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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the transition period from_____to_____.

0-21488
(Commission File Number)
______________

CATALYST SEMICONDUCTOR, INC.

(408) 542-1000

     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 September 10, 2002 was 16,656,317 exclusive of 2,138,263 shares of treasury stock.

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CATALYST SEMICONDUCTOR, INC.

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PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

CATALYST SEMICONDUCTOR, INC.

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)

			Three Months Ended
			July 31,				July 31,
			2002				2001
Net revenues			$	12,457			$	10,516
Cost of revenues				7,019				6,478
Gross profit				5,438				4,038
Research and development				1,290				1,065
Selling, general and administrative				2,359				2,817
Income from operations				1,789				156
Interest income, net				66				264
Income before income taxes				1,855				420
Income tax provision				695				49
Net income			$	1,160			$	371
Net income per share:
	Basic		$	0.07			$	0.02
	Diluted		$	0.06			$	0.02
Weighted average common shares:
	Basic			16,926				17,654
	Diluted			18,958				20,073

See accompanying notes to the unaudited condensed consolidated financial statements.

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CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

						Three Months Ended
						July 31,				July 31,
						2002				2001
Cash flows from operating activities:
	Net income					$	1,160			$	371
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation of property and equipment					245				267
		Provision for excess and obsolete inventory					(102	)			(16	)
		Changes in assets and liabilities:
			Accounts receivable				693				897
			Inventories				(352	)			(673	)
			Other assets				(369	)			1
			Accounts payable (including related parties)				(614	)			(590	)
			Accrued expenses				826				10
			Deferred gross profit on shipments to distributors				97				(171	)
			Tax related credits				—				49
				Net cash provided by operating activities			1,584				145
Cash flows from investing activities:
	Cash used for the acquisition of fixed assets						(320	)			(181	)
				Cash used in investing activities			(320	)			(181	)
Cash flows from financing activities:
	Common stock issuances						99				40
	Treasury stock purchases						(902	)			—
	Payment of line of credit						—				(2,025	)
	Payment of long-term debt and capital lease obligations						—				(39	)
				Net cash used in financing activities			(803	)			(2,024	)
Net increase (decrease) in cash and cash equivalents							461				(2,060	)
Cash at beginning of the period							26,295				30,534
Cash at end of the period						$	26,756			$	28,474
Supplemental non-cash information:
	Deferred compensation on exercised stock options					$	—			$	41
Supplemental cash flow disclosures:
	Cash paid during the period for:
	Interest					$	—			$	29
	Income taxes					$	6			$	50

See accompanying notes to the unaudited condensed consolidated financial statements.

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CATALYST SEMICONDUCTOR, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation:

     In the opinion of the management of Catalyst Semiconductor, Inc. (Company), the unaudited condensed consolidated interim financial statements included herein have been prepared on the same basis as the April 30, 2002 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. The consolidated statements include the accounts of the Company’s wholly owned subsidiary, Nippon Catalyst KK, a sales organization in Japan. Certain prior period balances have been reclassified to conform to the current period presentation. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (SEC), but omit certain information and footnote disclosures necessary to present the statements in accordance with accounting principles generally accepted in the United States of America. 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, 2002. The results of operations for the three month period ended July 31, 2002 are not necessarily indicative of the results to be expected for the entire year ending April 30, 2003 or any other future period.

     The Company’s business is highly cyclical and has been subject to significant downturns at various times which have been characterized by reduced product demand, production overcapacity and significant erosion of average selling prices. Throughout fiscal 1998 and 1999, the market for certain FLASH and EEPROM devices, which comprise the majority of Catalyst’s business, experienced an excess market supply relative to demand which resulted in a significant downward trend in prices. During fiscal 2000, the semiconductor market rebounded from a cyclical decline which had a favorable impact on the Company’s revenues and gross margins into fiscal 2001 through the quarter ended October 2000. However, during the period from November 2000 through October 2001, the market for the Company’s products became more competitive as a result of the increased availability of products when demand was decreasing. During the two quarters from November 2001 through April 2002, unit volumes increased faster than prices declined, resulting in increased sales, margins and profitability. In the most recent quarter ended July 2002, the combined effects of decreased shipments with increased prices resulted in revenues similar to the previous quarter. The Company could experience other such downward trends in product pricing or volume in the future which could further adversely affect the Company’s operating results.

     The Company’s fiscal year and its first, second and third fiscal quarters end on the Sunday closest to April 30, July 31, October 31 and January 31, respectively. For purposes of financial statement presentation, the year end date is expressed as April 30 and the quarter end dates are expressed as July 31, October 31 or January 31, respectively.

     Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Through July 31, 2002, the Company has not had any items of comprehensive income other than net income.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early adoption is encouraged. We will adopt SFAS No. 146 during the quarter ending January 31, 2003. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The effect on adoption of SFAS No. 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred.

Note 2 — Net Income (Loss) Per Share:

     Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the

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period and excludes the dilutive effect of stock options. Diluted net income (loss) per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted net income (loss) 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 and diluted income (loss) per share is presented below:

     Options to purchase 1,673,000 shares of common stock at prices from $4.07 to $9.50 per share outstanding during the quarter ended July 31, 2002 and options to purchase 1,700,999 shares of common stock at prices from $4.63 to $9.50 per share outstanding during the quarter ended July 31, 2001 were not included in the computation of diluted income (loss) per share because the inclusion of such options would have been antidilutive.

Note 3 — Balance Sheet Components (in thousands):

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Note 4 — 1998 Special Equity Incentive Plan:

     In December 1998, the Company adopted an additional stock option plan entitled the 1998 Special Equity Incentive Plan (Special Option Plan) for incentive stock options and non-statutory stock options for certain directors, officers and consultants of the Company. A total of 3.5 million shares of Common Stock have been reserved for issuance under the Special Option Plan. Options granted under the Special Option Plan are for periods not to exceed ten years. Options generally vest over four year periods. During fiscal 1999, options totaling 3.0 million shares were granted under the plan at a price of $0.125 per share when the market was at $0.33 per share. As a result, an aggregate of $479,000 of compensation expense will be recognized over the four year vesting period of the options, $28,000 of which was recognized during the three month period ended July 31, 2002. An aggregate of $450,000 of such expense has been recognized through July 31, 2002 and $29,000 remains to be recognized in future periods.

Note 5 — Commitment:

     On April 17, 2001, Xicor Corporation (Xicor), a competitor in the nonvolatile and mixed signal markets, served a complaint against the Company in the United States District Court for the District of Delaware. The complaint alleged that some of the Company’s recently announced Digital Programmable Potentiometer (DPP) products infringed on a patent that Xicor obtained in 1988. In June 2002, the Company entered into a settlement agreement with Xicor according to which Catalyst has received a license to manufacture DPP products in exchange for royalty payments based upon sales of those products after July 22, 2002. Such royalty payments are of varying rates and for a variable period based upon product type and volumes sold.

Note 6 — Contingencies:

     In 1989, the Company entered into a license agreement with Philips Export B.V. and U.S. Philips Corporation (Philips) to license technology relating to their I2C bus technology. The Company received a communication from Philips in May 2001 suggesting that royalties may be due and owing on past sales of certain products. The Company continues to investigate this communication.

     In the normal course of business, the Company receives notification of threats of legal action in relation to claims of patent infringement by the Company. Although no assurances can be given to the results of these claims, management does not believe that any such results will have a material adverse impact on the Company’s financial condition or results of operations.

Note 7 — Related Party Transactions:

     During the fourth quarter of fiscal 2000, the Company began taking delivery of wafers fabricated at X-fab Texas, Inc. (Xfab), a wholly owned subsidiary of Elex NV, a Belgian holding company that owns 24% of the outstanding shares of the Company as of September 10, 2002. Mr. Roland Duchâtelet, the Chairman and CEO of Elex NV, serves as a member of the Company’s Board of Directors. The wafers provided by Xfab supplement the same designs fabricated at Oki Semiconductor in Japan, the Company’s principal wafer fab since 1985. Other than the purchase orders currently open with Xfab, there is no purchasing agreement currently in place with Xfab. Each purchase order remains open until the wafers are delivered, generally within two months (or over a one year period in the case of one particular wafer design which calls for monthly deliveries at a set price for each wafer delivered). The prices of wafers purchased from Xfab are determined by periodic negotiations with the management of Xfab and compared to quotes obtained from other prospective wafer fabricators and pricing surveys published by various industry trade organizations. During the three months ended July 31, 2002, the Company’s purchases from Xfab totaled $578,000. As of July 31, 2002, the total amount owed Xfab was $297,000.

     The Company has had an informal arrangement since 1995 to obtain engineering services from Lxi Corporation, a California corporation (Lxi), a provider of engineering services through Essex com SRL (Essex), its wholly owned subsidiary in Romania. Officers of the Company, Messrs. Voicu and Gay own approximately 3% and 1%, respectively, of Lxi. Further, our former President and Chief Executive Officer, Mr. Radu Vanco, who left the Company effective August 21, 2002, owns 91% of Lxi. We anticipate that Messrs. Voicu and Gay will divest themselves of their holdings in Lxi in the next 90 days. The number of full-time engineers we use is dependent upon the scope and number of R&D projects we have in process at a given time. For example, during the month of July 2002, Essex employed the equivalent of approximately 14 engineers to perform services on behalf of Catalyst. These services relate to key development projects of the Company including development, design, layout and test program development services. The Company anticipates continuing to use the engineering services of Lxi for the

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near term, but given Mr. Vanco’s departure and the fact that the Company does not have any contractual commitment to obtain these services from Lxi, nor does Lxi have any obligation to provide these services to Catalyst, we cannot be assured of the availability of these services. During the three months ended July 31, 2002, the Company recorded $225,000 of engineering fees from Lxi for engineering design services. As of July 31, 2002 the total amount owed to Lxi was $149,000.

     One director, Mr. Allan, also serves as a consultant to the Company through his consulting company, Allan Advisors, Inc. (AAI). Under the terms of the consulting agreement, AAI is paid consulting fees of $8,333 per month. The consulting agreement will expire on August 14, 2003.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

     The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q. In addition, in order to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we hereby notify our readers that the factors set forth in “Certain Factors that May Affect Our 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 our actual results and could cause our results for future periods to differ materially from those expressed in any forward looking statements made by or on our behalf, including without limitation those made in this report. All forward looking statements included in this report are based upon information available to us on the date of filing and we assume no obligation to update such forward-looking statements.

Overview

     Catalyst Semiconductor, Inc., incorporated October 8, 1985, designs, develops and markets nonvolatile memory semiconductor products including Serial and Parallel EEPROMs, Flash memory and Mixed Signal devices. Revenues are derived from sales of semiconductor products designed by us and manufactured by other companies.

     Our business is highly cyclical and has been subject to significant downturns at various times which have been characterized by reduced product demand, production overcapacity and significant erosion of average selling prices. Throughout fiscal 1998 and fiscal 1999, the market for certain FLASH and EEPROM devices, which comprise the majority of our business, experienced an excess market supply relative to demand which resulted in a significant downward trend in prices. During fiscal 2000 and the first half of fiscal 2001, we reduced our manufacturing costs, increased the efficiency of our manufacturing operations and the selling prices for certain products that we produce increased, all contributing to the increased gross margin percentages. During the second half of fiscal 2001, we experienced cancellations of orders by our customers, increased supplies of competitive products, decreased prices and decreasing revenues. Revenues, gross profits, selling prices and net income continued to decline through the second quarter of fiscal 2002. In the second half of fiscal 2002, quarterly revenues, gross profits and net income increased. However, in the first quarter of fiscal 2003, these increases appear to have ceased. We could, however,