A love/hate affair…

That’s probably the best way to describe the relationship Catalyst Semiconductor (CATS) has with generally accepted accounting principles (GAAP). Catalyst, which had to include stock option expenses in its GAAP net income for the first time this quarter, posted a sharp drop in earnings per share, from 0.12 per diluted share in first quarter 2005 to 0.03 per diluted share in the current quarter (1Q FY 2006). Granted, other factors contributed to the decline, but given that the Company ( in its most recent 10-K) disclosed it would have taken an eleven-cent hit to the bottom line for all of 2005 as a result of stock option expenses, the change in accounting rules had to be a factor.

Accounting rules didn’t always work against Catalyst, however. The Company twice (in 2003 and 2004) took advantage of GAAP’s “more likely than not” criteria to reverse millions of dollars in valuation allowances for deferred tax assets — despite reporting a net loss in 2002 after stock option expenses. The effect of the valuation allowance reversal added 0.10 per share to Catalyst’s 2003 earnings and a whopping 0.24 per share to Catalyst’s 2004 earnings — half the Company’s reported EPS.

Either way, you’d never would have known unless you had flipped to the footnotes.