<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended January 30, 2000 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 3,
2000 was 15,866,536
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CATALYST SEMICONDUCTOR, INC.
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets
at January 31, 2000 and April 30, 1999................................... Page 3
Unaudited Condensed Consolidated Statements of Operations
for the three and nine month periods ended January 31, 2000 and 1999..... Page 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine month periods ended January 31, 2000 and 1999............... 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 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>
January 31, April 30,
2000 1999
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash .............................................................. $ 3,405 $ 1,852
Accounts receivable, net .......................................... 7,716 5,119
Inventories ....................................................... 2,014 1,914
Other assets ...................................................... 654 742
------- --------
Total current assets .......................................... 13,789 9,627
Property and equipment, net ....................................... 1,819 1,939
------- --------
$15,608 $ 11,566
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .................................................... $ 3,439 $ 2,942
Accounts payable .................................................. 3,835 5,770
Accounts payable - related party .................................. 145 275
Accrued expenses .................................................. 2,195 1,508
Deferred gross profit on shipments to distributors ................ 925 1,061
Current portion of long-term debt and capital lease obligations ... 205 1,141
------- --------
Total current liabilities ..................................... 10,744 12,697
Long-term debt and capital lease obligations .......................... 117 81
------- --------
Total liabilities ............................................. 10,861 12,778
Total stockholders' equity (deficit) .................................. 4,747 (1,212)
------- --------
$15,608 $ 11,566
======= ========
</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, 2000 Jan. 31, 1999 Jan. 31, 2000 Jan. 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues .......................... $ 12,536 $ 8,441 $ 32,432 $ 23,872
Cost of revenues ...................... 7,212 5,806 18,140 16,647
-------- -------- -------- --------
Gross profit .......................... 5,324 2,635 14,292 7,225
Research and development .............. 646 591 1,951 1,741
Selling, general and administrative ... 2,209 1,520 6,776 5,537
-------- -------- -------- --------
Income (loss) from operations ......... 2,095 524 5,565 (53)
Interest income (expense), net ........ (127) (134) (416) (622)
-------- -------- -------- --------
Net income (loss) ..................... $ 2,342 $ 390 $ 5,149 $ (675)
======== ======== ======== ========
Net income (loss) per share:
Basic ............................. $ 0.16 $ 0.03 $ 0.36 $ (0.06)
======== ======== ======== ========
Diluted ........................... $ 0.12 $ 0.02 $ 0.27 $ (0.06)
======== ======== ======== ========
Weighted average common shares:
Basic ............................. 14,492 13,948 14,164 11,653
======== ======== ======== ========
Diluted ........................... 19,976 19,186 18,986 11,653
======== ======== ======== ========
</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, 2000 Jan. 31, 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 5,149 $ (675)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ........................... 728 957
Changes in assets and liabilities:
Restricted cash ...................................... -- 5,750
Accounts receivable .................................. (2,597) 156
Inventories .......................................... (100) 1,518
Other assets ......................................... 88 (252)
Accounts payable (including related party) ........... (2,065) (5,990)
Accrued expenses ..................................... 687 (1,312)
Deferred gross profit on shipments to distributors ... (136) 501
------- -------
Net cash provided by operating activities ............... 1,754 653
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for the acquisition of equipment .................. (608) (232)
------- -------
Cash used in investment activities ...................... (608) (232)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock transactions, net .............................. 810 2,433
Net borrowing from (payment of) line of credit .............. 497 (108)
Payment of long-term debt and capital lease obligations ..... (900) (534)
------- -------
Cash provided by financing activities ................... 407 1,791
------- -------
Net increase in cash and cash equivalents ....................... 1,553 2,212
Cash at beginning of the period ................................. 1,852 534
------- -------
Cash at end of the period ....................................... $ 3,405 $ 2,746
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid (net) .................................. $ 416 $ 622
======= =======
</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 nine
month period ended January 31, 2000 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 beyond and is
currently considering other possible 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 Nine Months Ended
---------------------------- -----------------------------
Jan. 31, 2000 Jan. 31, 1999 Jan. 31, 2000 Jan. 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) ................................ $ 2,342 $ 390 $ 5,149 $ (675)
======= ======= ======= ========
Shares calculation:
Weighted average shares outstanding-basic .... 14,492 13,948 14,164 11,653
Effect of dilutive securities:
Stock options ................................ 5,484 5,238 4,822 --
------- ------- ------- --------
Weighted average shares outstanding-diluted ...... 19,976 19,186 18,986 11,653
======= ======= ======= ========
Net income (loss) per share:
Basic ........................................ $ 0.16 $ 0.03 $ 0.36 $ (0.06)
======= ======= ======= ========
Diluted ...................................... $ 0.12 $ 0.02 $ 0.27 $ (0.06)
======= ======= ======= ========
</TABLE>
Options to purchase 70,000 shares of common stock at prices ranging from
$5.00 to $6.30 per share outstanding during the quarter ended January 31, 2000
and options to purchase 732,000 shares of common stock at prices from $5.00 to
$6.30 per share outstanding during the nine month period ended January 31, 2000
were not included in the computation of diluted EPS because the inclusion of
such options would have been antidilutive. Options to purchase 1,268,000 shares
of common stock at prices ranging from $0.11 to $6.30 per share outstanding
during the quarter ended January 31, 1999 and options to purchase 6,506,000
shares of common stock at prices from $0.11 to $6.30 per share outstanding
during the nine month period ended January 31, 1999 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>
January 31, April 30,
2000 1999
----------- ---------
<S> <C> <C>
Accounts receivable:
Accounts receivable ............................... $ 8,002 $ 5,405
Less: Allowance for doubtful accounts ............ (286) (286)
-------- --------
$ 7,716 $ 5,119
======== ========
Inventories:
Work-in-process ................................... $ 1,235 $ 1,507
Finished goods .................................... 779 407
-------- --------
$ 2,014 $ 1,914
======== ========
Property and equipment:
Engineering and test equipment .................... $ 7,782 $ 7,193
Computer hardware and software .................... 3,497 3,485
Furniture and office equipment .................... 1,288 1,281
-------- --------
12,567 11,959
Less: accumulated depreciation and amortization ... (10,748) (10,020)
-------- --------
$ 1,819 $ 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 3.5%
(12.0% at January 31, 1999). At January 31, 2000, the balance outstanding under
this line was $3,439,000. As of January 31, 2000, under the terms of its
borrowing agreement, the Company was eligible to borrow approximately $1.6
million additional cash. Additionally, although the Company is current on the
payments due
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<PAGE> 8
under its various leases of facilities and equipment, as a result of its recent
financial condition, the Company had been in violation of certain terms of its
leases. Effective April 1999, the Company obtained a letter of forbearance from
the principal equipment lessor agreeing to not take any action on the then
existing condition of default through April 2000. As a result of its more 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. The loan was classified under the current
portion of long-term debt at April 30, 1999. In May 1999, the 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. 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 for directors and officers. During 1999,
options totaling 3.35 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 thirteen
month period from December 1998 through January 2000, options for 509,000 shares
have been cancelled by the Company. An aggregate of $583,000 of compensation
expense will be recognized over the four year vesting period of the options,
$294,000 of which was recognized during the nine-month period ended January 31,
2000, $57,000 during the fiscal year ended April 30, 1999 and $232,000 remains
to be recognized as of January 31, 2000.
NOTE 7 - RELATED PARTY TRANSACTIONS
During the nine month period ended January 31, 2000, the Company
recorded $350,000 of engineering expenses that were from a related party. As of
January 31, 2000, the Company owes this related party $145,000.
NOTE 8 - ONE TIME TRANSACTIONS
In the quarter ended July 31, 1999, the Company received the benefit of
approximately $0.5 million credit to cost of sales as a result of sales of
inventory, which was previously reserved. In the quarter ended October 31, 1999,
the Company received the benefit of a $0.8 million credit to cost of sales as a
result of the successful completion of payments required in settlement of claims
for amounts due to a vendor.
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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 most 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 recent fiscal 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 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
operations beyond 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 49% to $12.5
million for the quarter ended January 31, 2000 from $8.4 million for the quarter
ended January 31, 1999. The increase was primarily attributable to an increase
in sales of the Company's EEPROM products. Total revenues of $12.5 million for
the quarter ended January 31, 2000 increased by 17% from $10.7 million for the
quarter ended October 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 nine months ended January 31,
2000, total revenues increased 36% to $32.4 million from $23.9 million for the
nine months ended January 31, 1999. 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 nine months ended January 31, 2000, approximately 62% 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 January 31, 2000 was
$5.3 million, or 42% of revenues, compared to a gross profit of $2.6 million, or
31% of revenues, for the quarter ended January 31, 1999. 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. For the
nine months ended January 31, 2000, gross profits increased by 99% to $14.3
million or 44% of revenues, from $7.2 Million, or 30% of revenues for the nine
months ended January 31, 1999. 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. 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. 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. The fiscal 2000 results benefited from $1.3 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 $0.6
million, which represented 5% of revenues for the quarter ended January 31, 2000
in comparison to $0.6 million or 7% of revenues for the quarter ended January
31, 1999. For the nine months ended January 31, 2000, R&D expenses increased 18%
to $2.0 million or 6% of revenues from $1.7 million or 7% of revenues for the
nine months ended January 31, 1999. The increase is primarily attributable to
increased costs for personnel and services provided by outside contractors.
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 47% to $2.2 million, or 18% of revenues, for the quarter ended
January 31, 2000, from $1.5 million, or 18% of revenues, for the quarter ended
January 31, 1999. The increase is primarily attributable to increased expenses
for sales and administrative personnel and increased commissions to sales
representatives. For the nine months ended January 31, 2000, SG&A expenses
increased 24% to $6.8 million, or 21% of revenues from $5.5 million, or 23% of
revenues for the nine months ended January 31, 1999. 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 interest expense decreased by 5% to
$127,000 for the quarter ended January 31, 2000 from $134,000 for the quarter
ended January 31, 1999. The decrease is primarily related to the decreased
average outstanding borrowings and reductions in the effective interest rate.
Net interest expense for the nine months ended January 31, 2000 decreased 33% to
$416,000 from the net interest expense of $622,000 for the nine months ended
January 31, 1999. 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 January 31, 2000.
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 increased $1.5 million to $3.4 million as of January 31, 2000 from
$1.9 million as of April 30, 1999. The increase was primarily attributable to
profits from the Company's operations and an increase of $.5 million in the
amount borrowed from the bank.
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 3.5%
(12.0% at January 31, 2000). As of January 31, 2000, the Company had
approximately $3.4 million of secured loans owed to its bank. As of January 31,
2000, under the terms of its borrowing agreement, the Company was eligible to
borrow approximately $1.6 million additional cash and had cash on hand of $3.4
million. The Company is also indebted to other creditors in the amount of
approximately $4.0 million. This amount is principally comprised of amounts owed
for wafers and inventory processing. Additionally, although the Company is
current on the payments due under its various leases of facilities and
equipment, as a result of its recent financial condition, the Company had been
in violation of certain terms of its leases. Effective April 1999, the Company
obtained a letter of forbearance from the principal equipment lessor agreeing to
not take any action on the then existing condition of default through April
2000. As a result of its more 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 remaining balance of
$0.8 million due under 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 beyond and is
currently considering other possible 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 considering 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 DISCLOSURE
The "Year 2000 Issue" (or "Y2K") is the result of computer hardware and
software programs that were written using two digits rather than four to define
the applicable year. If the Company's various computer programs with
date-sensitive functions are not year 2000 compliant, they may recognize a date
using "00" as the year 1900 rather than 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process various financial transactions
such as invoicing to customers and payments to vendors, track inventories or
design new products. During 1998 through 1999, the Company incurred expenses of
approximately $15,000 related to year 2000 issues. As of January 31, 2000, the
Company has not directly or indirectly through customers or vendors encountered
any significant problems associated with year 2000 issues and the Company
continues to review all computer related activities for any
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<PAGE> 12
potential issues. The Company cannot make any assurances that all future issues
associated with year 2000 have been identified or completely resolved.
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 APRIL
30, 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:
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
accelerated erosion of average selling prices caused by adverse industry-wide
conditions in fiscal years 1997, 1998 and 1999.
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 35%
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.
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
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<PAGE> 13
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.
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.
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
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<PAGE> 14
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.
Recent Operating Results; Possibility of Future Losses. The Company's
operating results for the nine months ended January 31, 2000 would have resulted
in a profit of $3.8 million instead of a profit of $5.1 million if they had not
included $1.3 million of credits received from vendors as a result of various
negotiations and the sale of inventory previously reserved. 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 most of 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 50 in January 2000. Although reductions in headcount may help
the Company meet its operating expense objectives, such reductions could
adversely impact the Company's sales, marketing and product development efforts.
There can be no assurance that the Company can continue to 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.
Although the Company has reported profits for the quarter and nine months ended
January 30, 2000. There can be no assurance that the Company will continue to
sustain profitability.
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.
International Operations. For the nine months ended January 31, 2000 and
fiscal years 1999 and 1998 international sales accounted for approximately 62%,
41% and 64%, respectively, of the Company's product sales. The decrease in
international sales in 1999 was primarily 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. 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.
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 decline rapidly in
the future and that average selling prices for each new product will decline
significantly over the life of the product. Declines in average selling prices
for 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.
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<PAGE> 15
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 STMicroelectronics, Fairchild 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.
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 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, STMicroelectronics, Sharp, Texas
Instruments and Toshiba) are expected to further increase Flash memory
production. Due to the intense competition, limited development resources and
other factors, the Company has not developed any Flash memory devices with more
than 2 megabytes of memory while most of its competitors are manufacturing and
selling devices with larger memories which are utilized in more recently
developed products such as digital cameras. 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.
Expected Need for Additional Capital. The Company has incurred
significant losses or experienced significant negative cash flow from operations
during several recent 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 taking 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, constraints in hiring additional personnel, 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
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<PAGE> 16
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 the Company's 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.
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.
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).
Reoccurrence of Defaults under Outstanding Loans; Risk of Bankruptcy.
The Company had approximately $3.4 million of secured loans owing to its bank at
January 31, 2000. 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 agreeing not
to take 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 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 $4.0 million.
Due to its poor performance in fiscal 1998 and fiscal 1999 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.
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.
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<PAGE> 17
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.
Limited Market for the Company's Securities. The Company's common stock
was traded on the NASDAQ National Market from May 1993 until it was delisted in
August 1998 for sustained trading below the minimum level of $1.00 required by
the NASDAQ stock exchange for continued listing. The Company's stock has been
trading on the Over-The-Counter Bulletin Board market since the delisting
action. The over the counter market is generally less visible to investors and
fails to meet the liquidity requirements of some major commercial, institutional
and private investors. As a result of recent operating results, recent increases
in the trading price of the Company's common stock and other conditions,
management believes that the Company's stock now meets the qualifications for
being listed on the NASDAQ SmallCap market. The Company intends to submit a
request that its securities be listed but is unable to ascertain the amount of
time NASDAQ will take to consider such application. Additionally, the Company
cannot be certain that NASDAQ will reply favorably to such application or, if
additional information is requested, how much time and effort will be required
on the part of the Company's management and legal representatives to adequately
demonstrate and verify the Company's qualifications.
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 nine months ended January 31, 2000, 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.
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.
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities and is effective for all fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137. We believe the
adoption of this statement will not have a significant effect on the Company's
financial position and results from operations. In December 1999, the SEC issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition", which outlines the
basic criteria that must be met to recognize revenue and
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<PAGE> 18
provides guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the SEC. The
Company believes that adopting SAB 101 will not have a material impact on its
financial position and results of operations.
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<PAGE> 19
CATALYST SEMICONDUCTOR, INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended January
31, 2000.
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<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: March 15, 2000 By: /s/ Radu M. Vanco
-------------- ----------------------------------------
Radu M. Vanco
President and Chief Executive Officer
Date: March 15, 2000 By: /s/ Thomas E. Gay III
-------------- ----------------------------------------
Thomas E. Gay III
Vice President of Finance and Administration
and Chief Financial Officer
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<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit # Description
- --------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
unaudited financial results for the nine months ended January 31, 2000 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-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 3,405
<SECURITIES> 0
<RECEIVABLES> 8,002
<ALLOWANCES> (286)
<INVENTORY> 2,014
<CURRENT-ASSETS> 13,789
<PP&E> 12,567
<DEPRECIATION> (10,748)
<TOTAL-ASSETS> 15,608
<CURRENT-LIABILITIES> 10,744
<BONDS> 0
0
0
<COMMON> 46,033
<OTHER-SE> (41,276)
<TOTAL-LIABILITY-AND-EQUITY> 15,608
<SALES> 32,432
<TOTAL-REVENUES> 32,432
<CGS> 18,140
<TOTAL-COSTS> 18,140
<OTHER-EXPENSES> 8,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 416
<INCOME-PRETAX> 5,149
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,149
<EPS-BASIC> .36
<EPS-DILUTED> .27
</TABLE>
