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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, 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 March
13, 1999 was 13,948,061
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CATALYST SEMICONDUCTOR, INC.
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets
at January 31, 1999 and April 30, 1998.................................................... Page 3
Unaudited Condensed Consolidated Statements of Operations for the three and nine month
periods ended January 31, 1999 and 1998................................................... Page 4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine month periods
ended January 31, 1999 and 1998........................................................... Page 5
Notes to Unaudited Condensed Consolidated Financial Statements.............................. Pages 6-9
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 II-1
ITEM 5. OTHER INFORMATION........................................................................... Page II-2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................ Page II-2
SIGNATURES........................................................................................... Page II-3
</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>
Jan. 31, April 30,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................ $ 2,746 $ 534
Restricted cash ................................................. 0 5,750
Accounts receivable, net ........................................ 4,570 4,726
Inventories ..................................................... 2,676 4,194
Other assets .................................................... 1,067 815
---------- ----------
Total current assets ........................................ 11,059 16,019
Property and equipment, net ..................................... 2,109 2,834
---------- ----------
$ 13,168 $ 18,853
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit .................................................. $ 3,117 $ 3,225
Accounts payable ................................................ 7,410 13,400
Accrued expenses ................................................ 2,338 3,650
Deferred gross profit on shipments to distributors .............. 976 475
Current portion of long-term debt and capital lease obligations . 1,122 1,471
---------- ----------
Total current liabilities ................................... 14,963 22,221
Long-term debt and capital lease obligations ......................... 316 501
---------- ----------
Total liabilities ........................................... 15,279 22,722
Total stockholders' equity (deficit) ................................. (2,111) (3,869)
---------- ----------
$ 13,168 $ 18,853
========== ==========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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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, 1999 Jan. 31, 1998 Jan. 31, 1999 Jan. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues ...................... $ 8,441 $ 10,034 $ 23,872 $ 29,757
Cost of revenues .................. 5,806 11,989 16,647 28,183
---------- ---------- ---------- ----------
Gross profit ...................... 2,635 (1,955) 7,225 1,574
Research and development .......... 591 1,299 1,741 3,527
Selling, general and administrative 1,520 2,625 5,537 6,268
---------- ---------- ---------- ----------
Income (loss) from operations ..... 524 (5,879) (53) (8,221)
Interest income (expense), net .... (134) (161) (622) (549)
---------- ---------- ---------- ----------
Net income (loss) ................. $ 390 $ (6,040) $ (675) $ (8,770)
========== ========== ========== ==========
Net income (loss) per share:
Basic ........................ $ 0.03 $ (0.72) $ (0.06) $ (1.07)
========== ========== ========== ==========
Diluted ...................... $ 0.02 $ (0.72) $ (0.06) $ (1.07)
========== ========== ========== ==========
Weighted average common shares:
Basic ........................ 13,948 8,417 11,653 8,188
========== ========== ========== ==========
Diluted ...................... 19,186 8,417 11,653 8,188
========== ========== ========== ==========
</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>
Nine Months Ended
-------------------------------
Jan. 31, 1999 Jan. 31, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ (675) $ (8,770)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation and amortization ........................... 957 1,491
Loss on impairment of equipment ......................... - - - 855
Changes in working capital:
Accounts receivable ................................ 156 (103)
Inventories ........................................ 1,518 5,540
Other assets ....................................... (252) (123)
Accounts payable ................................... (5,990) 1,315
Accrued expenses ................................... (1,312) 299
Deferred gross profit on shipments to distributors . 501 (146)
---------- ----------
Net cash used in operating activities ............................ (5,097) 358
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for the acquisition of equipment .................. (232) (1,652)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock transactions, net .............................. 2,433 228
Restricted cash ............................................. 5,750 - - -
Net proceeds from (payment of) line of credit ............... (108) (12)
Payment of long-term debt and capital lease obligations .... (534) (386)
---------- ----------
Cash provided by (used in) financing activities ......... 7,541 (170)
---------- ----------
Net increase (decrease) in cash and cash equivalents ............. 2,212 (1,464)
Cash and cash equivalents at beginning of the period ............. 534 2,695
---------- ----------
Cash at end of the period ........................................ $ 2,746 $ 1,231
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash activity:
Interest paid (net) .................................. $ 622 $ 549
Non cash activity:
Common stock issued in settlement of accounts payable - - - $ 675
</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, 1998 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, 1998. The results of operations for the nine
month period ended January 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 thus far in 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 continue to
experience a downward trend in product pricing which could further adversely
affect the Company's operating results.
The Company's operating results in the past year have consumed
substantial amounts of cash. The reduction in cash has also placed restrictions
on wafer purchases which, during the fourth quarter of 1998, resulted in the
cancellation of some customer sales orders. In May 1998, the Company received
net proceeds of $1.5 million from the sale of 1,500,000 shares of its Common
Stock in a private placement. In September 1998, the Company completed the sale
of 4,000,000 additional shares of its Common Stock to the same investor for $1.0
million. Management believes, however, that it will 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 1999,
and is currently pursuing other sources of liquidity.
As a result of these circumstances, the Company's independent
accountants' opinion on the Company's April 30, 1998 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
During the quarter ended January 31, 1998, the Company adopted SFAS No.
128, "Earnings Per Share". SFAS No. 128 requires presentation of both basic and
diluted net income per share on the face 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.
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
Jan. 31, 1999 Jan. 31, 1998 Jan. 31, 1999 Jan. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) ......................... $ 390 $ (6,040) $ (675) $ (8,770)
========== ========== ========== ==========
Shares calculation:
Weighted avg shares outstanding-basic 13,948 8,417 11,653 8,188
Effect of diluted securities:
Stock options ........................ 5,238 -- -- --
---------- ---------- ---------- ----------
Weighted average shares outstanding-diluted 19,186 8,417 11,653 8,188
========== ========== ========== ==========
Net loss per share:
Basic ................................ $ 0.03 $ (0.72) $ (0.06) $ (1.07)
========== ========== ========== ==========
Diluted .............................. $ 0.02 $ (0.72) $ (0.06) $ (1.07)
========== ========== ========== ==========
</TABLE>
Options to purchase 6,506,000 shares of common stock at prices ranging
from $0.11 to $6.30 per share were outstanding during the quarter ended January
31, 1999. Options to purchase 2,675,000 shares of common stock at prices from
$1.08 to $7.25 per share outstanding during the quarter ended January 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>
Jan. 31, April 30,
1999 1998
---------- ----------
<S> <C> <C>
Accounts receivable:
Accounts receivable ........................... $ 4,878 $ 5,052
Less: Allowance for doubtful accounts ........ (308) (326)
---------- ----------
$ 4,570 $ 4,726
========== ==========
Inventories:
Work-in-process ............................... $ 2,059 $ 2,410
Finished goods ................................ 617 1,784
---------- ----------
$ 2,676 $ 4,194
========== ==========
Property and equipment:
Engineering and test equipment ................ $ 7,908 $ 7,691
Computer hardware and software ................ 3,485 3,470
Furniture and office equipment ................ 1,275 1,275
---------- ----------
12,668 12,436
Less: accumulated depreciation and amortization (10,559) (9,602)
---------- ----------
$ 2,109 $ 2,834
========== ==========
</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 at a variable interest rate of prime plus 5.25%
(13.0% at January 31, 1999). The revolving line of credit is subject to
compliance with loan covenants. At July 31, 1998, the Company was not in
compliance with certain of the loan covenants and the bank has agreed in a
letter of forbearance not to enforce certain of its rights to which it is
entitled under such condition. Such forbearance is granted until March 31, 1999
for each condition of non-compliance on July 31, 1998. As a result of such
non-compliance with the terms of the loan, the Company cannot currently borrow
any additional funds under the line without the permission of the bank. During
the nine months ended January 31, 1999, the bank has continued to loan amounts
in accordance with the loan agreement.
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The credit line with the Company's bank automatically renewed on
February 19, 1999, extending the term by a one year period ending June 19, 2000.
The Company has requested and the bank has agreed to consider changing various
terms and conditions of the agreement to reduce the amount of the credit limit
to a more appropriate amount, to reduce other fees and expenses and modify
various covenants such that the Company will no longer be in default and
therefore not require any further letters of forbearance from the bank. The
Company and the bank have agreed to make a reasonable effort to have the new
agreement in place before March 31, 1999 when the current letter of forbearance
expires.
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%, was originally due and payable on May 15,
1998. A subsequent agreement has been negotiated allowing the Company to satisfy
the obligation by making monthly payments of $0.1 million principal and interest
beginning on November 15, 1998 until paid in full. As of January 31, 1999 the
balance remaining was $0.9 million and all payments had been made as agreed.
NOTE 5 - SALE OF COMMON STOCK:
In May 1998, a private investor purchased 1,500,000 shares of the
Company's common stock in a private placement for $1.00 per share. The offer and
sale of the securities was 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. The Company also has repurchase rights with respect to the
shares sold over the twelve months from the date of issuance.
In September 1998, the same shareholder purchased an additional
4,000,000 shares of the Company's common stock for $.25 per share. The terms and
conditions applicable to this additional purchase are the same as the shares
purchased in May 1998. In addition, for a period of twelve months following the
closing of the foregoing sale of shares, the Company has the right to require
the shareholder to purchase up to 4,000,000 additional shares of common stock at
a purchase price of $.25 per share.
NOTE 6 - STOCK OPTION PLAN REPRICING:
In September 1998, the Board of Directors repriced all outstanding
options held by employees and consultants to the then current fair market value
of the Common Stock. As a consequence, all such outstanding options were
cancelled and an equivalent number of new options with an exercise price of
$.125 were issued in replacement thereof. The terms and conditions applicable to
the new options, including the vesting provisions, were the same as the old
options except that the price was lowered and the expiration date of the options
was extended to a date ten years from the date of the repricing.
NOTE 7 - 1998 SPECIAL EQUITY INCENTIVE PLAN
In December 1998, the Board of Directors adopted a special equity
incentive plan to provide additional incentives to eligible employees,
consultants, officers and directors whose present and potential contributions
are important to the continued success of the Company. The Board reserved 3.5
million shares for issuance under such plan. At the annual shareholders meeting
held January 14, 1999 the shareholders approved the grant of 3.25 million shares
at a price of $0.125 per share to certain directors and officers as originally
granted December 8, 1998 by the board. As a result of these grants the Company
will recognize approximately $0.6 million of compensation expense over the four
year vesting period of the options. The grants to officers and directors will
vest 25% at the end of the first year with the balance to vest monthly for the
following 36 months.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company has an arrangement to obtain engineering services from
Essex com SRL ("Essex"), a wholly owned Romanian subsidiary of Lxi Corporation,
a California corporation ("Lxi"), a provider of engineering services. The
services relate to key development projects of the Company including
development, design, layout and test program development services. Messrs.
Vanco, Voicu and Gay own approximately 91%, 3% and 1%, respectively, of Lxi. The
fees for such engineering services are on terms believed by the Company to be
fair to the Company and no less favorable to the Company than arms length
commercial terms. During the fiscal year ended May 3, 1998, the Company recorded
$413,000 of engineering fees to Essex for engineering design services. For the
current fiscal year through the date covered by this report (May 4, 1998 through
January 31, 1999), the Company recorded $294,000 of
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engineering fees to Essex and Lxi. As of January 31, 1999 the total amount owed
to Essex and Lxi was $119,000. Messrs. Vanco, Voicu and Gay received no payments
during the fiscal year ended May 3, 1998 and through January 31, 1999 of the
current fiscal year, except Mr. Gay who received $3,000 and $1,200 from Lxi
during such respective periods. Such payments to Mr. Gay were made for services
rendered prior to his joining the Company in connection with his duties as
Treasurer of Lxi. Mr. Gay resigned such position immediately prior to joining
the Company. Mr. Gay continues to serve as a director of Lxi.
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 semiconductor memory products and is in the
process of developing mixed signal and micro-controller supervisory products.
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 through the nine months ended January
31, 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 continue to experience a downward trend in product pricing which could
further adversely affect the Company's operating results.
The Company's operating results in the past year 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 net proceeds of $1.5 million from the
sale of 1,500,000 shares of its Common Stock in a private placement. In
September 1998, the Company sold 4,000,000 additional shares of its Common Stock
for $1.0 million in another private placement to the same investor. 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 1999 and beyond, and is
currently pursuing these sources of liquidity.
As a result of these circumstances, the Company's independent
accountants' opinion on the Company's April 30, 1998 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 decreased 16% to $8.4
million for the quarter ended January 31, 1999 from $10.0 million for the
quarter ended January 31, 1998. For the nine months ended January 31, 1999,
total revenues decreased 20% to $23.9 million from $29.8 million for the nine
months ended January 31, 1998. The decreases were primarily attributable to a
decrease in sales of the Company's Flash products, the resignation of the
Company's Japanese distributor, price erosion caused by excess supply and other
adverse industry-wide conditions. Shipments of the
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Company's Flash memory devices decreased by $8.5 million to 26% of revenues for
the first three quarters of fiscal 1999 compared to 51% of revenues or $14.4
million in the comparable period of the prior year. The decrease in Flash
product sales is attributable to ASP erosion and that the majority of the market
is for devices with larger memory capacity than the 2 megabyte devices that the
Company has developed. Marubun, the Company's Japanese distributor which
resigned effective the end of fiscal 1998, represented sales of approximately
$5.9 million in the nine months ended January 31, 1998. The Company has been
seeking replacement distribution relationships in Japan but such sales have only
totaled $0.3 million during the nine months of fiscal 1999. Total revenues of
$8.4 million for the quarter ended January 31, 1999 increased by 4% from $8.1
million for the quarter ended October 31, 1998. The increase is primarily
attributable to an increase in units shipped that exceeded the effects of
average sales price erosion experienced during the quarter. 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 continuation of
weak demand, capital deficiencies and price erosion for the Company's products
could lead to continued poor operating results. For the nine months ended
January 31, 1999, approximately 50% of the Company's revenues were derived from
shipments to international customers compared with 64% and 63% of net product
sales in fiscal 1998 and 1997, respectively. The decrease in international
revenues is attributable to the loss of the Company's Japanese distributor and
the Company's inability to compete effectively at the low prices prevalent in
certain markets in the Far East. All sales of the Company's products are in US
dollars, minimizing the effects of currency fluctuations.
Gross Profit (Loss). Gross profit for the quarter ended January 31,
1999 was $2.6 million, or 31% of revenues, compared to a gross loss of $2.0
million, or 19% of revenues, for the quarter ended January 31, 1998. The
increase was attributable to $2.7 million of inventory valuation charges and
expenses of $0.8 million for impaired manufacturing assets taken in the quarter
ended January 31, 1998. For the nine months ended January 31, 1999, gross
profits increased by 350% to $7.2 million or 30% of revenues, from $1.6 million,
or 5% of revenues, for the nine months ended January 31, 1998. The gross profits
for the nine months ended January 31, 1998 were decreased by the $3.5 million in
charges for inventory valuation adjustments and impaired equipment charges in
the quarter ended January 31, 1998 as contrasted with the benefit of $1.2
million in credits and vendor debt reductions negotiated by management in the
nine months ended January 31, 1999. The $2.7 million of inventory valuation
adjustments in the quarter ended January 1998 were due to the rapid decrease in
demand for and the selling prices for the Company's products. In addition, 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. Additionally, certain masks
valued at $0.6 million and other manufacturing assets valued at $0.2 million
associated with the production of the Company's inventory were written off in
the quarter ended January 31, 1998. 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 are paid mostly within
30 days, minimizing the effects of currency fluctuations.
Research and Development. Research and development (R&D) expenses
consist principally of salaries for engineering, technical and support
personnel, depreciation of equipment, and the cost of wafers used to evaluate
new products and new versions of current products. R&D expenses decreased by 54%
to $0.6 million, or 7% of revenues, for the quarter ended January 31, 1999 from
$1.3 million, or 13% of revenues, for the quarter ended January 31, 1998. The
decrease is primarily attributable to a $0.5 million reduction in personnel
costs due to a reduction in force and employee attrition. For the nine months
ended January 31, 1999, R&D expenses decreased 51% to $1.7 million, or 7% of
revenues, from $3.5 million, or 12% of revenues, for the nine months ended
January 31, 1997. The decrease in absolute dollars spent was attributable to a
$1.4 million reduction in labor and headcount related expenses resulting from a
general reduction in force and a transfer of development to more cost effective
off share sources and $0.2 million reduction in depreciation due to the lack of
new asset purchases.
Selling, General and Administrative. Selling, general and
administrative (SG&A) expenses consist principally of salaries for sales,
marketing and administrative personnel, commissions and promotional activities.
SG&A expenses decreased by 42% to $1.5 million, or 18% of revenues, for the
quarter ended January 31, 1999, from $2.6 million, or 26% of revenues, for the
quarter ended January 31, 1998. The decreases were attributable to $0.5 in bad
debt expense in 1998 as compared to no such expense in 1999 and a reduction of
$0.4 in personnel and related costs due to the accrual of severance expense for
a general reduction in force in March 1998. The fiscal 1998 results included
$0.3 million for additional provisions for the write-off of trade receivables
from a distributor in Taiwan. The SG&A expense was reduced in the quarter ended
January 31, 1999 by the settlement of executive
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severance benefits for $0.1 million less than previously reserved. For the nine
months ended January 31, 1999, SG&A expenses decreased 13% to $5.5 million, or
23% of revenues, from $6.3 million, or 21% of revenues, for the nine months
ended January 31, 1998. The decrease is attributable to a reduction of $0.6 in
personnel and related costs including the $0.4 million accrual of severance
expense for a general reduction in force in March 1998 and $0.3 million
reduction of bad debt expenses. The primary reason for the increase in the
percentage of revenue is the decrease in revenues primarily attributable to the
erosion of prices to the Company's customers.
Net Interest Income (Expense.) Net interest expense decreased by 17% to
$134,000 for the quarter ended January 31, 1999 from $161,000 for the quarter
ended January 31, 1998. The decrease is primarily related to the decreased
average outstanding borrowings. Net interest expense for the nine months ended
January 31, 1999 increased 13% to $622,000 compared to $549,000 for the nine
months ended January 31, 1998. The increase is primarily attributable to higher
interest rates on the Company's outstanding borrowings.
Income Tax Provision. As a result of the Company's losses, the
provision for income taxes remained at zero for the quarter ended January 31,
1999.
As of April 30, 1998 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
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased $2.2 million to $2.7 million as of January 31, 1999 from
$0.5 million as of April 30, 1998. The increase was primarily attributable to
$2.5 million received from the sale of common stock to an investor. Restricted
cash decreased to zero as of January 31, 1998 from $5.8 million as of April 30,
1998. The restricted cash was pledged as security on a $7.0 million letter of
credit that had been required by certain of the Company's wafer foundries. The
Company utilized such restricted cash and additional borrowings from its bank to
make a payment of $7.0 million in September 1998 to terminate the letter of
credit.
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 at a variable interest rate of prime plus 5.25%
(13.0% at January 31, 1999). The revolving line of credit is subject to
compliance with loan covenants. At January 31, 1999, the Company was not in
compliance with certain of the loan covenants and the bank agreed in a letter
of forbearance not to enforce certain of its rights resulting from such
noncompliance. Such forbearance has been granted until March 31, 1999 for each
condition of non-compliance on July 31, 1998. As a result of such
non-compliance with the terms of the loan, the Company cannot currently borrow
any additional funds under the line without the permission of the bank. During
the nine months ended January 31, 1999, the bank has continued to loan amounts
in accordance with the loan agreement. Due to continued losses by the Company,
the borrowings against the backlog from certain foreign customers have been
eliminated.
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%, was originally due and payable on May 15,
1998. The Company has renegotiated the terms of the note and agreed to satisfy
the obligation with monthly payments of $0.1 million applied to principal and
interest beginning on November 15, 1998 until paid in full. There can be no
assurance that the Company will be able to make such payments to the
satisfaction of the vendor or, if the Company fails to comply with the agreement
that the vendor will not seek to enforce its right to collect the unpaid
balance. As of January 31, 1999, the Company had made all payments as agreed and
was in compliance with the payment schedule.
The Company has been seeking additional equity or debt financing to
address its working capital needs and to provide funding for capital
expenditures. In September 1998, the Company entered into an agreement to issue
Common Stock in exchange for $1.0 million with the right to obtain an additional
$1.0 million of equity financing on the same terms and conditions. There can be
no assurances, however, that further financing will be available on terms
acceptable to the Company, if at all. 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 can not reasonably
assess how long its current cash balances, cash generated from operations and
borrowings available under any remaining
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<PAGE> 12
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.
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, 1999, FOR THE FISCAL QUARTER ENDING APRIL
30, 1999, 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 has
approximately $3.1 million of secured loans owing to its bank. As a result of
the Company's financial condition and results of operations, the bank has
determined that the Company is in default under various provisions of the loan
agreement entitling the bank to terminate the loan agreement and declare the
loans immediately due and payable. Although the Company has obtained letters of
forbearance from the bank taking any action with respect to existing defaults,
such forbearance only extends until March 31, 1999 and only as to the specified
defaults claimed through September 21, 1998. The Company is working to persuade
the bank to continue to forebear taking action on the events of default and not
to declare the loan immediately due and payable. In that regard the Company has
received $1.0 million in equity financing and a twelve month right to obtain up
to an additional $1.0 million of equity financing. There can be no assurance
that efforts to obtain additional funding will be successful or, if successful,
that the bank will continue to forbear action on or otherwise waive the existing
defaults. There can be no assurance the Company's efforts will be successful. If
the Company's efforts are unsuccessful, the bank is likely to declare the loans
due and payable. Under such circumstances the Company would be unable to
continue operations which would result in bankruptcy. The Company is also
indebted to other creditors in the amount of approximately $7.4 million.
Continued operation of the Company would also require such other creditors to
forbear taking action or waiving defaults under such other debt. Moreover, it is
anticipated that any continued forbearance by the bank would require such other
creditors to take similar action under the other loans. In addition, 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 is in violation of
certain terms of its lease. Similar violations have resulted under certain
equipment lease agreements.
Need for Additional Capital. The Company has incurred significant
losses and experienced significant negative cash flow from operations for over
two years. Such negative cash flow has significantly reduced the Company's
available capital. The Company has thus far been 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 keep such loans
outstanding but there can be no assurance that such lenders will continue to
agree to such favorable actions. The Company may, as a condition to such waivers
or forbearances, need to obtain additional capital. 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 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 substantial reductions in operating expenses and
capital expenditures, will permit the Company to continue operations. There can
be no assurance 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 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.
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 could 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 could
be further adversely affected.
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<PAGE> 13
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 and a twelve month right to obtain up to an additional $1.0 million of
equity financing. 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 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.
Recent Operating Results; Anticipated Future Losses. Although the
Company's operating results for the quarter ended January 31, 1999 reflect an
increase in revenues and profitability from the previous two quarters, the year
to date results still reflect a loss of $0.7 million. Total revenues for the
quarter ended January 31, 1999 were $8.4 million compared to revenues of $8.1
million in the quarter ended October 31, 1998 and revenues of $10.0 million for
the comparable period of the prior year. In addition, the Company had net income
for the quarter ended January 31, 1999 of $0.4 million compared to a net loss
for the quarter ended October 31, 1998 of $.4 million and to a net loss of $6.0
million for the comparable period in the prior year. The Company lost $18.9
million in the fiscal year ended April 30, 1998 and the Company's last
profitable year was the fiscal year ended April 30, 1996. For the preceding two
years, the Company has 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 42 in January
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 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 nine months ended January 31, 1999 and in the fiscal years ended April 30,
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 nine months ended January 31, 1999 and
the years ended April 30, 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 continue 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. 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
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<PAGE> 14
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.
The Company recorded $2.7 million of inventory valuation adjustments in the
quarter ended January 1998 due to the rapid decrease in demand for and the
selling prices for the Company's products. In addition, 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. Additionally, during the last
half of fiscal 1998, the Company recorded charges of approximately $7.5 million
attributable to reserves for similar excess and obsolete inventory valuation
adjustments for lower of cost or market adjustments. Such adjustments have
amounted to $0.6 million in the nine month period ended January 31, 1999. 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 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. There 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.
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 to fabricate 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
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<PAGE> 15
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 also has concerns about the
financial viability of its primary test and assembly contractor. Although the
Company is exploring alternative contractors, there can be no assurance that it
will be able to obtain such alternative services or that the Company will have
adequate test and assembly facilities available. Failure to have such services
available would have a material adverse effect on the Company's business,
financial condition and results of operations. 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, 1999
and fiscal 1998, 1997 and 1996 international sales accounted for approximately
50%, 64%, 63% and 60%, respectively, of the Company's product sales. The
decrease in international sales is attributable to the transition in Japan from
Marubun who 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. 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, NCKK, 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. 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 the nine months ended January 31, 1999 and the fiscal year ended April
1998 were derived from sales of Flash memory products. The market for Flash
memory products has been characterized by intense price competition, long
production cycles, inconsistent yields, competing technologies, rapidly
declining average selling prices, declines in gross margins and
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<PAGE> 16
intense overall competition. The Company's operating results in fiscal 1997,
1998 and for the first nine months of fiscal 1999 have been 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, fiscal 1998 and the first half of fiscal 1999
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, fiscal 1998 and thus far in
fiscal 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.
During the nine month period ended January 31, 1999, only one customer, Intel
Corporation, represented more than 10% of the Company's product revenues, which
represented 11% of the Company's shipments. During the fiscal years 1998, 1997
and 1996, the only customer which represented more than ten percent of
Catalyst's product revenue was Marubun Corporation, a Japanese distributor (21%,
14% and 12%, respectively). In December 1997, Marubun resigned as a distributor
effective in or about March 1998. The Company is 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.
Year 2000 Program, General. The Company is currently conducting a
company-wide Year 2000 readiness program ("Y2K Program") with a task force
meeting weekly. The Y2K Program is addressing the issue of computer programs and
embedded computer chips being unable to distinguish between the year 1900 and
the
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<PAGE> 17
year 2000. Therefore, some computer hardware and software will need to be
modified prior to the Year 2000 in order to remain functional. The Company
anticipates that Year 2000 compliance will be substantially complete by July
1999.
The Company's Y2K Program is divided into four major sections
- --Catalyst manufactured products, internal information ("IT") system, non-IT
system, and third-party suppliers and customers. The general phases common to
all sections are: (1) inventorying Year 2000 items; (2) assessing the Year 2000
compliance of items determined to be material to the company; and (3) repairing
or replacing material items that are determined not to be Year 2000 compliant.
The Company has completed the review of all Catalyst manufactured
products for Year 2000 compliance purposes. The Company believes that all of the
Company's products are Y2000 compliant since the Company's products do not
create or calculate date related information.
The Company is currently evaluating and addressing Year 2000 issues
associated with its internal IT systems. The supplier of the Company's financial
system has provided an update under its software maintenance contract that is
designed to make the system Year 2000 compliant. The Company expects to finish
its evaluation and installation of the update in or about June 1999. Other
internal computer systems that have been identified as non-compliant will be
upgraded to be Year 2000 compliant in or about July 1999.
The Company has completed the evaluation of Year 2000 issues associated
with its non-IP systems. Most of them are Year 2000 compliant. Those non-IT
systems that are not Year 2000 are expected to be repaired or replaced in or
about June 1999.
The Company is currently assessing the possible effects on the
Company's operations of the Year 2000 readiness of its key suppliers and
contract manufacturers. See "Dependence on Independent Foreign Manufacturers and
Subcontractors; Manufacturing Risks." The Company expects this assessment will
be completed in or about June 1999. The Company's reliance on suppliers and
contract manufacturers and, therefore, on the proper functioning of their
information systems and software, means that failure to address Year 2000 issues
could have a material impact on the Company's operations and financial results;
however, the potential impact and related costs are not known at this time. The
Company has received detailed reports of Year 2000 readiness from all its major
contract suppliers. Such reports show that their programs are substantially
complete and that all Year 2000 issues have been resolved. The suppliers that
represent more than 10% of each of its manufacturing activities are: Oki
Semiconductor, the Company's principal wafer fabricator, Yoshikawa Semiconductor
Co, Ltd., provider of wafer testing services and NS Electronics Bangkok (1998)
Ltd. and Gateway Electronics Corporation, its primary contract assembly and test
service providers. The Company intends to discuss the Y2K statements of each
major supplier during visits to each such manufacturer and to audit the state of
readiness in the Y2K readiness reports received.
Year 2000 Costs. The total cost associated with required modifications
to become Year 2000 compliant is not expected to be material to the Company's
financial position. Through January 31, 1999, the Company has spent less than
$1,000 of out of pocket expenses to implement its Year 2000 compliance program.
That amount has been expensed. The Company estimates that it may spend up to an
additional $25,000 for other replacements or upgrades and for audits and
communicating with key suppliers and customers. That amount will also be
expensed as incurred.
Year 2000 Risks. The failure to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely affect
the Company's results of operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Year 2000 problem resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Y2K Program is
expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000 compliance and
readiness of its material key suppliers and customers. The Company believes
that, with the implementation of new business systems and completion of the Y2K
Program as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
Year 2000 Contingency Plans. The Company has developed a contingency
plan to address the Y2000 problem that is expected to minimize any interruption
to its supplies and shipments of its products to its customers in January 2000.
Such plan includes an increase of manufacturing activity during November and
December 1999 to
-17-
<PAGE> 18
have all products on order for the month of January 2000 completed and in
finished goods inventory. The Company may not be able to fulfill any orders for
immediate shipment during January if its suppliers do experience any disruptions
that may have a material adverse impact on the Company's 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 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.
-18-
<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 January 14,
1999 the following proposals were adopted by the margins indicated.
<TABLE>
<CAPTION>
Number of
Voted Shares
For Withheld
----------- ----------
<S> <C> <C> <C> <C>
1. To elect one Class II director to serve for a
two-year term expiring upon the Annual Meeting of
Stockholders next following April 30, 2000 and to
elect one Class III director to serve for a
three-year period expiring upon the Annual Meeting of
Stockholders next following April 30, 2001, or until
such directors respective successors are duly elected
and qualified.
Patrick Verderico - Class II Director 12,033,545 269,577
Lionel M. Allan - Class III Director 12,027,645 275,477
Voted Voted Broker
For Against Abstain Nonvote
----- ------- ------- -------
2. To approve an amendment and restatement of the
Company's Restated Certificate of Incorporation to
increase the number of authorized shares of Common
Stock from 25,000,000 shares to 45,000,000 shares. 11,649,973 622,349 30,800 0
3. To approve amendments to the Company's Stock Option
Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 1,800,000 shares,
to increase the maximum number of shares subject to
options that may be issued to any one employee during
a fiscal year to 1,000,000 shares and to make changes
in the Plan necessary to comply with applicable state
securities law. 6,492,905 733,509 54,325 5,022,383
4. To approve the adoption of the 1998 Special Equity
Incentive Plan and the reservation of 3,500,000
shares for issuance thereunder. 6,505,960 704,544 70,255 5,022,383
5. To approve the following option grants under the 1998
Special Equity Incentive Plan: 1,000,000 to Radu M.
Vanco; 200,000 to each of Marc Cremer, Thomas E. Gay
III, Bassam Khoury, Gelu Voicu, Lionel M. Allan,
Hideyuki Tanigami and Patrick Verderico; 250,000 each
to Irv Kovalik and Juzer Mogri; 150,000 shares to
William Priestner; and 100,000 shares to Frank
Reynolds. 6,333,144 885,021 62,574 5,022,383
6. To ratify the appointment of Pricewaterhouse Coopers
LLP as independent accountants of the Company for the
fiscal year ending April 30, 1999. 12,100,193 136,904 66,025 0
</TABLE>
II-1
<PAGE> 20
ITEM 5. OTHER INFORMATION
The Company has an arrangement to obtain engineering services from
Essex com SRL ("Essex"), a wholly owned Romanian subsidiary of Lxi Corporation,
a California corporation ("Lxi"), a provider of engineering services. The
services relate to key development projects of the Company including
development, design, layout and test program development services. Messrs.
Vanco, Voicu and Gay own approximately 91%, 3% and 1%, respectively, of Lxi. The
fees for such engineering services are on terms believed by the Company to be
fair to the Company and no less favorable to the Company than arms length
commercial terms. During the fiscal year ended May 3, 1998, the Company recorded
$413,000 of engineering fees to Essex for engineering design services. For the
current fiscal year through the date covered by this report (May 4, 1998 through
January 31, 1999), the Company recorded $294,000 of engineering fees to Essex
and Lxi. As of January 31, 1999 the total amount owed to Essex and Lxi was
$119,000. Messrs. Vanco, Voicu and Gay received no payments during the fiscal
year ended May 3, 1998 and through January 31, 1999 of the current fiscal year,
except Mr. Gay who received $3,000 and $1,200 from Lxi during such respective
periods. Such payments to Mr. Gay were made for services rendered prior to his
joining the Company in connection with his duties as Treasurer of Lxi. Mr. Gay
resigned such position immediately prior to joining the Company. Mr. Gay
continues to serve as a director of Lxi.
Effective November 1, 1998 Mr. Vanco's salary was adjusted to $325,000
per year.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.67 Modification of Consulting Agreement dated January 1, 1999
between the Company and Allan Advisors, Inc.
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, 1999.
II-2
<PAGE> 21
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 22, 1999 By: /s/ Radu M. Vanco
---------------------------------------
Radu M. Vanco
President and Chief Executive Officer
Date: March 22, 1999 By: /s/ Thomas E. Gay III
---------------------------------------
Thomas E. Gay III
Vice President of Finance and
Administration and Chief Financial Officer
II-3
<PAGE> 22
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.67 Modification of Consulting Agreement dated January 1, 1999 between the
Company and Allan Advisors, Inc.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.67
MODIFICATION OF CONSULTING AGREEMENT
This Modification of Consulting Agreement is entered into at Sunnyvale,
California as of January 1, 1999 between Catalyst Semiconductor, Inc. (the
"Company") and Allan Advisors, Inc. ("Consultant").
A. Recitals: Company and Consultant entered into a Consulting Agreement on
August 14, 1995, which Agreement was extended on June 3, 1998 until
August 14, 2001. Company and Consultant wish to modify that Agreement
as set forth herein.
B. Compensation. In that the consulting fee has not been increased since
August 14, 1995, Company and Consultant agree to modify Paragraph 3 of
the 1995 Agreement to increase the consulting fee to $8,333 per month
effective as of this date and to discontinue the office allowance of
$1000 per month.
C. Term. Company and Consultant hereby agree modify Paragraph 4 of the
1995 Agreement to provide for termination fee of 12 months of
consulting fees.
Except as expressly modified herein, Company and Consultant ratify and
affirm all the terms and conditions in the Consulting Agreement entered into on
August 14, 1995 and extended on June 3, 1998.
Catalyst Semiconductor, Inc. Allan Advisors, Inc.
/s/ Radu Vanco /s/ Lionel M. Allan
- ---------------------------------- ------------------------------------
Radu Vanco Lionel M. Allan
President and CEO President and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL RESULTS FOR THE NINE MONTH PERIOD ENDED JANUARY 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 2,746
<SECURITIES> 0
<RECEIVABLES> 4,878
<ALLOWANCES> (308)
<INVENTORY> 2,676
<CURRENT-ASSETS> 11,059
<PP&E> 12,668
<DEPRECIATION> (10,559)
<TOTAL-ASSETS> 13,168
<CURRENT-LIABILITIES> 14,963
<BONDS> 0
0
0
<COMMON> 45,222
<OTHER-SE> (47,333)
<TOTAL-LIABILITY-AND-EQUITY> 13,168
<SALES> 23,872
<TOTAL-REVENUES> 23,872
<CGS> 16,647
<TOTAL-COSTS> 16,647
<OTHER-EXPENSES> 7,278
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 622
<INCOME-PRETAX> (675)
<INCOME-TAX> 0
<INCOME-CONTINUING> (675)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (675)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
