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 September 30, 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
PARADIGM TECHNOLOGY, INC.
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0140882
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
694 TASMAN DRIVE, MILPITAS, CALIFORNIA 95035
-------------------------------------- -----
(Address of principal executive offices) (Zip code)
(408) 954-0500
--------------
(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 October 3, 1997 was 10,100,069.
<PAGE>
TABLE OF CONTENTS
Page
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 15
Results of Operations 15
Liquidity and Capital Resources 17
Factors That May Affect Future Results 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28
Part II. Other Information 29
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 32
Signature 33
Exhibit 11.1 Computation of Net Income (Loss) Per Share
Exhibit 27.1 Financial Data Schedule
Page 2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
---------------------------------- ---------------------
Sept. 30, Sept. 30, June 30, Sept. 30, Sept. 30,
1997 1996 1997 1997 1996
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Sales, net $ 3,609 $ 5,191 $ 3,466 $ 10,647 $ 20,120
Cost of goods sold 3,960 8,501 3,046 10,320 29,770
-------- -------- -------- -------- --------
Gross profit (loss) (351) (3,310) 420 327 (9,650)
-------- -------- -------- -------- --------
Operating expenses:
Research and development 1,091 1,657 777 3,051 4,596
Selling, general and administrative 1,330 2,523 1,190 4,145 6,781
Acquisition related non-recurring charges -- -- -- -- 3,841
-------- -------- -------- -------- --------
Total operating expenses 2,421 4,180 1,967 7,196 15,218
-------- -------- -------- -------- --------
Operating income (loss) (2,772) (7,490) (1,547) (6,869) (24,868)
Interest expense 67 305 74 183 910
Other (income) expense, net 193 (515) (536) (313) (918)
-------- -------- -------- -------- --------
Income (loss) before taxes (3,032) (7,280) (1,085) (6,739) (24,860)
Provision (benefit) for income taxes -- -- -- -- (1,125)
-------- -------- -------- -------- --------
Net income (loss) ($ 3,032) ($ 7,280) ($ 1,085) ($ 6,739) ($23,735)
======== ======== ======== ======== ========
Accretion on Convertible Preferred Stock ($ 432) -- ($ 347) ($ 1,167) --
-------- -------- -------- -------- --------
Net income (loss) available to Common Stockholders ($ 3,464) ($ 7,280) ($ 1,432) ($ 7,906) ($23,735)
======== ======== ======== ======== ========
Net income (loss) per share ($ 0.39) ($ 1.01) ($ 0.19) ($ 1.00) ($ 3.33)
======== ======== ======== ======== ========
Weighted average shares outstanding 8,843 7,184 7,624 7,899 7,133
======== ======== ======== ======== ========
<FN>
See accompanying notes to condensed financial statements.
</FN>
</TABLE>
Page 3
<PAGE>
<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED BALANCE SHEET
(In Thousands)
(unaudited)
<CAPTION>
At At
September 30, December 31,
1997 1996
------------- ---------------
<S> <C> <C>
Assets:
Cash and Short-term Investments $ 863 $ 587
Accounts Receivable, net 3,573 2,937
Inventory 2,371 2,472
Other Current Assets 620 4,918
-------- --------
Total Current Assets 7,427 10,914
Property and Equipment, net 4,247 6,638
Other Assets 119 190
-------- --------
Total Assets $ 11,793 $ 17,742
======== ========
Liabilities, Convertible Preferred Stock and Stockholders' Equity
Line of Credit $ 2,527 $ 2,015
Current Portion, Long-term Debt 169 282
Accounts Payable and Accrued Liabilities 5,010 9,009
-------- --------
Total Current Liabilities 7,706 11,306
Long-term Debt 26 92
Deferred Rent 22 --
-------- --------
Total Liabilities 7,754 11,398
-------- --------
Convertible Preferred Stock 2,750 --
Common Stock 39,149 36,298
Accumulated Deficit (37,860) (29,954)
-------- --------
Total Stockholders' Equity 4,039 6,344
-------- --------
Total Liabilities, Convertible Preferred Stock and
Stockholders' Equity $ 11,793 $ 17,742
======== ========
<FN>
See accompanying notes to condensed financial statements.
</FN>
</TABLE>
Page 4
<PAGE>
<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Nine Months Ended
---------------------------------------
September 30, September 30,
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,739) $(23,735)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 1,624 4,395
Loss (Gain) on disposition of fixed assets 808 (532)
Write-off of in-process technology required -- 3,841
Changes in operating assets and liabilities:
Accounts receivable (636) 6,588
Inventory 101 1,517
Other assets 4,213 (916)
Accounts payable, accrued liabilities and other (3,983) (2,670)
Prepetition liabilities paid -- (34)
-------- --------
Net cash provided by (used in) operating activities (4,612) (11,546)
-------- --------
Cash flows used in investing activities:
Purchases of capital equipment (261) (13,310)
Sale of fixed assets 376 549
Purchases of short-term investments -- (2,672)
Sale of short-term investments -- 19,870
Acquisition of NewLogic net of cash acquired -- (723)
-------- --------
Net cash provided by (used in) investing activities: 115 3,714
-------- --------
Cash flows from financing activities:
Line of credit increase (decrease) 512 2,100
Payments on capital leases (38) --
Issuance of notes payable -- 11,339
Principal payments on notes payable (135) (9,494)
Issuance of Common Stock 684 743
Issuance of Convertible Preferred Stock 3,750 --
-------- --------
Net cash provided by financing activities 4,773 4,688
-------- --------
Net increase (decrease) in cash and cash equivalents 276 (3,144)
Cash and cash equivalents:
Beginning of period 587 4,015
-------- --------
End of period $ 863 $ 871
-------- --------
Supplemental cash flow information:
Interest paid $ 183 $ 797
======== ========
Income taxes paid $ -- $ 1,067
======== ========
Supplemental disclosure of non cash items:
Issuance of warrant in connection with sale of
Convertible Preferred Stock $ 67 $ --
======== ========
Accretion on Convertible Preferred Stock $ 1,167 $ --
======== ========
<FN>
See accompanying notes to condensed financial statements.
</FN>
</TABLE>
Page 5
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: Basis of Presentation
The 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 (the "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 Current Report
on Form 8-K, dated August 21, 1997 and filed with the Commission on August 22,
1997 and include all adjustments, consisting of only normal recurring
adjustments, necessary to fairly state the information set forth therein.
Results for the three and nine month periods ended September 30, 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 report 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 personal computers to original equipment manufacturers 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 continuing into 1996 and the first
nine 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 experience rapid erosion in product pricing in 1996 and
during the first nine 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.
Page 6
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
The Company's recent operating results have consumed substantial amounts of cash
and have generated an aggregate net loss for the period from January 1, 1997
through September 30, 1997 of $6,700,000. During this period, the Company has
continued to experience a downward trend in product pricing which has
contributed to the poor operating results. The Company expects to incur a net
loss for quarter ended December 31, 1997. In January 1997, the Company completed
the private placement of 5% Series A Convertible Redeemable Preferred Stock (the
"Series A Preferred Stock") for net proceeds of approximately $1,880,000 and in
July 1997, the Company completed the private placement of 5% Series B
Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") for net
proceeds of approximately $1,870,000. Due to the low price of the Company's
Common Stock during the period prior to conversion, the number of shares of
Series A Preferred Stock converted was significantly less than anticipated (and,
therefore, the number of common shares issued upon conversion was significantly
greater than anticipated). Without obtaining stockholder approval to allow the
Company to issue additional shares of Common Stock upon conversion of the
remaining outstanding shares of Series A Preferred Stock, the Company would have
been required to redeem such shares for cash in the amount of approximately $1.2
million, which would have caused an adverse effect on the Company's liquidity.
The stockholders approved a proposal that allows for full conversion of the
Series A Preferred Stock.
Should continued product pricing pressures or delayed acceptance of the
Company's new products continue to adversely affect the Company's operating
results, the Company will have to pursue alternative financing opportunities.
Management has taken several steps to help ensure that adequate cash resources
will continue to be available to the Company. Among these steps are further
planned reductions in operating expenses and the proposed sale of additional
equity securities. If additional equity securities are issued, substantial
dilution to existing stockholders could occur. No assurances can be given that
such steps will be sufficient or that additional financing will be available on
attractive terms or at all.
As a result of these circumstances, the Company's independent accountants'
reissued report on the Company's December 31, 1996 financial statements includes
an explanatory paragraph indicating that these matters raise a substantial doubt
about the Company's ability to continue as a going concern.
On September 26, 1997, at a Special Meeting of Stockholders (the "Stockholders'
Meeting"), the stockholders approved: (1) the elimination of the restriction of
the number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock; (2) the elimination of the restriction of the number of shares
of Common Stock issuable upon conversion of the Series B Preferred Stock; and
(3) a proposed transaction or series of transactions to sell up to 5,000,000
shares of Common Stock or Preferred Stock (convertible into Common Stock), and
to grant rights to elect a majority of the directors of the Company, which might
result in the issuance of more than 20% of the Company's outstanding Common
Stock and a change in control of the Company.
Page 7
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
As a result of the Stockholders' Meeting, the Series A Preferred Stock and
Series B Preferred Stock can now be fully converted into Common Stock. As of
October 3, 1997, the holders of the Series A Preferred Stock have converted 103
shares of the Series A Preferred Stock and 97 shares remain unconverted.
This report on Form 10-Q for the quarter ended September 30, 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 Current Report on Form 8-K,
dated August 21, 1997 and filed with the Commission on August 22, 1997.
NOTE 2: Net Income (Loss) Per Share
Net income (loss) per share was calculated based on net income (loss) available
to Common Stockholders. For the quarter ended September 30, 1997, the net loss
per share was computed as net loss of $3.0 million and $0.4 million of accretion
on the Convertible Preferred Stock divided by the weighted average Common shares
outstanding. For the nine month period ended September 30, 1997, the net loss
per share was computed as net loss of $6.7 million and $1.2 million of accretion
on the Convertible Preferred Stock divided by the weighted average Common shares
outstanding. Common Stock equivalents for these periods are excluded as their
effect is anti-dilutive.
NOTE 3: NewLogic Corporation Acquisition
In June 1996, the Company acquired, through a stock purchase and merger
transaction, NewLogic Corporation ("NewLogic"), a company which develops and
manufactures logic designs with large memory arrays. In exchange for its
purchase of the NewLogic 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 NewLogic's net tangible 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
September 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.
Page 8
<PAGE>
<TABLE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 4: Balance Sheet Detail
<CAPTION>
Sept. 30, Dec. 31.
1997 1996
---------- ----------
<S> <C> <C>
Inventory (in thousands):
Raw materials $ 0 $ 16
Work in process 1,415 1,778
Finished goods 956 678
---------- ----------
$ 2,371 $ 2,472
========== ==========
Property and equipment (in thousands):
Machinery and equipment $ 6,549 $ 9,488
Leasehold improvements 279 0
Furniture and fixtures 149 19
---------- ----------
6,977 9,507
Less accumulated depreciation (2,730) (2,869)
---------- ----------
$ 4,247 $ 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") and PaineWebber, Inc. 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 against Michael Gulett and as to
all causes of actions except for violation of certain provisions of the
California Corporate Securities Law, against the remaining Paradigm Defendants.
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,
Page 9
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
to which the Paradigm Defendants have responded. Plaintiffs have also subpoenaed
documents from various third parties. The Paradigm Defendants have served the
plaintiffs with an initial set of discovery requests, to which Plaintiffs have
responded. The Paradigm defendants also took the depositions of the named
Plaintiffs on April 9, 1997. Following a hearing on Plaintiffs' motion for class
certification on May 20, 1997, the Court has three times reset the motion for
hearing. Most recently, after hearing additional argument on September 18, 1997,
the Court again deferred ruling and continued the matter to February 5, 1998.
There can be no assurance that the Company will be successful in such defense.
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 of the August 12, 1996 class action lawsuit,
except that Plaintiff was a stockholder who held the Company's stock during the
relevant period. This second class action is asserted against the same Paradigm
Defendants, PaineWebber, Inc. and Smith Barney. The Paradigm Defendants
authorized counsel to acknowledge service which occurred on April 9, 1997. Prior
to the hearing on the Paradigm Defendants' demurrer to the initial complaint,
Plaintiffs amended their complaint to incorporate factual allegations derived
from the May 19, 1997 lawsuit described below. The Paradigm Defendants filed a
demurrer to the amended complaint, which was heard on September 9, 1997. On
September 10, 1997, the Court issued an order sustaining the Paradigm
Defendants' demurrer as to all causes of action without leave to amend. A
judgment in favor of the Paradigm Defendants dismissing the entire complaint was
entered by the Court on September 23, 1997. Plaintiffs have since filed an
appeal. There can be no assurances that the Company will be successful in the
defense of the appeal.
On May 19, 1997, several former employees of the Company filed an action in
Santa Clara County Superior Court. The complaint names as defendants the
Company, Michael Gulett, Richard Veldhouse, Dennis McDonald and Chiang Lam.
Plaintiffs filed with the complaint a notice that they consider their case
related legally and factually to the August 12, 1996 class action lawsuit
described above. The complaint alleges fraud, breach of fiduciary duty and
violations of certain provisions of the California Corporate Securities Law and
Civil Code. Plaintiffs allege that they purchased the Company's stock at
allegedly inflated prices and were damaged thereby. The Plaintiffs seek an
unspecified amount of compensatory, rescissory and/or punitive damages.
Defendants responded to the complaint on September 12, 1997 by filing a demurrer
as to all causes of action. A hearing on the demurrer is set for November 18,
1997. Plaintiffs have served the Company and two of the individual defendants
with requests for production of documents, to which the Company and the
individual defendants have responded. There can be no assurance that the Company
will be successful in such defense.
The Company is involved in various other litigation and potential claims. Due to
the inherent uncertainty of litigation, management is not able to reasonably
estimate losses that may be
Page 10
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
incurred in relation to this litigation. However, based on the facts presently
known, management believes that the resolution of these matters will not have a
material adverse impact on the results of operations or the financial position
of the Company.
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 (the "Fab"). 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 Semiconductor Inc. ("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
manufacturing agreement 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 (the "Agreement") that required Orbit to supply Paradigm with
approximately 9,750 of certain fabricated wafers through May 1997 at $500 per
wafer purchased by Paradigm. Per terms of the Agreement, if the Company did not
purchase the wafers by the end of May 1997, the Company would forfeit any
remaining amount owed under the promissory note. At September 28, 1997, the
Company has completed its obligations under this Agreement.
In July 1997, the Company negotiated an accelerated payment on the $1.0 million
promissory note held in escrow. As part of the agreement, the Company allowed
Orbit to retain $250,000 for repairs on equipment purchased as part of the Fab
sale and certain additional amounts for other matters. As of July 31, 1997, the
note has been fully paid.
NOTE 7: Sale of Preferred Stock
On January 23, 1997, Paradigm sold a total of 200 shares of Series A 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 Series A Preferred Stock includes cumulative dividends at 5% per
annum. The Series A Preferred Stock also includes an embedded discount which was
accreted from the issuance date through April 23, 1997, the date upon which the
Series A Preferred Stock became convertible. The accretion of the embedded
discount and
Page 11
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
the cumulative dividends is a charge to retained earnings and a credit to the
Convertible Preferred Stock. Also in connection with the sale of the Series A
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 Series A 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 Series A 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 (or quoted on such other national or
regional securities exchange or automated quotations system upon which the
Common Stock is listed and principally traded) over the five (5) consecutive
trading days immediately preceding the date of notice of conversion of the
Series A Preferred Stock. As of October 3, 1997, the holders of the Series A
Preferred Stock have converted 103 shares of the Series A Preferred Stock into
1,439,620 shares of the Company's Common Stock. The Common Stock issuable upon
conversion of the Series A Preferred Stock has been registered on Form S-3.
On July 22, 1997, Paradigm sold a total of 200 shares of Series B Preferred
Stock in a private placement to Lyford Ltd. at a price of $10,000 per share, for
total proceeds (net of payments to third parties) of approximately $1,870,000.
The Series B Preferred Stock includes cumulative dividends at 5% per annum. The
Series B Preferred Stock also includes an embedded discount which will be
accreted from the issuance date through September 10, 1997, the date upon which
the Series B Preferred Stock became convertible. The accretion of the embedded
discount and the cumulative dividends will be a charge to retained earnings and
a credit to the Series B Preferred Stock. The Series B Preferred Stock is
convertible at the option of the holder into the number of fully paid and
non-assessable 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 Series B 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) $1.375 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 (or quoted on such other national or regional securities
exchange or automated quotations system upon which the Common Stock is listed
and principally traded) over the five (5) consecutive trading days immediately
preceding the date of notice of conversion of the Series B Preferred Stock. As
of October 3, 1997, the holders of the Series B Preferred Stock have converted
74 shares of the Series B Preferred Stock into 898,376 shares of the Company's
Common Stock. The Common Stock issuable upon conversion of the Series B
Preferred Stock had been registered on Form S-3.
Page 12
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 8: Subsequent Event
In October 1997, the Company renewed its line of credit with Greyrock Business
Credit. The borrowing limit is limited to the lesser of $5,000,000 or the sum of
(a) 80% of the amount of eligible receivables owing from original equipment
manufacturers; plus (b) 70% of the amount of eligible receivables owing from
distributors. Interest is at the greater of LIBOR plus 5.25% or 9%. The Company
elected to have the line of credit mature on February 28, 1998, however, the
line of credit will automatically be extended until October 31, 1998 unless one
party gives written notice to the other not later than January 31, 1998 that
such party elects to terminate the agreement effective on February 28, 1998. The
loan agreement also provides for an automatic and continuous renewal for
successive additional terms of one year each, unless one party gives written
notice to the other, not less than sixty (60) days prior to the next maturity
date, that such party elects to terminate the agreement effective on the next
maturity date. This line of credit is secured by the Company's trade
receivables, inventory, equipment and general intangibles. As of September 28,
1997, the Company's outstanding indebtedness under this line of credit was
approximately $2.5 million.
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"). The
Company is required to adopt SFAS 128 in the second quarter of fiscal 1998 and
will restate at that time earnings per share data for prior periods to conform
with SFAS 128. 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 three and
nine month periods ended September 30, 1997 and 1996.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). This statement is effective for the Company's fiscal year ending December
31, 1999. The statement establishes presentation and disclosure requirements for
reporting comprehensive income. Comprehensive income includes charges or credits
to equity that are not the result of transactions with owners. The Company plans
to adopt the disclosure requirements and report comprehensive income as part of
the Consolidated Statements of Stockholders' Equity as required under SFAS 130,
and expects there to be no material impact on the Company's financial position
and results of operations as a result of the adoption of this new accounting
standard.
Page 13
<PAGE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises the required
information regarding the reporting of operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company will adopt SFAS 131 beginning in fiscal 1999
and does not expect such adoption to have a material effect on the consolidated
financial statements.
Page 14
<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 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 nine month periods ended September 30,
1997 decreased 30% and 47%, respectively, from the corresponding periods 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 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. In this
regard, the Company did experience rapid erosion in product pricing during the
first nine 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 losses have decreased from $3.3 million and $9.6 million for the
respective three and nine month periods ended September 30, 1996, to a loss of
$351,000 and profit of $327,000 for the corresponding periods in fiscal 1997.
The increase in gross profit resulted principally from a write down of inventory
values to current market prices in 1996. However, the gross loss for the three
month period ended September 30, 1997 includes an inventory write down of
approximately $650,000 due to lower market prices. The Company continues to
experience
Page 15
<PAGE>
industry-wide pricing pressures caused by an oversupply in the worldwide SRAM
marketplace. These pricing pressures directly impacted profits as average
selling prices of the Company's products declined during the quarter and nine
month period ended September 30, 1997 when compared to the comparable periods in
1996.
The Company'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 $1.1 million and $3.1 million in
the respective three and nine month periods ended September 30, 1997 from $1.7
million and $4.6 million in the corresponding periods in fiscal 1996. As a
percentage of revenues, these expenses have decreased to 30% and increased to
29% in the respective three and nine month periods ended September 30, 1997 from
32% and 23% in the corresponding periods in fiscal 1996. The Company expects
research and development expenses in absolute dollars to decrease through at
least the end of 1997 due to the shutdown of NewLogic and other cost cutting
measures being implemented by the Company.
Selling, General and Administrative
Selling, general and administrative expenses were $1.3 million and $4.1 million
in the respective three and nine month periods ended September 30, 1997 compared
to $2.5 million and $6.8 million in the corresponding periods in fiscal 1996.
These expenses are expected to decline in the future as the Company continues
implementation of its cost cutting measures.
Interest Expense
Interest expense of $67,000 and $183,000 for the respective three and nine month
periods ended September 30, 1997 compared to $305,000 and $910,000 in the
corresponding periods in fiscal 1996. This decrease in interest expense for the
three and nine month periods in 1997 reflects repayment of certain outstanding
debt by the Company from the proceeds of its sale of the wafer fabrication
operations. See also "Liquidity and Capital Resources."
Other (Income) Expense, Net
For the three and nine month periods ended September 30, 1997, Other (Income)
Expense, Net reflects gain on sale of equipment, recoveries of previous
write-offs and write-off of goodwill associated with the acquisition of
NewLogic.
Page 16
<PAGE>
Taxes
The Company provides for income taxes during interim reporting periods based
upon an estimated annual tax rate. During the three and nine month periods ended
September 30, 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 in
2011, if not utilized.
Liquidity and Capital Resources
The Company's operating, investing and financing activities generated $0.3
million in cash in the nine month period ended September 30, 1997 compared to
using $3.1 million of cash in the corresponding period in fiscal 1996. Operating
activities used $4.6 million in cash in 1997 compared to a use of $11.5 million
of cash in 1996. This increase of $6.9 million is primarily due to savings
generated from the sale of the wafer fabrication operations in November 1996 and
additional reductions in operating expenses.
Investing activities consumed $0.1 million in the 1997 period compared to $3.7
million in the 1996 period. Capital equipment purchases decreased from $13.3
million in the 1996 period to $0.3 million in the 1997 period as a result of the
sale of the wafer fabrication operations.
Financing activities provided $4.8 million in the 1997 period compared to $4.7
million in the 1996 period. So far in 1997, the Company has raised approximately
$3.8 million through the issuance of Convertible Preferred Stock (see Note 7 of
Notes to Condensed Financial Statements), and converted approximately $0.7
million of trade payables into equity. Borrowing under the Company's line of
credit decreased by $1.6 million in the 1997 period compared to the 1996 period.
The decrease in borrowing is due to lower revenue in the 1997 period compared to
the 1996 period.
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 is 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
Page 17
<PAGE>
this new line of credit with Greyrock Business Credit were limited to up to 80%
of eligible receivables and interest is at the greater of LIBOR plus 5.25% or
9%.
In October 1997, the Company renewed the line of credit with Greyrock Business
Credit with a borrowing limit of $5,000,000. See Note 8 of Notes to Condensed
Financial Statements. At September 28, 1997, the outstanding balance under this
line of credit was approximately $2.5 million.
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 that was purchased. The Company used
approximately $2.2 million of the cash proceeds from the sale of the wafer
fabrication facility to pay off the remaining CIT Group borrowings.
The Company's recent operating results have consumed substantial amounts of cash
and have generated an aggregate net loss for the period from January 1, 1997
through September 30, 1997 of $6,700,000. During this period, the Company has
continued to experience a downward trend in product pricing which has
contributed to the poor operating results. The Company expects to incur a net
loss for quarter ended December 31, 1997. In January 1997, the Company completed
the private placement of Series A Preferred Stock for net proceeds of
approximately $1,880,000 and in July 1997, the Company completed the private
placement of Series B Preferred Stock (the "Series B Preferred Stock") for net
proceeds of approximately $1,870,000. See Note 7 of Notes to Condensed Financial
Statements. Due to the low price of the Company's Common Stock during the period
prior to conversion, the number of shares of Series A Preferred Stock converted
was significantly less than anticipated (and, therefore, the number of common
shares issued upon conversion was significantly greater than anticipated).
Without obtaining stockholder approval to allow the Company to issue additional
shares of Common Stock upon conversion of the remaining outstanding shares of
Series A Preferred Stock, the Company would have been required to redeem such
shares for cash in the amount of approximately $1.2 million, which would have
caused an adverse effect on the Company's liquidity.
Should continued product pricing pressures or delayed acceptance of the
Company's new products continue to adversely affect the Company's operating
results, the Company will have to pursue alternative financing opportunities.
Management has taken several steps to help ensure that adequate cash resources
will continue to be available to the Company. Among these steps are further
planned reductions in operating expenses and the proposed sale of additional
equity securities. If additional equity secrities are issued, substantial
dilution to existing stockholders could occur. No assurances can be given that
such steps will be sufficient or that additional financing will be available on
attractive terms or at all.
As a result of these circumstances, the Company's independent accountants'
reissued report on the Company's December 31, 1996 financial statements includes
an explanatory paragraph indicating that these matters raise a substantial doubt
about the Company's ability to continue as a going concern.
On September 26, 1997, at a Stockholders Meeting, the stockholders approved: (1)
the elimination of the restriction of the number of shares of Common Stock
issuable upon conversion
Page 18
<PAGE>
of the Series A Preferred Stock; (2) the elimination of the restriction of the
number of shares of Common Stock issuable upon conversion of the Series B
Preferred Stock; and (3) a proposed transaction or Series of transactions to
sell up to 5,000,000 shares of Common Stock or Preferred Stock (convertible into
Common Stock), and to grant rights to elect a majority of the directors of the
Company, which might result in the issuance of more than 20% of the Company's
outstanding Common Stock and a change in control of the Company. As a result of
the Stockholders' Meeting, the Series A Preferred Stock and Series B Preferred
Stock can now be fully converted into Common Stock.
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.
Uncertainty of Future Profitability; Need for Additional Funds. The
Company's recent operating results have consumed substantial amounts of cash.
The Company believes that cash flow from operations and other existing and
potential sources of liquidity, such as the sale of additional equity
securities, sale of assets and equipment financing, 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.
Also, during the period from May 9, 1997 through July 7, 1997, the
Company converted into Common Stock the maximum number of shares of Series A
Preferred Stock allowed without obtaining stockholder approval for the issuance
of additional shares of Common Stock upon conversion of the Series A Preferred
Stock. The number of preferred shares converted was significantly less than
anticipated (and, therefore, the number of common shares issued upon conversion
was significantly greater than anticipated) due to the low price of the
Company's Common Stock during the period just prior to conversion. On September
26, 1997, the Company obtained stockholder approval to allow for the full
conversion of the Series A Preferred Stock. Should product pricing pressures or
delayed acceptance of the Company's new products continue to adversely affect
the Company's operating results, the Company will have to pursue alternative
financing opportunities. Management has taken several steps to help ensure that
adequate cash resources will continue to be available to the Company. Among
these steps are further planned reductions in operating expenses and the
proposed sale of additional equity securities. On September 26, 1997,
stockholders approved a proposed transaction or series of transactions to sell
up to 5,000,000 shares of the Company's Common Stock or Preferred Stock
(convertible into Common Stock). Any such sale of securities could have a
substantial dilutive effect on existing stockholders.
Page 19
<PAGE>
Continuing Losses and Doubtful Ability to Continue as a Going Concern.
As a result of the Company's recent operating results consuming substantial
amounts of cash, and the fact that prior to obtaining stockholder approval, the
Company may have been required to redeem the Series A Preferred Stock, the
Company's independent accountants' reissued report on the Company's December 31,
1996 financial statements includes an explanatory paragraph indicating that
these matters raise a substantial doubt about the Company's ability to continue
as a going concern. The Company is seeking to raise additional equity. However,
there can be no assurance that the Company's efforts will be successful.
Dilution of Common Stock. The issuance of additional shares of Common
Stock upon conversion of the Series A Preferred Stock and Series B Preferred
Stock (collectively, the "Preferred Stock") will have a dilutive effect on the
Common Stock outstanding prior to such issuances. There can be no assurance that
the Company's Common Stock will not be diluted as a result of conversion of the
Preferred Stock. Additionally, the issuance of the Company's Common Stock in
lieu of payment of certain trade payables will have a dilutive effect on holders
of the Company's Common Stock.
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 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 and continuing into 1996 and 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. Prior to August 22, 1997, the
Company's Common Stock was listed on the Nasdaq National Market (the "NNM"). For
continued listing on the
Page 20
<PAGE>
NNM, however, the Company was required to maintain (1) $4,000,000 in net
tangible assets because it has sustained losses from continuing operations
and/or net losses in three of its four most recent fiscal years, (2) a
$2,000,000 market value of the public float, (3) $1,000,000 in total capital and
surplus, (4) a minimum bid price of $1.00 per share and (5) two market-makers.
As of June 30, 1997, the Company was not in compliance with items (1) and (4)
above.
On July 15, 1997, The Nasdaq Stock Market ("Nasdaq") staff notified the
Company of a bid price deficiency and provided a ninety-day grace period within
which to regain compliance with this requirement. On August 8, 1997, Nasdaq,
based on a review of the Company's trading history from July 8 to the present,
indicated that the Company had regained compliance with the minimum closing bid
price requirement of $1.00. On August 20, 1997, Nasdaq informed the Company that
due to its failure to comply with the terms of the qualifications exception
granted to the Company, the Company's Common Stock would be removed from the NNM
and listed on The Nasdaq SmallCap Market (the "NSCM") effective August 22, 1997,
pursuant to a waiver to the initial inclusion bid price requirement. The Company
is in the process of appealing this decision.
On August 22, 1997, the Company announced that effective August 22,
1997, the Company's Common Stock, formerly listed on the NNM, would be listed on
the NSCM, pursuant to a waiver to the initial inclusion bid price requirement.
The Company's continued listing on the NSCM is contingent upon the Company
meeting certain conditions. In order to continue to be listed on the NSCM,
however, the Company must maintain net tangible assets of $2,000,000 and a
$1,000,000 market value of the public float. In addition, continued inclusion on
the NSCM requires two market-makers and a minimum bid price of $1.00 per share.
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). See
"--Risks Relating to Low-Priced Stock; Possible Effect of "Penny Stock" Rules on
Liquidity for the Company's Securities."
Dependence on New Products and Technologies. 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 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
Page 21
<PAGE>
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 (the "Agreement"). Under
the Agreement, Orbit contracted to supply a quantity of wafers to the Company
over a specified period of time to offset Orbit's payment obligations against
the two promissory notes delivered in connection with the sale. As of September
28, 1997, the Company completed its contractual obligations to purchase wafers
under the first note. In July 1997, the Company negotiated a payment of the
second promissory note. As part of the agreement, the Company allowed Orbit to
retain a portion of the note amount for repairs on equipment purchased as part
of the sale of the Fab and for other matters. As of July 31, 1997, the second
note has been fully paid.
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.
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
Page 22
<PAGE>
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
so far in 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") and PaineWebber, Inc. 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 against Michael Gulett
and as to all causes of actions except for violation of certain provisions of
the California Corporate Securities Law, against the remaining Paradigm
Defendants. 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. Plaintiffs
have also subpoenaed documents from various third parties. The Paradigm
Defendants have served the plaintiffs with an initial set of discovery requests,
to which Plaintiffs have responded. The Paradigm defendants also took the
depositions of the named Plaintiffs on April 9, 1997. Following a hearing on
Plaintiffs' motion for class certification on May 20, 1997, the Court has
Page 23
<PAGE>
three times reset the motion for hearing. Most recently, after hearing
additional argument on September 18, 1997, the Court again deferred ruling and
continued the matter to February 5, 1998. 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.
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 of the August 12, 1996 class action lawsuit,
except that Plaintiff was a stockholder who held the Company's Stock during the
relevant period. This second class action is asserted against the same Paradigm
Defendants, PaineWebber, Inc. and Smith Barney. The Paradigm Defendants
authorized counsel to acknowledge service which occurred on April 9, 1997. Prior
to the hearing on the Paradigm Defendants' demurrer to the initial complaint,
Plaintiffs amended their complaint to incorporate factual allegations derived
from the May 19, 1997 lawsuit described below. The Paradigm Defendants filed a
demurrer to the amended complaint, which was heard on September 9, 1997. On
September 10, 1997, the Court issued an order sustaining the Paradigm
Defendants' demurrer as to all causes of action without leave to amend. A
judgment in favor of the Paradigm Defendants dismissing the entire complaint was
entered by the Court on September 23, 1997. Plaintiffs have since filed an
appeal. There can be no assurances that the Company will be successful in the
defense of the appeal. Even if Paradigm is successful in such defense of the
appeal, it may incur substantial legal fees and other expenses related to this
appeal. If unsuccessful in the defense of any such appeal, the Company's
business, operating results and cash flows could be materially adversely
affected.
On May 19, 1997, several former employees of the Company filed an action in
Santa Clara County Superior Court. The complaint names as defendants the
Company, Michael Gullet, Richard Veldhouse, Dennis McDonald and Chiang Lam.
Plaintiffs filed with the complaint a notice that they consider their case
related legally and factually to the August 12, 1996 class action lawsuit. The
complaint alleges fraud, breach of fiduciary duty and violations of certain
provisions of the California Corporate Securities Law and Civil Code. Plaintiffs
allege that they purchased the Company's stock at allegedly inflated prices and
were damaged thereby. The Plaintiffs seek an unspecified amount of compensatory,
rescissory and/or punitive damages. Defendants responded to the complaint on
September 12, 1997 by filing a demurrer as to all causes of action. A hearing on
the demurrer is set for November 18, 1997. Plaintiffs have served the Company
and two of the individual defendants with requests for production of documents,
to which the Company and the individual defendants have responded. 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.
The Company is involved in various other litigation and potential claims. 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
Page 24
<PAGE>
believes that the resolution of these matters will not have a material adverse
impact on the results of operations or the financial position of the Company.
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 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 Corporation ("NKK") and Atmel Corporation ("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.
Page 25
<PAGE>
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 capital 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 an agreement with Atmel
because 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. Any such competition with NKK 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
Page 26
<PAGE>
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.
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. 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. Recently, the Company has
had to significantly reduce its work staff. There can be no assurance that the
Company will be able to attract and retain the necessary personnel, and any
failure to do so could have a material adverse effect on the Company.
Page 27
<PAGE>
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 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 $0.68 in June 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.
Page 28
<PAGE>
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") and PaineWebber, Inc. 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 against Michael Gulett and as to
all causes of actions except for violation of certain provisions of the
California Corporate Securities Law, against the remaining Paradigm Defendants.
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. Plaintiffs
have also subpoenaed documents from various third parties. The Paradigm
Defendants have served the plaintiffs with an initial set of discovery requests,
to which Plaintiffs have responded. The Paradigm defendants also took the
depositions of the named Plaintiffs on April 9, 1997. Following a hearing on
Plaintiffs' motion for class certification on May 20, 1997, the Court has three
times reset the motion for hearing. Most recently, after hearing additional
argument on September 18, 1997, the Court again deferred ruling and continued
the matter to February 5, 1998. There can be no assurance that the Company will
be successful in such defense.
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 of the August 12, 1996 class action lawsuit,
except that Plaintiff was a stockholder who held the Company's Stock during the
relevant period. This second class action is asserted against the same Paradigm
Defendants, PaineWebber, Inc. and Smith Barney. The Paradigm Defendants
authorized counsel to acknowledge service which occurred on April 9, 1997. Prior
to the hearing on the Paradigm Defendants' demurrer to the initial complaint,
Plaintiffs amended their complaint to incorporate factual allegations derived
from the May 19, 1997 lawsuit described below. The Paradigm Defendants filed a
demurrer to the amended complaint, which was heard on September 9, 1997. On
September 10, 1997, the Court issued an order sustaining the Paradigm
Defendants' demurrer as to all causes of action without leave to amend. A
judgment in favor of the Paradigm Defendants dismissing the entire complaint was
entered by the Court on September 23, 1997.
Page 29
<PAGE>
Plaintiffs have since filed an appeal. There can be no assurances that the
Company will be successful in the defense of the appeal.
On May 19, 1997, several former employees of the Company filed an action in
Santa Clara County Superior Court. The complaint names as defendants the
Company, Michael Gullet, Richard Veldhouse, Dennis McDonald and Chiang Lam.
Plaintiffs filed with the complaint a notice that they consider their case
related legally and factually to the August 12, 1996 class action lawsuit. The
complaint alleges fraud, breach of fiduciary duty and violations of certain
provisions of the California Corporate Securities Law and Civil Code. Plaintiffs
allege that they purchased the Company's stock at allegedly inflated prices and
were damaged thereby. The Plaintiffs seek an unspecified amount of compensatory,
rescissory and/or punitive damages. Defendants responded to the complaint on
September 12, 1997 by filing a demurrer as to all causes of action. A hearing on
the demurrer is set for November 18, 1997. Plaintiffs have served the Company
and two of the individual defendants with requests for production of documents,
to which the Company and the individual defendants have responded. There can be
no assurance that the Company will be successful in such defense.
The Company is involved in various other litigation and potential claims. 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
these matters will not have a material adverse impact on the results of
operations or the financial position of the Company.
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 4. Submission of Matters to a Vote of Security Holders.
Annual Meeting
--------------
At the Annual Meeting of Stockholders on June 25, 1997, the holders of
4,559,531 shares of Common Stock, representing 62.9% of the outstanding shares
of Common Stock, adopted the following proposals by the following margins
indicated:
(1) The election of the following three candidates for Director, to
serve until the next Annual Meeting of Stockholders:
Nominee In Favor Withheld
------- --------- --------
George J. Collins 4,339,589 219,942
Michael Gulett 4,337,958 221,573
James L. Kochman 4,341,489 218,042
Page 30
<PAGE>
(2) The ratification of Price Waterhouse LLP as the Company's
independent auditors for the 1997 fiscal year:
Voted For Voted Against Abstained
--------- ------------- ---------
4,482,109 55,323 22,099
Special Meeting of Stockholders
-------------------------------
At the Special Meeting of Stockholders held on September 19, 1997 and
reconvened on September 26, 1997, the holders of 4,441,680 shares of Common
Stock adopted the following proposals by the following margins indicated:
(1) The elimination of the restriction on the number of shares of
Common Stock issuable upon conversion of the Company's 5% Series A Convertible
Redeemable Preferred Stock:
For: 3,956,267
Against: 400,880
Abstain: 84,533
(2) The elimination of the restriction on the number of shares of
Common Stock issuable upon conversion of the Company's 5% Series B Convertible
Redeemable Preferred Stock:
For: 3,921,317
Against: 433,430
Abstain: 86,933
(3) A proposed transaction or series of transactions to sell up to
5,000,000 shares of Common Stock and to grant rights to elect a majority of the
directors of the Company, which might result in the issuance of more than 20% of
the Company's outstanding Common Stock and a change in control of the Company:
For: 3,059,198
Against: 1,294,051
Abstain: 88,431
Page 31
<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 July 30, 1997. The report announced the private placement of a
total of 200 shares of the Registrant's 5% Series B Convertible Redeemable
Preferred Stock to Lyford Ltd. at a price of $10,000 per share, for a total
proceeds (net of payments to third parties) of approximately $1.9 million.
A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on August 22, 1997. The Form 8-K contained updated financial
statements and a reissued report by the Company's independent accountants.
A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on August 26, 1997. The report announced that the Company issued a
press release announcing that the Company's Common Stock was transferred to the
Nasdaq SmallCap Market effective on August 22, 1997.
A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on October 7, 1997. The report announced the results of the
stockholders vote at the Special Meeting of Stockholders held on September 19,
1997 and reconvened on September 26, 1997.
Items 2, 3 and 5 are not applicable and have been omitted.
Page 32
<PAGE>
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.
PARADIGM TECHNOLOGY, INC.
Date: November 13, 1997 /s/ David G. Campbell
--------------------------
David G. Campbell
Vice President Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 33
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 Nine Months Ended
----------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) from operations $ (3,032) $ (7,280) $ (6,739) $(23,735)
Accretion on Convertible Preferred Stock (432) -- (1,167) --
-------- -------- -------- --------
Net income (loss) available to Common Stockholders $ (3,464) $ (7,280) $ (7,906) $(23,735)
======== ======== ======== ========
Weighted average shares outstanding:
Common Stock 8,843 7,184 7,899 6,933
Common Stock issuable upon exercise of options and 0 0 0 200
warrants -------- -------- -------- --------
Weighted average common shares and equivalents 8,843 7,184 7,899 7,133
========= ========= ========= ========
Net income (loss) per share ($0.39) ($1.01) ($1.00) ($3.33)
========= ========= ========= ========
<FN>
(1) This Exhibit should be read in conjunction with Note 2 of Notes to Condensed Financial Statements.
</FN>
</TABLE>
Page 34
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 863
<SECURITIES> 0
<RECEIVABLES> 5,297
<ALLOWANCES> 1,724
<INVENTORY> 2,371
<CURRENT-ASSETS> 7,427
<PP&E> 6,977
<DEPRECIATION> 2,730
<TOTAL-ASSETS> 11,793
<CURRENT-LIABILITIES> 7,706
<BONDS> 195
0
2,750
<COMMON> 39,149
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,793
<SALES> 10,647
<TOTAL-REVENUES> 10,647
<CGS> 10,320
<TOTAL-COSTS> 10,320
<OTHER-EXPENSES> 7,196
<LOSS-PROVISION> (31)
<INTEREST-EXPENSE> 183
<INCOME-PRETAX> (6,739)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,739)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
