SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: August 21, 1997
PARADIGM TECHNOLOGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-26124 770140882-5
- ---------------------------- ---------------------- ------------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification Number)
694 Tasman Drive, Milpitas, CA 95035
---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(408) 954-0500
-------------------------------
(Registrant's telephone number,
including area code)
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<PAGE>
Item 5. Other Events.
------------
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 June 30, 1997 of $3,707,000. During this period, the
Company has continued to experience a downward trend in product pricing which
has contributed to the poor operating results. In January 1997, the Company
completed the private placement of Series A Convertible Preferred Stock for net
proceeds of approximately $1,880,000 and in July 1997, the Company completed the
private placement of Series B Convertible Preferred Stock for net proceeds of
approximately $1,870,000. Management believes that these cash infusions will be
sufficient to meet the Company's projected working capital and other operating
cash requirements through at least the end of 1997. 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 Convertible Preferred Stock allowed without
obtaining stockholder approval for the issuance of additional shares of Common
Stock upon conversion of the Series A Convertible 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. Without obtaining stockholder
approval to allow the Company to issue additional shares of its Common Stock
upon conversion of the remaining outstanding shares of Series A Convertible
Preferred Stock, the Company will be required to redeem such stock for cash in
the amount of approximately $1,200,000, which would cause an adverse affect 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, or if the Company does not obtain stockholder
approval to issue Common Stock upon conversion of the remaining shares of Series
A Convertible Preferred Stock rather than redeem such stock for cash, 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, the proposed sale of additional equity securities and the
proposed conversion of certain trade payables to equity. In addition, a special
stockholders' meeting has been scheduled for September 19, 1997 to approve the
issuance of the additional Common Stock, among other matters.
As a result of these changes in 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. The updated financial statements are included in this Current
Report on Form 8-K.
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<PAGE>
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF PARADIGM TECHNOLOGY, INC.
In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the pre-reorganization results of its
operations and its cash flows for the period from April 1, 1994 to June 20, 1994
and the post-reorganization financial position of Paradigm Technology, Inc. at
December 31, 1995 and 1996 and the post-reorganization results of its operations
and its cash flows for the period from June 21, 1994 to December 31, 1994 and
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 3 to the financial statements, on June 21,
1994, the Company's Third Amended Joint Plan of Reorganization was consummated.
As of that date, the Company adopted "fresh-start" reporting to account for the
reorganization, as set forth in Note 4 to the financial statements. Accordingly,
the financial statements for periods subsequent to the reorganization have been
prepared using a different basis of accounting and are, therefore, not
comparable to the pre-reorganization financial statements.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency. In addition, if certain stockholder approvals
are not obtained, the Company will be required to redeem for cash in the amount
of approximately $1,200,000 the remaining outstanding shares of its Series A
Redeemable Convertible Preferred Stock. These matters raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Price Waterhouse LLP
San Jose, California
January 23, 1997, except as to the second paragraph of Note 14, which is as of
February 21, 1997, and except as to the fifth paragraph of Note 1 and the second
paragraph of Note 15, which are as of July 31, 1997.
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<PAGE>
<TABLE>
BALANCE SHEETS
(in thousands except per share amounts)
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents .................................. $ 4,015 $ 587
Short-term investments ..................................... 17,198 --
Accounts receivable, net of allowances of $675 and $1,569 .. 10,085 2,800
Accounts receivable, related party ......................... 339 137
Inventory .................................................. 5,702 2,472
Prepaid expenses and other ................................. 1,883 4,918
-------- --------
Total current assets .................................. 39,222 10,914
Property and equipment, net ................................ 17,331 6,638
Other assets ............................................... 179 190
-------- --------
$ 56,732 $ 17,742
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Line of credit ............................................. $ -- $ 2,015
Pre-petition liabilities ................................... 34 --
Accounts payable ........................................... 2,855 6,103
Accounts payable, related party ............................ 1,319 140
Accrued expenses and other liabilities ..................... 5,103 2,766
Current portion of debt obligations ........................ 3,287 282
-------- --------
Total current liabilities ............................. 12,598 11,306
Debt obligations, net of current portion ................... 4,349 92
Deferred rent .............................................. 436 --
-------- --------
Total liabilities ..................................... 17,383 11,398
-------- --------
Commitments and contingencies (Notes 7, 13 and 14)
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized, no
shares issued and outstanding ......................... -- --
Common stock, $0.01 par value; 25,000 shares authorized;
6,599 and 7,225 shares issued and outstanding ......... 66 72
Additional paid-in capital ................................. 32,812 36,226
Retained earnings (accumulated deficit) .................... 6,471 (29,954)
-------- --------
Total stockholders' equity ............................ 39,349 6,344
-------- --------
$ 56,732 $ 17,742
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<CAPTION>
Pre-Reorganization Post-Reorganization
------------------ --------------------------------------------
Period from Period from
April 1 to June 21 to Year Ended Year Ended
June 20, December 31, December 31, December 31,
1994 1994 1995 1996
------------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales, net ................... $ 6,033 $ 19,690 $ 51,923 $ 23,202
Cost of goods sold ........... 5,895 12,881 31,033 36,364
-------- -------- -------- --------
Gross profit (loss) .......... 138 6,809 20,890 (13,162)
-------- -------- -------- --------
Operating expenses:
Research and development ..... 1,192 1,920 4,621 6,243
Selling, general and
administrative .......... 1,191 3,004 8,107 9,497
Loss on sale of wafer
fabrication facility
(Note 13) ............... -- -- -- 4,632
Write-off of in-process
technology acquired
(Note 8) ................ -- -- -- 3,841
-------- -------- -------- --------
Total operating expenses 2,383 4,924 12,728 24,213
-------- -------- -------- --------
Operating income (loss) ...... (2,245) 1,885 8,162 (37,375)
Interest expense ............. 518 721 1,369 1,121
Other income, net ............ (17) (44) (615) (946)
-------- -------- -------- --------
Income (loss) before extra-
ordinary gain and provision
(benefit)for income taxes .... (2,746) 1,208 7,408 (37,550)
Extraordinary gain ........... 12,990 -- -- --
Provision (benefit) for income
taxes ........................ -- -- 2,145 (1,125)
-------- -------- -------- --------
Net income (loss) ............ $ 10,244 $ 1,208 $ 5,263 $(36,425)
======== ======== ======== ========
Net income (loss) per share
(Note 2) ..................... $ 0.23 $ 0.83 $ (5.16)
-------- -------- --------
Weighted average common
and common equivalent
shares outstanding (Note 2) .. 5,355 6,314 7,060
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
------------------- ------------------- PAID IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 ........... -- $ -- $ 10,393 $ 5,376 $ -- (54,864) $(49,488)
Net loss .......................... -- -- -- -- -- (2,746) (2,746)
-------- -------- -------- -------- -------- -------- --------
Balance, June 20, 1994 pre-
reorganization .................. -- -- 10,393 5,376 -- (57,610) (52,234)
Adjustments for reorganization:
Extraordinary gain on debt ...... -- -- -- -- -- 12,990 12,990
Fresh start reporting
adjustments .................. -- -- (10,393) (5,376) -- 44,620 39,244
Issuance of new stock ........... 6,400 960 550 165 -- -- 1,125
-------- -------- -------- -------- -------- -------- --------
Balance, June 21, 1994 post-
reorganization .................. 6,400 960 550 165 -- -- 1,125
Stock options exercised ........... -- -- 39 12 -- -- 12
Net income ........................ -- -- -- -- -- 1,208 1,208
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1994 ........ 6,400 960 589 177 -- 1,208 2,345
Reincorporation in Delaware
(Note 1) ........................ -- -- -- (171) 171 -- --
Initial public offering of common
stock, net of costs ............. -- -- 2,300 23 28,281 -- 28,304
Conversion of preferred stock to
common stock .................... (6,400) (960) 3,200 32 928 -- --
Issuance of stock pursuant to Atmel
agreement (Note 6) .............. -- -- 425 4 3,396 -- 3,400
Stock options exercised ........... -- -- 85 1 36 -- 37
Net income ........................ -- -- -- -- -- 5,263 5,263
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1995 ........ -- -- 6,599 66 32,812 6,471 39,349
Issuance of common stock to
acquire NewLogic (Note 8) ....... -- -- 314 3 2,653 -- 2,656
Issuance of common stock under
employee stock plans ............ -- -- 312 3 761 -- 764
Net loss .......................... -- -- -- -- -- (36,425) (36,425)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 ........ -- $ -- 7,225 $ 72 $ 36,226 $(29,954) $ 6,344
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Pre-Reorganization Post-Reorganization
------------------ -----------------------------------------
Period from Period from
April 1 to June 21 to Year Ended Year Ended
JUNE 20, DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------- ---------- ----------- --------------
1994 1994 1995 1996
----------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................... $ 10,244 $ 1,208 $ 5,263 $(36,425)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization ...................... 1,503 2,777 5,141 5,716
Provision for doubtful accounts .................... 115 -- 90 1,372
Extraordinary gain ................................. (12,990) -- -- --
Loss on sale of wafer fabrication facility ......... -- -- -- 4,632
Write off in-process technology .................... -- -- -- 3,841
Gain on sale of fixed assets ....................... -- -- -- (532)
Changes in operating assets and liabilities:
Accounts receivable ................................ (59) (1,077) (5,680) 6,115
Inventory .......................................... (520) (1,190) (814) 1,430
Other assets ....................................... 284 (356) (1,361) (48)
Accounts payable ................................... (63) (47) 3,475 2,023
Pre-petition liabilities paid ...................... -- (2,981) (1,007) (34)
Other liabilities .................................. 868 (168) 3,012 (3,723)
-------- -------- -------- --------
Net cash provided by (used in) operating activities
before reorganization items paid ................... (618) (1,834) 8,119 (15,633)
Reorganization items paid .......................... (175) (889) (189) --
-------- -------- -------- --------
Net cash provided by (used in) operating
activities .............................. (793) (2,723) 7,930 (15,633)
-------- -------- -------- --------
Cash flows used in investing activities:
Purchases of property and equipment ..................... (263) (827) (13,609) (13,985)
Purchase of short-term investments ...................... -- -- (18,689) (2,672)
Sale of short-term investments .......................... -- -- 1,491 19,870
Sale of fixed assets .................................... -- -- -- 549
Proceeds from sale of wafer fabrication facility ........ -- -- -- 6,665
Acquisition of NewLogic, net of cash acquired ........... -- -- -- (723)
-------- -------- -------- --------
Net cash provided by (used) by investing activities (263) (827) (30,807) 9,704
-------- -------- -------- --------
Cash flows from financing activities:
Line of credit increase (decrease) ...................... 973 171 (4,623) 2,015
Payments on capital leases .............................. -- (2,012) (7,747) --
Issuance of notes payable ............................... -- -- 9,300 11,339
Principal payments on notes payable ..................... -- (455) (1,914) (11,601)
Issuance of common stock ................................ -- 12 31,741 748
Issuance of preferred stock ............................. 6,000 -- -- --
-------- -------- -------- --------
Net cash provided by (used by) financing activities 6,973 (2,284) 26,757 2,501
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,917 (5,834) 3,880 (3,428)
Cash and cash equivalents:
Beginning of period ..................................... 52 5,969 135 4,015
-------- -------- -------- --------
End of period ........................................... $ 5,969 $ 135 $ 4,015 $ 587
========
Supplemental information:
Interest paid ........................................... $ 266 $ 1,060 $ 1,335 $ 1,291
-------- -------- -------- --------
Income taxes paid ....................................... $ -- $ -- $ 348 $ 1,067
-------- -------- -------- --------
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS BUSINESS:
Paradigm Technology, Inc. ("Paradigm" or the "Company") was originally
incorporated in California in January 1987. Pursuant to the May 24, 1994, Third
Amended Joint Plan of Reorganization (the "Plan") under Chapter 11 of the United
States Bankruptcy Code (Note 3), amended Articles of Incorporation were filed.
On June 7, 1994, the Court confirmed the Plan, which became effective on June
21, 1994. The Company reincorporated in Delaware effective June 22, 1995, which
involved the exchange of the Company's postReorganization common and preferred
stock into shares of the Delaware Company stock. Pursuant to the
reincorporation, the Company has authorized 25,000,000 shares of $0.01 par value
common stock and 5,000,000 shares of $0.01 par value preferred stock.
The Company markets high speed, high density Static Random Access
Memory ("SRAM") products for uses in telecommunication devices, workstations and
high performance PCs to OEMs and distributors in the United States, Europe and
the Far East.
The SRAM business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity, and accelerated erosion of
average selling prices. During the latter part of 1995 and all of 1996, the
market for certain SRAM devices experienced an excess supply relative to demand
which resulted in a significant downward trend in prices.
The selling price that the Company is able to command for it's products
is highly dependent on industry-wide production capacity and demand. In this
regard, the Company did experience rapid erosion in product pricing during 1996
which was not within the control of the Company. The Company could continue to
experience a downward trend in product pricing which could adversely effect the
Company's operating results.
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 June 30, 1997 of $3,707,000 (unaudited). During this
period, the Company has continued to experience a downward trend in product
pricing which has contributed to the poor operating results. In January 1997,
the Company completed the private placement of Series A Convertible Preferred
Stock for net proceeds of approximately $1,880,000 (Note 15) and in July 1997,
the Company completed the private placement of Series B Convertible Preferred
Stock for net proceeds of approximately $1,870,000 (Note 15). Management
believes that these cash infusions will be sufficient to meet the Company's
projected working capital and other operating cash requirements through at least
the end of 1997. Also, from the period from May 9, 1997 through July 7, 1997,
the Company converted into Common Stock the maximum number of shares of Series A
Convertible Preferred Stock allowed without obtaining stockholder approval for
the issuance of additional shares of Common Stock upon conversion of the Series
A Convertible 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. Without obtaining stockholder approval to allow the Company to issue
additional shares of its Common Stock upon conversion of the remaining
outstanding shares of Series A Convertible Preferred Stock, the Company will be
required to redeem such stock for cash in the amount of approximately
$1,200,000, which would cause an adverse affect 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, or if the Company does not obtain stockholder approval to issue Common
Stock upon conversion of the remaining shares of Series A Convertible Preferred
Stock rather than redeem such stock for cash, the Company will have to pursue
alternative financing opportunities. As of July 31, 1997, 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, the proposed sale of additional equity securities and the
proposed conversion of certain trade payables to equity. In addition, a special
stockholders' meeting has
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<PAGE>
tentatively been scheduled in September to approve the issuance of the
additional Common Stock, among other matters.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR
Prior to consummation of the Reorganization, the Company's fiscal year
ended on the Sunday closest to March 31. Upon completion of the Reorganization,
the Company changed its fiscal year end to December 31. The periods from April
1, 1994 to June 20, 1994 and from June 21, 1994 to December 31, 1994 contained
12 and 27 weeks, respectively.
REVERSE STOCK SPLIT
Share information for all periods has been retroactively adjusted to
reflect a 1-for-2 reverse stock split of common stock effected on June 22, 1995.
BASIS OF PRESENTATION
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from those
estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents and investments with
original maturities of greater than 90 days to be short-term investments. The
Company accounts for its short-term investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). As of December 31, 1995, the Company
had short-term investments comprising primarily of fixed-maturity securities of
$17.2 million, all of which had been classified as available for sale and which
all have contractual maturities of less than two years. These securities are
stated at fair market value. Unrealized gains and losses were immaterial at
December 31, 1995.
CONCENTRATION OF CREDIT RISK
Export sales, primarily to Europe and the Far East, represent 15%, 26%,
28%, and 25% of total sales for the period from April 1, 1994 to June 20, 1994,
for the period from June 21, 1994 to December 31, 1994, and for the years ended
December 31, 1995 and December 31, 1996, respectively. The Company's sales have
been denominated in U.S. dollars.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The following table summarizes the
percentage of net sales to significant customers:
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<TABLE>
<CAPTION>
Pre-Reorganization Post-Reorganization
-------------------- -----------------------------------------------------
Period from Period from
April 1 to June 21 to Year Ended Year Ended
June 20, December 31, December 31, December 31,
1994 1994 1995 1996
-------------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C>
Customer A 20% 11% -- --
Customer B 11% 23% 28% 25%
Customer C -- 13% -- --
Customer D -- -- -- 13%
Customer E -- -- -- 13%
</TABLE>
As of December 31, 1995, accounts receivable from three customers
accounted for approximately 11%, 11% and 15% of total gross accounts receivable,
respectively. As of December 31, 1996, accounts receivable from three customers
accounted for approximately 16%, 17%, and 18% of total gross accounts
receivable, respectively. The Company maintains allowances for potential credit
losses based upon expected collectibility of all accounts receivable.
INVENTORY
Inventory is stated at the lower of cost (determined on a first-in,
first-out method) or market. Included in cost of sales for the year ended
December 31, 1996 are lower of cost or market provisions of $2,475,000 and
write-offs of $3,325,000 related to older generation SRAM products.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over estimated useful lives of three to five
years. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life. During the quarter ended December 31, 1996 the
Company sold fixed assets with a net book value of $19.3 million related to its
wafer fabrication facility (Note 13).
REVENUE RECOGNITION
Revenue from product sales is generally recognized upon shipment and a
reserve is provided for estimated returns. The Company's sales to distributors
are made under agreements allowing certain rights of return and price protection
on products unsold by the distributors. Accordingly, the Company defers
recognition of revenue on such sales until the products are sold by the
distributors.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to the statement of
operations as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts under the provisions of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes" (Note
11).
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans based on the fair value of options granted. The Company has chosen to
continue
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<PAGE>
to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
NET INCOME (LOSS) PER SHARE
Net loss per share is computed using the weighted average number of
Common shares outstanding. Common stock equivalents are excluded as their effect
is anti-dilutive. Net income per share is computed using the weighted average
number of common stock and common stock equivalents outstanding. Common stock
equivalent shares consist of stock options and warrants. Pursuant to the
requirements of the Securities and Exchange Commission, common stock equivalent
shares relating to stock options and warrants issued during the twelve months
prior to the initial public offering are included in the computations for
periods presented through the initial public offering, whether they are
anti-dilutive or not. Net income per share for pre-reorganization periods is not
presented since such information is not comparable with post-reorganization net
income per share. The Company completed its initial public offering of common
shares on July 5, 1995 and shares issued are included in the weighted average
computation only from the date of issuance. Accordingly, these shares resulted
in a greater amount of average shares in 1996 compared to 1995.
NOTE 3 -- THE REORGANIZATION:
From its inception through fiscal 1994, the Company incurred
substantial losses and consumed all of the equity contributed by stockholders.
In addition, during this period, the Company continued to incur indebtedness to
fund its cash flow needs including capital expenditures associated with its
wafer fabrication facility. As a result of the significant interest expense
caused by this leverage and continued operating losses, the Company concluded
that it could not meet its debt obligations and developed a plan for
restructuring its debt and capital structure.
On February 23, 1994, the Company entered into a letter of intent with
ACMA Limited ("ACMA") and a letter of intent with National Semiconductor
Corporation ("National Semiconductor") to restructure its obligations and
provide additional capital to the Company. On March 30, 1994 and pursuant to the
ACMA letter of intent, the Company filed in the United States Bankruptcy Court
for the Northern District of California (the "Court") a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. On April 7, 1994,
the Company filed its initial Plan of Reorganization with the Court. On May 24,
1994, after further negotiations between the Company and the Official Committee
of Unsecured Creditors in its bankruptcy proceeding, the Company filed its Plan.
On June 7, 1994, the Court confirmed the Plan, which became effective on June
21, 1994.
The Plan provided for the elimination of a significant portion of the
Company's indebtedness and a significant reduction in its interest expense.
Pursuant to the Plan:
o ACMA paid $5.0 million in exchange for 2,295,000 shares of Series
A-1 voting preferred stock, 2,405,000 shares of Series A-2
nonvoting preferred stock and warrants to purchase 250,000 shares
of the post-reorganization new common stock (the "new common
stock") (Note 9) at an exercise price of $250,000, and paid $1.0
million for a convertible note,
o ACMA guaranteed $1.5 million of the Company's line of credit with
CoastFed Business Credit Corporation ("CoastFed"),
o National Semiconductor paid $1.0 million for 500,000 shares of
Series A-1 voting preferred stock, the proceeds of which were used
to repay ACMA's convertible note,
o Mitsubishi International Corporation ("Mitsubishi") received a
cash payment of $300,000 and 465,116 shares of new Series B
preferred stock in exchange for the cancellation of $5.0 million
of indebtedness,
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<PAGE>
o Equipment lessors received payments in full under a modified
payments schedule and new common stock equal to approximately 3.2%
of the Company's capital stock on a fully diluted basis (300,000
shares, pre-split),
o NUF Corporation, an affiliate of NKK Corporation, and NKK
Corporation received $345,000 in cash, 734,884 shares of new
Series B preferred stock and a license to sell Paradigm's 256K
product in North America in exchange for cancellation of $5.8
million of indebtedness,
o Claim holders of The Creditor Workout Agreement, who were
considered unsecured creditors, received 30% of their proof of
claim and new common stock equal to approximately 8.5% of the
Company's capital stock, on a fully diluted basis (800,000 shares,
pre-split),
o A $526,000 term note was repaid in full to an equipment supplier,
and
o The rights and interests of the Company's previous equity
holders were terminated.
As of the effective date of the Plan, a claim by one of the Company's
equipment suppliers was in dispute. A provision of $250,000 was accrued as of
December 31, 1994 for the disputed claim. A total of $66,000 was paid on
pre-petition interest accrued prior to March 30, 1994 and pre-petition interest
accrued during the Chapter 11 proceedings. The Company recorded an extraordinary
gain of $13.0 million in the period ended June 20, 1994, as a result of the
Plan.
NOTE 4 -- FRESH START REPORTING:
In connection with the Reorganization under Chapter 11 of the U.S.
Bankruptcy Code described in Note 3, the Company's basis of accounting for
financial reporting purposes changed starting June 21, 1994 as follows: (i) the
Company's assets and liabilities were adjusted to reflect a reorganization value
(the "Reorganization Value"), generally approximating the fair value of the
Company as a going concern on an unleveraged basis, (ii) the accumulated deficit
was eliminated, and (iii) the Company's capital structure was adjusted to
reflect consummation of the Plan. Accordingly, the results of operations after
June 20, 1994 are not comparable to results of operations prior to such date.
The Reorganization Value of $1.1 million was determined based on
several factors including projected discounted cash flows and management's
estimate of the fair value of its common stock upon reorganization from
bankruptcy. The cash flow analysis gave effect to the corporate restructuring
and resultant debt obligations as well as other operating program changes,
limitations on the use of available net operating loss carryforwards and other
tax attributes, market share and position, competition and general economic
considerations, projected sales growth and profitability, and working capital
requirements.
Current assets and liabilities were recorded at their book value, which
approximated fair value. Property and equipment was recorded based upon the
Reorganization Value, which was less than its fair value in continued use, based
on an independent appraisal. Other noncurrent assets were recorded at net book
value, which approximates fair value and long-term debt was recorded at present
value of the obligation determined under the Plan as of June 21, 1994.
-12-
<PAGE>
The effect of the Plan and the adoption of fresh start reporting on the
Company's balance sheet as of June 21, 1994 was as follows (in thousands):
<TABLE>
<CAPTION>
Adjustment to Record the
Plan of Reorganization
----------------------
Prior to Debt Subsequent to
Reorganization Exchange Fresh Start Reorganization
-------------- -------- ----------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents ............ $ (31) $ -- $ 6,000 $ 5,969
Accounts receivable, net ............. 3,757 -- -- 3,757
Inventories .......................... 3,698 -- -- 3,698
Prepaid expenses and other ........... 340 -- (195) 145
-------- -------- -------- --------
Total current assets ................ 7,764 -- 5,805 13,569
-------- -------- -------- --------
Property and equipment, net .......... 9,485 -- 1,328 10,813
Other assets ......................... 199 -- -- 199
-------- -------- -------- --------
Total assets ........................ $ 17,448 $ -- $ 7,133 $ 24,581
======== ======== ======== ========
LIABILITIES AND STOCK-
HOLDERS' EQUITY (DEFICIT):
Line of credit ....................... $ 4,452 $ -- $ -- $ 4,452
Accounts payable ..................... 5,808 (3,295) -- 2,513
Accrued payroll and related expenses . 1,048 16 (30) 1,034
Accrued expenses and other liabilities 2,614 (265) 1,129 3,478
Accrued interest ..................... 700 (614) -- 86
Capital leases, current portion ...... 9,172 (5,132) -- 4,040
Notes payable ........................ 11,527 (9,978) (127) 1,422
-------- -------- -------- --------
Total current liabilities ........... 35,321 (19,268) 972 17,025
-------- -------- -------- --------
Capital leases, net of current portion -- 5,933 -- 5,933
Deferred rent ........................ 608 -- (110) 498
-------- -------- -------- --------
Total liabilities ................... 35,929 (13,335) 862 23,456
-------- -------- -------- --------
Common/preferred stock ............... -- 345 780 1,125
Predecessor common/preferred stock ... 39,129 -- (39,129) --
Retained earnings (deficit) .......... (57,610) 12,990 44,620 --
-------- -------- -------- --------
Total stockholders' equity (deficit) (18,481) 13,335 6,271 1,125
-------- -------- -------- --------
Total liabilities and stockholders'
equity ......................... $ 17,448 $ -- $ 7,133 $ 24,581
======== ======== ======== ========
</TABLE>
Pre-petition liabilities paid in the years ended December 31, 1995 and
1996 consist of (in thousands):
<TABLE>
<CAPTION>
Post-Reorganization
--------------------
1995 1996
------ ------
<S> <C> <C>
Accounts payable................................ $ 715 $ --
Accrued payroll and related expenses............ 146 --
Accrued expenses................................ 146 34
------ ------
Total.......................................... $1,007 $ 34
====== ======
</TABLE>
-13-
<PAGE>
NOTE 5 -- BALANCE SHEET DETAIL:
(in thousands)
<TABLE>
<CAPTION>
Post-Reorganization
December 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Inventory:
Raw materials ................. $ 633 $ 16
Work in process ............... 4,307 1,778
Finished goods ................ 762 678
-------- --------
$ 5,702 $ 2,472
======== ========
Property and equipment:
Machinery and equipment ....... $ 21,315 $ 9,488
Leasehold improvements ........ 3,622 --
Furniture and fixtures ........ 264 19
-------- --------
25,201 9,507
Less accumulated depreciation . (7,870) (2,869)
-------- --------
$ 17,331 $ 6,638
======== ========
Accrued Liabilities:
Accrued payroll and commissions $ 1,583 $ 804
Income taxes .................. 1,797 --
Other ......................... 1,723 1,962
-------- --------
$ 5,103 $ 2,766
======== ========
</TABLE>
NOTE 6 -- RELATED PARTY TRANSACTIONS:
As a result of the Reorganization, certain of the Company's creditors
became stockholders (Note 3). Transactions with stockholders consist of the
following:
Gross sales to NKK were $359,000 for the period from June 21, 1994 to
December 31, 1994. Gross sales to NKK were insignificant during the years ended
December 31, 1995 and December 31, 1996. The value of product purchased from NKK
in the year ended December 31, 1995 was $3,237,000 of which $1,319,000 is
included in the accounts payable, related party balance at December 31, 1995.
During the year ended December 31, 1996, the Company purchased product with a
value of $6,111,000 from NKK. There was no amount due NKK at December 31, 1996.
Gross sales to National Semiconductor for the period from June 21, 1994
to December 31, 1994 and during the years ended December 31, 1995 and December
31, 1996 amounted to $1,700,000, $2,500,000, and $500,000, respectively, of
which $339,000 and $137,000, respectively, is included in the accounts
receivable, related party balance at December 31, 1995 and December 31, 1996.
In April 1995, NKK and the Company modified their previous technology
license and development agreements. This 1995 agreement provides for payment of
royalties to the Company by NKK on certain quantities of 1M SRAM's sold and,
with certain exceptions, cancels further obligations of each party to deliver
technology improvements or design updates to the other.
On April 28, 1995, pursuant to certain agreements with certain of the
Company's stockholders, Atmel acquired 425,000 shares of common stock from the
Company, 300,000 shares of common stock from certain stockholders of the Company
who had been unsecured creditors of the Company as of the reorganization, and
28,050 shares of common stock from the Company's equipment lessors all of which
shares were purchased at
-14-
<PAGE>
a price of $8.00 per share (the "Atmel Stock"). Atmel also acquired
from ACMA certain warrants to purchase 175,000 shares of common stock at an
exercise price of $1.00 per share, for a purchase price of $7.00 per share
subject to the warrants. In connection with these transactions, the Company
entered into an Agreement with Atmel (the "Stock Purchase Agreement") pursuant
to which Atmel agreed to certain transfer restrictions for a period of three
years. Atmel also agreed to certain standstill provisions, including an
agreement not to increase its beneficial ownership above 19.9% of the voting
power of the Company on a fully diluted basis for a period of five years from
the date of the Stock Purchase Agreement. The foregoing restrictions terminate
on the date on which a person or entity acquires more than 50% of the voting
power of the Company. In addition, Atmel agreed that, for a period of ten years
from the date of the Stock Purchase Agreement, it will vote the Atmel Stock in
proportion to the votes cast by the other stockholders of the Company, except
with respect to certain material events. The voting and standstill restrictions
terminate at such time as Atmel beneficially owns less than 5% of the common
stock of the Company. On April 28, 1995, Atmel also entered into a Licensing and
Manufacturing Agreement (the "Agreement") with the Company. This Agreement
provides Atmel with a nonexclusive, royalty bearing license to manufacture, use
and sell certain of the Company's products. The royalty fee is based on a
percentage of the average selling price of the products sold. In addition, under
the Agreement, a certain wafer manufacturing capacity per week has been made
available to the Company by Atmel. The Agreement does not include a purchase
commitment by the Company. However, to the extent the Company provides Atmel
with its three-month demand forecast, it is committed to purchase the
three-month forecasted quantities. No obligation to purchase wafers existed as
of December 31, 1996. The price of the wafers has been fixed at the current fair
market value. The Agreement expires on April 28, 2000. There was no amount due
Atmel at December 31, 1995. The value of product purchased from Atmel in the
year ended December 31, 1996 was $429,000 of which $140,000 is included in the
accounts payable, related party balance at December 31, 1996.
NOTE 7 -- DEBT OBLIGATIONS:
Notes payable and debt, excluding the line of credit consist of the
following (in thousands):
<TABLE>
<CAPTION>
Post-Reorganization
December 31,
-------------------
1995 1996
--------- --------
<S> <C> <C>
Promissory notes ...... $ -- $ 374
Term loans ............ 7,636 --
------ ------
7,636 374
Less current portion .. 3,287 282
------ ------
$4,349 $ 92
====== ======
</TABLE>
Outstanding promissory notes at December 31, 1996 bear interest at
rates ranging from 8.0% to 19.8% and are repayable at various dates through
1998. These notes are secured by the equipment purchased.
At December 31, 1995, the Company had outstanding borrowings of $7.5
million related to three term notes under a credit facility with Greyrock
Business Credit with a credit limit of $16.75 million. Under the agreement,
borrowings were limited to 80% of eligible accounts receivable (not to exceed
$8.0 million), plus the aggregate amount outstanding under certain term loans,
plus $2.5 million until May 15, 1995 and $1.5 million thereafter. The credit
facility was secured by all inventory, equipment, receivables and general
intangibles of the Company. ACMA issued a $2.5 million standby letter of credit
to guarantee the line of credit, and in connection therewith received a warrant
to purchase 25,000 shares of common stock (Note 9). In connection with the
repayment of the line of credit in August 1995, the standby letter of credit was
terminated.
In February 1996 the Company replaced the existing line of credit with
Greyrock Business Credit with a line of credit from Bank of the West with a
borrowing limit of $10.0 million. Borrowings were limited to 80% of eligible
receivables and interest was at prime. The line of credit was secured by
accounts receivable.
-15-
<PAGE>
On February 27, 1996 the Company borrowed $5.6 million 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
$15,000,000 and the commitment expired on December 30, 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 new line of credit from Greyrock Business Credit with a borrowing
limit of $6,000,000 of which $513,000 was available at December 31, 1996.
Borrowings under this line of credit are limited to 80% of eligible receivables
and interest is at the greater of LIBOR plus 5.25% or 9%. At December 31, 1996
the outstanding balance under this line of credit was $2,015,000.
In November 1996 the Company sold its wafer fabrication operations
(Note 13). The purchasing company assumed $7,500,000 of outstanding borrowings
with the CIT Group that were secured by wafer fabrication equipment that was
purchased. The Company used approximately $2,200,000 of the cash proceeds from
the sale of the wafer fabrication facility to pay off the remaining CIT Group
borrowings.
NOTE 8 -- NEWLOGIC ACQUISITION
In June 1996, the Company acquired, through a stock purchase and merger
transaction, 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 $2,656,000, and approximately $825,000 in cash. In
addition, the Company incurred transaction costs of approximately $237,000. The
fair value of NewLogic's tangible net assets at the date of acquisition was a
deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of
the fair market value of the net tangible assets was allocated to in-process
technology which the Company wrote off in the quarter ended June 30, 1996.
Approximately $250,000 was allocated to other intangibles. The unamortized
balance of these other intangibles was written off in connection of the shutdown
of NewLogic in early 1997.
The Company accounted for this acquisition using the purchase method of
accounting and accordingly, the results of operations and cash flows of the
acquisition have been included only from the date of acquisition. Excluding the
$3,841,000 write-off of purchased in-process technology, the pro forma impact on
the Company's results of operations had the acquisition been consummated on
January 1, 1995 is not materially different from the results presented in the
accompanying statement of operations.
NOTE 9 -- PREFERRED STOCK, NEW COMMON STOCK AND NEW COMMON STOCK WARRANTS:
As a result of the Plan, the Company issued 2,295,000 voting shares of
Series A-1 preferred stock ("Series A-1") and 2,405,000 nonvoting shares of
Series A-2 preferred stock to ACMA for cash of $5.0 million. National
Semiconductor was issued 500,000 voting shares of Series A-1 for $1.0 million.
In addition, 1,200,000 shares of Series B voting preferred stock were issued to
NKK and Mitsubishi. These shares form part of the settlement against $10,750,000
of short-term notes owed by the Company prior to June 21, 1994. All preferred
stock was converted at a 2-for-1 ratio of preferred stock to common stock upon
the completion of the Company's initial public offering.
A total of 550,000 shares of the new common stock was issued to
creditors and lessors as part of the Plan. The 1994 Stock Option Plan was also
created (Note 10).
-16-
<PAGE>
In exchange for its guarantee on the CoastFed line of credit in April
1994, ACMA was issued warrants to purchase 250,000 shares of new common stock at
an exercise price of $1.00 per share. There is a five year expiration date
placed on these warrants. On December 9, 1994, ACMA assigned a warrant to
purchase 50,000 shares of common stock to Chiang Lam (President of ACMA USA). In
January 1995, in exchange for a $1.0 million increase in its guarantee of the
line of credit, ACMA received an additional warrant to purchase 25,000 shares of
new common stock at an exercise price of $4.00 per share. No warrants were
exercised at December 31, 1995 and December 31, 1996. The value of the warrants
is considered nominal at the date of grant. On April 28, 1995 ACMA sold a
warrant to purchase 175,000 shares of new common stock to Atmel Corporation
("Atmel") (Note 6).
NOTE 10 -- STOCK COMPENSATION PLANS:
Pursuant to the Plan, the 1994 Stock Option Plan was created on June
21, 1994.
Under the 1994 Stock Option Plan (the "Option Plan"), the maximum
aggregate number of shares which may be optioned is 1,498,000 shares.
Nonstatutory stock options may be granted to employees, outside directors and
consultants, whereas incentive stock options can only be granted to employees.
Options are generally granted at fair market value subject to the following:
1. With respect to options granted to an employee who, at the time of the
grant owns stock representing more than 10% of the voting power of all
classes of stock of the Company or any parent or subsidiary, the per
share exercise price shall be no less than 110% of the fair market
value on the date of the grant for incentive and nonstatutory stock
options.
2. With respect to options granted to any employee other than described in
the preceding paragraph, the exercise price shall be no less than 100%
for incentive stock options and 85% for nonstatutory stock options of
the fair market value on the date of the grant.
During 1994, the Company's directors and stockholders approved the
Directors' Stock Option Plan ("Directors' Plan") and reserved 150,000 shares of
common stock for issuance thereunder. Terms of the Directors' Plan provide for
the grant of options to the Company's independent directors in annual increments
commencing in 1995. The exercise price of options granted is the fair market
value at the date of grant.
<TABLE>
Nonstatutory stock option activity under the Option Plan and Director's
Plan was as follows (in thousands):
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Outstanding at beginning of period -- 730 896
Granted ......................... 857 414 1,175
Canceled ........................ (88) (163) (700)
Exercised ....................... (39) (85) (235)
------ ------ ------
Outstanding at December 31 ....... 730 896 1,136
Exercisable at December 31 ....... 256 384 298
------ ------ ------
Available for Grant at December 31 103 307 149
------ ------ ------
</TABLE>
Weighted average option exercise price information for the years 1994,
1995 and 1996 follows:
-17-
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- -------
<S> <C> <C> <C>
Outstanding at beginning of period................. $0.00 $0.32 $4.30
Granted during the year............................ 0.31 10.26 6.20
Canceled during the year........................... 0.30 3.35 8.24
Exercised during the year.......................... 0.30 0.43 0.58
Outstanding at December 31......................... 0.32 4.30 4.54
Exercisable at December 31......................... 0.31 1.36 2.77
</TABLE>
<TABLE>
Significant option groups outstanding at December 31, 1996, and related
weighted average price and life information follows (options in thousands):
<CAPTION>
Range of Outstanding Exercisable Remaining
Exercise Prices Shares Price Shares Price Life (years)
- --------------- ------ ----- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
$0.30-0.50 242 $0.32 202 $0.31 7.5
$2.50 234 2.50 -- 0.0 9.9
$3.25-5.00 379 4.49 28 4.50 9.2
$5.13-9.00 224 8.41 59 8.09 8.8
$13.50-25.00 57 16.02 9 17.49 9.0
Options granted vest over a period of four years. The terms of the
option shall be no longer than 10 years. All options were granted at an exercise
price equal to the fair market value of the Company's common stock at the date
of grant. The weighted average fair value at date of grant for options granted
during 1995 and 1996 was $5.34 and $2.74 per option, respectively. The fair
value of options at date of grant was estimated using the BlackScholes model
with the following assumptions: </TABLE>
<TABLE>
<CAPTION>
1995 1996
------ -----
<S> <C> <C>
Expected life (years)............ 5 5
Risk free interest rate.......... 6.9% 6.6%
Volatility....................... 48% 50%
Dividend yield................... -- --
</TABLE>
In April 1995, the board of directors of the Company adopted the
Paradigm Technology, Inc. Employee Stock Purchase Plan (the "ESPP") to provide
employees of the Company with an opportunity to purchase common stock through
payroll deductions. The ESPP became effective upon the closing of the Company's
initial public offering in July 1995. Under the ESPP, 250,000 shares of common
stock have been reserved for issuance to full-time employees employed with the
Company for at least three consecutive months.
Under the ESPP, the purchase price of the common stock will be equal to
85% of the lower of (i) the market price of common stock immediately before the
beginning of the applicable participation period or (ii) the market price of
common stock at the time of purchase. In general, each participation period is
24 months long, with a new participation period beginning every six months.
During 1996, 76,783 shares were issued under the plan. The fair value of the
employee's purchase rights was estimated using the Black-Scholes model with the
following assumptions for 1995 and 1996, respectively; dividend yield of 0% in
both years; an expected life of two years for each purchase period; expected
volatility of 48% and 50%; and risk free interest rates of 6.0% and 6.3%. The
weighted-average fair value of these purchase rights granted in 1995 and 1996
was $5.37 and $4.78, respectively.
-18-
<PAGE>
Had compensation expense for the Company's stock-based compensation
plans been determined based on the methods prescribed by SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1995 1996
------------- ------------
<S> <C> <C>
Net income (loss):
As reported ............ $ 5,263 $(36,425)
Pro forma .............. 5,024 (37,272)
Net income (loss) per share:
As reported ............ $ 0.83 $ (5.16)
Pro forma .............. 0.79 (5.28)
</TABLE>
NOTE 11 -- INCOME TAXES:
No provision has been recorded for any of the periods prior to December
31, 1994, since the Company incurred a net operating loss for tax purposes.
<TABLE>
The provision (benefit) for income taxes consists of the following (in
thousands):
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1995 1996
------------ -----------
<S> <C> <C>
Federal:
Current.. $ 1,673 $ (1,125)
State:
Current.. 472 --
---------- ---------
$ 2,145 $ (1,125)
========== ==========
</TABLE>
<TABLE>
The components of the net deferred tax asset were as follows (in
thousands):
<CAPTION>
Post-Reorganization
December 31,
-------------------------------
1995 1996
---------- -----------
<S> <C> <C>
Inventory and other reserves.......... $ 589 $ 3,052
Depreciation and capital leases....... 2,425 972
Other................................. 473 551
Net operating losses.................. 1,822 13,885
---------- -----------
5,309 18,460
Less valuation allowance.............. (5,309) (18,460)
---------- -----------
$ -- $ --
========== ===========
</TABLE>
The Company's effective tax rate for 1995 and 1996 was 29% and (3)%,
respectively. This rate differs from the federal statutory rate due principally
to the following:
-19-
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1995 1996
----------- ------------
<S> <C> <C>
Tax at statutory rate..................................... 34% (34)%
State taxes, net of federal benefit....................... 6 (6)
Tax losses not recognized................................. -- 37
Net operating losses and tax credits utilized............ (11) --
----- -----
29% (3)%
===== =====
</TABLE>
The Company has established a valuation allowance equal to its deferred
tax assets on the basis that realization of such assets is not assured.
Management's assessment is based on the Company's current net operating losses.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. The Company experienced such an ownership change as a
result of the Reorganization (Note 3), and the utilization of the carryforwards
was limited.
At December 31, 1996, the Company had net operating loss carryforwards
(reflecting limitation resulting from change in ownership) of approximately
$35.5 million available to offset future regular and alternative minimum taxable
income. The Company's net operating loss carryforwards expire through 2011, if
not utilized.
NOTE 12 -- CAPITAL LEASE OBLIGATIONS AND COMMITMENTS:
Until May 1, 1995 the Company leased its fab/manufacturing and lab and
test equipment from eleven equipment lessors. A modified payment stream
sufficient to cure all defaults under the original lease agreements was
confirmed by the Bankruptcy Court in June 1994. The Company was responsible for
all insurance, property tax and maintenance. On May 1, 1995, the Company
purchased this leased equipment effective March 31, 1995 with proceeds of a term
note from Greyrock Business Credit (Note 7).
The Company's principal manufacturing and administrative facility was
leased under an operating lease expiring in 2004. This lease was assumed by the
purchaser of the Company's wafer fabrication facility. Rent expense for the
period from April 1, 1994 to June 20, 1994, the period from June 21, 1994 to
December 31, 1994 and the years ended December 31, 1995 and December 31, 1996
was $164,000, $368,000, $715,000 and $680,000, respectively.
In December 1996 the Company entered into an agreement to lease its new
principal administrative facility under an operating lease expiring in 2002.
Future minimum payments under noncancelable operating leases at December 31,
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31, Operating Leases
------------ ----------------
<S> <C>
1997 $ 382,000
1998 439,000
1999 452,000
2000 464,000
2001 476,000
Thereafter 40,000
-----------------
$ 2,253,000
=================
</TABLE>
-20-
<PAGE>
NOTE 13 -- SALE OF WAFER FABRICATION FACILITY
The Company recorded a loss of $4.6 million in the quarter ended
December 31, 1996 as a result of the sale of its wafer fabrication facility.
This charge included the excess of the net book value of leasehold improvements,
wafer fabrication equipment, fabrication work in process inventory and other
assets sold to Orbit over the proceeds received from Orbit, an accrual for
professional fees incurred to complete the transaction, a reserve for an adverse
purchase commitment related to the wafer 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 will occupy office space at its
principal offices not associated with the Fab.
The $4.8 million promissory note was issued in connection with a wafer
supply agreement that requires Orbit to supply Paradigm with approximately 9,750
of certain fabricated wafers through May 1997 at $500 per wafer purchased by
Paradigm. In accordance with the terms of the promissory note and wafer supply
agreement, for each wafer purchased from Orbit no cash payment is required to be
made, however, the amount of the promissory note receivable will be reduced by
$500 for each wafer purchased. Accordingly, as Paradigm purchases wafers from
Orbit, the outstanding balance of the promissory note receivable is reduced and
inventory is recorded. Per terms of the agreement, if the Company does not
purchase the wafers by the end of May 1997, the Company will forfeit any
remaining amount owed under the promissory note. At December 31, 1996, the
Company is required to purchase 6,684 wafers under this agreement which the
Company fully expects to receive by the end of May 1997. The $1.0 million
promissory note is held in escrow to satisfy certain representation and
warranties made by the Company. Orbit is required to make two payments of
$500,000 plus interest of 4% in May and November 1997. As of December 31, 1996
the outstanding balance under these promissory notes was $4,342,000 which was
classified as prepaid expenses and other assets. Management believes that the
fair value of these notes at December 31, 1996 is approximately $3,000,000.
The following table sets forth the components of the $4.6 million loss
recorded in 1996 related to the sale of the wafer fabrication facility (in
thousands):
<TABLE>
<CAPTION>
Benefit (Charge)
Recorded in 1996
----------------
<S> <C>
Sale proceeds................................... $ 20,000
Less: Cost of inventory, fixed assets
and other assets sold........................... (21,480)
---------------
(1,480)
Adverse purchase commitment..................... (1,920)
Professional fees............................... (360)
Lease buyout.................................... (225)
Other costs..................................... (647)
---------------
Loss on sale.................................... $ (4,632)
===============
</TABLE>
The fair value of the wafers to be purchased from Orbit for $500 each
was approximately $303 each at the date of the sale of the Fab. Accordingly, the
Company recorded an adverse purchase commitment of $1,920,000. As wafers are
purchased from Orbit, the cost capitalized into inventory is $500 per wafer less
a prorated portion of the adverse purchase commitment. The net inventory value
will be recognized in cost of goods sold as the related inventory is sold. At
December 31, 1996 the remaining adverse purchase commitment of $1,337,000 is
recorded in prepaid expenses and other as an offset to the note receivable from
Orbit.
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<PAGE>
In connection with the sale of the Fab, substantially all of the 109
employees associated with the Fab were terminated and became employees of Orbit.
No severance payments were made to employees transferred to Orbit.
NOTE 14 -- LITIGATION:
On August 12, 1996, a securities class action lawsuit was filed in
Santa Clara County Superior Court against the Company and certain of its
officers and directors (the "Paradigm Defendants"). The class alleged by
plaintiffs consists of purchasers of the Company's common stock from November
20, 1995 to March 22, 1996, inclusive. The complaint alleges negligent
misrepresentation, fraud and deceit, breach of fiduciary duty, and violations of
certain provisions of the California Corporate Securities Law and Civil Code.
The plaintiffs seek an unspecified amount of compensatory and punitive damages.
Plaintiffs allege, among other things, that the Paradigm Defendants wrongfully
represented that the Company would have protection against adverse market
conditions in the semiconductor market based on the Company's focus on high
speed, high performance semiconductor products. On September 30, 1996, the
Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire
complaint dismissed with prejudice. On December 12, 1996, the Court sustained
the demurrer as to all of the causes of action except for violation of certain
provisions of the California Corporate Securities Law and Civil Code. The Court,
however, granted plaintiffs leave to amend the complaint to attempt to cure the
defects which caused the Court to sustain the demurrer. Plaintiffs failed to
amend within the allotted time. On January 8, 1997, the Paradigm Defendants
filed an answer to the complaint denying any liability for the acts and damages
alleged by the plaintiffs. Plaintiffs have since served the Paradigm Defendants
with discovery requests for production of documents and interrogatories, to
which the Paradigm Defendants have responded, with other responses not yet due.
The Paradigm Defendants have served the plaintiffs with an initial set of
discovery requests. Additional discovery is scheduled to take place prior to the
hearing on the motion for class certification, tentatively scheduled for May 20,
1997. The Paradigm Defendants intend to vigorously defend the action, however,
there can be no assurance that the Company will be successful in such defense.
Even if Paradigm is successful in such defense, it may incur substantial legal
fees and other expenses related to this claim. If unsuccessful in the defense of
any such claim, the Company's business, operating results and cash flows could
be materially adversely affected. Due to the inherent uncertainty of litigation,
management is not able to reasonably estimate losses that may be incurred in
relation to this litigation. However based on the facts presently known,
management believes that the resolution of this matter will not have a material
adverse impact on the Company's financial position, results of operations or
cash flows.
On February 21, 1997, an additional purported class action lawsuit was
filed in Santa Clara County Superior Court against the Company and certain of
its officers and directors, with causes of action and factual allegations
essentially identical to those of the August 12, 1996 class action lawsuit. This
second class action is asserted against the same Paradigm Defendants,
PaineWebber, Inc. and Smith Barney. The Paradigm Defendants have authorized
counsel to acknowledge service. The Paradigm Defendants responsive pleading is
due by May 9, 1997. The Paradigm Defendants believe the new class action appears
to be essentially identical to the causes of action and factual allegations of
the August 12, 1996 class action. Therefore, the Company believes that it
probably will be subject to the demurrer which the Court sustained in the August
12, 1996 class action as to all causes of action asserted against Michael Gulett
and all but one of the causes of action asserted against the remaining Paradigm
Defendants. There can be no assurances that the Court will determine that the
February 21, 1997 class action will be subject to the demurrer or that the
Company will be successful in the defense of the class actions. Due to the
inherent uncertainty of litigation, management is not able to reasonably
estimate losses that may be incurred in relation to this litigation. However
based on the facts presently known, management believes that the resolution of
this matter will not have a material adverse impact on the Company's financial
position, results of operations or cash flows.
The Company is involved in various other litigation and potential
claims which management believes, based on facts presently known, will not have
a material adverse effect on the results of operations or the financial position
of the Company.
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NOTE 15 -- SUBSEQUENT EVENTS:
On January 23, 1997, Paradigm sold a total of 200 shares of 5% Series A
Convertible Redeemable Preferred Stock (the "Preferred Stock") in a private
placement to Vintage Products, Inc. at a price of $10,000 per share, for total
proceeds (net of payments to third parties) of approximately $1,880,000. The
Preferred Stock is convertible at the option of the holder into the number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
(A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or
accumulated dividends on the shares of Preferred Stock being converted by (B)
the Conversion Price in effect at the time of conversion. The "Conversion Price"
will be equal to the lower of (i) $2.25 or (ii) eighty-two percent (82%) of the
average closing bid price of a share of Common Stock as quoted on the Nasdaq
National Market over the five (5) consecutive trading days immediately preceding
the date of notice of conversion of the Preferred Stock. The Preferred Stock is
redeemable by the Company under certain limited circumstances. The Company is
required to register the maximum number of shares of Common stock issuable upon
conversion of the Preferred Stock.
On July 22, 1997, Paradigm sold a total of 200 shares of 5% Series B
Convertible Redeemable Preferred Stock (the "Preferred B 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 Preferred B
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 Preferred B 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 over the five (5) consecutive trading days immediately preceding
the date of notice of conversion of the Preferred B Stock. The Preferred B Stock
is redeemable by the Company under certain limited circumstances. The Company is
required to register the maximum number of shares of Common Stock issuable upon
conversion of the Preferred B Stock.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
Not applicable.
(b) Pro forma financial information.
Not applicable.
(c) Exhibits.
23.1 Consent of Price Waterhouse LLP.
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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 hereunto duly authorized.
Dated: August 21, 1997
PARADIGM TECHNOLOGY, INC.
By /s/ David G. Campbell
-------------------------------------
David G. Campbell
Chief Financial Officer
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EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
23.1 Consent of Price Waterhouse LLP.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-4412) and Form S-3 (No. 333-21505) of Paradigm
Technology, Inc. of our report dated January 23, 1997, except as to the second
paragraph of Note 14, which is as of February 21, 1997, and except as to the
fifth paragraph of Note 1 and the second paragraph of Note 15, which are as of
July 31, 1997, appearing on page 3 of this Current Report on Form 8-K.
Price Waterhouse LLP
San Jose, California
August 21, 1997
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