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 March 31, 1997
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 0-26124
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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 or other jurisdiction of (I.R.S. Employee
incorporation or organization Identification No.)
694 TASMAN DRIVE, MILPITAS, CALIFORNIA 95035
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(Address of principal executive offices)
(408) 954-0500
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(Registrant's telephone number, including area code)
-----------------------------------------
(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 the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 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 / /
The number of shares of the Registrant's Common Stock, $.01 par value,
outstanding as of March 31, 1997 was 7,241,086.
<PAGE>
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION............................................ 3
ITEM 1. FINANCIAL STATEMENTS.................................. 3
CONDENSED STATEMENTS OF OPERATIONS............ 3
CONDENSED BALANCE SHEETS...................... 4
CONDENSED STATEMENTS OF CASH FLOWS............ 5
NOTES TO CONDENSED FINANCIAL STATEMENTS....... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 12
RESULTS OF OPERATIONS......................... 12
FACTORS THAT MAY AFFECT FUTURE RESULTS........ 15
PART II. OTHER INFORMATION................................................ 24
ITEM 1. LEGAL PROCEEDINGS..................................... 24
ITEM 2. CHANGES IN SECURITIES................................. 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 26
SIGNATURES ................................................................. 26
EXHIBIT 11.1 COMPUTATION OF NET INCOME (LOSS) PER SHARE
EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1997 1996
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<S> <C> <C>
Sales, net............................................. $ 3,572 $10,927
Cost of goods sold..................................... 3,314 7,275
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Gross profit .......................................... 258 3,652
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Operating expenses:
Research and development....................... 1,183 1,316
Selling, general, and administrative........... 1,625 1,940
------ ------
Total operating expenses................ 2,808 3,256
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Operating income (loss)................................ (2,550) 359
Interest expense....................................... 42 241
Other (income) expense, net............................ 30 (204)
----- ------
Income (loss) before provision for income taxes........ (2,622) 359
Provision for income taxes............................. -- 122
----- ------
Net income (loss)...................................... $ (2,622) $ 237
======= ======
Accretion on Redeemable Convertible
Preferred Stock..................................... (388) --
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Net income (loss) available to
common shareholders................................. $ (3,010) $ 237
======= ======
Net income (loss) per share............................ (0.42) 0.03
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Weighted average shares outstanding.................... 7,241 7,317
======= ======
See accompanying notes to condensed financial statements.
</TABLE>
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<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED BALANCE SHEETS
(In thousands)
(unaudited)
<CAPTION>
March 31, December 31,
1997 1996
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<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents......................... $ 1,355 $ 587
Short-term investments............................ -- --
Accounts receivable, net of allowances............ 2,817 2,937
Inventory......................................... 3,637 2,472
Prepaid expenses and other current assets......... 1,652 4,918
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Total current assets....................... 9,461 10,914
Property and equipment, net............................... 6,122 6,638
Other assets.............................................. 138 190
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$ 15,721 $ 17,742
======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
EQUITY:
Current Liabilities:
Line of credit.................................... $ 1,945 $ 2,015
Current portion of long-term debt................. 285 282
Accounts payable and accrued liabilities.......... 7,839 9,009
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Total current liabilities.................. 10,069 11,306
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Long-term debt, net of current portion.................... 54 92
Deferred rent............................................. 6 0
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Total liabilities.......................... 10,129 11,398
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Redeemable Convertible Preferred Stock.................... 2,201 --
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Stockholders Equity:
Common Stock...................................... 36,355 36,298
Accumulated (deficit)............................. (32,964) (29,934)
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Total stockholders' equity................. 3,391 6,344
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$ 15,721 $ 17,742
======= =======
See accompanying notes to condensed financial statements.
</TABLE>
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<PAGE>
<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Three Month Ended
March 31, March 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,622) $ 237
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization 643 1,110
Loss on disposition of fixed assets 290
Changes in operating assets and liabilities:
Accounts receivable 120 (2,066)
Inventory (1,165) (3,311)
Other assets 3,162 (206)
Accounts payable and accrued liabilities (1,170) 803
Deferred rent 6 0
Prepetition liabilities paid 0 (34)
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Net cash provided by (used in) operating activities (736) (3,467)
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Cash flows used in investing activities:
Purchases of capital equipment (261) (8,658)
Purchases of short-term investments (2,672)
Sale of short-term investments 6,898
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Net cash provided by (used in) investing activities (261) (4,432)
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Cash flows from financing activities:
Line of credit increase (decrease) (70) 5,610
Payments on capital leases (35)
Issuance of notes payable 0 10,607
Principal payments on notes payable 0 (7,625)
Issuance of common stock, net (10) 413
Issuance of redeemable convertible preferred stock 1,880 0
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Net cash provided by financing activities 1,765 9,005
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Net increase (decrease) in cash and cash equivalents 768 1,106
Cash and cash equivalents:
Beginning of period 587 4,015
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End of period $ 1,355 $ 5,121
========= ========
Supplemental cash flow information:
Interest paid $ 42 $ 247
========= ========
Income taxes paid $ 0 $ 1,036
========= ========
Supplemental disclosure of noncash items:
Issuance of warrant in connection with sale of redeemable convertible
preferred stock $ 67 $ --
========= ========
Accretion on redeemable convertible preferred stock $ 388 $ --
========= ========
See accompanying notes to condensed financial statements.
</TABLE>
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<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: Basis of Presentation
These unaudited condensed financial statements have been prepared by Paradigm
Technology, Inc. ("Paradigm" or the "Company"), 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, 1996 audited financial statements, contained in the Company's Annual Report
on Form 10-K/A, and include all adjustments, consisting of only normal recurring
adjustments, necessary to fairly state the information set forth therein.
Results for the three month period ended March 31, 1997, 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 reporting period. Actual results could differ from
estimates.
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 continuing into 1996 and the first three
months of 1997, the market for certain SRAM devices experienced an excess supply
relative to demand which resulted in a significant downward trend in prices.
The selling prices that the Company is able to command for its products are
highly dependent on industry-wide production capacity and demand. In this
regard, the Company did experienced rapid erosion in product pricing in 1996 and
during the first three months of 1997 which was not within the control of the
Company. The Company could continue to experience a downward trend in pricing
which could adversely affect the Company's operating results.
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<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
This report on Form 10-Q for the quarter ended March 31, 1997 should be read in
conjunction with the audited financial statements as of December 31, 1996, and
the notes thereto included in the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1996.
NOTE 2: Net Income (Loss) Per Share
Net income (loss) per share was calculated based on net income (loss) available
to Common Shareholders. For the quarter ended March 31, 1997, the net loss per
share was computed as net loss of $2.6 million less $0.4 million of accretion on
the redeemable convertible Preferred Stock divided by the weighted average
Common Shares outstanding. Common Stock equivalents at March 31, 1997 are
excluded as their effect is anti-dilutive.
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.
In early 1997, the Company believed that it was in Paradigm's best interest to
shut down the NewLogic operation and focus on Paradigm's core SRAM products and
markets. As a result, the Company wrote off unamortized intangibles of
approximately $156,000 in the quarter ended March 31, 1997.
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<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
NOTE 4: Balance Sheet Detail
<CAPTION>
March 31, December 31,
1997 1996
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<S> <C> <C>
Inventory (in thousands):
Raw Materials...................... $ 0 $ 16
Work in process.................... 1,979 1,778
Finished goods..................... 1,658 678
------ ------
$ 3,637 $ 2,472
====== ======
Property and equipment (in thousands):
Machinery and equipment............ $ 9,136 $ 9,488
Leasehold improvements............. 226 0
Furniture and fixtures............. 120 19
------ ------
9,482 9,507
Less accumulated depreciation...... (3,360) (2,869)
------ ------
$ 6,122 $ 6,638
====== ======
</TABLE>
NOTE 5: Litigation
On August 12, 1996, a securities class action lawsuit was filed in Santa Clara
Superior Court against the Company and certain of its officers and directors
(the "Paradigm Defendants"). The class alleged by plaintiffs consists of
purchasers of the Company's common stock from November 20, 1995 to March 22,
1996, inclusive. The complaint alleges negligent misrepresentation, fraud and
deceit, breach of fiduciary duty, and violations of certain provisions of the
California Corporate Securities Law and Civil Code. The plaintiffs seek an
unspecified amount of compensatory and punitive damages. Plaintiffs allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company would have protection against adverse market conditions in the
semiconductor market based on the Company's focus on high speed, high
performance semiconductor products. On September 30, 1996, the Paradigm
Defendants filed a demurrer seeking to have plaintiffs' entire complaint
dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer
as to all of the causes of action except for violation of certain provisions of
the California Corporate Securities Law and Civil Code. The Court, however,
granted plaintiffs leave to amend the complaint to attempt to cure the defects
which caused the Court to sustain the demurrer. Plaintiffs failed to amend
within the allotted time. On January 8, 1997, the Paradigm Defendants filed an
answer to the complaint denying any liability for the acts and damages alleged
by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with
-8-
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
discovery requests for production of documents and interrogatories, to which the
Paradigm Defendants have responded, with other responses not yet due. The
Paradigm Defendants have served the plaintiffs with an initial set of discovery
requests.
Additional discovery is scheduled to take place prior to the hearing on the
motion for class certification, tentatively scheduled for May 20, 1997. The
Paradigm Defendants intend to vigorously defend the action, however, there can
be no assurance that the Company will be successful in such defense. 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
claim, the Company's business, operating results and cash flows could be
materially adversely affected. Due to the inherent uncertainty of litigation,
management is not able to reasonably estimate losses that may be incurred in
relation to this litigation. However based on the facts presently known,
management believes that the resolution of this matter will not have a material
adverse impact on the Company's financial position, results of operations or
cash flows.
On February 21, 1997, an additional purported class action lawsuit was filed in
Santa Clara County Superior Court against the Company and certain of its
officers and directors, with causes of action and factual allegations
essentially identical to those on the August 12, 1996 class action lawsuit. This
second class action is asserted against the same Paradigm Defendants,
PaineWebber, Inc. and Smith Barney. The Paradigm Defendants have authorized
counsel to acknowledge service. The Paradigm Defendants filed a demurrer to the
complaint on May 9, 1997. A hearing on the demurrer has been scheduled for June
19, 1997. The Paradigm Defendants believe the new class action appears to be
essentially identical to the causes of action and factual allegations of the
August 12, 1996 class action. The only apparent major difference between the two
suits is that the February 21 class action purports to be on behalf of holders
of the Company's stock as opposed to purchasers on whose behalf the August 12
action was filed. Therefore, the Company believes that the February 21 class
action may be subject to the demurrer which the Court sustained in the August 12
class action as to all causes of action asserted against Michael Gulett and all
but one of the causes of action asserted against the remaining Paradigm
Defendants. There can be no assurances that the Court will determine that the
February 21 class action will be subject to the demurrer or that the Company
will be successful in the defense of the class actions. Due to the inherent
uncertainty of litigation, management is not able to reasonably estimate losses
that may be incurred in relation to this litigation. However, based on the facts
presently known, management believes that the resolution of this matter will not
have a material adverse impact on the Company's financial position, results of
operations or cash flows.
-9-
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 6: Sale of Wafer Fabrication Facility
The Company recorded a loss of $4.6 million in the quarter ended December 31,
1996 as a result of the sale of its wafer fabrication facility. This charge
included the excess of the net book value of leasehold improvements, wafer
fabrication equipment, fabrication work in process inventory and other assets
sold to orbit over the proceeds received from Orbit, an accrual for professional
fees incurred to complete the transaction, a reserve for an adverse purchase
commitment related to the wafer supply agreement entered into as a result of the
sale and accruals for other estimated costs to be incurred.
Orbit paid to the Company aggregate consideration of $20 million consisting of
$6.7 million in cash, assumption of $7.5 million of indebtedness associated with
and secured by the Fab, and promissory notes in the principal amounts of $4.8
million and $1.0 million. The Company also executed a short-term sublease with
Orbit pursuant to which it occupied office space at its principal offices not
associated with the Fab. The Company has since relocated its headquarters to 694
Tasman Drive, Milpitas, California.
The $4.8 million promissory note was issued in connection with a wafer supply
agreement that requires Orbit to supply Paradigm with approximately 9,750 of
certain fabricated wafers through May 1997 at $500 per wafer purchased by
Paradigm. At May 9, 1997, the Company completed its purchase of the remaining
wafers under this agreement. The $1.0 million promissory note is held in escrow
to satisfy certain representations and warranties made by the Company. Orbit is
required to make two payments of $500,000 plus interest of 4% in May and
November 1997. As of March 31, 1997 the outstanding balance under these
promissory notes was $1,158,000 which was classified as prepaid expenses and
other current assets.
In connection with the sale of the Fab, substantially all of the 109 employees
associated with the Fab were terminated and became employees of Orbit. No
severance payments were made to employees transferred to Orbit.
NOTE 7: Sale of Preferred Stock
On January 23, 1997, Paradigm sold a total of 200 shares of 5% Series A
Convertible Redeemable Preferred Stock (the "Preferred Stock") in a private
placement to Vintage Products, Inc. at a price of $10,000 per share, for total
proceeds (net of payments to third parties) of approximately $1,880,000. The
Preferred Stock includes cumulative dividends at 5% per annum. The Preferred
Stock also includes an embedded discount which is being accreted from the
issuance date through April 23, 1997, the date upon which the Preferred Stock
became convertible. The accretion of the embedded discount and the cumulative
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<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
dividends is a charge to retained earnings and a credit to the redeemable
convertible Preferred Stock. Also in connection with the sale of the Preferred
Stock, the Company issued warrants to purchase 150,000 shares of its common
stock for $4.125 per share. The warrant is exercisable until January 22, 2000.
The Company valued these warrants at $67,000 using the Black/Scholes model.
The Preferred Stock is convertible at the option of the holder into the number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but
unpaid or accumulated dividends on the shares of Preferred Stock being converted
by (B) the Conversion Price in effect at the time of conversion. The "Conversion
Price" will be equal to the lower of (i) $2.25 or (ii) eighty-two percent (82%)
of the average closing bid price of a share of Common Stock as quoted on the
Nasdaq National Market over the five (5) consecutive trading days immediately
preceding the date of notice of conversion of the Preferred Stock. The Preferred
Stock is redeemable by the Company under certain limited circumstances. A
portion of the Preferred Stock may be mandatorily redeemable for cash to the
extent that the number of shares of Common Stock issuable upon conversion of the
Preferred Stock is in excess of 20% of the Common Stock outstanding at the date
of original issuance of the Preferred Stock. Those "excess" preferred shares,
and only those "excess" preferred shares, which if converted cause the greater
than 20% issuance of Common Stock, are redeemable for cash of $12,190 per
preferred share.
NOTE 8: Subsequent Event
On May 9, 1997, the Company received notice of conversion for 10 shares of the
Series A Redeemable Convertible Preferred Stock. These Preferred Shares were
converted into 115,090 shares of the Company's Common Stock.
NOTE 9: Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This
statement is effective for interim and annual financial statements for periods
ending after December 15, 1997. The statement redefines earnings per share under
generally accepted accounting principles. Under the new standard primary
earnings per share is replaced by basic earnings per share and fully diluted
earnings per share is replaced by diluted earnings per share. The adoption of
SFAS 128 would not have a material impact on the Company's earnings per share
for the quarter ended March 31, 1997.
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<PAGE>
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 --
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 expressly disclaims any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
Results of Operations
Sales. The Company's net sales for the three month period ended March 31,
1997 decreased 67% from the corresponding period in fiscal year 1996. 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 1996. The reduced selling prices of the Company's products and reduced unit
shipments are both principally a result of the significant 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, continuing into 1996 and the first three
months of 1997, the market for SRAM devices experienced an excess supply
relative to demand which resulted in a significant downward trend in prices.
The selling prices that the Company is able to command for its products
are highly dependent on industry-wide production capacity and demand. The
Company continued to experience rapid erosion in product pricing during the
first three months of 1997 which was not within the control of the Company. The
Company could continue to experience a downward trend in pricing which could
adversely affect the Company's operating results.
Gross Profit. Gross profit has decreased from $3.7 million for the three
month period ended March 31, 1996, to $258,000 for the comparable period in
fiscal 1997. The decrease in gross profit resulted principally from
industry-wide pricing pressures experienced by the Company in 1996 and the March
1997 quarter caused by an oversupply in the worldwide
-12-
<PAGE>
SRAM marketplace. These pricing pressures directly impacted profits as average
selling prices of the Company's products declined during the quarter ended March
31, 1997 when compared to the quarter ended March 31, 1996.
Paradigm's future needs for wafers will need to be supplied by third
parties. Constraints or delays in the supply of the Company's products, whether
because of capacity constraints, unexpected disruptions at the current or future
foundries or assembly houses, delays in obtaining additional production at the
existing foundry or in obtaining production from new foundries, shortages of raw
materials, or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, including effects
that may result should the Company be forced to purchase products from higher
cost foundries or pay expediting charges to obtain additional supply.
Research and Development. Research and development expenses decreased to
$1.2 million in the three month period ended March 31, 1997 from $1.3 million in
the corresponding period in fiscal 1996. As a percentage of revenues these
expenses have increased to 33% in the three month period ended March 31, 1997
from 12% in the 1996 period. The Company expects research and development
expenses in absolute dollars to decrease through at least the end of 1997 due to
the shutdown of New Logic. Research and development expenses, as a percentage of
revenue, have also increased as a result of the decline in revenue in the 1997
period compared to the 1996 period.
Selling, General and Administrative. Selling, general and administrative
expenses were $1.6 million in the three month period ended March 31, 1997
compared to $1.9 million in the comparable period in 1996 due to staff attrition
and cost containment. These expenses are expected to increase in the future in
absolute dollars, as the Company increases its sales and marketing staff.
Interest Expense. Interest expense of $42,000 for the three month period
ended March 31, 1997 compares to $241,000 in the corresponding period in fiscal
1996. This decrease in interest expense for the three month period in 1997
reflects repayment in late 1996 of certain outstanding debt by the Company from
the proceeds of its sale of wafer fabrication operations. See also "Liquidity
and Capital Resources."
Other (Income) Expense, Net. The March 1997 quarter includes fixed asset
write-offs from the shutdown of NewLogic operations offset by a recovery of
fixed asset write-offs related to the sale of wafer fabrication operations.
Taxes. During the three month period ended March 31, 1997 the Company
recorded a loss for tax purposes. The Company has net operating loss
carryforwards 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 generated $0.8 million in cash in the three months ended
March 31, 1997 compared
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<PAGE>
to generating $1.1 million of cash in the comparable period in 1996. Operating
activities used $0.7 million in cash in 1997 compared to a use of $3.5 million
of cash in 1996. This decrease of $2.8 million is primarily due to lower
inventory purchases and a reduction in accounts receivable balances offset by
the loss of $2.6 million in the 1997 period. In addition, in the 1997 quarter
prepaid expenses and other assets decreased by $3.2 million due to wafers
received under the wafer supply agreement entered into on the sale of the wafer
fab.
Investing activities consumed $0.3 million in the March 1997 quarter
compared to $4.4 million in the March 1996 quarter. Capital equipment purchases
decreased from $8.7 million in the March 1996 quarter to $0.3 million in the
March 1997 quarter as a result of the sale of the wafer fab.
Financing activities provided $1.8 million in the March 1997 quarter
compared to $9.0 million in the March 1996 quarter. Average borrowings under the
Company's line of credit decreased by $5.5 million in the March 1997 quarter
compared to the March 1996 quarter.
In February, 1996 the Company replaced an 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 were limited to 80% of eligible
receivables and interest was at prime. The line of credit was secured by the
Company's accounts receivable. 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.
In addition to the Bank of the West line of credit, the Company obtained
a line of credit for equipment purchases from the CIT Group. The aggregate
principal amount of all loans under this commitment could not exceed $15.0
million and the commitment expired on December 31, 1996. Borrowings under this
line of credit bore interest at the U.S. Treasury rate for two year maturities
plus 2.96% and were limited to 80% of the cost of eligible equipment. All
borrowings under this commitment were secured by the equipment purchased.
In November 1996 the Company replaced the Bank of the West line of credit
with a line of credit with Greyrock Business Credit with a borrowing limit of
$6,000,000. Borrowings under this new line of credit with Greyrock Business
Credit are limited to up to 80% of eligible receivables and interest is at the
greater of LIBOR plus 5.25% or 9%. At March 31, 1997 the outstanding balance
under this line of credit was approximately $1.9 million. The outstanding $5.6
million Bank of the West line of credit was paid off in various stages: $1.5
million was paid off on July 1, 1996 from the Company's funds; $2 million was
paid off on July 17, 1996 from the CIT line of credit and; $2.1 million was paid
off on November 6, 1996 with the new line of credit from Greyrock.
In November 1996 the Company sold its wafer fabrication operations to
Orbit. Orbit assumed $7.5 million of outstanding borrowings with the CIT Group
that were secured by wafer fabrication equipment. The Company used approximately
$2.2 million of the cash
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proceeds from the sale of the wafer fabrication facility to pay off the
remaining CIT Group borrowings.
The Company's recent operations have consumed substantial amounts of
cash. In January 1997, the Company completed the private placement of Series A
Redeemable Convertible Preferred Stock for net proceeds of approximately $1.9
million (See Note 7 of Notes to Condensed Financial Statements). The Company
believes that existing cash balances and other sources of liquidity, such as
asset sales and equipment financing will be sufficient to meet the Company's
projected working capital and other cash requirements through at least the end
of 1997. If the cash generated from operations is insufficient to meet the
Company's cash requirements, 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.
Factors That May Affect Future Results
The operations and business prospects of the Company are subject to
certain qualifications based on potential business risks faced by the Company.
This Form 10-Q should be reviewed in light of the potential effects of events
that may occur as outlined in the following risk factors. Readers of this report
should consider carefully the following risk factors in addition to the other
information presented in this Form 10-Q.
Need for Additional Funds. The Company's recent operations have consumed
substantial amounts of cash. The Company believes that cash flow from operations
and other existing and potential sources of liquidity will be sufficient to meet
its projected working capital and other cash requirements through at least the
remainder of 1997. However, there can be no assurance that the Company will not
need additional capital and if so that such capital can be successfully obtained
on terms acceptable to the Company or at all. The sale or issuance of additional
equity or convertible debt securities could result in additional dilution to the
Company's stockholders. There can be no assurance that additional financing, if
required, will be available when needed or, if available, will be on terms
acceptable to the Company.
Fluctuations in Quarterly Results. 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 by contracted
manufacturers, 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 and the 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
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based, in part, on expectations of product orders and shipments 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. Beginning in
late 1995, continuing into 1996 and the first three months of 1997, the market
for certain SRAM devices experienced a significant excess supply relative to
demand, which resulted in a significant downward trend in prices. The market for
the Company's products could continue to experience a downward trend in pricing
which could adversely affect the Company's operating results. 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.
Risks Relating to Low-Priced Stocks. The Common Stock is currently
eligible for listing on Nasdaq. In order to continue to be listed on Nasdaq,
however, the Company must maintain $2,000,000 in total assets, a $200,000 market
value of the public float and $1,000,000 in total capital and surplus. In
addition, continued inclusion on Nasdaq requires two market-makers and a minimum
bid price of $1.00 per share. In the future, if the Company fails to meet these
maintenance criteria it may result in the delisting of the Company's securities
from Nasdaq, and trading, if any, and the Company's securities would thereafter
be conducted in the non-Nasdaq over-the-counter market. If the Company's
securities are delisted, an investor could find it more difficult to dispose of,
or to obtain accurate quotations as to the market value of, the Company's
securities. In addition, if the Common Stock were to become delisted from
trading on Nasdaq and the trading price of the Common Stock were to remain below
$5.00 per share, trading in the Common Stock would also be subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, as amended, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to the sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock, which could
severely limit the market liquidity of the Common Stock and the ability of
purchasers in this offering to sell the Common Stock in the secondary market.
Dependence on New Products and Technologies. The market for the Company's
products is characterized by rapidly changing technology, short product life
cycles, cyclical
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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 develop and introduce on
a timely basis new products and enhanced versions of its existing products which
incorporate advanced features and command higher prices. The success of new
product introductions and enhancements to existing products depends on several
factors, including the Company's ability to develop and implement new product
designs, achievement of acceptable production yields, and market acceptance of
customers' end products. In the past, the Company has experienced delays in the
development of certain new and enhanced products. Based upon the increasing
complexity of both modified versions of existing products and planned new
products, such delays could occur again in the future. Further, the cost of
development can be significant and is difficult to forecast. In addition, there
can be no assurance that any new or enhanced products will achieve or maintain
market acceptance. If the Company is unable to design, develop and introduce
competitive products or to develop new or modified designs on a timely basis,
the Company's operating results will be materially adversely affected.
Dependence on Foundries and Other Third Parties. On November 15, 1996,
the Company sold its Fab to Orbit. Following the sale of the Fab, the Company
and Orbit entered into a Wafer Manufacturing Agreement. Orbit will supply a
quantity of wafers to the Company over a specified period of time to offset
Orbit's payment obligations against the promissory notes delivered in connection
with the sale. The Company is also in the process of seeking wafer supply from
other offshore foundries, and anticipates that it will conduct business with
other foundries by delivering written purchase orders specifying the particular
product ordered, quantity, price, delivery date and shipping terms and,
therefore, such foundries will not be obligated to supply products to the
Company for any specific period, in any specific quantity or at any specified
price, except as may be provided in a particular purchase order. Reliance on
outside foundries involves several risks, including constraints or delays in
timely delivery of the Company's products, reduced control over delivery
schedules, quality assurance, potential costs and loss of production due to
seismic activity, weather conditions and other factors. To the extent a foundry
terminates its relationship with the Company, or should the Company's supply
from a foundry be interrupted or terminated for any other reason, the Company
may not have a sufficient amount of time to replace the supply of products
manufactured by the foundry. Should the Company be unable to obtain a sufficient
supply of products to enable it to meet demand, it could be required to allocate
available supply of its products among its customers. Until recently, there has
been a worldwide shortage of advanced process technology foundry capacity and
there can be no assurance that the Company will obtain sufficient foundry
capacity to meet customer demand in the future, particularly if that demand
should increase. The Company is continuously evaluating potential new sources of
supply. However, the qualification process and the production ramp-up for
additional foundries could take longer than anticipated, and there can be no
assurance that such sources will be able or willing to satisfy the Company's
requirements on a timely basis or at acceptable quality or per unit prices.
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Constraints or delays in the supply of the Company's products, whether
because of capacity constraints, unexpected disruptions at the current or future
foundries or assembly houses, delays in obtaining additional production at the
existing foundry or in obtaining production from new foundries, shortages of raw
materials, or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, including effects
that may result should the Company be forced to purchase products from higher
cost foundries or pay expediting charges to obtain additional supply.
Semiconductor Industry; SRAM Market. 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 1996 and early 1997, 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 to
continue to experience a downward trend in pricing which could adversely affect
the Company's operating margins. 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 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.
Litigation. On August 12, 1996, a securities class action lawsuit was
filed in Santa Clara Superior Court against the Company and certain of its
officers and directors (the "Paradigm Defendants"). The class alleged by
plaintiffs consists of purchasers of the Company's common stock from November
20, 1995 to March 22, 1996, inclusive. The complaint alleges negligent
misrepresentation, fraud and deceit, breach of fiduciary duty, and violations of
certain provisions of the California Corporate Securities Law and Civil Code.
The plaintiffs seek an unspecified amount of compensatory and punitive damages.
Plaintiffs allege, among other things, that the Paradigm Defendants wrongfully
represented that the Company would have protection against adverse market
conditions in the semiconductor market based on the Company's focus on high
speed, high performance semiconductor products. On September 30, 1996, the
Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire
complaint dismissed with prejudice. On December 12, 1996, the Court sustained
the demurrer as to all of the causes of action except for violation of certain
provisions of the California Corporate Securities Law and Civil Code. The Court,
however, granted plaintiffs leave to amend the complaint to attempt to cure the
defects which caused the Court to sustain the demurrer. Plaintiffs failed to
amend within the allotted time. On January 8, 1997, the Paradigm Defendants
filed an answer to the complaint denying any liability for the acts and damages
alleged by the plaintiffs. Plaintiffs have since served the
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Paradigm Defendants with discovery requests for production of documents and
interrogatories, to which the Paradigm Defendants have responded, with other
responses not yet due. The Paradigm Defendants have served the plaintiffs with
an initial set of discovery requests.
Additional discovery is scheduled to take place prior to the hearing on
the motion for class certification, tentatively scheduled for May 20, 1997. The
Paradigm Defendants intend to vigorously defend the action, however, there can
be no assurance that the Company will be successful in such defense. 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
claim, the Company's business, operating results and cash flows could be
materially adversely affected. Due to the inherent uncertainty of litigation,
management is not able to reasonably estimate losses that may be incurred in
relation to this litigation. However based on the facts presently known,
management believes that the resolution of this matter will not have a material
adverse impact on the Company's financial position, results of operations or
cash flows.
On February 21, 1997, an additional purported class action lawsuit was
filed in Santa Clara County Superior Court against the Company and certain of
its officers and directors, with causes of action and factual allegations
essentially identical to those on the August 12, 1996 class action lawsuit. This
second class action is asserted against the same Paradigm Defendants,
PaineWebber, Inc. and Smith Barney. The Paradigm Defendants have authorized
counsel to acknowledge service. The Paradigm Defendants filed a demurrer to the
complaint on May 9, 1997. A hearing on the demurrer has been scheduled for June
19, 1997. The Paradigm Defendants believe the new class action appears to be
essentially identical to the causes of action and factual allegations of the
August 12, 1996 class action. The only apparent major difference between the two
suits is that the February 21 class action purports to be on behalf of holders
of the Company's stock as opposed to purchasers on whose behalf the August 12
action was filed. Therefore, the Company believes that the February 21 class
action may be subject to the demurrer which the Court sustained in the August 12
class action as to all causes of action asserted against Michael Gulett and all
but one of the causes of action asserted against the remaining Paradigm
Defendants. There can be no assurances that the Court will determine that the
February 21 class action will be subject to the demurrer or that the Company
will be successful in the defense of the class actions. Due to the inherent
uncertainty of litigation, management is not able to reasonably estimate losses
that may be incurred in relation to this litigation. However based on the facts
presently known, management believes that the resolution of this matter will not
have a material adverse impact on the Company's financial position, results of
operations or cash flows.
Product and Customer Concentration; Dependence on Telecommunications and
Computer Industries. Currently, substantially all of the Company's sales are
derived from the sale of SRAM products. Substantially all of the Company's
products are incorporated into telecommunications and computer-related products.
The telecommunications and computer industries have recently experienced strong
unit sales growth, which has increased demand for integrated circuits, including
the memory products offered by the Company. However, these industries have from
time to time experienced cyclical, depressed business
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conditions. Such industry downturns have historically resulted in reduced
product demand and declining average selling prices. The Company's business and
operating results could be materially and adversely affected by a downturn in
the telecommunications or computer industries in the future.
Competition. 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 Company's principal competitors in the high
performance SRAM market include Motorola and Micron Technology. Other
competitors in the SRAM market include Alliance Semiconductor, Cypress
Semiconductor, Integrated Device Technology, Integrated Silicon Solution,
Samsung and numerous other large and emerging semiconductor companies. In
addition, other manufacturers can be expected to enter the high speed, high
density SRAM market.
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.
Strategic Relationships; Potential Competition. The Company, pursuant to
certain licenses of its technology, has entered into strategic relationships
with NKK and Atmel. The Company has had a long-standing business relationship
with NKK which began in October 1992. The Company, NKK and affiliates of NKK
entered into several equity and debt transactions which provided start-up and
development funding to the Company. Given the long-standing relationship, the
Company and NKK entered into three technology license and development agreements
which provide for NKK to supply the Company a specified number of 1M SRAMs for
three years. These Agreements provided funding to the Company.
The Company's business relationship with Atmel began in April 1995 when
pursuant to certain agreements, Atmel purchased a substantial number of shares
of the Company's stock from the Company, certain stockholders of the Company who
had been unsecured creditors of the Company as of the Reorganization and from
the Company's equipment lessors. Atmel also acquired certain warrants to
purchase shares of the Company's Common Stock. In 1995, the Company and Atmel
entered into a five-year License and Manufacturing Agreement pursuant to which
Atmel would provide the capacity to manufacture wafers at its wafer
manufacturing facility. The Company entered into such agreement with Atmel
because
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Atmel provided the Company with significant wafer manufacturing capacity when
such capacity was in short supply.
The Company previously licensed the design and process technology for
substantially all of its products at such time, including certain of its 256K,
1M and 4M products, to NKK as a source of revenue. The Company has not licensed
any of its current products to NKK. In the future, the Company may compete with
NKK with respect to all of such products in certain Pacific Rim countries, North
America and Europe and, as to certain of its 256K and 1M products, in the rest
of the world. In 1995, NKK commenced production of products using the Company's
design and process technologies, and therefore may become a more significant
competitor of the Company. Because NKK has greater resources than the Company
and is an SRAM manufacturer, any such competition could adversely affect the
Company. Paradigm has also licensed to Atmel the right to produce certain of its
SRAM products which provided significant wafer manufacturing capacity. As a
result, the Company is likely to compete with Atmel with respect to such
products. Because Atmel has greater resources than the Company and has foundry
capacity, any such competition could adversely affect the Company. To the extent
that the Company enters into similar arrangements with other companies, it may
compete with such companies as well.
Dependence on Patents, Licenses and Intellectual Property; Potential
Litigation. 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 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
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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.
International Operations. A significant portion of the Company's sales is
attributable to sales outside the United States, primarily in Asia and Europe,
and the Company expects that international sales will continue to represent a
significant portion of its sales. In addition, the Company expects that a
significant portion of its products will be manufactured by independent third
parties in Asia. Therefore, the Company is subject to the risks of conducting
business internationally, and both manufacturing and sales of the Company's
products may be adversely affected by political and economic conditions abroad.
Protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export compliance
laws, or other trade policies, could adversely affect the Company's ability to
have products manufactured or sell products in foreign markets. The Company
cannot predict whether quotas, duties, taxes, or other charges or restrictions
will be imposed by the United States, Hong Kong, Japan, Taiwan, or other
countries upon the importation or exportation of the Company's products in the
future, or what effect any such actions would have on its relationship with NKK
or other manufacturing sources, or its general business, financial condition and
results of operations. In addition, there can be no assurance that the Company
will not be adversely affected by currency fluctuations in the future. The
prices for the Company's products are denominated in dollars. Accordingly, any
increase in the value of the dollar as compared to currencies in the Company's
principal overseas markets would increase the foreign currency-denominated sales
prices of the Company's products, which may negatively affect the Company's
sales in those markets. The Company has not entered into any agreements or
instruments to hedge the risk of foreign currency fluctuations. Currency
fluctuations in the future may also increase the manufacturing costs of the
Company's products. Although the Company has not to date experienced any
material adverse effect on its operations as a result of such international
risks, there can be no assurance that such factors will not adversely impact the
Company's general business, financial condition and results of operations.
Employees; Management of Growth. 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 has experienced a
high degree of turnover in personnel, including at the senior and middle
management levels. 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.
Potential Volatility of Stock Price. The trading price of the Company's
Common Stock is subject to wide fluctuations in response to variations in
operating results of the
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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. The Company's stock traded from a high of $37.25 in
August 1995 to a low of $1.00 in May 1997. 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.
Antitakeover Effect of Certain Charter Provisions. 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-----------------
On August 12, 1996, a securities class action lawsuit was filed in Santa
Clara Superior Court against the Company and certain of its officers and
directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists
of purchasers of the Company's common stock from November 20, 1995 to March 22,
1996, inclusive. The complaint alleges negligent misrepresentation, fraud and
deceit, breach of fiduciary duty, and violations of certain provisions of the
California Corporate Securities Law and Civil Code. The plaintiffs seek an
unspecified amount of compensatory and punitive damages. Plaintiffs allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company would have protection against adverse market conditions in the
semiconductor market based on the Company's focus on high speed, high
performance semiconductor products. On September 30, 1996, the Paradigm
Defendants filed a demurrer seeking to have plaintiffs' entire complaint
dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer
as to all of the causes of action except for violation of certain provisions of
the California Corporate Securities Law and Civil Code. The Court, however,
granted plaintiffs leave to amend the complaint to attempt to cure the defects
which caused the Court to sustain the demurrer. Plaintiffs failed to amend
within the allotted time. On January 8, 1997, the Paradigm Defendants filed an
answer to the complaint denying any liability for the acts and damages alleged
by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with
discovery requests for production of documents and interrogatories, to which the
Paradigm Defendants have responded, with other responses not yet due. The
Paradigm Defendants have served the plaintiffs with an initial set of discovery
requests.
Additional discovery is scheduled to take place prior to the hearing on
the motion for class certification, tentatively scheduled for May 20, 1997. The
Paradigm Defendants intend to vigorously defend the action, however, there can
be no assurance that the Company will be successful in such defense. 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
claim, the Company's business, operating results and cash flows could be
materially adversely affected. Due to the inherent uncertainty of litigation,
management is not able to reasonably estimate losses that may be incurred in
relation to this litigation. However, based on the facts presently known,
management believes that the resolution of this matter will not have a material
adverse impact on the Company's financial position, results of operations or
cash flows.
On February 21, 1997, an additional purported class action lawsuit was
filed in Santa Clara County Superior Court against the Company and certain of
its officers and directors, with causes of action and factual allegations
essentially identical to those on the August 12, 1996 class action lawsuit. This
second class action is asserted against the same Paradigm Defendants,
PaineWebber, Inc. and Smith Barney. The Paradigm Defendants have authorized
counsel to acknowledge service. The Paradigm Defendants filed a demurrer to the
complaint on May 9, 1997. A hearing on the demurrer has been scheduled for June
19, 1997. The Paradigm Defendants believe the new class action appears to be
essentially identical to the causes of action and factual allegations of the
August 12, 1996 class action. The only
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apparent major difference between the two suits is that the February 21 class
action purports to be on behalf of holders of the Company's stock as opposed to
purchasers on whose behalf the August 12 action was filed. Therefore, the
Company believes that the February 21 class action may be subject to the
demurrer which the Court sustained in the August 12 class action as to all
causes of action asserted against Michael Gulett and all but one of the causes
of action asserted against the remaining Paradigm Defendants. There can be no
assurances that the Court will determine that the February 21 class action will
be subject to the demurrer or that the Company will be successful in the defense
of the class actions. Due to the inherent uncertainty of litigation, management
is not able to reasonably estimate losses that may be incurred in relation to
this litigation. However based on the facts presently known, management believes
that the resolution of this matter will not have a material adverse impact on
the Company's financial position, results of operations or cash flows.
Other than as set forth above, there are no material pending legal
proceedings against the Company or as to which any of its property is the
subject.
ITEM 2. CHANGES IN SECURITIES.
---------------------
On January 17, 1997, the Company issued to ACMA Limited a warrant to
purchase 150,000 shares of the Company's Common Stock for $4.125 per share in
consideration for authorizing the Company to grant additional registration
rights in connection with a private placement with Vintage Products, Inc. The
warrant is exercisable until January 28, 2000. The warrant and the securities
issuable upon the exercise thereunder were not registered under the Securities
Act of 1933, as amended (the "Securities Act") in reliance upon the exemption
contained in section 4(2) of the Securities Act.
On January 23, 1997, Paradigm sold a total of 200 shares of Preferred
Stock in a private placement to Vintage Products, Inc. at a price of $10,000 per
share, for total proceeds (net of payments to third parties) of approximately
$1,880,000. The Preferred Stock was not registered under the Securities Act in
reliance upon the exemption contained in section 4(2) of the Securities Act.
The Preferred Stock is convertible at the option of the holder into the
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but
unpaid or accumulated dividends on the shares of Preferred Stock being converted
by (B) the Conversion Price in effect at the time of conversion. The "Conversion
Price" will be equal to the lower of (i) $2.25 or (ii) eighty-two percent (82%)
of the average closing bid price of a share of Common Stock as quoted on the
Nasdaq National Market over the five (5) consecutive trading days immediately
preceding the date of notice of conversion of the Preferred Stock. The Company
is not required to issue shares of Common Stock equal to or greater than twenty
percent (20%) of the Common Stock outstanding on the date of the initial
issuance of the Preferred Stock. At the time of the initial issuance of the
Preferred Stock, the Company had outstanding 7,243,154 shares of Common Stock,
twenty percent of which equaled approximately 1,448,631 shares. The Company has
the option of seeking stockholder approval for the issuance of shares in excess
of 1,448,631 shares, seeking Nasdaq National Market approval for the issuance of
shares in excess of 1,448,631 shares or redeeming the shares in excess of
1,448,631 shares at a price of $12,190 per preferred share.
-25-
<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)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed with the Securities and
Exchange Commission on February 6, 1997. The report announced the private
placement of a total of 200 shares of the Registrant's 5% Series A Redeemable
Convertible Preferred Stock to Vintage Products, Inc. at a price of $10,000 per
share, for a total proceeds (net of payments to third parties) of approximately
$1.9 million.
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.
Date: May 14, 1997
PARADIGM TECHNOLOGY, INC.
/s/ David G. Campbell
------------------------------------------
David G. Campbell
Vice President Finance, CFO
(Principal Financial and Accounting Officer)
-26-
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 Ended
------------------
Mar. 31, Mar. 31,
1997 1996
---- ----
<S> <C> <C>
Net income (loss) from operations $ (2,622) $ 237
Accretion on Redeemable Convertible Preferred Stock (388)
------- -------
Net income (loss) available to Common Stockholders $ (3,010) $ 237
------- -------
Weighted average shares outstanding:
Common Stock 7,241 6,716
Common Stock issuable upon exercise of options
and warrants -- 601
------- ------
Weighted average common shares and equivalents 7,241 7,317
------- ------
Net income (loss) per share $ (0.42) $ 0.03
------- ------
(1) This Exhibit should be read with Note 2 of Notes to Condensed Financial
Statements.
</TABLE>
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,355
<SECURITIES> 0
<RECEIVABLES> 4,565
<ALLOWANCES> 1,748
<INVENTORY> 3,637
<CURRENT-ASSETS> 9,461
<PP&E> 9,482
<DEPRECIATION> 3,360
<TOTAL-ASSETS> 15,721
<CURRENT-LIABILITIES> 10,069
<BONDS> 339
0
2,201
<COMMON> 36,355
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,721
<SALES> 3,572
<TOTAL-REVENUES> 3,572
<CGS> 3,314
<TOTAL-COSTS> 3,314
<OTHER-EXPENSES> 2,808
<LOSS-PROVISION> 179
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> (2,622)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,622)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
