received
gross proceeds of $2.5 million from the sale of 5,500,000 shares of its Common
Stock in two private placements to the same investor, Elex, NV. Management
believes, however, that it may require additional cash from similar or related
private placements or other sources of liquidity to meet the Company's projected
working capital and other cash requirements for fiscal 2000, and is currently
considering other sources of liquidity.
As a result of these circumstances, the Company's independent
accountants' opinion on the Company's April 30, 1999 consolidated financial
statements includes an explanatory paragraph indicating that these matters raise
substantial doubt about the Company's ability to continue as a going concern.
Although management believes the Company may have sufficient working
capital resources to continue its operations, the Company is 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 the Company can not
reasonably assess how long its current cash balances, cash generated from
operations and borrowings available under any remaining loans or lines of credit
and from equipment financing, even with reductions in operating expenses and
limited capital expenditures, will permit the Company to continue operations.
YEAR 2000 COMPLIANCE
The Company uses a number of computer software programs and operating
systems and intelligent hardware devices in its internal operations, including
information technology ("IT") and non-IT systems used in the design, manufacture
and marketing of Company products. These items are considered to be year 2000
"objects" and to the extent that these objects are unable to correctly recognize
and process date dependent information beyond the year 1999, some level of
modification or replacement is necessary. Most computer programs were designed
to perform data computations on the last two digits of the numerical value of a
year. When a computation referencing the year 2000 is performed, these systems
may interpret "00" as the year 1900 and could either stop processing
date-related computations or could process them incorrectly. Computations
referencing the year 2000 might be invoked at any time, but are likely to begin
occurring in the year 1999.
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<PAGE> 12
The Company has performed a company-wide year 2000 readiness assessment
and has made changes to computer programs which the Company believes will not be
year 2000 compliant. During fiscal years 1998, 1999 and during the first two
quarters of fiscal 2000, the Company spent approximately $15,000 in connection
with its year 2000 activities, and expects future costs during the balance of
fiscal 2000 to be minimal.
The Company could possibly be materially adversely impacted by the year
2000 issues faced by major distributors, suppliers, subcontractors, customers,
vendors, and financial service organizations with which the Company interacts.
The Company is in the process of determining the impact of the Company's
operations as a result of the year 2000 readiness of these third parties. In the
event year 2000 issues relating to key customers and suppliers are not
successfully resolved, based on information available to us at present, the
Company believes that the most reasonably likely worse case scenario is a
temporary disruption in infrastructure service, which could adversely impact
supplier deliveries or customer shipments. If severe disruptions occur in these
areas and are not corrected in a timely manner, a revenue or profit shortfall
may result in fiscal year 2000. The Company has completed its primary assessment
of the year 2000 readiness of its major suppliers and vendors and has developed
a contingency plan, which includes the use of alternative manufacturing
facilities and communication lines if problems arise.
Year 2000 compliance issues could have a significant impact on the
Company's operations and its financial results if the new information systems
develop unforeseen needs or problems arise; or, if the systems operated by the
Company's customers, vendors or subcontractors are not year 2000 compliant. The
assessment under which the Company believes its year 2000 readiness has been
completed is based on the Company's management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or additional costs associated
with, the implementation of year 2000 compliant solutions. Specific factors that
might cause differences between the estimates and actual results include, but
are not limited to, the availability and cost of personnel trained in these
areas, the ability to locate and correct all relevant computer code, timely
responses to and corrections by third-parties and suppliers, the ability to
implement interfaces between the new systems and the systems not being replaced,
and similar uncertainties. Due to the general uncertainty inherent in the year
2000 problem, resulting in part from the uncertainty of the year 2000 readiness
of third-parties and the interconnection of global businesses, the Company
cannot ensure its ability to timely and cost-effectively resolve problems
associated with the year 2000 issue that may affect its operations and business,
or expose it to third-party liability.
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, ENACTED IN DECEMBER 1995 (THE
"REFORM ACT") THAT PROVIDES A "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS MADE
BY OR ON BEHALF OF THE COMPANY. THE COMPANY HEREBY CAUTIONS STOCKHOLDERS,
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 YEAR ENDING APRIL 30, 2000, FOR THE FISCAL QUARTER ENDING JANUARY
31, 2000, AND FUTURE FISCAL YEARS AND QUARTERS 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:
Defaults under Outstanding Loans; Risk of Bankruptcy. The Company had
approximately $2.9 million of secured loans owing to its bank at October 31,
1999. As a result of the Company's financial condition and results of operations
in 1998, the bank had determined that the Company was in default under various
provisions of the loan agreement that would entitle the bank to terminate the
loan agreement and declare the loans immediately due and payable. The Company
was able to obtain letters of forbearance from the bank taking any action with
respect to the existing defaults until March 1999. In that regard, the Company
received $2.5 million in equity financing during fiscal 1999. In March 1999, the
bank credit line automatically renewed and in April 1999, various terms and
conditions of the agreement were renegotiated, reducing the borrowing limit from
$13.5 million to $5.0 million, reducing the interest rate and changing the
covenant requiring a minimum net worth, to allow the Company to be in compliance
at April 30, 1999. As a result of the Company's limited cash resources, the
Company may seek to obtain additional equity or other funding to increase the
cash available for operations and other purposes. There can
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<PAGE> 13
be no assurance that efforts to obtain additional funding will be successful or,
if successful, on terms acceptable to the Company. The Company is also indebted
to other creditors in the amount of approximately $4.4 million. Due to its poor
performance in recent fiscal years and the resulting net worth deficiency, the
Company has had to negotiate forbearance agreements with its bank and principal
lessor. Although recent results have cured such conditions, there can be no
assurance that such conditions will not recur, requiring the resumption of
negotiations with the Company's principle creditors and increased borrowing
expenses associated with forbearance agreements or waivers of default necessary
for continued operations.
Expected Need for Additional Capital. The Company has incurred
significant losses or experienced significant negative cash flow from operations
for more than three years. Such negative cash flow has significantly reduced the
Company's available capital. During fiscal 1999, the Company was successful in
having its lenders agree to waive or forbear actions on defaults under existing
loans or to renegotiate the terms of such loans to enable the Company to be in
conformance with the terms and conditions negotiated. If the Company is not
successful in raising additional capital, in view of the uncertainties relating
to arrangements with its bank and other lenders the Company cannot reasonably
assess how long its current cash balances, cash generated from operations and
borrowings available under any remaining loans or lines of credit and from
equipment financing, even with substantial reductions in operating expenses and
capital expenditures, will permit the Company to continue operations. There can
be no assurance that the Company will continue to generate sufficient revenue to
fund its operations in the absence of additional funding sources. The Company
has pursued and continues to pursue measures designed to reduce expenses and
conserve cash such as deferring payments to vendors and other suppliers,
headcount constraints, deferrals of planned expenditures, other expense
reductions and other measures. Although such activities help preserve cash and
enable the Company to continue operations, the lack of available capital hinders
the Company's ability to continue manufacturing, sales, product development and
other ongoing operational activities necessary to generating revenues. 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 obtained additional capital of $1.5 million in the quarter
ended July 31, 1998 and $1.0 million equity financing in the quarter ended
October 31, 1998. The Company may seek additional equity or debt financing to
address its working capital needs and to provide funding for capital
expenditures. There can be no assurance that additional funding will continue to
be available at acceptable terms, if at all. If the Company is successful in
raising additional 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 may be required to continue operations either of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Recent Operating Results; Possibility of Future Losses. The Company's
operating results for the six months ended October 31, 1999 would have resulted
in a profit of $1.5 million instead of a profit of $2.8 million if they had not
included $1.3 million of credits received from vendors as a result of various
negotiations. Additionally, the Company's 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. Additionally, the Company's operating
results in fiscal 1998 and 1997 resulted in losses of $18.9 million and $4.0
million respectively. The Company's last previous profitable year was the fiscal
year ended April 30, 1996. During the fiscal years 1997 through 1999 and before,
the Company experienced significant negative cash flow from operations. The
Company has taken many steps to reduce its operating expenses including reducing
its headcount from 71 in December 1996 to 43 in April 1999. 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 could 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 sustain profitability.
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<PAGE> 14
Dependence on a Sole Source Manufacturer. The Company does not
manufacture the semiconductor wafers used for its products. Oki has supplied
wafers to the Company since 1987 and is the Company's sole foundry source. The
Company does not have a wafer supply agreement with Oki at this time and instead
purchases wafers on a purchase order and acceptance basis. The Company's
exclusive reliance on this independent foundry involves a number of risks
including the risk of inadequate wafer supplies to meet the Company's production
needs, 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. In view of the recent increase in demand
for semiconductor products, the Company has not been able to obtain sufficient
quantities of wafers from Oki to fulfill some of the recent increased customer
demand, a circumstance that is expected to continue in at least the near future.
Although the Company has a wafer purchase agreement with UMC for certain Flash
products which runs through February 2006, due to declining Flash bookings and
other circumstances, the Company has not ordered any wafers from UMC since
December 1997. To address the Company's wafer supply concerns, the Company is
working on developing a secondary foundry capability with X-Fab at that
foundry's facility in Lubbock, Texas. X-Fab is owned by Elex NV which is a 39%
shareholder of the Company. The addition of X-Fab as a second foundry source
could enable the Company to reduce the risks associated with the sourcing and
quantity of its wafer supply and thereby improve control over an important
component of its business; however, there can be no assurance that sufficient
capacity will be available from X-Fab or another manufacturer. Even if such
capacity is available, the qualification process and time required to make the
foundry fully operational for the Company could take many months, or longer, and
be subject to the other factors described under "Semiconductor Manufacturing
Risks" below. The loss of Oki as a supplier, the inability of the Company to
obtain additional capacity at Oki or to qualify X-Fab or other wafer
manufacturers for desired foundry capacity, or any other circumstances causing a
significant interruption in the supply of semiconductor wafers to the Company
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Semiconductor Manufacturing Risks. The manufacture of semiconductor
wafers is highly complex and sensitive to a wide variety of factors and, as is
typical in the semiconductor industry, the Company's outside wafer foundry from
time to time has experienced lower than anticipated production yields. The
amount of time to develop an alternative foundry source can be lengthy and the
expense considerable. Furthermore, the yield of satisfactory product is often
substandard during the initial developmental stages when the process is being
initiated. 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 cash constraints could result in delays
or reductions in wafer deliveries from the Company's supplier. 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, the failure to develop X-Fab as a reliable foundry in an expeditious
and cost-effective manner, any prolonged inability to obtain adequate yields or
deliveries from Oki or X-Fab, or any other circumstance that would require the
Company to seek and qualify alternative sources of supply of such products,
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 wafer supplies from Oki 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. Although the Company is
exploring and seeking to develop alternative wafer supply sources such as X-Fab,
there can be no assurance that it will be able to obtain such alternative
sources or that the Company will have adequate facilities available. Failure to
have such supplies available would have a material adverse effect on the
Company's business, financial condition and results of operations.
Delinquency to Customers. Due to the constraints in the Company's wafer
supply, it has been unable to fulfill all its customers orders according to the
schedule originally requested. Although the Company is striving to increase its
supply of wafers and communicate to its customers the scheduled delivery dates
that it believes that it can reasonably expect to meet, there can be no
assurance that the customers will accept the alternative delivery date or not
seek cancellation of its outstanding orders. 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
recent fiscal years).
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<PAGE> 15
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 years ended April 30, 1999, 1998 and 1997), 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 years ended April 30, 1999, 1998 and
1997, 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 investors, which could have a material adverse effect on the
market price of the Company's Common Stock. Reductions in revenue expectations
can also require the Company to take additional reserves against inventory
valuations based upon the reduced likelihood that the Company will be able to
liquidate its inventories at profitable prices.
Inventory. The cyclical nature of the semiconductor industry
periodically results in oversupply or shortages 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. There can be no
assurance that the Company's inventory will be reduced 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 or other related factors.
For example, during the last half of fiscal 1998, the Company recorded charges
of approximately $7.5 million due to the rapid decrease in demand for and the
selling prices for the Company's products. Such adjustments have amounted to
less than $0.5 million in fiscal 1999 and have not been material thus far in
fiscal 2000. In addition, in fiscal 1998, the Company's ability to forecast
future demand and selling prices diminished. It is the policy of the Company to
fully reserve all inventory that is not expected 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 the Company's
products, the Company provided additional reserves for excess quantities and
obsolescence for certain products, primarily the Company's Flash and EEPROM
products. The rapid erosion of selling prices also left the Company 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. There can be no assurance that the Company
will not suffer similar reductions in values of its inventories in the future or
that the Company will be able to liquidate its inventory at acceptable prices.
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
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<PAGE> 16
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 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,
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 resulting in
major reductions in average selling prices and corresponding reductions in
margins. The Company's 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, 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.
International Operations. For the six months ended October 31, 1999 and
fiscal years 1999 and 1998 international sales accounted for approximately 74%,
41% and 64%, respectively, of the Company's product sales. The decrease in
international sales in 1999 was attributable to the transition in Japan from
Marubun which resigned in fiscal 1998 to various smaller alternative
distributors that serve similar markets and the inability of the Company to
compete with the low selling prices in certain Far East markets. In fiscal 2000,
the Company has been able to reenter certain Far East markets, contributing to
the increased international 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.
Except for a few sales through the Company's subsidiary in Japan, Nippon
Catalyst KK, all sales are invoiced and paid in dollars, reducing the Company's
direct exposure to currency fluctuations. Except for Yoshikawa Semiconductor in
Japan, and some payroll and incidental manufacturing supply purchases in
Thailand, over 95% of the Company's purchases are in US dollars, minimizing any
direct currency fluctuation risk. However, recent adverse developments in the
economic environment in the Far East may have a material adverse effect on the
Company's subcontractors. 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. 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.
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
during 1998 and 1999 were derived from sales of Flash memory products. The
market for Flash memory products has been characterized by
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<PAGE> 17
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, 1998
and 1999 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, 1998 and 1999 operating results to continue 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 years 1997, 1998 and 1999.
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
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.
For the six months ended October 31, 1999, shipments to Future Electronics, Inc.
a distributor headquartered in Canada and two distributors located in the Far
East, Yosun Industrial Corp. and Memec (Asia Pacific) Ltd. each represented more
than ten percent of the Company's revenues (12%, 11% and 11% respectively).
During fiscal years 1999 and 1998, the only customer which represented more than
ten percent of Catalyst's product revenue was Marubun Corporation, a Japanese
distributor (0% and 21%, respectively). In December 1997, Marubun resigned as a
distributor effective in or about March 1998. The Company has been working to
develop alternative distributors in Japan to replace Marubun. Such efforts take
substantial time and may not completely replace the sales volumes achieved
through Marubun. 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.
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<PAGE> 18
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board 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, we will be 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. We believe the adoption of this
statement will not have a significant effect on our results of operations.
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 investors 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.
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<PAGE> 19
CATALYST SEMICONDUCTOR, INC.
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 November 4,
1999, the following proposals were adopted by the margins indicated.
<TABLE>
<CAPTION>
Number of
Voted Shares
Proposal For Withheld
-------- ----- --------
<S> <C> <C>
1. To elect two Class I Directors to
serve for a three-year term expiring upon
the Annual Meeting of Stockholders next
following April 30, 2002, or until such
directors' respective successors are duly
elected and qualified.
Radu M. Vanco - Class I Director 12,631,621 237,836
Hideyuki Tanigami - Class I 12,630,921 237,836
Director
</TABLE>
<TABLE>
<CAPTION>
Voted Vote Broker
For Against Abstain Non-votes
----- ------- ------- ---------
<S> <C> <C> <C> <C>
2. To approve an amendment to the
Company's 1993 Director Stock Option
Plan to increase the number of shares
of Common Stock reserved for issuance
hereunder by 100,000 shares. 11,884,342 630,583 42,121 311,711
3. To ratify the appointment of
PricewaterhouseCoopers LLP as
independent accountants of the
Company for the fiscal year ending
April 30, 2000. 12,736,371 75,776 56,610 0
</TABLE>
ITEM 5. OTHER INFORMATION
On September 8, 1999, the Company's Board of Directors increased the
number of authorized directors from four to five, comprised of two Class I
Directors, one Class II Director and two Class III Directors. Mr. Roland
Duchatelet, Chairman of Elex NV, was appointed as a Class III Director. Mr.
Duchatelet's term will expire, along with that of the other Class III Director,
on April 30, 2001, or at such time as his successor has been duly elected and
qualified.
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 October
31, 1999.
-19-
<PAGE> 20
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: December 15, 1999 By: /s/ Radu M. Vanco
----------------- ----------------------------------------
Radu M. Vanco
President and Chief Executive Officer
Date: December 15, 1999 By: /s/ Thomas E. Gay III
----------------- ----------------------------------------
Thomas E. Gay III
Vice President of Finance and Administration
and Chief Financial Officer
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
THE UNAUDITED FINANCIAL RESULTS FOR THE SIX MONTH PERIOD ENDED OCTOBER
31, 1999 AND IS QUALIFIED IN ITS ENTITETY BY REFERENCE TO SUCH (B) 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-03-1999
<PERIOD-END> OCT-31-1999
<CASH> 1,563
<SECURITIES> 0
<RECEIVABLES> 6,013
<ALLOWANCES> (286)
<INVENTORY> 2,603
<CURRENT-ASSETS> 10,452
<PP&E> 12,502
<DEPRECIATION> (10,526)
<TOTAL-ASSETS> 12,428
<CURRENT-LIABILITIES> 10,648
<BONDS> 0
0
0
<COMMON> 45,239
<OTHER-SE> (43,628)
<TOTAL-LIABILITY-AND-EQUITY> 12,428
<SALES> 18,896
<TOTAL-REVENUES> 18,896
<CGS> 10,928
<TOTAL-COSTS> 10,928
<OTHER-EXPENSES> 5,872
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289
<INCOME-PRETAX> 2,807
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,807
<EPS-BASIC> .20
<EPS-DILUTED> .15
</TABLE>
