<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-26124
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PARADIGM TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0140882
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(State of Incorporation) (I.R.S. Employer Identification No.)
71 VISTA MONTANA, SAN JOSE, CALIFORNIA 95134
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(Address of principal executive offices) (Zip code)
(408) 954-0500
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Registrant's telephone number, including area code
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(Former name, former address and former fiscal year, if changed
since last report)
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 Exchange 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 at least the past 90 days.
Yes X No
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes X No
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The number of shares of the Registrant's Common Stock, $.01 par value,
outstanding as of June 30, 1996 was 7,136,994.
This document consists of 20 pages of which this is page 1.
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TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Statements of Operations 3
Condensed Balance Sheets 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 9-11
Liquidity and Capital Resources 11-13
Other Factors That May Affect Future
Operating Results 13-17
Part II. Other Information
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 19
Exhibit 11.1 Computation of Net Income (Loss) Per Share 20
Page 2 of 20
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales, net $ 4,002 $ 12,077 $ 14,929 $ 22,914
Cost of goods sold 13,994 7,244 21,269 13,828
-------- -------- -------- --------
Gross profit (loss) (9,992) 4,833 (6,340) 9,086
-------- -------- -------- --------
Operating expenses:
Research and development 1,623 1,213 2,939 2,104
Selling, general, and administrative 2,318 1,971 4,258 3,885
Write-off of in-process technology acquired 3,841 -- 3,841 --
-------- -------- -------- --------
Total operating expenses 7,782 3,184 11,038 5,989
-------- -------- -------- --------
Operating income (loss) (17,774) 1,649 (17,378) 3,097
Interest expense 364 398 605 780
Other income, net (199) (3) (403) (35)
-------- -------- -------- --------
Income (loss) before provision for income
taxes (17,939) 1,254 (17,580) 2,352
Provision (benefit) for income taxes (1,247) 427 (1,125) 427
-------- -------- -------- --------
Net income (loss) $(16,692) $ 827 $(16,455) $ 1,925
======== ======== ======== ========
Net income (loss) per share (Note 2) $ (2.42) $ 0.15 $ (2.31) $ 0.36
======== ======== ======== ========
Weighted average shares outstanding 6,898 5,355 7,108 5,355
======== ======== ======== ========
See accompanying notes to condensed financial statements.
</TABLE>
Page 3 of 20
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<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED BALANCE SHEETS
(In thousands)
(unaudited)
<CAPTION>
June 30, Dec. 31,
1996 1995
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<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,089 $ 4,015
Short-term investments 8,945 17,198
Accounts receivable, net 5,593 10,424
Inventory 4,560 5,702
Other current assets 3,080 1,883
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Total current assets 24,267 39,222
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Property and equipment, net 26,801 17,331
Other assets 347 179
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$51,415 $56,732
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Line of credit $ 5,610 $ --
Current portion of long-term debt 3,869 3,287
Accounts payable and accrued liabilities 8,375 9,311
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Total current liabilities 17,854 12,598
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Long-term debt, net of current portion 7,072 4,349
Deferred rent 437 436
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Total liabilities 25,363 17,383
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Stockholders' Equity:
Common stock 36,036 32,878
Retained earnings (deficit) (9,984) 6,471
-------- --------
Total stockholders' equity 26,052 39,349
-------- --------
$51,415 $56,732
======= =======
See accompanying notes to condensed financial statements.
</TABLE>
Page 4 of 20
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<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(16,455) $ 1,925
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 2,637 2,587
Write-off of in-process technology acquired 3,841 --
Changes in operating assets and liabilities:
Accounts receivable 4,831 7
Inventory 1,142 (107)
Other assets (934) (363)
Accounts payable and accrued liabilities (1,581) 1,797
Prepetition liabilities paid (34) (911)
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Net cash provided by (used in) operating activities
before reorganization items paid (6,553) 4,935
Reorganization items paid -- (189)
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Net cash provided by (used in) operating activities (6,553) 4,746
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Cash flows used in investing activities
Purchases of capital equipment (11,769) (6,494)
Purchases of short-term investments (2,672) --
Sale of short-term investments 10,925 --
Acquisition of New Logic net of cash acquired (723) --
-------- --------
Net cash used in investing activities (4,239) (6,494)
-------- --------
Cash flows from financing activities :
Line of credit increase (decrease) 5,610 (1,394)
Payments on capital leases -- (7,747)
Issuance of notes payable 11,339 9,300
Principal payments on notes payable (8,569) (263)
Issuance of common stock 486 32,013
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Net cash provided by financing activities 8,866 31,909
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Net increase (decrease) in cash and cash equivalents (1,926) 30,161
Cash and cash equivalents:
Beginning of period 4,015 135
-------- --------
End of period $ 2,089 $ 30,296
======== ========
Supplemental cash flow information:
Interest paid $ 505 $ 791
======== ========
Income taxes paid $ 1,063 $ --
======== ========
See accompanying notes to condensed financial statements.
</TABLE>
Page 5 of 20
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PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: Basis of Presentation
The financial statements have been prepared by Paradigm Technology, Inc.
("Paradigm" or the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim condensed financial
statements included herein have been prepared on the same basis as the December
31, 1995 audited financial statements, contained in the Company's Annual Report
to Stockholders, and include all adjustments, consisting of only normal
recurring adjustments, necessary to fairly state the information set forth
therein. Results for the three and six month periods ended June 30, 1996, are
not necessarily indicative of the results to be expected for the entire year.
The preparation of the interim condensed financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the interim
condensed consolidated financial statements and the reported amounts of revenue
and expenses during the report period.
Actual results could differ from estimates.
Share information for all periods has been retroactively adjusted to reflect a
1-for-2 reverse stock split approved in May 1995 and effected in conjunction
with the Company's reincorporation in Delaware effective June 22, 1995.
The Company markets high speed high density Static Random Access Memory ("SRAM")
products for uses in telecommunication devices, workstations and high
performance PCs to OEMs and distributors in the United States, Europe and the
Far East.
The SRAM business is highly cyclical and has been subject to significant
downturns at various times that have been characterized by diminished product
demand, production overcapacity, and accelerated erosion of average selling
prices. During the latter part of 1995, and the first half of 1996, the market
for certain SRAM devices experienced an excess supply relative to demand which
resulted in a significant downward trend in prices. The Company expects such
downward price trend to continue.
The selling prices that the Company is able to command for its products are
highly dependent on industry-wide production capacity and demand, and as a
consequence the Company could experience rapid erosion in product pricing which
is not within the control of the Company and which could adversely affect the
Company's operating results.
Page 6 of 20
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PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
This report on Form 10-Q for the quarter ended June 30, 1996 should be read in
conjunction with the audited financial statements as of December 31, 1995, and
the notes thereto included in the Company's Annual Report to Stockholders for
the year ended December 31, 1995.
NOTE 2: Net Income (Loss) Per Share
Net loss per share for the three months ended June 30, 1996 is computed using
the weighted average number of common shares outstanding. Common stock
equivalents are excluded as their effect is anti-dilutive. Net income per share
is computed using the weighted average number of shares of common stock and
common stock equivalents outstanding. Common stock equivalent shares consist of
convertible preferred stock (using the if-converted method), stock options and
warrants. Pursuant to the requirements of the Securities and Exchange
Commission, common stock equivalent shares relating to stock options and
warrants issued during the twelve months prior to the Company's initial public
offering are included in the computations for periods presented through the
initial public offering, whether they are anti-dilutive or not. The Company
completed its initial public offering of 2,300,000 common shares on July 5, 1995
and shares issued are included in the weighted average computation only from the
date of issuance. Accordingly, these shares result in a greater amount of
average shares in 1996 compared to 1995.
NOTE 3: New Logic Corporation Acquisition
In June 1996, the Company acquired, through a stock purchase and merger
transaction, New Logic Corporation ("New Logic"), a company which develops and
manufactures logic designs with large memory arrays. In exchange for its
purchase of the New Logic capital stock, the Company issued 314,394 shares of
the Company's common stock, with a market value of approximately $2.7 million,
and approximately $825,000 in cash. The fair value of New Logic Corporation's
tangible net assets at the date of acquisition was a deficit of $373,000.
Approximately $3.8 million of the purchase price over the fair market value of
the net tangible assets was allocated to in-process technology which because of
the uncertainty as to realization, the Company wrote off in the quarter ended
June 30, 1996. Approximately $250,000 was allocated to other intangibles and
will be amortized over a two year period.
Page 7 of 20
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PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 4: Balance Sheet Detail
June 30, December 31,
1996 1995
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Inventory (in thousands):
Raw materials $ 572 $ 633
Work in process 2,818 4,307
Finished goods 1,170 762
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$ 4,560 $ 5,702
======= =======
Property and equipment (in thousands):
Machinery and equipment $31,776 $21,315
Leasehold improvements 4,984 3,622
Furniture and fixtures 548 264
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37,308 25,201
Less accumulated depreciation (10,507) (7,870)
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$26,801 $17,331
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Page 8 of 20
<PAGE>
PART I. Financial Information
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
When used in this Form 10-Q, the words "estimate," "project," "intend," "expect"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to risks and uncertainties that could cause actual
results to differ materially, including factors relating to the impact of
competitive products and pricing, the timely development and market acceptance
of new products and upgrades to existing products, availability and cost of
products from Paradigm's suppliers and market conditions in the PC industry. For
discussion of certain such risk factors, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Other Factors That
May Affect Future Operating Results." Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release updates or
revisions to these statements.
Results of Operations
Sales
The Company's net sales for the three and six month periods ended June 30, 1996
decreased 67% and 35%, respectively, from the corresponding periods in fiscal
year 1995. The Company has continued to experience a significant downward trend
in pricing that began in late 1995 in addition to lower volumes of units shipped
when compared to 1995. The reduced selling prices of the Company's products and
reduced unit shipments are both principally a result of the excess supply of
SRAM devices relative to demand that the SRAM market has been experiencing since
late 1995.
The SRAM business is highly cyclical and has been subject to significant
downturns at various times that have been characterized by diminished product
demand, production overcapacity, and accelerated erosion of average selling
prices. During the latter part of 1995 and first half of 1996, the market for
SRAM devices experienced an excess supply relative to demand which resulted in a
significant downward trend in prices. The Company expects such downward price
trend to continue.
The selling prices that the Company is able to command for its products are
highly dependent on industry-wide production capacity and demand, and as a
consequence the Company could experience rapid erosion in product pricing which
is not within the control of the Company and could adversely affect the
Company's operating results.
Gross Profit
Gross profit has decreased from $4.8 million and $9.1 million for the three and
six month periods ended June 30, 1995, respectively, to losses of $10.0 million
and $6.3 million for the comparable periods in fiscal 1996. The decrease in
gross profit resulted principally from industry-wide pricing pressures
experienced by the Company in the March and June 1996 quarters caused by an
Page 9 of 20
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oversupply of specific products in the worldwide SRAM marketplace. These pricing
pressures directly impacted profits as average selling prices of the Company's
products declined during the two quarters ended June 30, 1996 when compared to
the two quarters ended June 30, 1995. In addition, in the quarter ended June 30,
1996 the Company provided $5.8 million to write down the value of inventory on
hand to reflect reduced product demand and current industry pricing trends.
Gross profit for future periods may be affected by an agreement between the
Company and Atmel Corporation ("Atmel"), pursuant to which Atmel has agreed to
sell to the Company, at predetermined prices, a committed quantity of sub-micron
wafers for five years, beginning in 1996, and by an agreement between the
Company and NKK pursuant to which NKK has agreed to supply the Company with a
significant quantity of 1M SRAMs of Paradigm's design each month for a three
year period. The Company is not obligated to make any purchases under the
agreements with Atmel and NKK. To the extent that market prices for 1M SRAM
sub-micron wafers are higher than the prices payable to Atmel or NKK under these
agreements, the Company's gross profit would tend to be higher than if the
Company were to purchase sub-micron wafers or 1M SRAMs at market prices. The
Company's conversion of its internal fabrication facility from five-inch to
six-inch wafer manufacturing during 1996 has caused and is expected to cause
further temporary declines in output and reductions in yield. Although the
Company plans to use third-party foundry capacity to offset such declines in its
internal output, the conversion may nevertheless adversely affect gross profit
levels until its completion.
Research and Development
Research and development expenses increased to $1.6 million and $2.9 million in
the three and six month periods ended June 30, 1996 from $1.2 million and $2.1
million in the corresponding periods in fiscal 1995. As a percentage of revenues
these expenses have increased to 41% and 20%, respectively, in the three and six
month periods ended June 30, 1996 from 10% and 9% in the comparable periods in
1995. Increased expenses result primarily from increased headcount required to
support the Company's co-development activities with Atmel, new product
introductions and other development activities. The Company expects research and
development expenses in absolute dollars to increase through at least the end of
1996. In addition, research and development expenses increased in the three and
six month periods ended June 30, 1996 as a result of the Company's acquisition
of New Logic Corporation in June 1996. Research and development expenses have
also increased as a result of the decline in revenue in the 1996 periods
compared to the 1995 periods.
Selling, General and Administrative
Selling, general and administrative expenses were $2.3 million and $4.3 million
in the three and six month periods ended June 30, 1996, respectively, compared
to $2.0 million and $3.9 million in the comparable periods in 1995. These
expenses are expected to increase in the future in absolute dollars, as the
Company increases its sales and marketing staff and opens new sales offices in
Europe and Japan during 1996.
Page 10 of 20
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Interest Expense
Interest expense of $.4 million and $.6 million for the three and six month
periods ended June 30, 1996 compares to $.4 million and $.8 million in the
corresponding periods in fiscal 1995. This decrease in interest expense for the
six month period in 1996 reflects repayment of certain outstanding debt by the
Company from the proceeds of its initial public offering which was subsequently
replaced during the March and June 1996 quarters by new debt at lower interest
rates. See "Liquidity and Capital Resources."
Other Income, Net
For the three and six month periods ended June 30, 1996, other income, net,
reflects interest income earned on the investment of the net proceeds to the
Company from its initial public offering.
Taxes
The Company's effective tax rate was 34.0% for the quarter ended June 30, 1995.
The Company's overall tax rate benefited from the use of net operating loss
carryforwards. No provision was recorded for the first quarter of 1995 because
the Company incurred a net operating loss for tax purposes. During the three and
six month periods ended June 30, 1996 the Company recorded a loss for tax
purposes. The Company recorded a tax benefit of $(1.2) million and $(1.1)
million for the three and six month periods ended June 30, 1996, respectively,
as a result of not providing a valuation allowance against the net operating
loss generated due to the existence of carryback potential against previously
paid taxes. At June 30, 1996, the Company had net operating loss carryforwards
of approximately $4.6 million available to offset future regular and alternative
minimum taxable income. The Company's net operating loss carryforwards expire
through 2011, if not utilized.
Liquidity and Capital Resources
The Company's operating, investing and financing activities used $2.0 million of
cash in the six months ended June 30, 1996 compared to generating $30.2 million
of cash in the comparable period in 1995. Operating activities used $6.6 million
in cash in 1996 versus the generation of $4.7 of cash in 1995. This change of
$11.3 million is primarily due to the loss of $16.5 million in the 1996 period
compared to net income of $2.0 million in the 1995 period. The 1996 loss is
partially offset by non-recurring acquisition related charges of $3.8 million
associated with the Company's purchase of New Logic Corporation in June 1996. In
addition, the decrease in accounts receivable in the 1996 period provided $4.8
million more cash than in 1995. The 1996 reduction in accounts receivable
reflects the decrease of $8.0 million in net sales for the quarter ended June
30, 1996 compared to the second quarter of 1995. Accounts payable and accrued
liabilities used $3.4 million more cash in 1996 than in 1995 due primarily to
the cost of equipment purchased in the Company's conversion from five to six
inch wafers.
Page 11 of 20
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Investing activities consumed $4.2 million in 1996 compared to $6.5 million in
1995. Capital equipment purchases increased from $6.5 in the 1995 period to
$11.8 million in the 1996 period as the Company continued its conversion from
5-inch wafers to 6-inch wafers in the Company's wafer fabrication facilities. In
addition, in the 1996 period the purchase of $2.7 million in short-term
investments partially offset the sale of $10.9 million of short-term
investments.
Financing activities provided $8.9 million in the 1996 period compared to $31.9
million in the 1995 period. Borrowing under the Company's line of credit
provided an increase of $7.0 million in the 1996 period compared to the 1995
period. The issuance of notes payable resulted in an increase of $2.0 million of
cash provided in 1996 compared to 1995 as the issuance of notes payable
increased to $11.3 in the 1996 period from $9.3 million in the 1995 period. The
increase in notes payable in the 1996 period resulted from borrowings by the
Company under its line of credit for equipment purchases with the CIT Group to
acquire capital equipment required for the Company's 5-inch to 6-inch wafer
conversion and test floor expansion. The 1996 and 1995 periods reflected capital
lease or note payable payments of approximately $8.6 million and 8.0 million,
respectively, as the Company retired debt by replacing it with new borrowings at
lower interest rates.
At June 30, 1995, the Company's credit facility with Greyrock Business Credit,
included a line of credit and two term loans, and could not exceed the lesser of
(i) $16.75 million or (ii) an amount equal to (a) 80% of eligible accounts
receivable (not to exceed $8.0 million), plus (b) the aggregate amount
outstanding under certain term loans (described below). The line of credit bore
interest at a per annum rate equal to the greater of 9% or LIBOR plus 5.375%.
The credit facility matured on February 28, 1996 and was replaced with a new
line of credit from Bank of the West. In August 1995, the Company repaid the
outstanding line of credit balance in the amount of $3.2 million with proceeds
received from its initial public offering. On April 7, 1995 the Company borrowed
$1.75 million pursuant to a term loan (the "First Term Loan"). The First Term
Loan bore interest at a per annum rate equal to the greater of 9% or LIBOR plus
4.875% and under this loan principal matured on February 28, 1996 when the
credit facility was terminated. On May 1, 1995 the Company borrowed an
additional $7.0 million pursuant to a term loan (the "Second Term Loan") in
order to purchase all of the Company's leased equipment. The Second Term Loan
bore interest at a per annum rate equal to the greater of 9% or LIBOR plus
4.875% and matured on February 28, 1996 the date the credit facility terminated.
On May 26, 1995 the Company borrowed $660,000 pursuant to a term loan (the
"Third Term Loan"). The Third Term Loan bore interest at a per annum rate equal
to the greater of 9% or LIBOR plus 4.875% and under this loan principal matured
on February 28, 1996, the date the credit facility terminated.
In February, 1996 the Company replaced the existing line of credit with Greyrock
Business Credit with a new line of credit from Bank of the West with a borrowing
limit of $10.0 million. Borrowings are limited to 80% of eligible receivables
and interest is at prime. The line of credit is secured by the Company's
accounts receivable and will continue until all obligations to Bank of the West
have been satisfied. On February 27, 1996 the Company borrowed $5.6 million
under the line of credit to pay off the outstanding balance of the Greyrock term
notes. At June 30, 1996 the Company was not in compliance with covenants
requiring a minimum quick ratio of 1.75 to 1.0, minimum tangible net worth
requirements and quarterly profitability requirements. The Company is in the
process of seeking a waiver from Bank of the West with respect to these
covenants. No assurance can be given that such waiver will be received.
Page 12 of 20
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In addition, in February 1996, the Company obtained a line of credit for
equipment purchases from the CIT Group. The aggregate principal amount of all
loans under this commitment may not exceed $15.0 million and the commitment
expires on December 30, 1996. Borrowings under this line of credit bear interest
at the U.S. Treasury rate for two year maturities plus 2.96% and are limited to
80% of the cost of eligible equipment. As of June 30, 1996, the Company's
outstanding indebtedness under this line of credit was approximately $10.5
million. All borrowings under this commitment are secured by the equipment
purchased. At June 30, 1996, the Company was not in compliance with covenants
requiring a minimum level of tangible net worth and a requirement for net
income, as adjusted per the agreement, to exceed the current portion of debt by
a ratio of 1.50 to 1.0 for the four most recent quarters. The Company has
received a waiver of these covenants from the CIT Group.
In June 1996, the Company acquired all of the outstanding share capital of New
Logic Corporation in exchange for 314,394 shares of the Company's common stock
with a market value of $2.7 million and approximately $825,000 in cash. (See
Note 3 of Notes to Condensed Financial Statements).
The Company believes that cash flow from operations and other existing sources
of liquidity will be sufficient to meet its projected working capital and other
cash requirements at least through 1996. The Company anticipates capital
expenditures of approximately $3.0 million through December 1996 for wafer
fabrication and test equipment. The Company is in the process of converting its
manufacturing facility from five-inch to six-inch wafers, which will continue to
require significant capital expenditures while simultaneously causing temporary
declines in output and reductions in yield. If the cash generated from
operations is insufficient to meet the Company's requirements for the conversion
of its facility or otherwise, the sale of additional equity or other securities
could result in additional dilution to the Company's stockholders. There can be
no assurance that such additional financing, if required, can be obtained on
acceptable terms, if at all.
Other Factors That May Affect Future Operating Results
The market for the Company's products is characterized by rapidly changing
technology, short product life cycles, cyclical oversupply and rapid price
erosion. Average selling prices for many of the Company's products have
generally decreased over the products' life cycles in the past and are expected
to decrease in the future. Accordingly, the Company's future success will
depend, in part, on its ability to offset expected price erosion through
manufacturing cost savings, yield improvements and developing and introducing on
a timely basis new products and enhanced versions of its existing products which
incorporate advanced features and command higher prices. If the Company is
unable to design, develop and introduce competitive products or to develop new
or modified designs and processes on a timely basis, the Company's operating
results will be materially adversely affected.
The manufacture and assembly of integrated circuits, particularly Paradigm's
high speed, high density SRAMs, involve highly complex processes. The number of
functional commercial quality devices produced from each processed silicon wafer
depends upon a wide variety of factors, including the level of contaminants in
the manufacturing environment, impurities in the silicon, chemicals, and other
materials used, and the performance of equipment and personnel.
Page 13 of 20
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Paradigm has in the past experienced reductions in yields with its 256K, 1M and
4M products as a result of various factors. Susceptibility to yield problems
generally increases as the density of the SRAM product increases. The Company's
San Jose facility is its sole internal wafer fabrication facility and as a
result is also vulnerable to future interruptions caused by natural disasters
such as earthquakes, power and other utilities outages (which have occurred
previously), fires and other interruptions. There can be no assurance that the
Company, or any third-party foundry used by the Company, will not experience
manufacturing problems including low yields of its products and business
interruptions, in the future, and such problems could have a material adverse
effect on the Company.
To maintain competitive manufacturing yields and product performance, the
Company must obtain from its vendors, in a timely manner, sufficient quantities
of acceptable materials at budgeted prices. From time to time, vendors have
extended lead times or limited supply to the Company because of capacity
constraints. A limited number of vendors supply certain critical raw materials
used in the Company's wafer fabrication facility, and the Company has
occasionally rejected materials from those vendors that did not meet its
specifications, resulting in temporary declines in output or yield. Only a few
vendors supply certain ceramic semiconductor packages used to assemble some of
the Company's products, and those vendors require long lead times to fill
orders. The Company relies on two outside vendors to provide ion implant
services that the Company requires as part of its manufacturing process. These
service providers are the only two significant ion implant service providers
available locally to the Company. Any interruption in the availability or
quality of services from these providers would materially adversely affect the
Company. In addition, the subcontracting of ion implant services involves the
removal of wafers from the Company's manufacturing facility during the
manufacturing process for transport to the facilities of the ion implant service
providers. The process of transfer of the wafer from one facility to another
involves the risks of breakage of wafers and contamination from impurities. The
Company would be adversely affected if it were unable to obtain sufficient
quantities of raw materials and other supplies or services in a timely manner,
if those materials, supplies or services were not of acceptable quality, or if
there were significant increases in the costs of raw materials.
The semiconductor industry is intensely competitive and is characterized by
rapidly changing technology, short product life cycles, cyclical oversupply, and
rapid price erosion. The Company competes with large domestic and international
semiconductor companies, most of which have substantially greater financial,
technical, marketing, distribution and other resources than the Company. The
ability of the Company to compete successfully depends on elements outside its
control, including the rate at which customers incorporate the Company's
products into their systems, the success of such customers in selling those
systems, the Company's protection of its intellectual property, the number,
nature and success of its competitors and their product introductions, and
general market and economic conditions. In addition, the Company's success will
depend in large part on its ability to develop, introduce and manufacture in a
timely manner products that compete effectively on the basis of product features
(including speed, density, die size and packaging), availability, quality,
reliability and price, together with other factors including the availability of
sufficient manufacturing capacity and the adequacy of production yields. There
is no assurance that the Company will be able to compete successfully in the
future.
The Company's future success will be heavily dependent upon its ability to
attract and retain qualified technical, managerial, marketing and financial
personnel. The Company experienced a high degree of turnover in personnel,
including at the senior and middle management levels,
Page 14 of 20
<PAGE>
during and subsequent to the Reorganization. The competition for such personnel
is intense and includes companies with substantially greater financial and other
resources to offer such personnel. There can be no assurance that the Company
will be able to attract and retain the necessary personnel, or successfully
manage its expansion, and any failure to do so could have a material adverse
effect on the Company.
The Company has experienced significant quarterly fluctuations in operating
results and anticipates that these fluctuations will continue. These
fluctuations have been caused by a number of factors, including changes in
manufacturing yields, changes in the mix of products sold, the timing of new
product introductions by the Company or its competitors, cancellation or delays
of purchases of the Company's products, the gain or loss of significant
customers, the cyclical nature of the semiconductor industry, consequent
fluctuations in customer demand for the Company's devices and the products into
which they are incorporated, and competitive pressures on prices. A decline in
demand in the markets served by the Company, lack of success in developing new
markets or new products, or increased research and development expenses relating
to new product introductions could have a material adverse effect on the
Company. Moreover, because the Company sets spending levels in advance of each
quarter based, in part, on expectations of product orders and shipping
requirements during that quarter, a shortfall in revenue in any particular
quarter as compared to the Company's plan could have a material adverse effect
on the Company. During the first half of 1996, the market for certain SRAM
devices experienced an excess supply relative to demand which resulted in a
significant downward trend in prices. The Company expects such downward price
trend to continue. The Company's ability to maintain or increase revenues in
light of the current downward trend in product prices will be highly dependent
upon its ability to increase unit sales volumes of existing products and to
introduce and sell new products in quantities sufficient to compensate for the
anticipated declines in average selling prices of existing products. Declining
average selling prices will also adversely affect the Company's gross margins
unless the Company is able to reduce its costs per unit to offset such declines.
There can be no assurance that the Company will be able to increase unit sales
volumes, introduce and sell new products, or reduce its costs per unit.
The semiconductor industry is highly cyclical and has been subject to
significant economic downturns at various times, characterized by diminished
product demand, production overcapacity and accelerated erosion of average
selling prices. During the first half of 1996, the market for certain SRAM
devices experienced an excess supply relative to demand which resulted in a
significant downward trend in prices. The Company expects such downward price
trend to continue. The selling prices that the Company is able to command for
its products are highly dependent on industry-wide production capacity and
demand, and as a consequence the Company could experience rapid erosion in
product pricing which is not within the controls of the Company and which could
adversely effect the Company's operating results. The Company expects that
additional SRAM production capacity will become increasingly available in the
foreseeable future, and such additional capacity may adversely affect the
Company's margins and competitive position. In addition, the Company may
experience period-to-period fluctuations in operating results because of general
semiconductor industry conditions, overall economic conditions, or other
factors. The Company's business is also subject to the risks associated with the
imposition of legislation and regulations relating to the import or export of
semiconductor products.
The Company intends to continue to pursue patent, trade secret, and mask work
protection for its semiconductor process technologies and designs. To that end,
the Company has obtained certain
Page 15 of 20
<PAGE>
patents and patent licenses and intends to continue to seek patents on its
inventions and manufacturing processes, as appropriate. The process of seeking
patent protection can be long and expensive, and there is no assurance that
patents will be issued from currently pending or future applications or that, if
patents are issued, they will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to the Company. In particular,
there can be no assurance that any patents held by the Company will not be
challenged, invalidated, or circumvented, or that the rights granted thereunder
will provide competitive advantage to the Company. The Company also relies on
trade secret protection for its technology, in part through confidentiality
agreements with its employees, consultants and third parties. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known to or independently developed by others. In addition, the
laws of certain territories in which the Company's products are or may be
developed, manufactured, or sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States.
There has been substantial litigation regarding patent and other intellectual
property rights in the semiconductor industry. In the future, litigation may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company, or to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of others. The Company has from time to time received,
and may in the future receive, communications alleging possible infringement of
patents or other intellectual property rights of others. Any such litigation
could result in substantial cost to and diversion of effort by the Company,
which could have a material adverse effect on the Company. Further, adverse
determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties, or prevent the
Company from manufacturing or selling its products, any of which could have a
material adverse effect on the Company.
The Company has received a letter from Integrated Device Technology, Inc.
("IDT") asserting that Paradigm's products that incorporate a "burst mode"
synchronous exchange into a single integrated SRAM chip infringe IDT's patent
number 5,126,975 which was issued on June 30, 1992. The Company's products using
this feature represented approximately 22% of the Company's sales for the year
ended December 31, 1995 and 19% for the six months ended June 30 1996. If IDT
initiates litigation against Paradigm based on such patent, it will likely seek
substantial damages and injunctive relief to prevent the Company from continuing
to ship those of its products which IDT asserts infringe such patent. Under the
patent laws, in certain circumstances, damage awards may be tripled. The Company
intends to vigorously defend any such claim that may be prosecuted by IDT and,
based on facts presently known, believes that it is not liable under the IDT
patent. The Company expects that such patent claim will be vigorously prosecuted
by IDT. No assurance can be given that the Company will be successful in the
defense of any such claims. Even if Paradigm is successful in such defense, it
may incur substantial legal fees and other expenses related to this claim. If
unsuccessful in the defense of any such claims, the Company's business and
operating results would be materially adversely affected.
The Company is subject to a variety of federal, state, and local governmental
laws and regulations related to air and water quality and to the use, storage,
discharge, and disposal of toxic, volatile, or otherwise hazardous chemicals
used in its manufacturing process. Such laws and regulations have required or,
from time to time, could require the Company to acquire costly equipment or to
incur
Page 16 of 20
<PAGE>
other significant expenses to comply with such laws and regulations. The
Company evaluates its compliance with environmental laws and regulations on an
ongoing basis and endeavors to maintain such compliance, including correcting
actual or potential noncompliance as soon as practicable after discovery of such
noncompliance. Nevertheless, failure by the Company to comply with present or
future environmental laws and regulations could result in fines being imposed on
the Company, suspension of production, or a cessation of operations. In
addition, any failure by the Company to control the use of, or adequately
restrict the discharge of, hazardous substances could subject it to future
liabilities.
The trading price of the Company's Common Stock is subject to wide fluctuations
in response to variations in operating results of the Company and other
semiconductor companies, actual or anticipated announcements of technical
innovations or new products by the Company or its competitors, general
conditions in the semiconductor industry and the worldwide economy, and other
events or factors. In addition, the stock market has in the past experienced
extreme price and volume fluctuations, particularly affecting the market prices
for many high technology companies, and these fluctuations have often been
unrelated to the operating performance of the specific companies. These market
fluctuations may adversely affect the market price of the Company's Common
Stock.
Certain provisions of the Company's Certificate of Incorporation and Bylaws and
of Delaware law could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. Such provisions could diminish
the opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit fluctuations in the market price of the
Common Stock that could result from takeover attempts. In addition, the Board of
Directors, without further stockholder approval, may issue Preferred Stock that
could have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could also adversely affect the voting
power of the holders of Common Stock, including the loss of voting control to
others.
The Company may from time to time acquire businesses, technologies, services and
product lines that are complementary to the Company's business. For example, in
June 1996 the Company acquired New Logic Corporation, a company which develops
and manufactures logic designs with large memory arrays. There can be no
assurance that the Company will be able to successfully negotiate, finance and
integrate acquired technologies, services, product lines or businesses, or that
a given acquisition (including the New Logic Acquisition) will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
In addition, incorporated by reference herein, are the following risk factors
set forth in Part I, Factors That May Affect Future Results, in the Company's
Form 10-K for the year ended December 31, 1995: "Current and Impending Capacity
Constraints and Risks of Proposed Expansion"; "Product and Customer
Concentration"; "International Trade" and "Future Capital Needs."
Page 17 of 20
<PAGE>
Part II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
The Company has a line of credit with Bank of the West with a borrowing limit of
$10.0 million, secured by the Company's accounts receivable (the "Bank of the
West Loan"). As of June 30, a total of $5.6 million was outstanding under the
Bank of the West Loan. At June 30, 1996 the Company was not in compliance with
covenants requiring a minimum quick ratio of 1.75 to one, minimum tangible net
worth requirements and quarterly profitability requirements. The Company is in
the process of seeking a waiver from Bank of the West with respect to these
covenants. No assurance can be given that such waiver will be received.
The Company has a line of credit for equipment purchases from the CIT Group. The
aggregate principal amount of all loans under this commitment may not exceed
$15.0 million and the commitment expires on December 30, 1996. As of June 30,
1996, the Company's outstanding indebtedness under this line of credit was
approximately $10.5 million. All borrowings under this commitment are secured by
the equipment purchased. At June 30, 1996, the Company was not in compliance
with covenants requiring a minimum level of tangible net worth and a requirement
for net income, as adjusted per the agreement, to exceed the current portion of
debt by a ratio of 1.50 to one for the four most recent quarters. The Company
has received a waiver from the CIT Group with respect to these covenants.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders on May 22, 1996, the holders of 5,944,259
shares of common stock representing 87% of the total votes eligible to be cast,
adopted the following proposals by the following margins indicated:
<TABLE>
(1) The election of the following six candidates for director, to serve
until the next Annual Meeting of Stockholders:
<CAPTION>
VOTES
NAME VOTES WITHHELD
---- ----- --------
<S> <C> <C>
Michael Gulett 5,906,070 38,189
James L. Kochman 5,865,288 78,971
Chiang Lam 5,906,263 37,996
Chee Wai Kwok 5,906,063 38,196
S. Atiq Raza 5,904,888 39,371
George J. Collins 5,902,588 41,671
</TABLE>
(2) The ratification of Price Waterhouse LLP as independent accountants
of the Company for the period ending December 31, 1996.
VOTED FOR VOTED AGAINST ABSTAINED
--------- ------------- ---------
5,906,021 18,205 20,033
Page 18 of 20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of net income (loss) per share
(see Note 2 of Notes to Condensed Financial Statements)
(b) Reports on Form 8-K
None
Signature
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.
PARADIGM TECHNOLOGY, INC.
Date: August 8, 1996 /s/ Robert C. McClelland
---------------------------- --------------------------
Robert C. McClelland
Vice President Finance
(Principal Financial and
Accounting Officer)
Page 19 of 20
<PAGE>
EXHIBIT 11.1
<TABLE>
PARADIGM TECHNOLOGY, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
(in thousands, except net income per share)
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- ------- -------- ------
<S> <C> <C> <C> <C>
Net income (loss) ($16,692) $ 827 ($16,455) $1,925
======== ======= ======== ======
Weighted average shares outstanding:
Common Stock 6,898 1,028 6,807 1,028
Convertible Preferred Stock -- 3,200 -- 3,200
Common Stock issuable upon exercise of options and
warrants (2) -- 1,127 301 1,127
-------- ------- -------- ------
Weighted average common shares and equivalents
6,898 5,355 7,108 5,355
======== ======= ======== ======
Net income (loss) per share ($2.42) $ 0.15 ($2.31) $0.36
======== ======= ======== ======
<FN>
(1) This Exhibit should be read with Note 2 of Notes to Condensed Financial
Statements.
(2) Stock options and warrants granted subsequent to May 1994, and prior to
the completion of the Company's initial public offering ("IPO") of
common stock, have been included in the calculation of common and
common equivalents shares as if they were outstanding for all periods
prior to the Company's IPO of 2,300,000 shares of common stock which
closed on July 5, 1995.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,089
<SECURITIES> 8,945
<RECEIVABLES> 5,593
<ALLOWANCES> 1,096
<INVENTORY> 4,560
<CURRENT-ASSETS> 24,267
<PP&E> 37,308
<DEPRECIATION> 10,507
<TOTAL-ASSETS> 51,415
<CURRENT-LIABILITIES> 17,854
<BONDS> 10,941
0
0
<COMMON> 71
<OTHER-SE> 35,965
<TOTAL-LIABILITY-AND-EQUITY> 51,415
<SALES> 4,002
<TOTAL-REVENUES> 4,002
<CGS> 13,994
<TOTAL-COSTS> 13,994
<OTHER-EXPENSES> 7,782
<LOSS-PROVISION> 413
<INTEREST-EXPENSE> 364
<INCOME-PRETAX> (17,939)
<INCOME-TAX> (1,247)
<INCOME-CONTINUING> (16,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,692)
<EPS-PRIMARY> ($2.42)
<EPS-DILUTED> ($2.42)
</TABLE>
