UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDENT NO. 1
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 0-26124
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PARADIGM TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0140882
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
694 TASMAN DRIVE, MILPITAS, CALIFORNIA 95035
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(Address of principal executive offices) (Zip code)
(408) 954-0500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for 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 June 30, 1997 was 8,107,574.
<PAGE>
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Statements of Operations 3
Condensed Balance Sheets 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 14-16
Liquidity and Capital Resources 16-17
Factors That May Affect Future
Results 18-24
Part II. Other Information
Item 1. Legal Proceedings 24-26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature 27
Exhibit 11.1 Computation of Net Income (Loss) Per Share
Exhibit 27.1 Financial Data Schedule
Page 2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF
OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, MAR. 31, JUNE 30, JUNE 30,
1997 1996 1997 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SALES, NET $3,466 $4,002 $3,572 $7,038 $14,929
Cost of goods sold 3,046 13,994 3,314 6,360 21,269
----------- ----------- ------------ -------------- ------------
GROSS PROFIT (LOSS) 420 (9,992) 258 678 (6,340)
----------- ----------- ------------ -------------- ------------
OPERATING EXPENSES:
Research and development 777 1,623 1,183 1,960 2,939
Selling, general and administrative 1,190 2,318 1,625 2,815 4,258
Acquisition related non-recurring charges -- 3,841 -- -- 3,841
----------- ----------- ------------ -------------- ------------
TOTAL OPERATING EXPENSES 1,967 7,782 2,808 4,775 11,038
----------- ----------- ------------ -------------- ------------
Operating income (loss) (1,547) (17,774) (2,550) (4,097) (17,378)
Interest expense 74 364 42 116 605
Other (income) expense, net (536) (199) 30 (506) (403)
----------- ----------- ------------ -------------- ------------
Income (loss) before taxes (1,085) (17,939) (2,622) (3,707) (17,580)
Provision (benefit) for income taxes -- (1,247) -- -- (1,125)
----------- ----------- ------------ -------------- ------------
NET INCOME (LOSS) ($1,085) ($16,692) ($2,622) ($3,707) ($16,455)
=========== =========== ============ ============== ============
Accretion on Redeemable Convertible
Preferred Stock ($347) -- ($388) ($735) --
----------- ----------- ------------ -------------- ------------
NET INCOME (LOSS) AVAILABLE TO
Common Shareholders ($1,432) ($16,692) ($3,010) ($4,442) ($16,455)
=========== =========== ============ ============== ============
NET INCOME (LOSS) PER SHARE ($0.19) ($2.42) ($0.42) ($0.60) ($2.31)
=========== =========== ============ ============== ============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,624 6,898 7,241 7,427 7,108
=========== =========== ============ ============== ============
See accompanying notes to condensed financial statements.
</TABLE>
Page 3
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<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED BALANCE SHEET
(In Thousands)
(unaudited)
<CAPTION>
AT JUNE 30, AT DEC. 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS:
Cash and Short-term Investments $879 $587
Accounts Receivable, net 2,739 2,937
Inventory 3,564 2,472
Other Current Assets 1,482 4,918
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TOTAL CURRENT ASSETS 8,664 10,914
Property and Equipment, net 5,555 6,638
Other Assets 125 190
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TOTAL ASSETS $14,344 $17,742
============= =============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Line of Credit $2,489 $2,015
Current Portion, Long-term Debt 264 282
Accounts Payable and Accrued Liabilities 6,996 9,009
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TOTAL CURRENT LIABILITIES 9,749 11,306
Long-term Debt 35 92
Deferred Rent 14 --
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TOTAL LIABILITIES 9,798 11,398
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Redeemable Convertible Preferred Stock 1,777 --
------------- -------------
Common Stock 37,165 36,298
Accumulated Deficit (34,396) (29,954)
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TOTAL STOCKHOLDERS' EQUITY 2,769 6,344
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TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE $14,344 $17,742
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
============= =============
See accompanying notes to condensed financial statements.
</TABLE>
Page 4
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<TABLE>
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Six Months Six Months
Ended Ended
JUNE 30, 1997 JUNE 30, 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,707) $ (16,455)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 1,210 2,637
Loss on disposition of fixed assets 134 -
Write-off of in-process technology required - 3,841
Changes in operating assets and liabilities:
Accounts receivable 198 4,831
Inventory (1,092) 1,142
Other assets 3,501 (934)
Accounts payable , accrued liabilities and
other (1,999) (1,581)
Prepetition liabilities paid - (34)
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Net cash provided by (used in) operating activities (1,755) (6,553)
-------------- -----------------
Cash flows used in investing activities:
Purchases of Capital equipment (261) (11,769)
Purchases of Short-term investments - (2,672)
Sale of short-term investments - 10,925
Acquisition of New Logic net of cash acquired - (723)
-------------- -----------------
Net cash provided by (used in) investing activities: (261) (4,239)
-------------- -----------------
Cash flows from financing activities:
Line if credit increase (decrease) 474 5,610
Payments on capital leases (75) -
Issuance of notes payable - 11,339
Principal payments on notes payable - (8,569)
Issuance of Common Stock 29 486
Issuance of Redeemable Convertible Preferred Stock 1,880 -
-------------- -----------------
Net cash provided by financing activities 2,308 8,866
-------------- -----------------
Net increase (decrease) in cash and cash equivalents 292 (1,926)
Cash and cash equivalents:
Beginning of period 587 4,015
-------------- -----------------
End of period $ 879 $ 2,089
-------------- -----------------
Supplemental cash flow information:
Interest paid $ 116 $ 505
============== =================
Income taxes paid $ - $ 1,063
============== =================
Supplemental disclosure of non cash items:
Issuance of warrant in connection with sale of
Redeemable Convertible Preferred Stock $ 67 $ -
============== =================
Accretion on Redeemable Convertible Preferred Stock $ 735 $ -
============== =================
See accompanying notes to condensed financial statements.
</TABLE>
Page 5
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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. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim condensed financial
statements included herein have been prepared on the same basis as the December
31, 1996 audited financial statements, contained in the Company's Annual Report
on Form 10K, as amended on Form 10-K/A Amendment No. 1 and as amended on Form
10-K/A Amendment No. 2 and include all adjustments, consisting of only normal
recurring adjustments, necessary to fairly state the information set forth
therein. Results for the three and six month periods ended June 30, 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 continuing into 1996 and the first six
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 six 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.
The Company's recent operations 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 $3.7 million. During this period the Company has continued to
experience a downward trend in product pricing
Page 6
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which has contributed to the poor operating results. In January 1997, the
Company completed the private placement of Series A Redeemable Convertible
Preferred Stock (the Series A Preferred Stock) for net proceeds of approximately
$1.9 million (See Note 7 of Notes to Condensed Financial Statements) and in July
1997, the Company completed the private placement of Series B Convertible
Redeemable Preferred Stock (the Series B Preferred Stock) for net proceeds of
approximately $1.9 million (See Note 8 of Notes to Condensed Financial
Statements). The Company believes that this cash infusion together with existing
cash balances and other sources of liquidity, such as asset sales and equipment
financing will be sufficient to meet the Company's projected working capital and
other operating cash requirements through at least the end of 1997.
During the period 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 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 Preferred Stock, the Company
will be required to redeem such stock for cash in the amount of approximately
$1.2 million, 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 tentatively been scheduled in September 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.
Page 7
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PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
This report on Form 10-Q for the quarter ended June 30, 1997 should be read in
conjunction with the audited financial statements as of December 31, 1996, and
the notes thereto included in the Company's Annual Report on Form 10K, as
amended on Form 10-K/A Amendment No.1 and as amended on Form 10-K/A Amendment
No.2 for the year ended December 31, 1996.
NOTE 2: Net Income (Loss) Per Share
Net income (loss) per share was calculated based on net income (loss) available
to Common Shareholders. For the quarter ended June 30, 1997, the net loss per
share was computed as net loss of $1.1 million and $0.3 million of accretion on
the Redeemable Convertible Preferred Stock divided by the weighted average
Common Shares outstanding. . For the six month period ended June 30, 1997, the
net loss per share was computed as net loss of $3.7 million and $0.7 million of
accretion on the Redeemable 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: New Logic 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 tangible net assets
at the date of acquisition was a deficit of $373,000.
Approximately $3.8 million of the purchase price over the fair market value of
the net tangible assets was allocated to in-process technology which, because of
the uncertainty as to realization, the Company wrote off in the quarter ended
June 30, 1996. Approximately $250,000 was allocated to other intangibles.
In early 1997, the Company believed that it was in Paradigm's best interest to
shut down the NewLogic operation and focus on Paradigm's core SRAM products and
markets. As a result, the Company wrote off unamortized intangibles of
approximately $156,000 in the quarter ended March 31, 1997.
Page 8
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<TABLE>
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 4: Balance Sheet Detail
<CAPTION>
<S> <C> <C>
June 30, Dec 31,
1997 1996
------- ------
Inventory (in thousands):
Raw materials $ 0 $ 16
Work in process 1,758 1,778
Finished goods 1,806 678
------ ------
$3,564 $2,472
====== ======
Property and equipment (in thousands):
Machinery and equipment $7,716 $9,488
Leasehold improvements 278 0
Furniture and fixtures 145 19
------ --
8,139 9,507
Less accumulated depreciation (2,584) (2,869)
------ ------
$5,555 $6,638
====== ======
</TABLE>
NOTE 5: Litigation
On August 12, 1996, a securities class action lawsuit was filed in Santa Clara
Superior Court against the Company and certain of its officers and directors
(the "Paradigm Defendants"). The class alleged by plaintiffs consists of
purchasers of the Company's common stock from November 20, 1995 to March 22,
1996, inclusive. The complaint alleges negligent misrepresentation, fraud and
deceit, breach of fiduciary duty, and violations of certain provisions of the
California Corporate Securities Law and Civil Code. The plaintiffs seek an
unspecified amount of compensatory and punitive damages. Plaintiffs allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company would have protection against adverse market conditions in the
semiconductor market based on the Company's focus on high speed, high
performance semiconductor products. On September 30, 1996, the Paradigm
Defendants filed a demurrer seeking to have plaintiffs' entire complaint
dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer
as to all of the causes of action except for violation of certain provisions of
the California Corporate Securities Law and Civil Code. The Court, however,
granted plaintiffs leave to amend the complaint to attempt the defects which
caused the Court to sustain the demurrer. Plaintiffs failed to amend within the
alloted 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 reset the motion for hearing on September 2, 1997. There
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can be no assurance that the Company will be successful in such defense. Even if
Paradigm is successful 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. 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 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 have
filed a demurrer to the amended complaint, which is set for hearing on September
9, 1997. The Paradigm Defendants believe the new class action appears to be
essentially identical to the causes of action and factual allegations as 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 Gullet 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.
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. 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. As of the date hereof, although some of the
defendants have been served with process, legal counsel for the parties are in
the process of resolving issues in regard to service on the remaining
defendants.
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.
Page 10
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PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 6: Sale of Wafer Fabrication Facility
The Company recorded a loss of $4.6 million in the quarter ended December 31,
1996 as a result of the sale of its wafer fabrication facility. This charge
included the excess of the net book value of leasehold improvements, wafer
fabrication equipment, fabrication work in process inventory and other assets
sold to orbit over the proceeds received from Orbit Semicondutor Inc. ("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 is sued in connection with a wafer supply
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 June 30, 1997, the Company has completed its
obligations under this requirement. The $1.0 million promissory note is held in
escrow to satisfy certain representations and warranties made by the Company.
Orbit was required to make two payments of $500,000 plus interest of 4% in May
and November 1997. As of June 30, 1997 the outstanding balance under these
promissory notes was $0.8 million which was classified as prepaid expenses and
other current assets.
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
wafer 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 5% Series A
Convertible Redeemable Preferred Stock (the "Preferred Stock") in a private
placement to Vintage Products, Inc. at a price of $10,000 per share, for total
proceeds (net of payments to third parties) of approximately $1,880,000. The
Preferred Stock includes cumulative dividends at 5% per annum. The Preferred
Stock also includes an embedded discount which was accreted from the issuance
date through April 23, 1997, the date upon which the Preferred Stock became
convertible. The accretion of the embedded discount and the cumulative dividends
is a charge to retained earnings and a credit to the Redeemable Convertible
Preferred Stock. Also in connection with the sale of the Preferred
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Stock, the Company issued warrants to purchase 150,000 shares of its Common
Stock for $4.125 per share. The warrant is exercisable until January 22, 2000.
The Company valued these warrants at $67,000 using the Black/Scholes model.
The Preferred Stock is convertible at the option of the holder into the number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but
unpaid or accumulated dividends on the shares of Preferred Stock being converted
by (B) the Conversion Price in effect at the time of conversion. The "Conversion
Price" will be equal to the lower of (i) $2.25 or (ii) eighty-two percent (82%)
of the average closing bid price of a share of Common Stock as quoted on the
Nasdaq National Market over the five (5) consecutive trading days immediately
preceding the date of notice of conversion of the Preferred Stock. As of June
30, 1997, the holders of the Preferred Stock have converted 70 shares of the
Series A Redeemable Convertible Preferred Stock into 840,973 shares of the
Company's common stock. Subsequent to June 30, 1997, the holders of the
Preferred Stock have converted an additional 33 shares of the Series A
Redeemable Convertible Preferred Stock into 598,647 shares of the Company's
common stock. As a result of these conversions, the Company has converted the
maximum number of shares of Series A Redeemable Convertible Preferred Stock
allowed without obtaining stockholder approval for the issuance of additional
shares of Common Stock upon conversion of the Series A Redeemable Convertible
Preferred Stock. Without obtaining stockholder approval to allow the Company to
issue the additional shares of Common Stock, the Company will be required to
redeem such shares for cash of approximately $1.2 million. A special
stockholders meeting has tentatively been scheduled for September 1997 to obtain
such approval. (See Note 1 of Notes to Condensed Financial Statements).
NOTE 8: Subsequent Event
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 includes
cumulative dividends at 5% per annum. The Preferred Stock also includes an
embedded discount which will be accreted from the issuance date through the date
upon which the Preferred Stock becomes convertible. The accretion of the
embedded discount and the cumulative dividends is a charge to retained earnings
and a credit to the Redeemable Convertible Preferred Stock. 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. A portion of the
Preferred B Stock may be mandatorily redeemable for cash to the extent that the
number of shares of Common Stock issuable upon conversion of the Preferred B
Stock is in excess of 20% of the Common Stock outstanding at the date of
original issuance of the Preferred B Stock. Those "excess" preferred shares, and
only those "excess" preferred shares, which if converted cause the greater than
20% issuance of Common Stock, are redeemable for cash for $12,190 per preferred
share. The Company is required to register the maximum number of shares of
Common Stock issuable upon conversion of the Preferred B Stock.
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NOTE 9: Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This
statement is effective for interim and annual financial statements for periods
ending after December 15, 1997. The statement redefines earnings per share under
generally accepted accounting principles. Under the new standard primary
earnings per share is replaced by basic earnings per share and fully diluted
earnings per share is replaced by diluted earnings per share. The adoption of
SFAS 128 would not have a material impact on the Company's earnings per share
for the three and six month periods ended June 30, 1997 and 1996.
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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 six month periods ended June 30, 1997
decreased 13% and 53%, 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 six 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 has decreased from $10 million and $6.3 million for the three and
six month periods ended June 30, 1996, to profits of $420,000 and $678,000 for
the comparable periods in fiscal 1997. The increase in gross profit resulted
principally from a write down of inventory values to current market prices in
1996. The Company continues to experience industry-wide pricing pressures caused
by an oversupply in the worldwide SRAM marketplace. These pricing pressures
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directly impacted profits as average selling prices of the Company's products
declined during the quarter and six month period ended June 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 $777,000 and $2 million in the
three and six month periods ended June 30, 1997 from $1.6 million and $2.9
million in the corresponding period in fiscal 1996. As a percentage of revenues,
these expenses have decreased to 22% and increased to 29% in the three and six
month periods ended June 30, 1997 from 41% and 20% in each of the periods in
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 $1.2 million and $3.7 million
in the three and six month periods ended June 30, 1997 compared to $2.3 million
and $4.3 million in the comparable periods in 1996. These expenses are expected
to increase in the future in absolute dollars, as the Company increases its
sales and marketing staff.
Interest Expense
Interest expense of $74,000 and $116,000 for the three and six month periods
ended June 30, 1997 compared to $365,000 and $606,000 in the corresponding
periods in fiscal 1996. This decrease in interest expense for the three and six
month periods in 1997 reflects repayment of certain outstanding debt by the
Company from the proceeds of its sale of wafer fabrication operations. See also
"Liquidity and Capital Resources."
Other (Income) Expense, Net
For the three and six month periods ended June 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.
Taxes
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The Company provides for income taxes during interim reporting periods based
upon an estimated annual tax rate. During the three and six month periods ended
June 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 through
2011, if not utilized.
Liquidity and Capital Resources
The Company's operating, investing and financing activities generated $0.3
million in cash in the six month period ended June 30, 1997 compared to using
$2.0 million of cash in the comparable period in 1996. Operating activities used
$1.8 million in cash in 1997 compared to a use of $6.6 million of cash in 1996.
This increase of $4.8 million is primarily due to savings generated from the
sale of the wafer fab in November 1996.
Investing activities consumed $0.3 million in the 1997 period compared to $4.2
million in the 1996 period. Capital equipment purchases decreased from $11.8
million in the 1996 period to $0.3 million in the 1997 perod as a result of the
sale of the wafer fab.
Financing activities provided $2.3 million in the 1997 period compared to $8.9
million in the 1996 period. Borrowing under the Company's line of credit
decreased by $5.1 million in the 1997 period compared to the 1996 period. This
is due to lower revenue of $7.9 million 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 are 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 this new line of credit with Greyrock Business
Credit are limited to up to 80% of eligible receivables and interest is at the
greater of LIBOR plus 5.25% or 9%. At March 31, 1997, the outstanding balance
under this line of credit was approximately $1.9 million.
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
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cash proceeds from the sale of the wafer fabrication facility to pay off the
remaining CIT Group borrowings.
The Company's recent operations have consumed substantial amounts of cash and
have generated an aggregate net loss for the period from January 1, 1997 through
June 30, 1997 of $3.7 million. 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 Redeemable Preferred Stock (the Series A Preferres
Stock) for net proceeds of approximately $1.9 million (See Note 7 of Notes to
Condensed Financial Statements) and in July 1997, the Company completed the
private placement of Series B Convertible Redeemable Preferred Stock (the Series
B Preferred Stock) for net proceeds of approximately $1.9 million (See Note 8 of
Notes to Condensed Financial Statements). The Company believes that this cash
infusion together with existing cash balances and other sources of liquidity,
such as asset sales and equipment financing will be sufficient to meet the
Company's projected working capital and other operating cash requirements
through at least the end of 1997.
During the period 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 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 Preferred Stock, the Company
will be required to redeem such stock for cash in the amount of approximately
$1.2 million, 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 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 tentatively been scheduled in September 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.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
THE OPERATIONS AND BUSINESS PROSPECTS OF THE COMPANY ARE SUBJECT TO
CERTAIN QUALIFICATIONS BASED ON POTENTIAL BUSINESS RISKS FACED BY THE COMPANY.
THIS FORM 10-Q SHOULD BE REVIEWED IN LIGHT OF THE POTENTIAL EFFECTS OF EVENTS
THAT MAY OCCUR AS OUTLINED IN THE FOLLOWING RISK FACTORS. READERS OF THIS REPORT
SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER
INFORMATION PRESENTED IN THIS FORM 10-Q.
NEED FOR ADDITIONAL FUNDS. The Company's recent operations have
consumed substantial amounts of cash. The Company believes that cash flow from
operations and other existing and potential sources of liquidity will be
sufficient to meet its projected working capital and other cash requirements
through at least the remainder of 1997. However, there can be no assurance that
the Company will not need additional capital and if so that such capital can be
successfully obtained on terms acceptable to the Company or at all. The sale or
issuance of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders. There can be no assurance
that additional financing, if required, will be available when needed or, if
available, will be on terms acceptable to the Company.
FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced
significant quarterly fluctuations in operating results and anticipates that
these fluctuations will continue. These fluctuations have been caused by a
number of factors, including changes in manufacturing yields by contracted
manufacturers, changes in the mix of products sold, the timing of new product
introductions by the Company or its competitors, cancellation or delays of
purchases of the Company's products, the gain or loss of significant customers,
the cyclical nature of the semiconductor industry and the consequent
fluctuations in customer demand for the Company's devices and the products into
which they are incorporated, and competitive pressures on prices. A decline in
demand in the markets served by the Company, lack of success in developing new
markets or new products, or increased research and development expenses relating
to new product introductions could have a material adverse effect on the
Company. Moreover, because the Company sets spending levels in advance of each
quarter 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. The Common Stock is currently
eligible for listing on Nasdaq. In order to continue to be listed on Nasdaq,
however, the Company must maintain $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, a $200,000 market value of the public float
and $1,000,000 in total capital and surplus. In addition, continued inclusion on
Nasdaq requires two market-makers and a minimum bid price of $1.00 per share. In
the future, if the Company fails to meet these maintenance criteria it may
result in the delisting of the Company's securities from Nasdaq, and trading, if
any, and the Company's securities would thereafter be conducted in the
non-Nasdaq over-the-counter market. If the Company's securities are delisted, an
investor could find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Company's securities. In addition, if
the Common Stock were to become delisted from
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trading on Nasdaq and the trading price of the Common Stock were to remain below
$5.00 per share, trading in the Common Stock would also be subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, as amended, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to the sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock, which could
severely limit the market liquidity of the Common Stock and the ability of
purchasers in this offering to sell the Common Stock in the secondary market.
DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES. The market for the
Company's products is characterized by rapidly changing technology, short
product life cycles, cyclical oversupply and rapid price erosion. Average
selling prices for many of the Company's products have generally decreased over
the products' life cycles in the past and are expected to decrease in the
future. Accordingly, the Company's future success will depend, in part, on its
ability to develop and introduce on a timely basis new products and enhanced
versions of its existing products which incorporate advanced features and
command higher prices. The success of new product introductions and enhancements
to existing products depends on several factors, including the Company's ability
to develop and implement new product designs, achievement of acceptable
production yields, and market acceptance of customers' end products. In the
past, the Company has experienced delays in the development of certain new and
enhanced products. Based upon the increasing complexity of both modified
versions of existing products and planned new products, such delays could occur
again in the future. Further, the cost of development can be significant and is
difficult to forecast. In addition, there can be no assurance that any new or
enhanced products will achieve or maintain market acceptance. If the Company is
unable to design, develop and introduce competitive products or to develop new
or modified designs on a timely basis, the Company's operating results will be
materially adversely affected.
DEPENDENCE ON FOUNDRIES AND OTHER THIRD PARTIES. On November 15, 1996,
the Company sold its Fab to Orbit. Following the sale of the Fab, the Company
and Orbit entered into a Wafer Manufacturing Agreement. Orbit will supply a
quantity of wafers to the Company over a specified period of time to offset
Orbit's payment obligations against the promissory notes delivered in connection
with the sale. As of June 30, 1997, the Company has received all the wafers
provided for under this agreement. 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
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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 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"). 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 the defects which
caused the Court to sustain the demurrer. Plaintiffs failed to amend within the
alloted 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
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certification on May 20, 1997, the court reset the motion for hearing on
September 2, 1997. There can be no assurance that the Company will be successful
in such defense. Even if Paradigm is successful 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. 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 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 have
filed a demurrer to the amended complaint, which is set for hearing on September
9, 1997. The Paradigm Defendants believe the new class action appears to be
essentially identical to the causes of action and factual allegations as 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 Gullet 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.
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. 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 the allegedly inflated prices
and were damaged thereby. The Plaintiffs seek an unspecified amount of
compensatory, rescissory and/or punitive damages. As of the date hereof,
although some of the defendants have been served with process, legal counsel for
the parties are in the process of resolving issues in regard to service on the
remaining defendants.
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.
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
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industry downturns have historically resulted in reduced product demand and
declining average selling prices. The Company's business and operating results
could be materially and adversely affected by a downturn in the
telecommunications or computer industries in the future.
COMPETITION. The semiconductor industry is intensely competitive and is
characterized by rapidly changing technology, short product life cycles,
cyclical oversupply and rapid price erosion. The Company competes with large
domestic and international semiconductor companies, most of which have
substantially greater financial, technical, marketing, distribution, and other
resources than the Company. The Company's principal competitors in the high
performance SRAM market include Motorola and Micron Technology. Other
competitors in the SRAM market include Alliance Semiconductor, Cypress
Semiconductor, Integrated Device Technology, Integrated Silicon Solution,
Samsung and numerous other large and emerging semiconductor companies. In
addition, other manufacturers can be expected to enter the high speed, high
density SRAM market.
The ability of the Company to compete successfully depends on elements
outside its control, including the rate at which customers incorporate the
Company's products into their systems, the success of such customers in selling
those systems, the Company's protection of its intellectual property, the
number, nature, and success of its competitors and their product introductions,
and general market and economic conditions. In addition, the Company's success
will depend in large part on its ability to develop, introduce, and manufacture
in a timely manner products that compete effectively on the basis of product
features (including speed, density, die size, and packaging), availability,
quality, reliability, and price, together with other factors including the
availability of sufficient manufacturing capacity and the adequacy of production
yields. There is no assurance that the Company will be able to compete
successfully in the future.
STRATEGIC RELATIONSHIPS; POTENTIAL COMPETITION. The Company, pursuant
to certain licenses of its technology, has entered into strategic relationships
with NKK and Atmel. The Company has had a long-standing business relationship
with NKK which began in October 1992. The Company, NKK and affiliates of NKK
entered into several equity and debt transactions which provided start-up and
development funding to the Company. Given the long-standing relationship, the
Company and NKK entered into three technology license and development agreements
which provide for NKK to supply the Company a specified number of 1M SRAMs for
three years. These Agreements provided funding to the Company.
The Company's business relationship with Atmel began in April 1995 when
pursuant to certain agreements, Atmel purchased a substantial number of shares
of the Company's stock from the Company, certain stockholders of the Company who
had been unsecured creditors of the Company as of the Reorganization and from
the Company's equipment lessors. Atmel also acquired certain warrants to
purchase shares of the Company's Common Stock. In 1995, the Company and Atmel
entered into a five-year License and Manufacturing Agreement pursuant to which
Atmel would provide the capacity to manufacture wafers at its wafer
manufacturing facility. The Company entered into such agreement with Atmel
because 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. 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.
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To the extent that the Company enters into similar arrangements
with other companies, it may compete with such companies as well.
DEPENDENCE ON PATENTS, LICENSES AND INTELLECTUAL PROPERTY; POTENTIAL
LITIGATION. The Company intends to continue to pursue patent, trade secret, and
mask work protection for its semiconductor process technologies and designs. To
that end, the Company has obtained certain patents and patent licenses and
intends to continue to seek patents on its inventions and manufacturing
processes, as appropriate. The process of seeking patent protection can be long
and expensive, and there is no assurance that patents will be issued from
currently pending or future applications or that, if patents are issued, they
will be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. In particular, there can be no assurance
that any patents held by the Company will not be challenged, invalidated, or
circumvented, or that the rights granted thereunder will provide competitive
advantage to the Company. The Company also relies on trade secret protection for
its technology, in part through confidentiality agreements with its employees,
consultants and third parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others. In addition, the laws of certain
territories in which the Company's products are or may be developed,
manufactured, or sold may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.
There has been substantial litigation regarding patent and other
intellectual property rights in the semiconductor industry. In the future,
litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of others. The Company has from time to time
received, and may in the future receive, communications alleging possible
infringement of patents or other intellectual property rights of others. Any
such litigation 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
Page 23
<PAGE>
any material adverse effect on its operations as a result of
such international risks, there can be no assurance that such factors will not
adversely impact the Company's general business, financial condition and results
of operations.
EMPLOYEES; MANAGEMENT OF GROWTH. The Company's future success will be
heavily dependent upon its ability to attract and retain qualified technical,
managerial, marketing and financial personnel. The Company has experienced a
high degree of turnover in personnel, including at the senior and middle
management levels. The competition for such personnel is intense and includes
companies with substantially greater financial and other resources to offer such
personnel. There can be no assurance that the Company will be able to attract
and retain the necessary personnel, or successfully manage its expansion, and
any failure to do so could have a material adverse effect on the Company.
POTENTIAL VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock is subject to wide fluctuations in response to variations in
operating results of the 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.
Part II. Other Information
Item 1. Legal Proceedings
On August 12, 1996, a securities class action lawsuit was filed in
Santa Clara Superior Court against the Company and certain of its officers and
directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists
of purchasers of the Company's common stock from November 20, 1995 to March 22,
1996, inclusive. The complaint alleges negligent misrepresentation, fraud and
deceit, breach of fiduciary duty, and violations of certain provisions of the
California Corporate Securities Law and Civil Code. The plaintiffs seek an
unspecified amount of compensatory and punitive damages. Plaintiffs allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company would have protection against
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<PAGE>
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
the defects which caused the Court to sustain the demurrer. Plaintiffs failed to
amend within the alloted 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 reset the motion for hearing on
September 2, 1997. There can be no assurance that the Company will be successful
in such defense. Even if Paradigm is successful 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. 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 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 have
filed a demurrer to the amended complaint, which is set for hearing on September
9, 1997. The Paradigm Defendants believe the new class action appears to be
essentially identical to the causes of action and factual allegations as 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 Gullet 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.
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. 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 the allegedly inflated prices
and were damaged thereby. The Plaintiffs seek an unspecified amount of
compensatory, rescissory and/or punitive damages. As of the date
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<PAGE>
hereof, although some of the defendants have been served with process,
legal counsel for the parties are in the process of resolving issues in regard
to service on the remaining defendants.
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 5. Other Information.
The Company's Common Stock is currently eligible for listing on Nasdaq.
In order to continue to be listed on Nasdaq, however, the Company must, 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 $200,000 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) requires
two market-makers. As of June 30, 1997, the Company was not in compliance with
(1) and (4) above.
On July 15, 1997, 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 has regained compliance with the minimum closing bid price requirement
of $1.00.
The Company reported net tangible assets of $2,769,000 at June 30,
1997. Subsequent to June 30, 1997, the Company reclassified into equity $562,000
as a result of the conversion of an additional 33 shares of the Series A
Convertible Redeemable Preferred Stock. In addition, certain outstanding
warrants have been exercised resulting in additional equity of $50,000. As noted
previously, the Company has tentatively scheduled a stockholders meeting in
September 1997 to obtain approval for the issuance of additional shares of
Common Stock upon conversion of the remaining Series A Convertible Redeemable
Preferred Stock. If this approval is obtained the Company will reclassify into
equity the remaining balance of the Series A Convertible Redeemable Preferred
Stock of $1,215,000, which is currently classified outside the equity section.
Had these events occurred at June 30, 1997, the Company's total stockholders
equity would have been $4,596,000.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11.1 Computation of Net Income (Loss) Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed with the Securities and
Exchange Commission on February 6, 1997. The report announced the private
placement of a total of 200 shares of the Registrant's 5% Series A Redeemable
Convertible Preferred Stock to Vintage Products, Inc. at a price of $10,000 per
share, for a total proceeds (net of payments to third parties) of approximately
$1.9 million.
A Current Report on Form 8-K was filed with the Securities and
Exchange Commission on June 11, 1997 as amended on Form 8-K/A Amendment No.1 on
June 19, 1997. The report was a response to an inquiry from Nasdaq Stock Market
concerning the Company's compliance with Nasdaq listing requirements.
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.
ITEMS 2, 3 AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARADIGM TECHNOLOGY, INC.
Date:_______________________ _______________________________________________
David G. Campbell
Vice President Finance, CFO
(Principal Financial and Accounting Officer)
Page 27
<PAGE>
EXHIBIT 11.1
<TABLE>
PARADIGM TECHNOLOGY, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
(in thousands, except net income per share)
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income (loss) from operations $(1,085) $(16,692) $(16,455)
Accretion on Redeemable Convertible Preferred Stock (347) (735)
----------------- --------------- -------------- --------------
Net income (loss) available to Common Stockholders $(1,432) $(16,692) $(4,442) $(16,455)
================= =============== ============== ==============
Weighted average shares outstanding:
Common Stock 7624 6898 7427 6807
Common Stock issuable upon exercise
of options and warrants 0 0 0 301
----------------- -------------- -------------- --------------
Weighted average common shares and
equivalents 7624 6898 7427 7108
================= ============== ============== ==============
Net income (loss) per share ($0.19) ($2.42) ($0.60) ($2.31)
================= ============== ============== ==============
(1) This Exhibit should be read with Note 2 of Notes to Condensed Financial Statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 879
<SECURITIES> 0
<RECEIVABLES> 4,494
<ALLOWANCES> 1,755
<INVENTORY> 3,564
<CURRENT-ASSETS> 8,664
<PP&E> 8,139
<DEPRECIATION> 2,584
<TOTAL-ASSETS> 14,344
<CURRENT-LIABILITIES> 9,749
<BONDS> 313
1,777
0
<COMMON> 37,165
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,344
<SALES> 7,038
<TOTAL-REVENUES> 7,038
<CGS> 6,360
<TOTAL-COSTS> 6,360
<OTHER-EXPENSES> 4,775
<LOSS-PROVISION> 179
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> (3,707)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,707)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
