0001413042-12-000062.txt : 20120308 0001413042-12-000062.hdr.sgml : 20120308 20120308154225 ACCESSION NUMBER: 0001413042-12-000062 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20111231 FILED AS OF DATE: 20120308 DATE AS OF CHANGE: 20120308 EFFECTIVENESS DATE: 20120308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARADIGM FUNDS CENTRAL INDEX KEY: 0001196878 IRS NUMBER: 000000000 STATE OF INCORPORATION: OH FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-21233 FILM NUMBER: 12677244 BUSINESS ADDRESS: STREET 1: NINE ELK STREET CITY: ALBANY STATE: NY ZIP: 12207 BUSINESS PHONE: 5184313516 0001196878 S000005314 Paradigm Value Fund C000014505 Paradigm Value Fund PVFAX 0001196878 S000005315 Paradigm Opportunity Fund C000014506 Paradigm Opportunity Fund PFOPX 0001196878 S000005316 Paradigm Select Fund C000014507 Paradigm Select Fund PFSLX 0001196878 S000020362 Paradigm Micro-Cap Fund C000057148 Paradigm Micro-Cap Fund PVIVX N-CSR 1 paradigmn-csrannual2011.htm Paradigm Funds

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES

Investment Company Act file number 811-21233

PARADIGM FUNDS
(Exact name of registrant as specified in charter)

Nine Elk Street, Albany, NY 12207-1002
(Address of principal executive offices) (Zip code)

Robert A. Benton
Nine Elk Street, Albany, NY 12207-1002
(Name and address of agent for service)

 

Registrant's telephone number, including area code: (518) 431-3500

Date of fiscal year end: December 31

Date of reporting period: December 31, 2011

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e -1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.


Paradigm Funds

Paradigm Value Fund
Paradigm Select Fund
Paradigm Opportunity Fund
Paradigm Micro-Cap Fund
For Investors Seeking Long-Term Capital Appreciation

 

ANNUAL REPORT
December 31, 2011

 

 

 

 

 

 

 

 

 


Table of Contents
 
 
 
PARADIGM FUNDS   
Letter to Shareholders  2 
Sector Allocation  6 
Performance Information  8 
Schedules of Investments  12 
Statements of Assets and Liabilities  22 
Statements of Operations  22 
Statements of Changes in Net Assets  24 
Financial Highlights  26 
NOTES TO FINANCIAL STATEMENTS  28 
DISCLOSURE OF EXPENSES  34 
ADDITIONAL INFORMATION  35 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  36 
TRUSTEES & OFFICERS  37 

 

 

 

 

2011 Annual Report 1


Letter to Shareholders

Dear Fellow Shareholders:

2011 was a year of extraordinarily volatile markets. It was a year in which investor sentiment dramatically shifted from "risk-on" in the spring to "risk-off" by the fall. We continued to focus on executing our investment strategy in a disciplined manner in this volatile environment. We took advantage of the downturn in mid-2011 to add to those positions in which we had the most confidence, and also to acquire new positions in several businesses that we believed were trading at significant discounts to intrinsic value.

We would be the first to acknowledge why it was a more "risk-off" market in 2011. It was a difficult year for investors to navigate given the array of external macro events and supply chain disruptions. Key events of 2011 included the Middle East/North Africa political uprisings, the Japan tsunami, the US debt debacle and subsequent ratings downgrade, severe floods in Thailand, and the Eurozone sovereign debt crisis. These were not events that could be easily anticipated, nor were their ramifications immediately or fully clear. In the fourth quarter in particular, the focal point of the market's concern was the Eurozone debt crisis, and markets swung in both directions around each day's headlines and rumors.

That being said, economic data in the fourth quarter suggests that the US economy is gaining traction. ISM manufacturing data remain in expansionary territory, while a particular bright spot has been the continued improvement in the employment picture. Recent jobless claims reports have improved, and the 4-week average has remained below the key 400-thousand level for several consecutive weeks now. In contrast to the US, however, the Eurozone employment picture is much less rosy. Unemployment levels in the Eurozone hit a new record in November, with ~16 million people unemployed, or 10.3% of the work force. This level is unprecedented in the period that the data has been recorded. Moreover, European manufacturing data remain mixed, fostering continued concerns about the possibility of a recession in Europe.

Despite the headwinds of 2011, we believe there are several reasons to be optimistic about prospects for 2012, particularly for small-cap stocks. First, as stated above, we do believe that increased traction in the U.S. economy is truly happening. While they received little credit for it in 2011, corporate America is executing very well despite the macro headwinds, with improved balance sheets and leaner cost structures. Additional upside drivers for 2012 could include lower commodity costs such as cotton and natural gas, confirmation of a US housing bottom, the presidential election year, and a resolution to the Eurozone debt crisis.

Second, there has been an array of statistical data suggesting that equities are due for an upswing. For example, a recent JP Morgan report cited the equity risk premium at a 60-year high, surpassing levels seen in 2009, 1982, and even 1974. Furthermore, the same report included data confirming that since 2007 cumulative fund flows have been positive for corporate debt and negative for equities — a classic contrarian indicator.

Third, we believe that small-caps in particular have been oversold and under bought. For example, small-cap funds have seen record levels of outflows, while conversely small-cap companies have undertaken record levels of share buybacks in 2011. Moreover, Russell 2000 companies trade at a discount to their historical averages across every valuation metric, while the index trades at a discount to minus, 10-year Treasuries, and CDs. This disconnect indicates an unprecedented and likely unsustainable implied multiple divergence.

Lastly, in our own portfolios, we continue to have confidence in our core holdings and their fundamentals. Among our conversations with company managements, most are looking ahead to a better 2012. While no one thinks that it will be a cakewalk, our companies typically have lean operating structures with aggressive cost controls. Many have also undertaken significant steps to improve their balance sheets and capital structures. As a result, they tend to have less debt, more cash, and continue to add to these balances with strong free cash flows. Given these strong cash positions, we also expect to see continued aggressive share repurchase activity, as well as M&A activity. Our companies have been both acquirers and acquirees, and we expect this trend to continue into 2012.

 

2011 Annual Report 2


Thank you for your continued confidence in Paradigm Capital Management. We are grateful to our clients for your continued trust in us and our process. As always, we welcome any questions or requests for additional information.

 

Paradigm Value Fund

The Paradigm Value Fund declined 3.22% in 2011, compared to a decline of 5.50% for its benchmark, the Russell 2000 Value Index. Over the past three years on an annualized basis, the Fund has returned 17.99%, compared to 12.36% for the benchmark. Since inception (January 1, 2003) on an annualized basis, the Fund has returned 14.77%, compared to 8.62% for the benchmark.

The Fund's outperformance in 2011 was driven by strong stock selection in the Consumer Discretionary and Materials sectors. The portfolio's positions in Consumer Discretionary returned 12.18% and outperformed the benchmark holdings by 21.90% . Men's Wearhouse, a leading retailer of men's tailored clothing and tuxedo rentals, capitalized on improving employment trends and a strong fashion cycle in men's apparel to deliver earnings growth north of 50%. Foot Locker, a leading retailer of athletic footwear and apparel and a Fund holding since early 2009, was able to build upon operational improvements put in place in 2010 by new management to deliver over 50% earnings growth in 2011.

Materials played an important role in performance again this year as it has in past years. The Fund's positions in the Materials sector returned 11.61%, and outperformed the benchmark holdings by 19.45% . Smurfit-Stone Container, a containerboard manufacturer we purchased in 2010, experienced strong price increases in the second half of 2010 and in 2011, and was purchased by competitor Rock-Tenn in June. Tronox, which makes titanium dioxide, a pigment widely used in paints, was a new purchase for us in 2011. Tronox shares fell by nearly 50% after the company announced plans to acquire its main titanium ore supplier. We believed the sell-off was overdone and our industry checks indicated that titanium ore was in tight supply, so the purchase made sense strategically. Shares have appreciated by approximately 80% since our purchase this fall.

Mergers and acquisitions have historically been one of the advantages of investing in small-cap companies, and our focus on quality, cash-generating companies was rewarded as the market saw a rebound in M&A activity. In addition to Smurfit-Stone, Lawson Software, Verigy, Arch Chemicals, and CKX Entertainment were acquired in 2011.

The Fund's most challenging sector in 2011 was Health Care, with a decline of 8.08% compared to a positive 2.54% return for the benchmark sector holdings. Health Care, however, has been a strong performer for us over the longer term, and the Fund's Health Care portfolio sector has had an annualized return of 20.46% over the last three years, compared to 14.94% for the benchmark's Health Care sector over the same period. Two of our holdings, Life Technologies and Perkin Elmer, delivered solid earnings growth in 2011, but their stock prices declined due to concerns that a reduction in government funding for life sciences research could negatively impact their long-term growth potential. The Energy sector was also an underperformer for us, down 21.30% compared to a decline of 13.96% for sector companies in the benchmark. The portfolio was affected by a sharp decline in Venoco shares during the summer correction. Venoco's Board of Directors subsequently recommended the acceptance of a take-private offer from its Chairman and CEO in early 2012 and the shares rallied substantially.

 

Paradigm Select Fund

The Paradigm Select Fund returned 1.97% in 2011, compared to a decline of 2.51% for its benchmark, the Russell 2500 Index. Over the past three years on an annualized basis, the Fund has returned 18.01% compared to 18.46% for the benchmark. Since inception (January 1, 2005) on an annualized basis, the Fund has returned 6.67% compared to 4.23% for the benchmark.

Consumer Discretionary was the top-performing sector with a return of 19.04% and outperformed the benchmark holdings by 21.21% . Top contributors included Men's Wearhouse, Foot Locker, and Big Lots. We highlighted Big Lots in the 2011 semi-annual report as an

 

2011 Annual Report 3


underperformer due to the Board's decision to not pursue a sale of the company. The stock rallied significantly in the second half of 2011 to finish the year with a return of 24%. The market reacted favorably to a stabilization of business trends and the Board's aggressive deployment of free cash flow to repurchase shares in an effort to improve shareholder value.

Materials was the second-best performing sector with a return of 7.81%, outperforming the benchmark holdings by 14.82% . Smurfit-Stone Container, Royal Gold, and Innospec were top performing stocks in the sector. Royal Gold receives royalties on major gold properties throughout the world. Gold royalties have historically been attractive places to invest because they provide cash flow from gold production without incurring many of the costs and risks associated with mining. We trimmed our position and took profits as gold prices rose this year.

Energy was a challenging sector for the Fund with a decline of 21.14%, compared to a decline of 3.51% for the benchmark sector. Energy was affected by the collapse of the leveraged buyout of EXCO Resources, and also by a sharp decline in Venoco shares during the summer correction. Venoco's Board of Directors subsequently recommended the acceptance of a take-private offer from its Chairman and CEO in early 2012 and the shares rallied substantially.

 

Paradigm Opportunity Fund

The Paradigm Opportunity Fund declined 1.34% in 2011, compared to a decline of 4.18% for its benchmark, the Russell 2000 Index. Over the past three years on an annualized basis, the Fund has returned 22.34%, compared to 15.63% for the benchmark. Since inception (January 1, 2005) on an annualized basis, the Fund has returned 4.32%, compared to 3.21% for the benchmark.

Consumer Discretionary was the top-performing sector with a return of 14.45%, and outperformed the benchmark sector holdings by 21.63% . Top contributors included Men's Wearhouse, Foot Locker, and Big Lots.

Information Technology was the second-best performing sector on a relative basis, with the Fund down 0.39% compared to a 7.09% decline for the benchmark sector companies. The Fund's top performing stock in the sector and overall portfolio for 2011 was IAC/InterActive Corp. The stock was purchased in January 2011 and delivered significantly better-than-expected results throughout 2011, driven by strong subscriber and profit growth in its Match.com online personal business, coupled with robust growth and profitability in its search business. Overall, the company expanded earnings by more than 75% in 2011.

Energy was a challenging sector for the Fund with a decline of 28.84%, compared to a decline of 8.19% in the benchmark sector holdings. Energy was affected by a sharp drop in Venoco shares during the summer correction. Venoco's Board of Director's subsequently recommended the acceptance of a take-private offer from its Chairman and CEO in early 2012 and the shares rallied substantially.

 

Paradigm Micro-Cap Fund

The Paradigm Intrinsic Value Fund was renamed the Paradigm Microcap Fund on December 27, 2011. The principal investment objective remained the same, but the principal investment strategy has changed. The Fund will focus primarily on companies in the market capitalization range of the Russell Microcap Index, whose average market capitalization was $310 million as of December 30, 2011.

In 2011, the Fund declined 0.90%, compared to an increase of 1.03% for its prior benchmark, the Russell 3000 Index. Over the past three years the Fund has returned 14.96% on an annualized basis, compared to 14.88% for the benchmark.

The Financials sector was the top performer on a relative basis. The Fund's positions in the sector declined 3.22%, compared to a drop of 13.70% for Financials in the Russell 3000

 

2011 Annual Report 4


Index. ViewPoint Financial Group was the best performer in the sector, appreciating 11.90% in light of the Texas bank's solid post-demutualization prospects.

Consumer Discretionary was the second-best performing sector on a relative basis in 2011 with a return of 20.02%, beating the Consumer Discretionary sector companies in the Russell 3000 Index by 16.61% . Top contributors included West Marine Inc., CKX Inc., and Big Lots Inc.

Energy was a challenging sector for the Fund with a decline of 15.40% compared to an increase of 3.46% for the Energy companies in the Russell 3000 Index. EXCO Resources was the largest single detractor in the sector and the Fund due to market concerns about natural gas supply.

 

Sincerely,

                                                    
Candace King Weir                                                        Amelia F. Weir
President and Chief Investment Officer                           Senior Vice President
Paradigm Funds Advisor LLC                                         Paradigm Funds Advisor LLC

 

 

 

2011 Annual Report 5


Paradigm Funds (Unaudited)                                                                                                           

                                                  PARADIGM VALUE FUND
                                              Sector Allocation (Unaudited)
                                      
(As a Percentage of Equity Securities Held)

                          

                                              PARADIGM SELECT FUND
                                            Sector Allocation (Unaudited)
 
                                     (As a Percentage of Equity Securities Held)

                       

 

2011 Annual Report 6


Paradigm Funds (Unaudited)                                                                                                                               

                                                  PARADIGM OPPORTUNITY FUND 
                                                     Sector Allocation (Unaudited)
 
                                               
(As a Percentage of Equity Securities Held)

                               

                                                  PARADIGM MICRO-CAP FUND 
                                                   Sector Allocation (Unaudited)
 
                                            
(As a Percentage of Equity Securities Held)

                               

 

2011 Annual Report 7


Paradigm Value Fund (Unaudited)                                                                                                          

                          

PERFORMANCE INFORMATION

Average Annual Rate of Return (%) for The Periods Ended December 31, 2011.

December 31, 2011 NAV $52.54

        Since
  1 Year(A) 3 Years(A) 5 Years(A) Inception(A)
Paradigm Value Fund  (3.22)% 17.99% 2.67% 14.76%
Russell 2000® Value Index(B)  (5.50)% 12.36% (1.87)% 8.59%

(A) 1 Year, 3 Years, 5 Years and Since Inception returns include change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. The inception date of the Paradigm Value Fund was January 1, 2003.

(B) The Russell 2000® Value Index (whose composition is different from the Fund) is an unmanaged index of small-capitalization stocks with lower price-to-book ratios and lower forecasted growth values than the total population of small-capitalization stocks.

For purposes of the graph and the accompanying table, it is assumed that all dividends and distributions were reinvested.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAT THE PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH END, PLEASE CALL 1-800-239-0732 OR VISIT OUR WEBSITE AT www.paradigm-funds.com.

 

2011 Annual Report 8


Paradigm Select Fund (Unaudited)                                                                                                              

                            

PERFORMANCE INFORMATION

Average Annual Rate of Return (%) for The Periods Ended December 31, 2011.

December 31, 2011 NAV $30.24

        Since
  1 Year(A) 3 Years(A) 5 Years(A) Inception(A)
Paradigm Select Fund  1.97% 18.01% 2.87% 6.66%
Russell 2500® Index(B)  (2.51)% 18.41% 1.24% 4.23%

(A) 1 Year, 3 Years, 5 Years and Since Inception returns include change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. The inception date of the Paradigm Select Fund was January 1, 2005.

(B) The Russell 2500® Index (whose composition is different from the Fund) measures the performance of the small to mid-cap segment of the U.S. equity universe, commonly referred to as "mid" cap. The Russell 2500 Index is a subset of the Russell 3000® Index. It includes approximately 2,500 of the smallest securities based on a combination of their market cap and current index membership.

For purposes of the graph and the accompanying table, it is assumed that all dividends and distributions were reinvested.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAT THE PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH END, PLEASE CALL 1-800-239-0732 OR VISIT OUR WEBSITE AT www.paradigm-funds.com.

 

2011 Annual Report 9


Paradigm Opportunity Fund (Unaudited)                                                                                                   

                          

PERFORMANCE INFORMATION

Average Annual Rate of Return (%) for The Periods Ended December 31, 2011.

December 31, 2011 NAV $25.04

        Since
  1 Year(A) 3 Years(A) 5 Years(A) Inception(A)
Paradigm Opportunity Fund  (1.34)% 22.34% 2.31% 4.31%
Russell 2000® Index(B)  (4.18)% 15.63% 0.15% 3.20%

(A) 1 Year, 3 Years, 5 Years and Since Inception returns include change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. The inception date of the Paradigm Opportunity Fund was January 1, 2005.

(B) The Russell 2000® Index (whose composition is different from the Fund) consists of the smallest 2,000 companies in the Russell 3000 Index (which represents approximately 98% of the investable U.S. equity market). The Index is an unmanaged index generally considered as the premier of small capitalization stocks.

For purposes of the graph and the accompanying table, it is assumed that all dividends and distributions were reinvested.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAT THE PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH END, PLEASE CALL 1-800-239-0732 OR VISIT OUR WEBSITE AT www.paradigm-funds.com.

 

2011 Annual Report 10


Paradigm Micro-Cap Fund (Unaudited)                                                                                                             

                      

PERFORMANCE INFORMATION

Average Annual Rate of Return (%) for The Period Ended December 31, 2011.

December 31, 2011 NAV $21.01             
           Since  
  1 Year(A)   3 Years(A)   Inception(A)  
Paradigm Micro-Cap Fund  (0.90)%   14.96%   1.51%  
Russell Microcap® Index(B)  (9.27)%   14.23%   (2.66)%  
S&P 500® Index(C)  2.11%   14.13%   (1.63)%  

(A) 1 Year, 3 Years and Since Inception returns include change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. The inception date of the Paradigm Micro-Cap Fund was January 1, 2008. Effective December 27, 2011, the name of the Paradigm Intrinsic Value Fund was changed to the Paradigm Micro-Cap Fund.

(B) The Russell Microcap® Index measures the performance of the microcap segment of the U.S. equity market. Microcap stocks make up less than 3% of the U.S. equity market (by market cap) and consist of the smallest 1,000 securities in the small-cap Russell 2000® Index, plus the next smallest eligible securities by market cap. The Russell Microcap is completely reconstituted annually to ensure larger stocks do not distort performance and characteristics of the true microcap opportunity set. Effective December 27, 2011 the Fund changed its investment strategy. Under normal circumstances, the Micro-Cap Fund invests at least 80% of its net assets in common stocks of U.S. micro-cap companies. Therefore, the primary comaprative index was changed from the S&P 500® Index to the Russell Microcap® Index.

(C)The S&P 500® Index (whose composition is different from the Fund) is an unmanaged index which measures the performance of 500 companies chosen by Standard & Poor’s to represent the large cap U.S. equity market. Effective December 27, 2011 the S&P 500® Index became the secondary comparison index. Previously the Russell 3000® Index was the secondary comparison index.

For purposes of the graph and the accompanying table, it is assumed that all dividends and distributions were reinvested.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAT THE PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH END, PLEASE CALL 1-800-239-0732 OR VISIT OUR WEBSITE AT www.paradigm-funds.com.

 

2011 Annual Report 11


Paradigm Value Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value  % of Net Assets
 
COMMON STOCKS         
Agriculture Production - Crops         
161,400  Dole Food Company Inc. *    $              1,396,110  0.59
Agriculture Production - Livestock & Animal Specialties         
91,000  Cal-Maine Foods, Inc.    3,327,870  1.42
Bituminous Coal & Lignite Surface Mining         
69,000  Cloud Peak Energy Inc. *    1,333,080  0.57
Chemical & Allied Products         
63,348  Innospec Inc. *    1,778,178     
205,400  Olin Corp.    4,036,110     
      5,814,288  2.48
Computer Communications Equipment         
416,700  Emulex Corporation *    2,858,562     
365,300  QLogic Corp. *    5,479,500     
      8,338,062  3.55
Construction - Special Trade Contractors         
241,102  Matrix Service Co. *    2,276,003  0.97
Crude Petroleum & Natural Gas         
301,200  McMoRan Exploration Co. *    4,382,460     
372,200  PetroQuest Energy Inc. *    2,456,520     
265,100  Resolute Energy Corporation *    2,863,080     
198,000  Venoco, Inc. *    1,340,460     
      11,042,520  4.69
Drilling Oil & Gas Wells         
72,400  Atwood Oceanics Inc. *    2,880,796  1.23
Electrical Work         
168,200  EMCOR Group Inc.    4,509,442  1.92
Electronic Components & Accessories         
670,400  Vishay Intertechnology Inc.*    6,026,896  2.57
Fabricated Plater Work (Boiler Shops)         
177,573  Global Power Equipment Group Inc. *    4,217,359  1.80
Fire, Marine & Casualty Insurance         
135,400  Aspen Insurance Holdings Limited (Bermuda)    3,588,100     
171,400  Montpelier Re Holdings Ltd. (Bermuda)    3,042,350     
      6,630,450  2.82
In Vitro & In Vivo Diagnostic Substances         
238,800  Myriad Genetics, Inc. *    5,000,472  2.13
Industrial Inorganic Chemicals         
24,300  Tronox Inc. *    2,916,000  1.24
Industrial Organic Chemicals         
173,377  Sensient Technologies Corp.    6,570,988  2.80
Laboratory Analytical Instruments         
129,500  PerkinElmer Inc.    2,590,000  1.10
Life Insurance           
19,825  National Western Life Insurance Co. Class A    2,699,372  1.15
Motor Vehicle Parts & Accessories         
128,600  Superior Industries International Inc.    2,127,044  0.91
Orthopedic, Prosthetic & Surgical Appliances & Supplies         
311,926  Symmetry Medical, Inc. *    2,492,289  1.06
Pharmaceutical Preparations         
128,100  Endo Pharmaceuticals Holdings Inc. *    4,423,293     
620,830  Vanda Pharmaceuticals, Inc. *    2,955,151     
      7,378,444  3.14

* Non-Income Producing Securities.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 12


Paradigm Value Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value  % of Net Assets
 
COMMON STOCKS         
Plastic Materials, Synth Resin/Rubber, Cellulos (No Glass)         
273,300  Chemtura Corp. *    $             3,099,222  1.32
Retail - Apparel & Accessory Stores         
198,600  Express Inc. *    3,960,084     
120,700  The Men's Wearhouse, Inc.    3,911,887     
      7,871,971  3.35
Retail - Family Clothing Stores         
296,500  American Eagle Outfitters, Inc.    4,533,485  1.93
Retail - Miscellaneous Retail         
138,700  EZCORP Inc. Class A *    3,657,519  1.56
Retail - Retail Stores, NEC         
95,800  IAC/InterActiveCorp.    4,081,080  1.74
Retail - Shoe Stores         
175,500  Foot Locker, Inc.    4,183,920  1.78
Retail - Variety Stores         
82,500  Big Lots Inc. *    3,115,200  1.33
Savings Institution, Federally Chartered         
101,200  Capitol Federal Financial    1,167,848     
272,900  SI Financial Group, Inc.    2,688,065     
237,300  United Financial Bancorp    3,818,157     
223,100  Viewpoint Financial Group    2,902,531     
306,200  Westfield Financial Inc.    2,253,632     
      12,830,233  5.46
Secondary Smelting & Refining of Nonferrous Metals         
909,400  Metalico Inc. *    2,991,926  1.27
Security Brokers, Dealers & Flotation Companies         
397,050  Knight Capital Group Inc. Class A *    4,693,131  2.00
Semiconductors & Related Devices         
109,700  Diodes Incorporated *    2,336,610     
312,800  Kulicke & Soffa Industries Inc. * (Singapore)    2,893,400     
172,500  Microsemi Corporation *    2,889,375     
309,700  TriQuint Semiconductor, Inc. *    1,508,239     
      9,627,624  4.10
Services - Business Services         
156,600  Lender Processing Services, Inc.    2,359,962     
456,852  Premiere Global Services Inc. *    3,869,536     
      6,229,498  2.65
Services - Computer Integrated Systems Design         
484,700  Convergys Corp. *    6,189,619  2.64
Services - Hospitals         
88,000  Magellan Health Services Inc. *    4,353,360     
67,500  MEDNAX, Inc. *    4,860,675     
      9,214,035  3.92
Services - Motion Picture Theaters         
446,430  Regal Entertainment Group Class A    5,330,374  2.27
Services - Prepackaged Software         
440,700  Actuate Corporation *    2,582,502     
378,800  Compuware Corp. *    3,151,616     
      5,734,118  2.44
Special Industry Machinery         
95,000  Cymer, Inc. *    4,727,200  2.01
Transportation Services         
89,700  GATX Corp.    3,916,302  1.67

* Non-Income Producing Securities.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 13


 Paradigm Value Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value   % of Net Assets
COMMON STOCKS           
Wholesale - Chemicals & Allied Products           
97,200  Innophos Holdings Inc.    $            4,720,032   2.01
Wholesale - Electronic Parts & Equipment, NEC           

         606,400 

Brightpoint, Inc. *    6,524,864   2.78
Wholesale - Machinery, Equipment & Supplies           

         118,792

Applied Industrial Technologies    4,177,915   1.78
Wholesale - Miscellaneous Durable Goods           
86,400  Schnitzer Steel Industries, Inc. Class A    3,652,992   1.55
Total for Common Stock (Cost $187,153,207)    $        210,669,745   89.70
REAL ESTATE INVESTMENT TRUSTS           

         815,100 

Anworth Mortgage Asset Corp.    5,118,828      

         289,200 

MFA Financial, Inc.    1,943,424      
69,200  Mid-America Apartment Communities Inc.    4,328,460      
 Total for Real Estate Investment Trusts (Cost $10,825,075)    11,390,712   4.85
MONEY MARKET FUNDS           

   12,985,386 

SEI Daily Income Treasury Government CL B 0.02% **    12,985,386   5.53
       (Cost $12,985,386)           
Total Investment Securities    235,045,843   100.08
       (Cost $210,963,668)           
Liabilities In Excess of Other Assets    (196,715 -0.08
Net Assets      $        234,849,128   100.00

 

 

* Non-Income Producing Securities.
** Variable Rate Security; the rate shown was the rate at
December 31, 2011.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 14


Paradigm Select Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value  % of Net Assets
 
COMMON STOCKS         
Agriculture Production - Crops         
6,400  Dole Food Company Inc. *    $                   55,360  0.70
Agriculture Production - Livestock & Animal Specialties         
2,800  Cal-Maine Foods, Inc.    102,396  1.29
Biological Products, (No Diagnostic Substances)         
2,500  Life Technologies Corporation *    97,275  1.23
Bituminous Coal & Lignite Surface Mining         
2,100  Cloud Peak Energy Inc. *    40,572  0.51
Canned Fruits, Vegetables, Preserves, Jams & Jellies         
1,200  The J. M. Smucker Company    93,804  1.18
Chemical & Allied Products         
1,700  Innospec Inc. *    47,719     
5,800  Olin Corp.    113,970     
      161,689  2.04
Computer & Office Equipment         
4,300  Lexmark International, Inc.    142,201  1.79
Computer Communications Equipment         
12,900  Emulex Corporation *    88,494     
11,700  QLogic Corp. *    175,500     
      263,994  3.33
Construction - Special Trade Contractors         
7,700  Matrix Service Co. *    72,688  0.92
Crude Petroleum & Natural Gas         
12,100  PetroQuest Energy Inc. *    79,860     
2,200  Plains Exploration & Production Company *    80,784     
3,500  Resolute Energy Corporation *    37,800     
7,900  Venoco, Inc. *    53,483     
2,000  Whiting Petroleum Corp. *    93,380     
      345,307  4.35
Electrical Work           
5,300  EMCOR Group Inc.    142,093  1.79
Electronic Components & Accessories         
16,960  Vishay Intertechnology Inc. *    152,471  1.92
Fire, Marine & Casualty Insurance         
409  Alleghany Inc. *    116,684     
3,200  American Financial Group Inc.    118,048     
4,500  Aspen Insurance Holdings Limited (Bermuda)    119,250     
150  Markel Corp. *    62,200     
7,000  Montpelier Re Holdings Ltd. (Bermuda)    124,250     
      540,432  6.82
In Vitro & In Vivo Diagnostic Substances         
8,000  Myriad Genetics, Inc. *    167,520  2.11
Industrial Inorganic Chemicals         
800  Tronox Inc. *    96,000  1.21
Industrial Organic Chemicals         
5,300  Sensient Technologies Corporation    200,870     
2,700  Westlake Chemical Corp.    108,648     
      309,518  3.90
Iron & Steel Foundries         
600  Precision Castparts Corp.    98,874  1.25
Laboratory Analytical Instruments         
4,100  PerkinElmer Inc.    82,000  1.03

* Non-Income Producing Securities.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 15


 Paradigm Select Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value  % of Net Assets
 
COMMON STOCKS         
Men's & Boy's Furnishings, Work Clothing & Allied Garments         
2,480  PVH Corp.    $                 174,815  2.20
Mineral Royalty Traders         
1,100  Royal Gold, Inc.    74,173  0.94
Paperboard Containers & Boxes         
1,101  Rock-Tenn Co. Class A    63,528  0.80
Pharmaceutical Preparations         
4,000  Endo Pharmaceuticals Holdings Inc. *    138,120  1.74
Plastic Materials, Synth Resin/Rubber, Cellulos (No Glass)         
8,500  Chemtura Corp. *    96,390  1.22
Plastics Products         
2,400  AptarGroup Inc.    125,208  1.58
Retail - Apparel & Accessory Stores         
5,900  Express Inc. *    117,646     
3,700  The Men's Wearhouse, Inc.    119,917     
      237,563  3.00
Retail - Family Clothing Stores         
9,200  American Eagle Outfitters, Inc.    140,668  1.77
Retail - Miscellaneous Retail         
4,300  EZCORP Inc. Class A *    113,391  1.43
Retail - Retail Stores, NEC         
3,000  IAC/InterActiveCorp.    127,800  1.61
Retail - Shoe Stores         
5,400  Foot Locker, Inc.    128,736  1.62
Retail - Variety Stores         
2,600  Big Lots Inc. *    98,176  1.24
Savings Institution, Federally Chartered         
10,600  Capitol Federal Financial    122,324  1.54
Security Brokers, Dealers & Flotation Companies         
13,500  Knight Capital Group Inc. Class A *    159,570  2.01
Semiconductors & Related Devices         
2,700  Diodes Incorporated *    57,510     
9,700  Kulicke & Soffa Industries Inc. * (Singapore)    89,725     
7,200  Marvell Technology Group Ltd. * (Bermuda)    99,720     
5,300  Microsemi Corporation *    88,775     
9,400  TriQuint Semiconductor, Inc. *    45,778     
      381,508  4.81
Services - Business Services         
5,489  Lender Processing Services, Inc.    82,719     
14,170  Premiere Global Services Inc. *    120,020     
      202,739  2.56
Services - Computer Integrated Systems Design         
16,700  Convergys Corp. *    213,259  2.69
Services - Hospitals         
3,200  Magellan Health Services Inc. *    158,304     
2,100  MEDNAX, Inc. *    151,221     
      309,525  3.90
Services - Management Consulting Services         
2,300  FTI Consulting, Inc. *    97,566  1.23
Services - Motion Picture Theaters         
13,800  Regal Entertainment Group Class A    164,772  2.08

* Non-Income Producing Securities.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 16


Paradigm Select Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value  % of Net Assets
COMMON STOCKS         
Services - Prepackaged Software         
           12,700  Compuware Corp. *    $           105,664  1.33
Special Industry Machinery         
             2,700  Cymer, Inc. *    134,352  1.69
Wholesale - Electronic Parts & Equipment, NEC         
             5,800  Avnet, Inc. *    180,322     
           17,700  Brightpoint, Inc. *    190,452     
      370,774  4.69
Wholesale - Machinery, Equipment & Supplies         
             3,600  Applied Industrial Technologies    126,612  1.60
Wholesale - Miscellaneous Durable Goods         
             2,100  Schnitzer Steel Industries, Inc. Class A    88,788  1.12
Total for Common Stock (Cost $6,256,387)    $        6,960,215  87.77
REAL ESTATE INVESTMENT TRUSTS         
           21,200  Anworth Mortgage Asset Corp.    133,136     
           16,100  MFA Financial, Inc.    108,192     
             2,100  Mid-America Apartment Communities Inc.    131,355     
Total for Real Estate Investment Trusts (Cost $387,509)    372,683  4.70
MONEY MARKET FUNDS         
582,105  SEI Daily Income Treasury Government CL B 0.02% **    582,105  7.34
        (Cost $582,105)         
Total Investment Securities    7,915,003  99.81
        (Cost $7,226,001)         
Other Assets In Excess of Liabilities    14,714  0.19
Net Assets      $        7,929,717  100.00

 

 


 

* Non-Income Producing Securities.
** Variable Rate Security; the rate shown was the rate at
December 31, 2011.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 17


Paradigm Opportunity Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value  % of Net Assets
 
COMMON STOCKS         
Agriculture Production - Crops         
6,000  Dole Food Company Inc. *    $                   51,900  1.16
Agriculture Production - Livestock & Animal Specialties         
3,300  Cal-Maine Foods, Inc.    120,681  2.69
Biological Products, (No Diagnostic Substances)         
2,900  Life Technologies Corporation *    112,839  2.51
Bituminous Coal & Lignite Surface Mining         
2,500  Cloud Peak Energy Inc. *    48,300  1.08
Computer Communications Equipment         
15,300  Emulex Corporation *    104,958     
13,500  QLogic Corp. *    202,500     
      307,458  6.85
Construction - Special Trade Contractors         
8,900  Matrix Service Co. *    84,016  1.87
Crude Petroleum & Natural Gas         
13,800  PetroQuest Energy Inc. *    91,080     
7,300  Venoco, Inc. *    49,421     
      140,501  3.13
Electrical Work           
6,200  EMCOR Group Inc.    166,222  3.70
Industrial Organic Chemicals         
6,400  Sensient Technologies Corporation    242,560  5.40
Laboratory Analytical Instruments         
4,800  PerkinElmer Inc.    96,000  2.14
Orthopedic, Prosthetic & Surgical Appliances & Supplies         
9,800  Symmetry Medical, Inc. *    78,302  1.74
Pharmaceutical Preparations         
4,000  Endo Pharmaceuticals Holdings Inc. *    138,120  3.08
Retail - Apparel & Accessory Stores         
6,900  Express Inc. *    137,586     
4,400  The Men's Wearhouse, Inc.    142,604     
      280,190  6.24
Retail - Family Clothing Stores         
10,900  American Eagle Outfitters, Inc.    166,661  3.71
Retail - Miscellaneous Retail         
4,800  EZCORP Inc. Class A *    126,576  2.82
Retail - Retail Stores, NEC         
3,500  IAC/InterActiveCorp.    149,100  3.32
Retail - Shoe Stores         
5,500  Foot Locker, Inc.    131,120  2.92
Retail - Variety Stores         
2,400  Big Lots Inc. *    90,624  2.02
Security Brokers, Dealers & Flotation Companies         
14,700  Knight Capital Group Inc. Class A *    173,754  3.87
Semiconductors & Related Devices         
11,500  Kulicke & Soffa Industries Inc. * (Singapore)    106,375     
6,300  Microsemi Corporation *    105,525     
11,100  TriQuint Semiconductor, Inc. *    54,057     
      265,957  5.92
Services - Business Services         
16,700  Premiere Global Services Inc. *    141,449  3.15
Services - Computer Integrated Systems Design         
17,900  Convergys Corp. *    228,583  5.09

* Non-Income Producing Securities.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 18


Paradigm Opportunity Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value   % of Net Assets
COMMON STOCKS           
Services - Hospitals           
4,600  Magellan Health Services Inc. *    $              227,562      
2,700  MEDNAX, Inc. *    194,427      
      421,989   9.39
Services - Motion Picture Theaters           
17,000  Regal Entertainment Group Class A    202,980   4.52
Service - Prepackaged Software           
13,500  Compuware Corp. *    112,320   2.50
Total for Common Stock (Cost $3,511,063)    $           4,078,202   90.82
REAL ESTATE INVESTMENT TRUSTS           
2,500  Mid-America Apartment Communities Inc.    156,375      
Total for Real Estate Investment Trusts (Cost $96,166)    156,375   3.48
MONEY MARKET FUNDS           
260,528  SEI Daily Income Treasury Government CL B 0.02% **    260,528   5.80
        (Cost $260,528)           
Total Investment Securities    4,495,105   100.10
        (Cost $3,867,757)           
Liabilities In Excess of Other Assets    (4,490 -0.10
Net Assets      $           4,490,615   100.00

 

 

]

* Non-Income Producing Securities.
** Variable Rate Security; the rate shown was the rate at
December 31, 2011.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 19


Paradigm Micro-Cap Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value  % of Net Assets
 
COMMON STOCKS         
Chemicals & Allied Products         
900  Innospec Inc. *    $            25,263  0.36
Communications Services, NEC         
           48,000  Kratos Defense & Security Solutions, Inc. *    286,560  4.08
Computer Peripheral Equipment, NEC         
           20,000  Intermec, Inc. *    137,200     
           50,000  RadiSys Corporation *    253,000     
      390,200  5.55
Electromedical & Electrotherapeutic Apparatus         
           11,000  Natus Medical Inc. *    103,730  1.48
Footwear, (No Rubber)         
           32,000  Brown Shoe Co. Inc.    284,800  4.05
Industrial Instruments for Measurement, Display and Control         
           32,000  Rudolph Technologies Inc. *    296,320  4.22
Instruments for Measuring & Testing of Electricity & Electric Signals         
           12,000  LeCroy Corp. *    100,920  1.44
Iron & Steel Foundries         
490  Precision Castparts Corp.    80,747  1.15
Laboratory Analytical Instruments         
           45,000  MFC Industrial Ltd. (Canada)    315,450  4.49
Men's & Boys' Furnishings, Work Clothing, and Allied Garments         
2,235  PVH Corp.    157,545  2.24
Miscellaneous Electrical Machinery, Equipment & Supplies         
152,000  Exide Technologies *    399,760  5.69
Oil & Gas Field Exploration Services         
           45,000  TGC Industries Inc. *    321,300  4.57
Orthopedic, Prosthetic & Surgical Appliances & Supplies         
           17,000  Exactech Inc. *    279,990  3.98
Paper Mills           
           16,000  KapStone Paper and Packaging Corporation *    251,840  3.58
Pharmaceutical Preparations         
           30,000  Obagi Medical Products, Inc. *    304,800  4.34
Railroads, Line-Haul Operating         
1,220  Canadian National Railway Company (Canada)    95,843  1.36
Retail - Auto Dealers & Gasoline Stations         
           25,000  West Marine Inc. *    290,750  4.14
Retail - Catalog & Mail-Order Houses         
           17,000  Insight Enterprises Inc. *    259,930  3.70
Retail - Family Clothing Stores         
           46,000  Stein Mart Inc. *    313,260  4.46
Retail - Furniture Stores         
           44,000  Haverty Furniture Companies Inc.    483,120  6.88
Retail - Retail Stores, NEC         
3,510  IAC/InterActiveCorp.    149,526     
           21,000  Kirkland's Inc. *    279,300     
      428,826  6.10
Retail - Women's Clothing Stores         
           70,000  Wet Seal Inc. Class A *    228,200  3.25
Services - Computer Integrated Systems Design         
           21,000  Dynamics Research Corp. *    238,140  3.39

* Non-Income Producing Securities.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 20


Paradigm Micro-Cap Fund
 
      Schedule of Investments
      December 31, 2011
Shares      Fair Value   % of Net Assets
COMMON STOCKS           
Special Industry Machinery (No Metalworking Machinery)           
             5,000  Kadant Inc. *    $           113,050   1.61
Surgical & Medical Instruments           
64,000  Alphatec Holdings, Inc. *    110,080   1.57
Wholesale - Electronic Parts & Equipment, NEC           
             6,260  Avnet Inc. *    194,624      
25,670  Brightpoint, Inc. *    276,209      
             8,000  Richardson Electronics Ltd.    98,320      
      569,153   8.10
Total for Common Stock (Cost $6,202,362)    $         6,729,577   95.78
EXCHANGE TRADED FUNDS           
             3,200  iShares Gold Trust *    48,736      
Total for Exchange Traded Funds (Cost - $26,018)    48,736   0.69
MONEY MARKET FUNDS           
252,002  SEI Daily Income Treasury Government CL B 0.02% **    252,002   3.59
        (Cost $252,002)           
Total Investment Securities    7,030,315   100.06
       (Cost $6,480,382)           
Liabilities In Excess of Other Assets    (3,990 -0.06
 
Net Assets      $         7,026,325   100.00

 

 


 

* Non-Income Producing Securities.
** Variable Rate Security; the rate shown was the rate at
December 31, 2011.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 21


 Paradigm Funds
 
 
Statements of Assets and Liabilities  Value   Select  
   December 31, 2011  Fund   Fund  
 
Assets:         
   Investment Securities at Fair Value*  $       235,045,843   $          7,915,003  
   Cash  -   1,301  
   Receivable for Fund Shares Sold  179,934   10,429  
   Dividends Receivable  325,880   10,564  
   Interest Receivable  1,185   46  
           Total Assets  235,552,842   7,937,343  
Liabilities:         
   Payable for Fund Shares Redeemed  401,055   -  
   Payable to Advisor  302,659   7,626  
           Total Liabilities  703,714   7,626  
Net Assets  $       234,849,128   $          7,929,717  
Net Assets Consist of:         
   Paid In Capital  $       214,054,575   $          7,283,387  
   Accumulated Realized Gain (Loss) on Investments - Net  (3,287,622 (42,672
   Unrealized Appreciation (Depreciation) in Value of Investment Securities - Net  24,082,175   689,002  
Net Assets  $       234,849,128   $          7,929,717  
 
Net Asset Value and Offering Price (Note 2)  $                 52.54   $                30.24  
 
* Investments at Identified Cost  $       210,963,668   $          7,226,001  
 
 Shares Outstanding (Unlimited number of shares  4,469,874   262,210  
         authorized without par value)         
 
Statements of Operations         
   For the fiscal year ended December 31, 2011         
 
Investment Income:         
   Dividends  $          3,663,011   $               91,240  
   Interest  12,644   367  
         Total Investment Income  3,675,655   91,607  
Expenses:         
   Investment Advisor Fees  5,457,312   97,467  
         Total Expenses  5,457,312   97,467  
   Less: Expenses Waived  (993,902 (19,470
         Net Expenses  4,463,410   77,997  
 
 
Net Investment Income (Loss)  (787,755 13,610  
 
Realized and Unrealized Gain (Loss) on Investments:         
   Net Realized Gain (Loss) on Investments  6,680,547   198,161  
   Net Change in Unrealized Appreciation (Depreciation) on Investments  (21,135,754 (209,355
Net Realized and Unrealized Gain (Loss) on Investments  (14,455,207 (11,194
 
Net Increase (Decrease) in Net Assets from Operations  $        (15,242,962 $                 2,416  

The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 22


 Paradigm Funds
 
 
Statements of Assets and Liabilities  Opportunity   Micro-Cap  
   December 31, 2011  Fund   Fund  
 
Assets:         
   Investment Securities at Fair Value*  $        4,495,105   $        7,030,315  
   Cash  -   330  
   Dividends Receivable  1,199   855  
   Interest Receivable  19   105  
            Total Assets  4,496,323   7,031,605  
Liabilities:         
   Payable to Advisor  5,708   5,280  
            Total Liabilities  5,708   5,280  
Net Assets  $        4,490,615   $        7,026,325  
Net Assets Consist of:         
   Paid In Capital  $        3,921,118   $        6,592,486  
   Accumulated Realized Gain (Loss) on Investments - Net  (57,851 (116,094
   Unrealized Appreciation (Depreciation) in Value of Investment Securities - Net  627,348   549,933  
Net Assets  $        4,490,615   $        7,026,325  
 
Net Asset Value and Offering Price (Note 2)  $              25.04   $              21.01  
 
* Investments at Identified Cost  $        3,867,757   $        6,480,382  
 
 Shares Outstanding (Unlimited number of shares  179,311   334,399  
         authorized without par value)         
 
Statements of Operations         
   For the fiscal year ended December 31, 2011         
 
Investment Income:         
   Dividends (Net of foreign withholding tax** and fees of $0 and $711, respectively)  $             35,800   $             36,806  
   Interest  189   226  
         Total Investment Income  35,989   37,032  
Expenses:         
   Investment Advisor Fees  97,323   44,153  
         Total Expenses  97,323   44,153  
   Less: Expenses Waived  (24,331 -  
         Net Expenses  72,992   44,153  
 
 
Net Investment Income (Loss)  (37,003 (7,121
 
Realized and Unrealized Gain (Loss) on Investments:         
   Net Realized Gain (Loss) on Investments  494,674   197,926  
   Net Change in Unrealized Appreciation (Depreciation) on Investments  (537,492 (40,694
Net Realized and Unrealized Gain (Loss) on Investments  (42,818 157,232  
 
Net Increase (Decrease) in Net Assets from Operations  $            (79,821 $           150,111  

** Foreign withholding taxes on foreign dividends have been provid-
ed for in accordance with the Funds’ understanding of the applica-
ble country's tax rules and rates.
The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 23


Paradigm Funds
 
 
3Statements of Changes in Net Assets  Value Fund   Select Fund  
 
 
  1/1/2011   1/1/2010   1/1/2011   1/1/2010  
  to   to   to   to  
  12/31/2011   12/31/2010   12/31/2011   12/31/2010  
From Operations:                 
   Net Investment Income (Loss)  $          (787,755 $          (256,163 $             13,610   $              (6,212
   Net Realized Gain (Loss) on Investments  6,680,547   18,143,844   198,161   274,580  
   Change in Net Unrealized Appreciation (Depreciation)  (21,135,754 29,589,320   (209,355 484,130  
   Increase (Decrease) in Net Assets from Operations  (15,242,962 47,477,001   2,416   752,498  
From Distributions to Shareholders:                 
     Net Investment Income  -   (417,251 (14,165 (9,549
     Net Realized Gain from Security Transactions  (3,448,769 -   -   -  
     Total Distributions to Shareholders  (3,448,769 (417,251 (14,165 (9,549
From Capital Share Transactions:                 
   Proceeds From Sale of Shares  199,045,263   125,199,934   4,955,030   745,813  
   Proceeds from Redemption Fees (Note 2)  129,958   20,531   77   10  
   Shares Issued on Reinvestment of Dividends  3,384,204   410,720   14,125   9,549  
   Cost of Shares Redeemed  (204,517,840 )  (40,234,926 (944,604 (291,079
   Net Increase (Decrease) from Shareholder Activity  (1,958,415 85,396,259   4,024,628   464,293  
Net Increase (Decrease) in Net Assets  (20,650,146 132,456,009   4,012,879   1,207,242  
 
Net Assets at Beginning of Period  255,499,274   123,043,265   3,916,838   2,709,596  
 
Net Assets at End of Period  $      234,849,128   $     255,499,274   $         7,929,717   $         3,916,838  
 
Accumulated Net Investment Income (Loss)  $                      -   $                      -   $                      -   $                      -  
 
 
Share Transactions:                 
   Issued  3,563,706   2,628,120   161,670   29,513  
   Reinvested  64,155   7,437   465   320  
   Redeemed  (3,796,093 (875,756 (31,750 (11,739
Net Increase (Decrease) in Shares  (168,232 1,759,801   130,385   18,094  
Shares Outstanding Beginning of Period  4,638,106   2,878,305   131,825   113,731  
Shares Outstanding End of Period  4,469,874   4,638,106   262,210   131,825  

 


 

The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 24


Paradigm Funds
 
 
Statements of Changes in Net Assets  Opportunity Fund   Micro-Cap Fund  
 
  1/1/2011   1/1/2010   1/1/2011   1/1/2010  
  to   to   to   to  
  12/31/2011   12/31/2010   12/31/2011   12/31/2010  
From Operations:                   
   Net Investment Income (Loss)  $          (37,003 $            (23,244 $           (7,121 $              (2,202
   Net Realized Gain (Loss) on Investments  494,674   546,219   197,926   73,772  
   Change in Net Unrealized Appreciation (Depreciation)  (537,492 465,618   (40,694 449,644  
   Increase (Decrease) in Net Assets from Operations  (79,821 988,593   150,111   521,214  
From Distributions to Shareholders:                   
     Net Investment Income  -     -   -   (17,498
     Net Realized Gain from Security Transactions  (37,186   -   -   -  
     Total Distributions to Shareholders  (37,186   -   -   (17,498
From Capital Share Transactions:                   
   Proceeds From Sale of Shares  14,626   562,603   5,073,670   385,083  
   Proceeds from Redemption Fees (Note 2)  -     10   -   -  
   Shares Issued on Reinvestment of Dividends  37,186     -   -   17,498  
   Cost of Shares Redeemed  (383,396 (305,306 (1,645,185 (33,840
   Net Increase (Decrease) from Shareholder Activity  (331,584 257,307   3,428,485   368,741  
Net Increase (Decrease) in Net Assets  (448,591 1,245,900   3,578,596   872,457  
 
Net Assets at Beginning of Period  4,939,206   3,693,306   3,447,729   2,575,272  
 
Net Assets at End of Period  $       4,490,615   $        4,939,206   $       7,026,325   $         3,447,729  
 
Accumulated Net Investment Income (Loss)  $                    -   $                     -   $                    -   $                      -  
 
 
Share Transactions:                   
   Issued  555   25,915   251,925   20,556  
   Reinvested  1,476     -   -   826  
   Redeemed  (15,760 (14,884 (80,132 (1,958
Net Increase (Decrease) in Shares  (13,729 11,031   171,793   19,424  
Shares Outstanding Beginning of Period  193,040   182,009   162,606   143,182  
Shares Outstanding End of Period  179,311   193,040   334,399   162,606  

 

The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 25


 Paradigm Value Fund
 
Financial Highlights - Paradigm Value Fund                     
 
Selected data for a share outstanding  1/1/2011   1/1/2010   1/1/2009   1/1/2008   1/1/2007  
throughout the period:  to   to   to   to   to  
  12/31/2011   12/31/2010   12/31/2009   12/31/2008   12/31/2007  
Net Asset Value - Beginning of Period  $         55.09   $        42.75   $        32.51   $        49.27   $        48.55  
Net Investment Income (Loss) (a)  (0.15 (0.07 0.16   (0.22 (0.40
Net Gains (Loss) on Securities (Realized and Unrealized)  (1.64 12.49   10.07   (16.52 2.84  
 Total from Investment Operations  (1.79 12.42   10.23   (16.74 2.44  
Distributions (From Net Investment Income)  -   (0.09 -   -   -  
Distributions (From Capital Gains)  (0.78 -   -   (0.07 (1.73
 Total Distributions  (0.78 (0.09 0.00   (0.07 (1.73
Proceeds from Redemption Fee (Note 2)  0.02   0.01   0.01   0.05   0.01  
Net Asset Value - End of Period  $         52.54   $        55.09   $        42.75   $        32.51   $        49.27  
Total Return (b)  (3.22 )%  29.08 31.50 (33.88 )%  5.03
 
Ratios/Supplemental Data                     
Net Assets - End of Period (Thousands)  $     234,849   $     255,499   $     123,043   $      85,018   $     116,247  
Before Reimbursement                     
 Ratio of Expenses to Average Net Assets  1.83 1.89 1.98 1.99 2.02
After Reimbursement                     
 Ratio of Expenses to Average Net Assets (c) ++  1.50 1.50 1.63 1.99 2.02
 Ratio of Net Investment Income (Loss) to Average                     
   Net Assets (c) ++  -0.26 -0.14 0.43 -0.52 -0.78
Portfolio Turnover Rate  83.95 81.17 69.85 67.84 59.75

 Paradigm Select Fund
 
Financial Highlights - Paradigm Select Fund                     
 
Selected data for a share outstanding throughout the period:  1/1/2011   1/1/2010   1/1/2009   1/1/2008   1/1/2007  
      to   to   to   to   to  
  12/31/2011   12/31/2010   12/31/2009   12/31/2008   12/31/2007  
Net Asset Value - Beginning of Period  $        29.71   $        23.82   $        18.53   $        27.91   $        26.48  
Net Investment Income (Loss) (a)  0.06   (0.05 0.08   0.03   (0.06
Net Gains (Loss) on Securities (Realized and Unrealized)  0.52   6.01   5.28   (9.41 1.54  
Total from Investment Operations  0.58   5.96   5.36   (9.38 1.48  
Distributions (From Net Investment Income)  (0.05 (0.07 (0.07 -   -  
Distributions (From Capital Gains)  -   -   -   -   (0.05
 Total Distributions  (0.05 (0.07 (0.07 -   (0.05
Proceeds from Redemption Fee (Note 2)  - - - -   -  
 
Net Asset Value - End of Period  $        30.24   $        29.71   $        23.82   $        18.53   $        27.91  
Total Return (b)  1.97 25.03 28.92 (33.61 )%  5.57
Ratios/Supplemental Data                     
Net Assets - End of Period (Thousands)  $        7,930   $        3,917   $        2,710   $        2,031   $      11,109  
Before Reimbursement                     
 Ratio of Expenses to Average Net Assets  1.50 1.50 1.50 1.50 1.50
After Reimbursement                     
 Ratio of Expenses to Average Net Assets ++  1.20 1.50 1.50 1.50 1.50
 Ratio of Net Investment Income/(Loss) to Average                     
   Net Assets ++  0.21 -0.20 0.42 0.13 -0.23
Portfolio Turnover Rate  58.40 65.77 65.57 47.71 64.68

  (a) Per share amount calculated using the average shares method.
(b) Total return in the above table represents the rate that the investor would have earned or lost on an investment in the Fund
assuming reinvestment of dividends. Returns do not reflect the deduction of taxes a shareholder would pay on Fund
distributions or redemption of Fund shares.
(c) Includes dividend expense on securities sold short and interest expense of 0.00%, 0.00%, 0.00%, 0.00% (Amount
calculated less than 0.005%) and 0.02% for the years ended 12/31/2011 - 2007, respectively.
+ Amount calculated is less than $0.005. ++ Such percentages reflect an expense waiver by the Advisor (for Value
since 2009 and for Select since 2011).

The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 26


 Paradigm Opportunity Fund
 
Financial Highlights - Paradigm Opportunity Fund                  
 
Selected data for a share outstanding throughout the period:  1/1/2011   1/1/2010   1/1/2009   1/1/2008   1/1/2007  
  to   to   to   to   to  
  12/31/2011   12/31/2010   12/31/2009   12/31/2008   12/31/2007  
Net Asset Value - Beginning of Period  $        25.59   $        20.29   $        13.79   $        22.94   $        23.21  
Net Investment Income (Loss) (a)  (0.20 (0.12 (0.01 (0.13 (0.04
Net Gains (Loss) on Securities (Realized and Unrealized)  (0.14 5.42   6.51   (9.02 0.47  
Total from Investment Operations  (0.34 5.30   6.50   (9.15 0.43  
Distributions (From Net Investment Income)  -   -   -   -   -  
Distributions (From Capital Gains)  (0.21 ) - - - (0.70
 Total Distributions  (0.21 ) - - - (0.70
Proceeds from Redemption Fee (Note 2)  - -

+

- - + -  
Net Asset Value - End of Period  $        25.04 $        25.59 $        20.29 $        13.79 $        22.94  
Total Return (b)  (1.34 )%  26.12 47.14 (39.89 )%  1.85
 
Ratios/Supplemental Data                     
Net Assets - End of Period (Thousands)  $        4,491   $        4,939   $        3,693    $       2,425   $        5,613  
Before Reimbursement                     
 Ratio of Expenses to Average Net Assets  2.00 2.00 2.00 2.00 2.00
After Reimbursement                     
 Ratio of Expenses to Average Net Assets (c)  1.50 1.50 1.50 1.50 1.50
 Ratio of Net Investment Income/(Loss) to Average                     
   Net Assets (c)  -0.76 -0.56 -0.04 -0.67 -0.17
Portfolio Turnover Rate  65.44 96.20 135.62 164.89 169.26

 Paradigm Micro-Cap Fund
 
Financial Highlights - Paradigm Micro-Cap Fund                 
 
Selected data for a share outstanding throughout the period:  1/1/2011   1/1/2010   1/1/2009   1/1/2008*  
  to   to   to   to  
  12/31/2011   12/31/2010   12/31/2009   12/31/2008  
Net Asset Value - Beginning of Period  $             21.20   $             17.99   $             13.98   $            20.00  
Net Investment Income (Loss) (a)  (0.04 (0.01 0.14   0.15  
Net Gains (Loss) on Securities (Realized and Unrealized)  (0.15 3.33   3.98   (6.17
Total from Investment Operations  (0.19 3.32   4.12   (6.02
Distributions (From Net Investment Income)  -   (0.11 (0.11 -  
Distributions (From Capital Gains)  -   -   -   -  
 Total Distributions  -   (0.11 (0.11 -  
Proceeds from Redemption Fee (Note 2)  -   -   - -  
Net Asset Value - End of Period  $             21.01   $             21.20   $             17.99   $             13.98  
Total Return (b)  (0.90 )%  18.44 29.44 (30.10 )% 
Ratios/Supplemental Data                 
Net Assets - End of Period (Thousands)  $             7,026   $             3,448   $             2,575   $             1,620  
 Ratio of Expenses to Average Net Assets  1.25 1.25 1.25 1.25
 Ratio of Net Investment Income/(Loss) to Average Net Assets  -0.20 -0.08 0.92 0.86
Portfolio Turnover Rate  126.43 % ++  77.78 79.35 70.57

  * Commencement of operations.
(a) Per share amount calculated using the average shares method.
(b) Total return in the above table represents the rate that the investor would have earned or lost on an investment in the Fund
assuming reinvestment of dividends. Returns do not reflect the deduction of taxes a shareholder would pay on Fund
distributions or redemption of Fund shares.
(c) Such percentages reflect an expense waiver by the Advisor.
+ Amount calculated is less than $0.005.
++ The Fund's portfolio turnover rate increased due to the change in the Fund's principal investment strategy to invest
(under normal circumstances) at least 80% of its net assets in the common stocks of U.S. micro-cap companies effective
December 27, 2011.

  The accompanying notes are an integral part of these
financial statements.

2011 Annual Report 27


NOTES TO FINANCIAL STATEMENTS
PARADIGM FUNDS
December 31, 2011

1.) ORGANIZATION
The Paradigm Funds (the "Trust”) is an open-end management investment company organized in Ohio as a business trust on September 13, 2002 that may offer shares of beneficial interest in a number of separate series, each series representing a distinct fund with its own investment objectives and policies. The Paradigm Value Fund (“Value”) commenced operations on January 1, 2003. The Paradigm Value Fund's investment objective is long-term capital appreciation. The Paradigm Opportunity Fund (“Opportunity”) and Paradigm Select Fund (“Select”) both commenced operations on January 1, 2005 with long-term capital appreciation as their objective. The Paradigm Micro-Cap Fund (“Micro-Cap”) commenced operations on January 1, 2008. Effective December 27, 2011, the name of the Paradigm Intrinsic Value Fund was changed to the Pardigm Micro-Cap Fund. The Paradigm Micro-Cap Fund's investment objective is long-term capital appreciation. Under normal circumstances, the Micro-Cap Fund invests at least 80% of its net assets in the common stocks of U.S. micro-cap companies. Prior to December 27, 2011, the principal investment strategy of the Fund was to invest primarily in the common stocks of small, mid or large capitalization companies that the Advisor believed had the potential for capital appreciation. Value, Opportunity, Select and Micro-Cap are all diversified funds. The advisor to Value, Opportunity, Select and Micro-Cap (collectively the “Funds”) is Paradigm Funds Advisor LLC (the “Advisor”).

2.) SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION: All investments in securities are recorded at their estimated fair value, as described in Note 3.

SECURITY TRANSACTIONS AND OTHER: Security transactions are recorded based on a trade date. Dividend income is recognized on the ex-dividend date. Interest income is recognized on an accrual basis. The Funds use the highest cost basis in computing gain or loss on sale of investment securities. Discounts and premiums on fixed income securities purchased are amortized over the lives of the respective securities. Withholding taxes on foreign dividends have been provided for in accordance with the Funds’ understanding of the applicable country’s tax rules and rates. The Funds may invest in real estate investment trusts (“REITs”) that pay distributions to their shareholders based on available funds from operations. It is common for these distributions to exceed the REITs taxable earnings and profits resulting in the excess portion of such distribution to be designated as return of capital. Distributions received from REITs are generally recorded as dividend income and, if necessary, are reclassified annually in accordance with tax information provided by the underlying REITs.

SHARE VALUATION: The net asset value (the “NAV”) is generally calculated as of the close of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time) every day the Exchange is open. The NAV for each Fund is calculated by taking the total value of the Fund’s assets, subtracting its liabilities, and then dividing by the total number of shares outstanding, rounded to the nearest cent. The offering price and redemption price per share is equal to the net asset value per share, except that shares of each Fund are subject to a redemption fee of 2% if redeemed within 90 days of purchase. During the fiscal year ended December 31, 2011 proceeds from redemption fees were $129,958, $77, $0 and $0 for Value, Select, Opportunity and Micro-Cap, respectively.

SHORT SALES: A Fund may sell a security it does not own in anticipation of a decline in the fair value of the security. When a Fund sells a security short, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale. A gain, limited to the price at which a Fund sold the security short, or a loss, unlimited in size, will be recognized upon the termination of a short sale.

INCOME TAXES: The Funds’ policy is to continue to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all of their taxable income to shareholders. Therefore, no federal income tax provision is required. It is the Funds’ policy to distribute annually, prior to the end of the calendar year, dividends sufficient to satisfy excise tax requirements of the Internal Revenue Code. This Internal Revenue Code requirement may cause an excess of distributions over the book year-end accumulated income. In addition, it is the Funds’ policy to distribute annually, after the end of the fiscal year, any remaining net investment income and net realized capital gains.

The Funds recognize the tax benefits of certain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Funds’ tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years (2008-2010), or expected to be taken on the Funds’ 2011 tax return. The Funds identify their major tax jurisdictions as U.S. Federal and New York State

 

2011 Annual Report 28


Notes to Financial Statements - continued

tax authorities; however the Funds are not aware of any tax positions for which they are reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months. The Funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statements of operations. During the year ended December 31, 2011, the Funds did not incur any interest or penalties.

ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. The treatment for financial reporting purposes of distributions made to shareholders during the year from net investment income or net realized capital gains may differ from their ultimate treatment for federal income tax purposes. These differences are caused primarily by differences in the timing of recognition of certain components of income, expense or realized capital gain for federal income tax purposes. Where such differences are permanent in nature, they are reclassified in the components of the net assets based on their ultimate characterization for federal income tax purposes. Any such reclassification will have no effect on net assets, results of operations or net asset values per share of any Fund. For the fiscal year ended December 31, 2011, net investment losses of $787,755, $555, $37,003 and $7,121 were reclassified to paid in capital for Value, Select, Opportunity and Micro-Cap, respectively.

3.) SECURITIES VALUATIONS
The Funds utilize various methods to measure the fair value of their investments on a recurring basis. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of inputs are:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Funds have the ability to access.

Level 2 - Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.

Level 3 - Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Funds’ own assumptions about the assumptions a market participant would use in valuating the assets or liabilities, and would be based on the best information available.

The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in level 3.

The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

FAIR VALUE MEASUREMENTS
A description of the valuation techniques applied to the Funds’ major categories of assets and liabilities measured at fair value on a recurring basis follows.

Equity securities (common stock, real estate investment trusts and exchange traded funds). Equity securities are carried at fair value. The market quotation used for equity securities, including those listed on the NAS-DAQ National Market System, is the last sale price on the date on which the valuation is made or, in the absence of sales, at the closing bid price. Over-the-counter securities will be valued on the basis of the bid price at the close of each business day. Generally, if the security is traded in an active market and is valued at the last sale price, the security is categorized as a level 1 security. When the security position is not considered to be part of an active market or when the security is valued at the bid price, the position is generally categorized as level 2. When market quotations are not readily available, when the Advisor determines the last bid price does not accurately reflect the current value or when restricted securities are being valued,

 

2011 Annual Report 29


Notes to Financial Statements - continued

such securities are valued as determined in good faith by the Advisor, in conformity with guidelines adopted by and subject to review of the Board of Trustees (the “Trustees”) and are categorized in level 2 or level 3, when appropriate.

Money market funds. Money market funds are valued at a net asset value of $1.00 and are classified in level 1 of the fair value hierarchy.

Fixed income securities. Fixed income securities generally are valued by using market quotations, but may be valued on the basis of prices furnished by a pricing service when the Advisor believes such prices accurately reflect the fair value of such securities. A pricing service utilizes electronic data processing techniques based on yield spreads relating to securities with similar characteristics to determine prices for normal institutional-size trading units of debt securities without regard to sale or bid prices. When prices are not readily available from a pricing service, or when restricted or illiquid securities are being valued, securities are valued at fair value as determined in good faith by the Advisor, subject to review of the Trustees. Short-term investments in fixed income securities with maturities of less than 60 days when acquired, or which subsequently are within 60 days of maturity, are valued by using the amortized cost method of valuation. Generally, fixed income securities are categorized as level 2.

In accordance with the Trust's good faith pricing guidelines, the Advisor is required to consider all appropriate factors relevant to the value of securities for which it has determined other pricing sources are not available or reliable as described above. There is no single standard for determining fair value controls, since fair value depends upon the circumstances of each individual case. As a general principle, the current fair value of an issue of securities being valued by the Advisor would appear to be the amount which the owner might reasonably expect to receive for them upon their current sale. Methods which are in accordance with this principle may, for example, be based on (i) a multiple of earnings; (ii) a discount from market of a similar freely traded security (including a derivative security or a basket of securities traded on other markets, exchanges or among dealers); or (iii) yield to maturity with respect to debt issues, or a combination of these and other methods.

The following tables summarize the inputs used to value the Funds’ assets measured at fair value as of December 31, 2011:

Value:         
Valuation Inputs of Assets  Level 1  Level 2  Level 3  Total 
Common Stock  $210,669,745  $0  $0  $210,669,745 
Real Estate Investment Trusts  11,390,712  0  0  11,390,712 
Money Market Funds  12,985,386   0   0  12,985,386 
Total  $235,045,843  $0  $0  $235,045,843 
 
Select:         
Valuation Inputs of Assets  Level 1  Level 2  Level 3  Total 
Common Stock  $6,960,215  $0  $0  $6,960,215 
Real Estate Investment Trusts  372,683  0  0  372,683 
Money Market Funds      582,105   0   0      582,105 
Total  $7,915,003  $0  $0  $7,915,003 
 
Opportunity:         
Valuation Inputs of Assets  Level 1  Level 2  Level 3  Total 
Common Stock  $4,078,202  $0  $0  $4,078,202 
Real Estate Investment Trusts  156,375  0  0  156,375 
Money Market Funds      260,528   0   0      260,528 
Total  $4,495,105  $0  $0  $4,495,105 
 
Micro-Cap:         
Valuation Inputs of Assets  Level 1  Level 2  Level 3  Total 
Common Stock  $6,729,577  $0  $0  $6,729,577 
Exchange Traded Funds  48,736  0  0  48,736 
Money Market Funds      252,002   0   0      252,002 
Total  $7,030,315  $0  $0  $7,030,315 

Refer to each Funds’ Schedule of Investments for a listing of securities by industry. The Funds did not hold any level 3 assets during the fiscal year ended December 31, 2011. There were no transfers into or out of level 1 or level 2 during the year ended December 31, 2011. It is the Funds’ policy to consider transfers into or out of level 1 and level 2 as of the end of the reporting period.

The Funds did not invest in derivative instruments during the fiscal year ended December 31, 2011.

 

2011 Annual Report 30


Notes to Financial Statements - continued

4.) INVESTMENT ADVISORY AGREEMENTS
Each of the Funds has an investment advisory agreement (collectively the "Management Agreements") with the Advisor. Under the terms of the Management Agreements, the Advisor manages the investment portfolios of the Funds, subject to policies adopted by the Trust’s Board of Trustees. Under the Management Agreements, the Advisor, at its own expense and without reimbursement from the Trust, furnishes office space and all necessary office facilities, equipment and executive personnel necessary for managing the assets of the Funds. The Advisor pays all operating expenses of the Funds with the exception of taxes, brokerage fees and commissions, borrowing costs (such as (a) interest and (b) dividend expenses on securities sold short) and extraordinary expenses as defined under accounting principles generally accepted in the United States of America. The Advisor also pays the salaries and fees of all of its officers and employees that serve as officers and trustees of the Trust. For its services and payment of certain Fund expenses as described below, the Advisor receives an annual investment management fee of 1.50% of the average daily net assets from Select, 2.00% of the average daily net assets from Opportunity; and 1.25% of the average daily net assets from Micro-Cap. Value pays the Advisor an annual investment management fee of 2.00% of the average daily net assets on assets up to and including $100 million and 1.75% of the average daily net assets over $100 million. As a result of the above calculations, for the fiscal year ended December 31, 2011, the Advisor earned management fees (before the waivers described below) totaling $5,457,312, $97,467, $97,323 and $44,153 for Value, Select, Opportunity, and Micro-Cap, respectively. At December 31, 2011, $302,659, $7,626, $5,708 and $5,280 was due to the Advisor from Value, Select, Opportunity and Micro-Cap, respectively. The Advisor has contractually agreed to waive management fees and/or reimburse Value and Opportunity to the extent necessary to maintain total annual operating expenses of the Funds (excluding brokerage fees and commissions, interest and other borrowing expenses, taxes, extraordinary expenses and indirect costs of investing in acquired funds) at 1.50% of daily net assets through May 1, 2012. Effective March 15, 2011 the Advisor has contractually agreed to waive management fees and reimburse expenses of Select to the extent necessary to maintain total annual operating expenses of the Fund (excluding brokerage fees and commissions, interest and other borrowing expenses, taxes, extraordinary expenses and the indirect costs of investing in acquired funds) at 1.15% of its average daily net assets through May 1, 2012. A total of $993,902, $19,470 and $24,331 was waived with no recapture provision for the fiscal year ended December 31, 2011 for Value, Select and Opportunity, respectively.

5.) RELATED PARTY TRANSACTIONS
Certain officers and shareholders of the Advisor are also officers and/or a Trustee of the Trust. These individuals may receive benefits from the Advisor resulting from management fees paid to the Advisor from the Funds.

The Trustees who are not interested persons of the Funds were paid $2,000 per meeting for the fiscal year ended December 31, 2011 for the Trust. Under the Management Agreements, the Advisor pays these fees.

6.) INVESTMENTS
For the fiscal year ended December 31, 2011, purchases and sales of investment securities other than U.S. Government obligations and short-term investments were as follows:

    Value    Select    Opportunity    Micro-Cap 
Purchases    $235,751,653    $7,222,190     $2,980,329    $7,962,970 
Sales    $232,171,143    $3,504,455     $3,317,405    $4,323,420 

There were no purchases or sales of U.S. Government obligations.

For federal income tax purposes, at December 31, 2011 the cost of securities on a tax basis and the composition of gross unrealized appreciation (the excess of value over tax cost) and depreciation (the excess of tax cost over value) were as follows:

    Value      Select   Opportunity   Micro-Cap  
Cost of Investments    $214,251,994   $7,268,306   $3,925,889   $6,480,444  
 
Gross Unrealized Appreciation    $36,272,114   $1,002,242   $762,281   $580,053  
Gross Unrealized Depreciation    ($15,478,265 )  ($355,545 )  ($193,065 )  ($30,182 ) 
Net Unrealized Appreciation                   
 (Depreciation) on Investments    $20,793,849   $646,697   $569,216   $549,871  

7.) CAPITAL SHARES
At December 31, 2011, the Trust was authorized to issue an unlimited number of shares of beneficial interest. The following are the shares issued and paid in capital outstanding for the Funds at December 31, 2011:

 

2011 Annual Report 31


Notes to Financial Statements - continued     
  Value  Select  Opportunity  Micro-Cap 
Shares Issued         
   and Outstanding  4,469,874  262,210  179,311  334,399 
Paid in Capital  $214,054,575  $7,283,387  $3,921,118  $6,592,486 

8.) DISTRIBUTIONS TO SHAREHOLDERS
The tax character of distributions paid during the fiscal years ended December 31, 2011 and 2010 were as follows:

  Fiscal Year Ended  Fiscal Year Ended 
  December 31, 2011  December 31, 2010 
PARADIGM VALUE FUND     
     Ordinary Income  $             -  $417,251 
     Long-term Capital Gain  3,448,769              - 
  $3,448,769  $417,251 
 
PARADIGM SELECT FUND     
     Ordinary Income  $    14,165  $    9,549 
     Long-term Capital Gain               -              - 
  $    14,165  $    9,549 
 
PARADIGM OPPORTUNITY FUND     
     Ordinary Income  $            -  $           - 
     Long-term Capital Gain      37,186              - 
  $    37,186  $           - 
 
PARADIGM MICRO-CAP FUND     
     Ordinary Income  $             -  $  17,498 
     Long-term Capital Gain                -             - 
  $             -  $  17,498 

As of December 31, 2011, the components of distributable earnings/(accumulated losses) on a tax basis were as follows:

  Value   Select  
Undistributed ordinary         
 income/(accumulated losses)  $             -0 -  $           -0 - 
Undistributed long-term capital         
 gain/(accumulated losses)  704   (367 ) 
Unrealized appreciation/(depreciation)  20,793,849      646,697  
  $20,794,553   $  646,330  
 
  Opportunity   Micro-Cap  
Undistributed ordinary         
 income/(accumulated losses)  $             -0 -  $           -0 - 
Undistributed long-term capital         
 gain/(accumulated losses)  281   (116,032 ) 
Unrealized appreciation/(depreciation)       569,216      549,871  
  $    569,497   $  433,839  

The difference between book basis and tax basis unrealized appreciation/(depreciation) is attributable to the tax deferral of losses on wash sales and tax treatment of grantor trusts.

9.) CAPITAL LOSS CARRYFORWARD
At December 31, 2011, Value, Select, Opportunity and Micro-Cap Funds had available for federal tax purposes unused capital losses of $0, $367, $0 and $116,032 respectively, all of which expires in 2017. Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses incurred in taxable years beginning after December 22, 2010 may now be carried forward indefinitely, and retain the character of the original loss. Under pre-enacted laws, capital losses could be carried forward for eight years, and carried forward as short-term capital, irrespective of the character of the original loss. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses. To the extent that these carryforwards are used to offset future capital gains it is probable that the amount which is offset will not be distributed to shareholders.

 

2011 Annual Report 32


Notes to Financial Statements - continued

10.) CONTROL OWNERSHIP
The beneficial ownership, either directly or indirectly, of more than 25% of the voting shares of a fund creates a presumption of control of the fund, under section 2(a)(9) of the Investment Company Act of 1940. At December 31, 2011, Charles Schwab & Co., Inc., located at 101 Mongomery Street, San Francisco, California 94101 and National Financial Services, LLC, located at 200 Liberty Street, New York, New York 10281, both for the benefit of its customers, held, in aggregate, 31.02% and 32.81%, respectively, of Value, and therefore each may be deemed to control Value. Charles Schwab & Co., Inc., located at 101 Mongomery Street, San Francisco, California 94101, held, for the benefit of its customers, in aggregate, 30.36% of Select, and therefore may be deemed to control Select. Candace King Weir, beneficial owner located at 9 Elk Street, Albany, New York 12207, held, in aggregate, 87.40%, of Opportunity, and therefore may be deemed to control Opportunity. Also, Candace King Weir, beneficial owner located at 9 Elk Street, Albany, New York 12207, held, in aggregate, 96.99% of Micro-Cap, and therefore may be deemed to control Micro-Cap.

11.) ACCOUNTING PRONOUNCEMENT
In May 2011, FASB issued Accounting Standards Update ("ASU") 2011-04. The amendments in this update are the results of the work of FASB and the International Accounting Standards Board to develop common requirements for measuring fair value and for disclosing information about fair value measurements, which are effective during interim and annual periods beginning after December 15, 2011. Consequently, these amendments improve the comparability of fair value measurements presented and disclosed in the financial statements prepared in accordance with GAAP and International Financial Reporting Standards. At this time, the Fund's management is evaluating the implications of ASU 2011-04.

 

 

 

 

2011 Annual Report 33


DISCLOSURE OF EXPENSES
(Unaudited)

     Shareholders of the Paradigm Funds (the “Funds”) incur ongoing costs. The ongoing costs associated with the Paradigm Value Fund include management fees, interest expense and dividend expense on securities sold short. The ongoing costs associated with the Paradigm Opportunity Fund, Paradigm Select Fund and Paradigm Micro-Cap Fund consist solely of management fees. Although the Funds charge no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks and stop payment orders at prevailing rates charged by Mutual Shareholder Services, LLC, the Funds’ transfer agent. IRA accounts will be charged an $8.00 annual maintenance fee. If shares are redeemed within 90 days of purchase from the Funds, the shares are subject to a 2% redemption fee. The following example is intended to help you understand your ongoing costs of investing in the Funds and to compare these costs with similar costs of investing in other mutual funds. The example is based on an investment of $1,000 invested in the Funds on July 1, 2011 and held through December 31, 2011.

     The first line of the table below provides information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6) and then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Period."

     The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Funds’ actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Funds’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses paid by a shareholder for the period. Shareholders may use this information to compare the ongoing costs of investing in the Funds and other funds. In order to do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in other funds' shareholder reports.

PARADIGM VALUE FUND         
            Expenses Paid 
    Beginning    Ending    During the Period* 
    Account Value    Account Value    July 1, 2011 to 
    July 1, 2011    December 31, 2011    December 31, 2011 
 
           Actual    $1,000.00    $923.88    $7.27 
 
           Hypothetical    $1,000.00    $1,017.64    $7.63 
           (5% annual return             
           before expenses)             

* Expenses are equal to the Fund’s annualized expense ratio of 1.50%, multiplied by the average
account value over the period, multiplied by 184/365 (to reflect the one-half year period).

PARADIGM SELECT FUND         
            Expenses Paid 
    Beginning    Ending    During the Period* 
    Account Value    Account Value    July 1, 2011 to 
    July 1, 2011    December 31, 2011    December 31, 2011 
 
           Actual    $1,000.00    $955.65    $5.67 
 
           Hypothetical    $1,000.00    $1,019.41    $5.85 
           (5% annual return             
           before expenses)             

* Expenses are equal to the Fund’s annualized expense ratio of 1.15%, multiplied by the average
account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

2011 Annual Report 34


Disclosure of Expenses (Unaudited) - continued     
 
PARADIGM OPPORTUNITY FUND         
            Expenses Paid 
    Beginning    Ending    During the Period* 
    Account Value    Account Value    July 1, 2011 to 
    July 1, 2011    December 31, 2011    December 31, 2011 
 
           Actual    $1,000.00    $928.57    $7.29 
 
           Hypothetical    $1,000.00    $1,017.64    $7.63 
           (5% annual return             
           before expenses)             

* Expenses are equal to the Fund’s annualized expense ratio of 1.50%, multiplied by the average
account value over the period, multiplied by 184/365 (to reflect the one-half year period).

PARADIGM MICRO-CAP FUND         
            Expenses Paid 
    Beginning    Ending    During the Period* 
    Account Value    Account Value    July 1, 2011 to 
    July 1, 2011    December 31, 2011    December 31, 2011 
 
           Actual    $1,000.00    $940.89    $6.12 
 
           Hypothetical    $1,000.00    $1,018.90    $6.36 
           (5% annual return             
           before expenses)             

* Expenses are equal to the Fund’s annualized expense ratio of 1.25%, multiplied by the average
account value over the period, multiplied by 184/365 (to reflect the one-half year period).


A
DDITIONAL INFORMATION
December 31, 2011

AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTS
(Unaudited)

     The Funds file their complete schedules of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on the SEC's Web site at http://www.sec.gov. The Funds’ Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

PROXY VOTING GUIDELINES
(Unaudited)

     Paradigm Funds Advisor LLC, the Funds’ Advisor, is responsible for exercising the voting rights associated with the securities held by the Funds. A description of the policies and procedures used by the Advisor in fulfilling this responsibility is available without charge on the Funds’ web site at www.paradigm-funds.com. It is also included in the Funds’ Statement of Additional Information, which is available on the Securities and Exchange Commission’s web site at http://www.sec.gov.

     Information regarding how the Funds voted proxies, Form N-PX, relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling our toll free number(1-800-239-0732). This information is also available on the Securities and Exchange Commission’s web site at http://www.sec.gov.

ADDITIONAL INFORMATION

     You will find more information about the Funds at www.paradigm-funds.com. For shareholder inquiries, please call toll-free in the U.S. at 1-800-239-0732.

 

2011 Annual Report 35


Cohen Fund Audit Services, Ltd.
Certified Public Accountants

800 Westpoint Pkwy, Ste 1100
Westlake, Ohio 44145
Phone: (440) 835-8500
Fax: (440) 835-1093
www.cohenfund.com


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Trustees
Paradigm Funds

We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Paradigm Funds (the "Funds"), comprising Paradigm Value Fund, Paradigm Select Fund, Paradigm Opportunity Fund and Paradigm Micro-Cap Fund as of December 31, 2011, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended for Paradigm Value Fund, Paradigm Select Fund and Paradigm Opportunity Fund, and for each of the four periods in the period then ended for Paradigm Micro-Cap Fund. These financial statements and financial highlights are the responsibility of Fund management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the funds constituting Paradigm Funds as of December 31, 2011, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America.


COHEN FUND AUDIT SERVICES, LTD.
Westlake, Ohio
February 28, 2012

 

 

2011 Annual Report 36


TRUSTEES AND OFFICERS (Unaudited)

     The Board of Trustees supervises the business activities of the Trust. Each Trustee serves as a trustee until the termination of the Trust unless the Trustee dies, resigns, retires or is removed.

     The following table provides information regarding each Trustee who is an "interested person" of the Trust, as defined in the Investment Company Act of 1940, and each officer of the Trust as of December 31, 2011.

Interested Trustees and Officers

        Number of Other
Name, Position(s)  Term of  Principal  Portfolios   Directorships 
Address1, Held with  Office and  Occupation(s)  Overseen  Held By 
and Year of Birth theTrust  Length of  During the  By  Trustee or 
    Time Served  Past 5 Years  Trustee  Officer 
 
Candace King President  Indefinite Term,  Investment Manager of PCM Ventures Intl., LLC (Nov. 2001  4  Director, 
Weir2, (1944) and Trustee  Since 2002  - current) and PCM Ventures II, LLC (June 2003 - current);    Nature's 
      Investment Manager and principal of PCM Ventures LLC    Sunshine 
      (Jan. 1997 - current); Director and President of Paradigm    Products 
      Capital Management, Inc. (1993 - current); Director and     
      President of C.L. King & Associates, a registered broker     
      dealer (1972 - current); CEO, Portfolio Manager and     
      Member of PCM Advisors LLC (Dec. 2004 - current); CEO     
      and Member of Paradigm Funds Advisor LLC (July 2005 -     
      current); Director and Member of PCM Growth Advisors,     
      Inc. (Feb. 2007 - current).     
 
Amelia F. Weir Secretary  Indefinite Term,  Portfolio Manager and Director of Research Paradigm  N/A  N/A 
(1975)   Since 2009  Capital Management (2008 - current), Portfolio Manager at     
      William D. Witter, Inc. (2006 - 2008), Equity Analyst and     
      Assistant Portfolio Manager at Tocqueville Asset     
      Management (2005).     
 
Carl A. Florio, Trustee  Indefinite Term,  Director and Vice Chairman of Paradigm Funds Advisors  4  Director, 
CPA3, (1948)   Since 2005  LLC and affiliated entities (2008 - current); Eastern    American Bio 
      Regional President of First Niagara Bank (2005 - 2007);    Medical; Dir., 
      President and Chief Executive Officer of Hudson River    First Niagara 
      Bank & Trust Company (1996 - 2005).    Financial Group 
 
John V. Gulick Chief  Indefinite Term,  VP and CCO of Paradigm Funds Advisor LLC and affiliat-  N/A  N/A 
(1972) Compliance  Since 2006  ed advisors (February 2007 - current), Compliance Officer     
  Officer    of Paradigm Capital Management, Inc. (April 2005 - Feb.     
      2007); Senior Compliance Analyst of GE Asset     
      Management, Inc. (Feb. 2001 - March 2005).     
 
Robert A. Treasurer  Indefinite Term,  SVP and CFO of Paradigm Funds Advisor LLC and affili-  N/A  N/A
Benton, CPA and Chief  Since 2002  ated advisors (May 2006 - current), SVP and CFO of C.L.     
(1954) Financial    King & Associates, a registered broker dealer (February     
  Officer    2001 - current); SVP and CFO of Paradigm Capital     
      Management, Inc. (February 2001 - March 2004).     

Independent Trustees

    Term of  Principal  Number of  Other 
Name, Position(s)  Office and  Occupation(s)  Portfolios    Directorships
Address1, Held with  Length of  During  Overseen  Held By 
and Year of Birth the Trust  Time Served  Past 5 Years  By Trustee  Trustee 
 
Peter H. Trustee  Indefinite Term,  Peter H. Heerwagen, Attorney at Law (2009 - current).  4  None 
Heerwagen   Since 2009  Executive Vice President of Ayco / Goldman Sachs     
(1945)     (2003 - 2009).     
 
Anthony J. Trustee  Indefinite Term,  President and Chairman of the Board of Cool Insuring  4  None 
Mashuta, (1956)   Since 2004  Agency, Inc. (1988 - current).     
 
William P. Trustee  Indefinite Term,  Chief Executive Officer of Bright Hub, Inc. (2006 - cur-  4  Director, MTI 
Phelan4, (1956)   Since 2007  rent); Chief Executive Officer of OneMade, Inc. (1999 -    Corporation 
      2004).     

1 The address of each trustee and officer is c/o Paradigm Funds, Nine Elk Street, Albany, NY 12207.

2 Candace King Weir is considered an "interested person" as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, by virtue of her affiliation with the Trust's investment advisor, Paradigm Funds Advisor LLC. Ms. Weir resigned her position with Nature's Sunshine Products on August 6, 2010.

3 Carl A. Florio is considered an "interested person" as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, because he is an officer of the Trust's investment advisor, Paradigm Funds Advisor LLC. Carl A. Florio is a member of the Board of Directors of a non-profit foundation that recently retained Paradigm Capital Management, Inc. to manage a portion of the foundation's assets. Candace King Weir is a Director and the President of Paradigm Capital Management, Inc.; and an interested Trustee of the Trust; and CEO of the Trust's investment advisor, Paradigm Funds Advisor LLC.

4 William P. Phelan is a limited partner in PCM Partners, LP II. As of December 31, 2009 he owned 0.92% of the PCM Partners, LP II partnership, the value of which was $1.968 million. Candace King Weir is the general partner of PCM Partners, LP II; an interested Trustee of the Trust; and CEO of the Trust's investment advisor, Paradigm Funds Advisor LLC.

The Statement of Additional Information includes additional information about the Funds’ Trustees and may be obtained without charge by calling 1-800-239-0732.

2011 Annual Report 37


Board of Trustees
Carl A. Florio
Peter H. Heerwagen
Candace King Weir
Anthony Mashuta
William P. Phelan

Investment Advisor
Paradigm Funds Advisor LLC
Nine Elk Street
Albany, NY 12207-1002

Counsel
Thompson Hine LLP
312 Walnut Street, 14th Floor
Cincinnati, OH 45202

Custodian
U.S. Bank, NA
425 Walnut Street
P.O. Box 1118
Cincinnati, OH 45201

Dividend Paying Agent,
Shareholders' Servicing Agent,
Transfer Agent
Mutual Shareholder Services
8000 Town Centre Dr., Suite 400
Broadview Hts., OH 44147

Fund Administrator
Premier Fund Solutions, Inc.
1939 Friendship Drive, Suite C
El Cajon, CA 92020

Independent Registered Public Accounting Firm
Cohen Fund Audit Services, Ltd.
800 Westpoint Pkwy., Suite 1100
Westlake, OH 44145-1524

Distributor
Rafferty Capital Markets, LLC
59 Hilton Avenue, Suite 101
Garden City, NY 11530

 

This report is provided for the general information of the shareholders of the Paradigm
Funds. This report is not intended for distribution to prospective investors in the Funds,
unless preceded or accompanied by an effective prospectus.


Item 2. Code of Ethics.

The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer and the principal financial officer. The registrant has not made any amendments to its code of ethics during the covered period. The registrant has not granted any waivers from any provisions of the code of ethics during the covered period. A copy of the registrant’s Code of Ethics is filed herewith.

Item 3. Audit Committee Financial Expert.

The registrant’s Board of Trustees has determined that William P. Phalen is an audit committee financial expert. Mr. Phalen is independent for purposes of this Item 3.

Item 4. Principal Accountant Fees and Services.

(a-d) The following table details the aggregate fees billed for each of the last two fiscal years for audit fees, audit-related fees, tax fees and other fees by the principal accountant to the registrant. The principal accountant has provided no services to the adviser or any entity controlled by, or under common control with the adviser that provides ongoing services to the registrant.

    FYE 12/31/11    FYE 12/31/10 
Audit Fees    $36,870    $34,000 
Audit-Related Fees    $0    $0 
Tax Fees    $8,000    $8,000 
All Other Fees    $2,500    $2,800 

Nature of Tax Fees: preparation of Excise Tax Statement and 1120 RIC.
Nature of All Other Fees: Review of Semi-Annual Report.

(e) (1) The audit committee approves all audit and non-audit related services and, therefore, has not adopted pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.

(e) (2) None of the services described in paragraph (b) through (d) of this Item were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f) All of the principal accountant’s hours spent on auditing the registrant’s financial statements were attributed to work performed by full-time permanent employees of the principal accountant.

(g) The following table indicates the aggregate non-audit fees billed by the registrant’s principal accountant for services to the registrant , the registrant’s investment adviser (not sub-adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant, for the last two years.

Non-Audit Fees    FYE 12/31/11    FYE 12/31/10 
Registrant    $10,500    $10,800 
Registrant’s Investment Adviser    $0    $0 

(h) The principal accountant provided no services to the investment adviser or any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant.

Item 5. Audit Committee of Listed Companies. Not applicable.

Item 6. Schedule of Investments. Schedule filed with Item 1.


Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable.

Item 8. Portfolio Managers of Closed End Management Investment Companies. Not applicable.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers. Not applicable.

Item 10. Submission of Matters to a Vote of Security Holders.

The registrant has not adopted procedures by which shareholders may recommend nominees to the registrant’s board of trustees.

Item 11. Controls and Procedures.

(a) The registrant’s president and chief financial officer concluded that the disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) were effective as of a date within 90 days of the filing date of this report, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the Act.

(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 12. Exhibits.

(a)(1) Code of Ethics. Filed herewith.

(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

(b) Certification pursuant to Section 906 Certification of the Sarbanes-Oxley Act of 2002. Filed herewith.

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  Paradigm Funds

  By: /s/Candace King Weir                 
Candace King Weir
President

  Date:         3-6-2012                           

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

  By: /s/Candace King Weir                 
Candace King Weir
President

  Date:         3-6-2012                           

 
By: /s/Robert A. Benton                     
Robert A. Benton
Chief Financial Officer

          Date:         3-6-2012                           

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PARADIGM FUNDS


CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND

SENIOR FINANCIAL OFFICERS


I.

Covered Officers/Purpose of the Code


This code of ethics (this “Code”) for Paradigm Funds (the “Trust”) applies to the Trust’s Principal Executive Officer and Principal Financial Officer (the “Covered Officers” each of whom is set forth in Exhibit A) for the purpose of promoting:

  • honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

  • full, fair, accurate, timely and understandable disclosure in reports and documents that the Trust files with, or submits to, the Securities and Exchange Commission (“SEC”) and in other public communications made by the Trust;

  • compliance with applicable laws and governmental rules and regulations;

  • the prompt internal reporting of violations of this Code to an appropriate person or persons identified in this Code; and

  • accountability for adherence to this Code.


Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.


II.

Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest


Overview.  A “conflict of interest” occurs when a Covered Officer’s private interests interfere with the interests of, or the Covered Officer’s service to, the Trust.  For example, a conflict of interest would arise if a Covered Officer, or a member of the Covered Officer’s family, receives improper personal benefits as a result of the Covered Officer’s position with the Trust.


Certain conflicts of interest arise out of the relationships between Covered Officers and the Trust and already are subject to conflict of interest provisions in the Investment Company Act of 1940 (“Investment Company Act”) and the Investment Advisers Act of 1940 (“Investment Advisers Act”).  For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Trust because of their status as “affiliated persons” of the Trust.  This Code does not, and is not intended to, repeat or replace any compliance programs and procedures of the Trust or the investment adviser designed to prevent, or identify and correct, violations of the Investment Company Act and the Investment Advisers Act.  










Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Trust and the investment adviser or the administrator of which a Covered Officer is also an officer or employee.  As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties, whether formally for the Trust and/or for the adviser or the administrator, be involved in establishing policies and implementing decisions that will have different effects on the adviser or the administrator and the Trust.  The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Trust and the adviser or the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the Trust.  Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically.  In addition, it is recognized by the Trust’s Board of Trustees (“Board”) that the Covered Officers may also be officers or employees of one or more investment companies covered by other codes.  


Other conflicts of interest are covered by this Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act.  The following list provides examples of conflicts of interest under this Code, but Covered Officers should keep in mind that these examples are not exhaustive.  The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Trust.


Each Covered Officer must:

  • not use personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Trust whereby the Covered Officer would benefit personally to the detriment of the Trust;

  • not cause the Trust to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Trust;

  • not use material non-public knowledge of portfolio transactions made or contemplated for the Trust to trade personally or cause others to trade personally in contemplation of the market effect of such transactions;

  • report at least annually any affiliations or other relationships related to conflicts of interest that the Trust’s Trustees and Officers Questionnaire covers.


There are some conflict of interest situations that should always be discussed with the compliance officer of the Trust appointed by the Board (the “Compliance Officer”), if material.  Examples of these include:

  • service as a director on the board of any public company;

  • the receipt of any non-nominal gifts;


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  • the receipt of any entertainment from any company with which the Trust has current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any questions of impropriety;

  • any ownership interest in, or any consulting or employment relationship with, any of the Trust’s service providers, other than its investment adviser, principal underwriter, administrator or any affiliated person thereof; and

  • a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Trust for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer’s employment, such as compensation or equity ownership.


III.

Disclosure and Compliance

  • Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the Trust.

  • Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Trust to others, whether within or outside the Trust, including to the Trust’s directors and auditors, and to governmental regulators and self-regulatory organizations.

  • Each Covered Officer should, to the extent appropriate within the Covered Officer’s area of responsibility, consult with other officers and employees of the Trust and of the adviser or the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Trust files with, or submits to, the SEC and in other public communications made by the Trust.

  • It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations.  


IV.

Reporting and Accountability


Each Covered Officer must:

  • upon adoption of this Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board , in substantially the form set forth on Exhibit B, that the Covered Officer has received, read, and understands this Code;

  • annually thereafter affirm to the Board, in substantially the form set forth on Exhibit C, that the Covered Officer has complied with the requirements of this Code;

  • not retaliate against any other Covered Officer or any employee of the Trust or their affiliated persons for reports of potential violations that are made in good faith; and


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  • notify the Compliance Officer for the Trust promptly if the Covered Officer knows of any violation of this Code.  Failure to do so is itself a violation of this Code.  

The Compliance Officer for the Trust is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation.  However, any approvals or waivers sought by a Covered Officer will be considered by the Audit Committee (the “Committee”), which will make recommendations to the Board.


The Trust will follow these procedures in investigating and enforcing this Code:

  • the Compliance Officer for the Trust will take all appropriate action to investigate any potential violations reported to the Compliance Officer;

  • the Compliance Officer will review with the outside legal counsel to the Trust the findings and conclusions of such investigation;

  • if, after such investigation and review, the Compliance Officer believes that no violation has occurred, the Compliance Officer is not required to take any further action;

  • any matter that the Compliance Officer believes is a violation will be reported to the Committee;

  • if the Committee concurs that a violation has occurred, it will inform and make a recommendation to the Board, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures (including changes to this Code); notification of the violation to appropriate personnel of the investment adviser or the administrator or its board; or a recommendation to take disciplinary action against the Covered Officer, which may include, without limitation, dismissal;

  • the Board will be responsible for granting waivers, as appropriate; and

  • any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules.


V.  

Other Policies and Procedures


This Code shall be the sole code of ethics adopted by the Trust for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder.  Insofar as other policies or procedures of the Trust, the Trust’s adviser, principal underwriter, the administrator or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code.  The Trust’s and its investment adviser’s and principal underwriter’s codes of ethics under Rule 17j-1 under the Investment Company Act are separate requirements applying to the Covered Officers and others, and are not part of this Code.  


-4-








VI.  

Amendments


Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the Board, including a majority of independent trustees.


VII.  

Confidentiality


 To the extent possible, all records, reports and other information prepared, maintained or acquired pursuant to this Code will be treated as confidential, it being understood that it may be necessary or advisable, that certain matters be disclosed to third parties (e.g., to the board of directors or officers of the adviser or the administrator).  


VIII.  

Internal Use


This Code is intended solely for the internal use by the Trust and does not constitute an admission, by or on behalf of the Trust, as to any fact, circumstance, or legal conclusion.





Date: December 12, 2003



EX-99.CERT 14 ex99cert.htm EX99 Cert

Exhibit 99.CERT


CERTIFICATIONS


I, Candace King Weir, certify that:


1.

I have reviewed this report on Form N-CSR of Paradigm Funds;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;


4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:


a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.

The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.




Date:           3-6-2012                      

/s/Candace King Weir              

Candace King Weir

 President



Exhibit 99.CERT


CERTIFICATIONS


I, Robert A. Benton, certify that:


1.

I have reviewed this report on Form N-CSR of Paradigm Funds;


2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;


4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:


a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.

The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.




Date:           3-6-2012                      

/s/Robert A. Benton                 

Robert A. Benton

Chief Financial Officer




EX-99.906 CERT 15 ex99906cert.htm EX-99.906 Cert

EX-99.906CERT



CERTIFICATION

Candace King Weir, President, and Robert A. Benton, Chief Financial Officer of Paradigm Funds (the “Registrant”), each certify to the best of his or her knowledge that:

1.

The Registrant’s periodic report on Form N-CSR for the period ended December 31, 2011 (the “Form N-CSR”) fully complies with the requirements of Sections 15(d) of the Securities Exchange Act of 1934, as amended; and

2.

The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

President

Chief Financial Officer

Paradigm Funds

Paradigm Funds



/s/Candace King Weir                                        

/s/Robert A. Benton                                                 

Candace King Weir

Robert A. Benton



Date:               3-6-2012                                              Date:               3-6-2012                                                     


A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Paradigm Funds and will be retained by Paradigm Funds and furnished to the Securities and Exchange Commission (the “Commission”) or its staff upon request.


This certification is being furnished to the Commission solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Form N-CSR filed with the Commission.