-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FOhs6JeC8eOJxQ93WYnHsM6cL+7tD8g1xZc0BLW/E6RAg2EViM5QatjS/paWqVXs RUUxnPO2W8o3W3jB1kf9vg== 0000950008-97-000153.txt : 19970912 0000950008-97-000153.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950008-97-000153 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARADIGM TECHNOLOGY INC /DE/ CENTRAL INDEX KEY: 0000945699 STANDARD INDUSTRIAL CLASSIFICATION: 3674 IRS NUMBER: 770140882 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26124 FILM NUMBER: 97606280 BUSINESS ADDRESS: STREET 1: 71 VISTA MONTANA CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089540500 MAIL ADDRESS: STREET 1: 71 VISTA MONTANA CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 QUARTERLY REPORT ON FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1997 OR / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to ________________ Commission file number 0-26124 --------- PARADIGM TECHNOLOGY, INC. -------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 77-0140882 ------------------------------ --------------- (State or other jurisdiction of (I.R.S. Employee incorporation or organization Identification No.) 694 TASMAN DRIVE, MILPITAS, CALIFORNIA 95035 -------------------------------------------- (Address of principal executive offices) (408) 954-0500 -------------------------------------------------- (Registrant's telephone number, including area code) ----------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes /X/ No / / The number of shares of the Registrant's Common Stock, $.01 par value, outstanding as of March 31, 1997 was 7,241,086. TABLE OF CONTENTS ----------------- Page ---- PART I. FINANCIAL INFORMATION............................................ 3 ITEM 1. FINANCIAL STATEMENTS.................................. 3 CONDENSED STATEMENTS OF OPERATIONS............ 3 CONDENSED BALANCE SHEETS...................... 4 CONDENSED STATEMENTS OF CASH FLOWS............ 5 NOTES TO CONDENSED FINANCIAL STATEMENTS....... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 12 RESULTS OF OPERATIONS......................... 12 FACTORS THAT MAY AFFECT FUTURE RESULTS........ 15 PART II. OTHER INFORMATION................................................ 24 ITEM 1. LEGAL PROCEEDINGS..................................... 24 ITEM 2. CHANGES IN SECURITIES................................. 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 26 SIGNATURES ................................................................. 26 EXHIBIT 11.1 COMPUTATION OF NET INCOME (LOSS) PER SHARE EXHIBIT 27.1 FINANCIAL DATA SCHEDULE -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. -------------------- PARADIGM TECHNOLOGY, INC. CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data) (unaudited)
Three Months Ended ------------------ March 31, March 31, 1997 1996 ------ ----- Sales, net............................................. $ 3,572 $10,927 Cost of goods sold..................................... 3,314 7,275 ------ ------ Gross profit .......................................... 258 3,652 ------ ------ Operating expenses: Research and development....................... 1,183 1,316 Selling, general, and administrative........... 1,625 1,940 ------ ------ Total operating expenses................ 2,808 3,256 ------ ------ Operating income (loss)................................ (2,550) 359 Interest expense....................................... 42 241 Other (income) expense, net............................ 30 (204) ----- ------ Income (loss) before provision for income taxes........ (2,622) 359 Provision for income taxes............................. -- 122 ----- ------ Net income (loss)...................................... $ (2,622) $ 237 ======= ====== Accretion on Redeemable Convertible Preferred Stock..................................... (388) -- ------- ------ Net income (loss) available to common shareholders................................. $ (3,010) $ 237 ======= ====== Net income (loss) per share............................ (0.42) 0.03 ------- ------ Weighted average shares outstanding.................... 7,241 7,317 ======= ====== See accompanying notes to condensed financial statements.
-3- PARADIGM TECHNOLOGY, INC. CONDENSED BALANCE SHEETS (In thousands) (unaudited)
March 31, December 31, 1997 1996 --------- ------------ ASSETS: Current Assets: Cash and cash equivalents......................... $ 1,355 $ 587 Short-term investments............................ -- -- Accounts receivable, net of allowances............ 2,817 2,937 Inventory......................................... 3,637 2,472 Prepaid expenses and other current assets......... 1,652 4,918 ------- ------- Total current assets....................... 9,461 10,914 Property and equipment, net............................... 6,122 6,638 Other assets.............................................. 138 190 ------- ------- $ 15,721 $ 17,742 ======= ======= LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY: Current Liabilities: Line of credit.................................... $ 1,945 $ 2,015 Current portion of long-term debt................. 285 282 Accounts payable and accrued liabilities.......... 7,839 9,009 ------- ------- Total current liabilities.................. 10,069 11,306 ------- ------- Long-term debt, net of current portion.................... 54 92 Deferred rent............................................. 6 0 ------- ------- Total liabilities.......................... 10,129 11,398 ------- Redeemable Convertible Preferred Stock.................... 2,201 -- ------- ------- Stockholders Equity: Common Stock...................................... 36,355 36,298 Accumulated (deficit)............................. (32,964) (29,934) ------- ------- Total stockholders' equity................. 3,391 6,344 ------- ------- $ 15,721 $ 17,742 ======= ======= See accompanying notes to condensed financial statements.
-4- PARADIGM TECHNOLOGY, INC. CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Three Month Ended March 31, March 31, 1997 1996 ---- ---- Cash flows from operating activities: Net income (loss) $ (2,622) $ 237 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 643 1,110 Loss on disposition of fixed assets 290 Changes in operating assets and liabilities: Accounts receivable 120 (2,066) Inventory (1,165) (3,311) Other assets 3,162 (206) Accounts payable and accrued liabilities (1,170) 803 Deferred rent 6 0 Prepetition liabilities paid 0 (34) --------- -------- Net cash provided by (used in) operating activities (736) (3,467) --------- -------- Cash flows used in investing activities: Purchases of capital equipment (261) (8,658) Purchases of short-term investments (2,672) Sale of short-term investments 6,898 --------- -------- Net cash provided by (used in) investing activities (261) (4,432) --------- -------- Cash flows from financing activities: Line of credit increase (decrease) (70) 5,610 Payments on capital leases (35) Issuance of notes payable 0 10,607 Principal payments on notes payable 0 (7,625) Issuance of common stock, net (10) 413 Issuance of redeemable convertible preferred stock 1,880 0 --------- -------- Net cash provided by financing activities 1,765 9,005 --------- -------- Net increase (decrease) in cash and cash equivalents 768 1,106 Cash and cash equivalents: Beginning of period 587 4,015 --------- -------- End of period $ 1,355 $ 5,121 ========= ======== Supplemental cash flow information: Interest paid $ 42 $ 247 ========= ======== Income taxes paid $ 0 $ 1,036 ========= ======== Supplemental disclosure of noncash items: Issuance of warrant in connection with sale of redeemable convertible preferred stock $ 67 $ -- ========= ======== Accretion on redeemable convertible preferred stock $ 388 $ -- ========= ======== See accompanying notes to condensed financial statements.
-5- PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) NOTE 1: Basis of Presentation These unaudited condensed financial statements have been prepared by Paradigm Technology, Inc. ("Paradigm" or the "Company"), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited interim condensed financial statements included herein have been prepared on the same basis as the December 31, 1996 audited financial statements, contained in the Company's Annual Report on Form 10-K/A, and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth therein. Results for the three month period ended March 31, 1997, are not necessarily indicative of the results to be expected for the entire year. The preparation of the interim condensed financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from estimates. The Company markets high speed high density Static Random Access Memory ("SRAM") products for uses in telecommunication devices, workstations and high performance PCs to OEMs and distributors in the United States, Europe and the Far East. The SRAM business is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity, and accelerated erosion of average selling prices. During the latter part of 1995 continuing into 1996 and the first three months of 1997, the market for certain SRAM devices experienced an excess supply relative to demand which resulted in a significant downward trend in prices. The selling prices that the Company is able to command for its products are highly dependent on industry-wide production capacity and demand. In this regard, the Company did experienced rapid erosion in product pricing in 1996 and during the first three months of 1997 which was not within the control of the Company. The Company could continue to experience a downward trend in pricing which could adversely affect the Company's operating results. -6- PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) This report on Form 10-Q for the quarter ended March 31, 1997 should be read in conjunction with the audited financial statements as of December 31, 1996, and the notes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996. NOTE 2: Net Income (Loss) Per Share Net income (loss) per share was calculated based on net income (loss) available to Common Shareholders. For the quarter ended March 31, 1997, the net loss per share was computed as net loss of $2.6 million less $0.4 million of accretion on the redeemable convertible Preferred Stock divided by the weighted average Common Shares outstanding. Common Stock equivalents at March 31, 1997 are excluded as their effect is anti-dilutive. NOTE 3: New Logic Corporation Acquisition In June 1996, the Company acquired, through a stock purchase and merger transaction, New Logic Corporation ("New Logic"), a company which develops and manufactures logic designs with large memory arrays. In exchange for its purchase of the New Logic capital stock, the Company issued 314,394 shares of the Company's common stock, with a market value of approximately $2.7 million, and approximately $825,000 in cash. The fair value of New Logic Corporation's tangible net assets at the date of acquisition was a deficit of $373,000. Approximately $3.8 million of the purchase price over the fair market value of the net tangible assets was allocated to in-process technology which because of the uncertainty as to realization, the Company wrote off in the quarter ended June 30, 1996. Approximately $250,000 was allocated to other intangibles. In early 1997, the Company believed that it was in Paradigm's best interest to shut down the NewLogic operation and focus on Paradigm's core SRAM products and markets. As a result, the Company wrote off unamortized intangibles of approximately $156,000 in the quarter ended March 31, 1997. -7- PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) NOTE 4: Balance Sheet Detail
March 31, December 31, 1997 1996 -------- ----------- Inventory (in thousands): Raw Materials...................... $ 0 $ 16 Work in process.................... 1,979 1,778 Finished goods..................... 1,658 678 ------ ------ $ 3,637 $ 2,472 ====== ====== Property and equipment (in thousands): Machinery and equipment............ $ 9,136 $ 9,488 Leasehold improvements............. 226 0 Furniture and fixtures............. 120 19 ------ ------ 9,482 9,507 Less accumulated depreciation...... (3,360) (2,869) ------ ------ $ 6,122 $ 6,638 ====== ======
NOTE 5: Litigation On August 12, 1996, a securities class action lawsuit was filed in Santa Clara Superior Court against the Company and certain of its officers and directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists of purchasers of the Company's common stock from November 20, 1995 to March 22, 1996, inclusive. The complaint alleges negligent misrepresentation, fraud and deceit, breach of fiduciary duty, and violations of certain provisions of the California Corporate Securities Law and Civil Code. The plaintiffs seek an unspecified amount of compensatory and punitive damages. Plaintiffs allege, among other things, that the Paradigm Defendants wrongfully represented that the Company would have protection against adverse market conditions in the semiconductor market based on the Company's focus on high speed, high performance semiconductor products. On September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer as to all of the causes of action except for violation of certain provisions of the California Corporate Securities Law and Civil Code. The Court, however, granted plaintiffs leave to amend the complaint to attempt to cure the defects which caused the Court to sustain the demurrer. Plaintiffs failed to amend within the allotted time. On January 8, 1997, the Paradigm Defendants filed an answer to the complaint denying any liability for the acts and damages alleged by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with -8- PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) discovery requests for production of documents and interrogatories, to which the Paradigm Defendants have responded, with other responses not yet due. The Paradigm Defendants have served the plaintiffs with an initial set of discovery requests. Additional discovery is scheduled to take place prior to the hearing on the motion for class certification, tentatively scheduled for May 20, 1997. The Paradigm Defendants intend to vigorously defend the action, however, there can be no assurance that the Company will be successful in such defense. Even if Paradigm is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. Due to the inherent uncertainty of litigation, management is not able to reasonably estimate losses that may be incurred in relation to this litigation. However based on the facts presently known, management believes that the resolution of this matter will not have a material adverse impact on the Company's financial position, results of operations or cash flows. On February 21, 1997, an additional purported class action lawsuit was filed in Santa Clara County Superior Court against the Company and certain of its officers and directors, with causes of action and factual allegations essentially identical to those on the August 12, 1996 class action lawsuit. This second class action is asserted against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. The Paradigm Defendants have authorized counsel to acknowledge service. The Paradigm Defendants filed a demurrer to the complaint on May 9, 1997. A hearing on the demurrer has been scheduled for June 19, 1997. The Paradigm Defendants believe the new class action appears to be essentially identical to the causes of action and factual allegations of the August 12, 1996 class action. The only apparent major difference between the two suits is that the February 21 class action purports to be on behalf of holders of the Company's stock as opposed to purchasers on whose behalf the August 12 action was filed. Therefore, the Company believes that the February 21 class action may be subject to the demurrer which the Court sustained in the August 12 class action as to all causes of action asserted against Michael Gulett and all but one of the causes of action asserted against the remaining Paradigm Defendants. There can be no assurances that the Court will determine that the February 21 class action will be subject to the demurrer or that the Company will be successful in the defense of the class actions. Due to the inherent uncertainty of litigation, management is not able to reasonably estimate losses that may be incurred in relation to this litigation. However, based on the facts presently known, management believes that the resolution of this matter will not have a material adverse impact on the Company's financial position, results of operations or cash flows. -9- PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) NOTE 6: Sale of Wafer Fabrication Facility The Company recorded a loss of $4.6 million in the quarter ended December 31, 1996 as a result of the sale of its wafer fabrication facility. This charge included the excess of the net book value of leasehold improvements, wafer fabrication equipment, fabrication work in process inventory and other assets sold to orbit over the proceeds received from Orbit, an accrual for professional fees incurred to complete the transaction, a reserve for an adverse purchase commitment related to the wafer supply agreement entered into as a result of the sale and accruals for other estimated costs to be incurred. Orbit paid to the Company aggregate consideration of $20 million consisting of $6.7 million in cash, assumption of $7.5 million of indebtedness associated with and secured by the Fab, and promissory notes in the principal amounts of $4.8 million and $1.0 million. The Company also executed a short-term sublease with Orbit pursuant to which it occupied office space at its principal offices not associated with the Fab. The Company has since relocated its headquarters to 694 Tasman Drive, Milpitas, California. The $4.8 million promissory note was issued in connection with a wafer supply agreement that requires Orbit to supply Paradigm with approximately 9,750 of certain fabricated wafers through May 1997 at $500 per wafer purchased by Paradigm. At May 9, 1997, the Company completed its purchase of the remaining wafers under this agreement. The $1.0 million promissory note is held in escrow to satisfy certain representations and warranties made by the Company. Orbit is required to make two payments of $500,000 plus interest of 4% in May and November 1997. As of March 31, 1997 the outstanding balance under these promissory notes was $1,158,000 which was classified as prepaid expenses and other current assets. In connection with the sale of the Fab, substantially all of the 109 employees associated with the Fab were terminated and became employees of Orbit. No severance payments were made to employees transferred to Orbit. NOTE 7: Sale of Preferred Stock On January 23, 1997, Paradigm sold a total of 200 shares of 5% Series A Convertible Redeemable Preferred Stock (the "Preferred Stock") in a private placement to Vintage Products, Inc. at a price of $10,000 per share, for total proceeds (net of payments to third parties) of approximately $1,880,000. The Preferred Stock includes cumulative dividends at 5% per annum. The Preferred Stock also includes an embedded discount which is being accreted from the issuance date through April 23, 1997, the date upon which the Preferred Stock became convertible. The accretion of the embedded discount and the cumulative -10- PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) dividends is a charge to retained earnings and a credit to the redeemable convertible Preferred Stock. Also in connection with the sale of the Preferred Stock, the Company issued warrants to purchase 150,000 shares of its common stock for $4.125 per share. The warrant is exercisable until January 22, 2000. The Company valued these warrants at $67,000 using the Black/Scholes model. The Preferred Stock is convertible at the option of the holder into the number of fully paid and nonassessable shares of Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated dividends on the shares of Preferred Stock being converted by (B) the Conversion Price in effect at the time of conversion. The "Conversion Price" will be equal to the lower of (i) $2.25 or (ii) eighty-two percent (82%) of the average closing bid price of a share of Common Stock as quoted on the Nasdaq National Market over the five (5) consecutive trading days immediately preceding the date of notice of conversion of the Preferred Stock. The Preferred Stock is redeemable by the Company under certain limited circumstances. A portion of the Preferred Stock may be mandatorily redeemable for cash to the extent that the number of shares of Common Stock issuable upon conversion of the Preferred Stock is in excess of 20% of the Common Stock outstanding at the date of original issuance of the Preferred Stock. Those "excess" preferred shares, and only those "excess" preferred shares, which if converted cause the greater than 20% issuance of Common Stock, are redeemable for cash of $12,190 per preferred share. NOTE 8: Subsequent Event On May 9, 1997, the Company received notice of conversion for 10 shares of the Series A Redeemable Convertible Preferred Stock. These Preferred Shares were converted into 115,090 shares of the Company's Common Stock. NOTE 9: Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This statement is effective for interim and annual financial statements for periods ending after December 15, 1997. The statement redefines earnings per share under generally accepted accounting principles. Under the new standard primary earnings per share is replaced by basic earnings per share and fully diluted earnings per share is replaced by diluted earnings per share. The adoption of SFAS 128 would not have a material impact on the Company's earnings per share for the quarter ended March 31, 1997. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS. ----------------------------------- When used in this Form 10-Q, the words "estimate," "project," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially, including factors relating to the impact of competitive products and pricing, the timely development and market acceptance of new products and upgrades to existing products, availability and cost of products from Paradigm's suppliers and market conditions in the PC industry. For discussion of certain such risk factors, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Operating Results." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Results of Operations Sales. The Company's net sales for the three month period ended March 31, 1997 decreased 67% from the corresponding period in fiscal year 1996. The Company has continued to experience a significant downward trend in pricing that began in late 1995 in addition to lower volumes of units shipped when compared to 1996. The reduced selling prices of the Company's products and reduced unit shipments are both principally a result of the significant excess supply of SRAM devices relative to demand that the SRAM market has been experiencing since late 1995. The SRAM business is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity, and accelerated erosion of average selling prices. During the latter part of 1995, continuing into 1996 and the first three months of 1997, the market for SRAM devices experienced an excess supply relative to demand which resulted in a significant downward trend in prices. The selling prices that the Company is able to command for its products are highly dependent on industry-wide production capacity and demand. The Company continued to experience rapid erosion in product pricing during the first three months of 1997 which was not within the control of the Company. The Company could continue to experience a downward trend in pricing which could adversely affect the Company's operating results. Gross Profit. Gross profit has decreased from $3.7 million for the three month period ended March 31, 1996, to $258,000 for the comparable period in fiscal 1997. The decrease in gross profit resulted principally from industry-wide pricing pressures experienced by the Company in 1996 and the March 1997 quarter caused by an oversupply in the worldwide -12- SRAM marketplace. These pricing pressures directly impacted profits as average selling prices of the Company's products declined during the quarter ended March 31, 1997 when compared to the quarter ended March 31, 1996. Paradigm's future needs for wafers will need to be supplied by third parties. Constraints or delays in the supply of the Company's products, whether because of capacity constraints, unexpected disruptions at the current or future foundries or assembly houses, delays in obtaining additional production at the existing foundry or in obtaining production from new foundries, shortages of raw materials, or other reasons, could result in the loss of customers and other material adverse effects on the Company's operating results, including effects that may result should the Company be forced to purchase products from higher cost foundries or pay expediting charges to obtain additional supply. Research and Development. Research and development expenses decreased to $1.2 million in the three month period ended March 31, 1997 from $1.3 million in the corresponding period in fiscal 1996. As a percentage of revenues these expenses have increased to 33% in the three month period ended March 31, 1997 from 12% in the 1996 period. The Company expects research and development expenses in absolute dollars to decrease through at least the end of 1997 due to the shutdown of New Logic. Research and development expenses, as a percentage of revenue, have also increased as a result of the decline in revenue in the 1997 period compared to the 1996 period. Selling, General and Administrative. Selling, general and administrative expenses were $1.6 million in the three month period ended March 31, 1997 compared to $1.9 million in the comparable period in 1996 due to staff attrition and cost containment. These expenses are expected to increase in the future in absolute dollars, as the Company increases its sales and marketing staff. Interest Expense. Interest expense of $42,000 for the three month period ended March 31, 1997 compares to $241,000 in the corresponding period in fiscal 1996. This decrease in interest expense for the three month period in 1997 reflects repayment in late 1996 of certain outstanding debt by the Company from the proceeds of its sale of wafer fabrication operations. See also "Liquidity and Capital Resources." Other (Income) Expense, Net. The March 1997 quarter includes fixed asset write-offs from the shutdown of NewLogic operations offset by a recovery of fixed asset write-offs related to the sale of wafer fabrication operations. Taxes. During the three month period ended March 31, 1997 the Company recorded a loss for tax purposes. The Company has net operating loss carryforwards to offset future regular and alternative minimum taxable income. The Company's net operating loss carryforwards expire through 2011, if not utilized. Liquidity and Capital Resources. The Company's operating, investing and financing activities generated $0.8 million in cash in the three months ended March 31, 1997 compared -13- to generating $1.1 million of cash in the comparable period in 1996. Operating activities used $0.7 million in cash in 1997 compared to a use of $3.5 million of cash in 1996. This decrease of $2.8 million is primarily due to lower inventory purchases and a reduction in accounts receivable balances offset by the loss of $2.6 million in the 1997 period. In addition, in the 1997 quarter prepaid expenses and other assets decreased by $3.2 million due to wafers received under the wafer supply agreement entered into on the sale of the wafer fab. Investing activities consumed $0.3 million in the March 1997 quarter compared to $4.4 million in the March 1996 quarter. Capital equipment purchases decreased from $8.7 million in the March 1996 quarter to $0.3 million in the March 1997 quarter as a result of the sale of the wafer fab. Financing activities provided $1.8 million in the March 1997 quarter compared to $9.0 million in the March 1996 quarter. Average borrowings under the Company's line of credit decreased by $5.5 million in the March 1997 quarter compared to the March 1996 quarter. In February, 1996 the Company replaced an existing line of credit with Greyrock Business Credit with a new line of credit from Bank of the West with a borrowing limit of $10.0 million. Borrowings were limited to 80% of eligible receivables and interest was at prime. The line of credit was secured by the Company's accounts receivable. On February 27, 1996 the Company borrowed $5.6 million under the line of credit to pay off the outstanding balance of the Greyrock term notes. In addition to the Bank of the West line of credit, the Company obtained a line of credit for equipment purchases from the CIT Group. The aggregate principal amount of all loans under this commitment could not exceed $15.0 million and the commitment expired on December 31, 1996. Borrowings under this line of credit bore interest at the U.S. Treasury rate for two year maturities plus 2.96% and were limited to 80% of the cost of eligible equipment. All borrowings under this commitment were secured by the equipment purchased. In November 1996 the Company replaced the Bank of the West line of credit with a line of credit with Greyrock Business Credit with a borrowing limit of $6,000,000. Borrowings under this new line of credit with Greyrock Business Credit are limited to up to 80% of eligible receivables and interest is at the greater of LIBOR plus 5.25% or 9%. At March 31, 1997 the outstanding balance under this line of credit was approximately $1.9 million. The outstanding $5.6 million Bank of the West line of credit was paid off in various stages: $1.5 million was paid off on July 1, 1996 from the Company's funds; $2 million was paid off on July 17, 1996 from the CIT line of credit and; $2.1 million was paid off on November 6, 1996 with the new line of credit from Greyrock. In November 1996 the Company sold its wafer fabrication operations to Orbit. Orbit assumed $7.5 million of outstanding borrowings with the CIT Group that were secured by wafer fabrication equipment. The Company used approximately $2.2 million of the cash -14- proceeds from the sale of the wafer fabrication facility to pay off the remaining CIT Group borrowings. The Company's recent operations have consumed substantial amounts of cash. In January 1997, the Company completed the private placement of Series A Redeemable Convertible Preferred Stock for net proceeds of approximately $1.9 million (See Note 7 of Notes to Condensed Financial Statements). The Company believes that existing cash balances and other sources of liquidity, such as asset sales and equipment financing will be sufficient to meet the Company's projected working capital and other cash requirements through at least the end of 1997. If the cash generated from operations is insufficient to meet the Company's cash requirements, the sale of additional equity or other securities could result in additional dilution to the Company's stockholders. There can be no assurance that such additional financing, if required, can be obtained on acceptable terms, if at all. Factors That May Affect Future Results The operations and business prospects of the Company are subject to certain qualifications based on potential business risks faced by the Company. This Form 10-Q should be reviewed in light of the potential effects of events that may occur as outlined in the following risk factors. Readers of this report should consider carefully the following risk factors in addition to the other information presented in this Form 10-Q. Need for Additional Funds. The Company's recent operations have consumed substantial amounts of cash. The Company believes that cash flow from operations and other existing and potential sources of liquidity will be sufficient to meet its projected working capital and other cash requirements through at least the remainder of 1997. However, there can be no assurance that the Company will not need additional capital and if so that such capital can be successfully obtained on terms acceptable to the Company or at all. The sale or issuance of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. There can be no assurance that additional financing, if required, will be available when needed or, if available, will be on terms acceptable to the Company. Fluctuations in Quarterly Results. The Company has experienced significant quarterly fluctuations in operating results and anticipates that these fluctuations will continue. These fluctuations have been caused by a number of factors, including changes in manufacturing yields by contracted manufacturers, changes in the mix of products sold, the timing of new product introductions by the Company or its competitors, cancellation or delays of purchases of the Company's products, the gain or loss of significant customers, the cyclical nature of the semiconductor industry and the consequent fluctuations in customer demand for the Company's devices and the products into which they are incorporated, and competitive pressures on prices. A decline in demand in the markets served by the Company, lack of success in developing new markets or new products, or increased research and development expenses relating to new product introductions could have a material adverse effect on the Company. Moreover, because the Company sets spending levels in advance of each quarter -15- based, in part, on expectations of product orders and shipments during that quarter, a shortfall in revenue in any particular quarter as compared to the Company's plan could have a material adverse effect on the Company. Beginning in late 1995, continuing into 1996 and the first three months of 1997, the market for certain SRAM devices experienced a significant excess supply relative to demand, which resulted in a significant downward trend in prices. The market for the Company's products could continue to experience a downward trend in pricing which could adversely affect the Company's operating results. The Company's ability to maintain or increase revenues in light of the current downward trend in product prices will be highly dependent upon its ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling prices will also adversely affect the Company's gross margins unless the Company is able to reduce its costs per unit to offset such declines. There can be no assurance that the Company will be able to increase unit sales volumes, introduce and sell new products, or reduce its costs per unit. Risks Relating to Low-Priced Stocks. The Common Stock is currently eligible for listing on Nasdaq. In order to continue to be listed on Nasdaq, however, the Company must maintain $2,000,000 in total assets, a $200,000 market value of the public float and $1,000,000 in total capital and surplus. In addition, continued inclusion on Nasdaq requires two market-makers and a minimum bid price of $1.00 per share. In the future, if the Company fails to meet these maintenance criteria it may result in the delisting of the Company's securities from Nasdaq, and trading, if any, and the Company's securities would thereafter be conducted in the non-Nasdaq over-the-counter market. If the Company's securities are delisted, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's securities. In addition, if the Common Stock were to become delisted from trading on Nasdaq and the trading price of the Common Stock were to remain below $5.00 per share, trading in the Common Stock would also be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and must receive the purchaser's written consent to the transaction prior to the sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market liquidity of the Common Stock and the ability of purchasers in this offering to sell the Common Stock in the secondary market. Dependence on New Products and Technologies. The market for the Company's products is characterized by rapidly changing technology, short product life cycles, cyclical -16- oversupply and rapid price erosion. Average selling prices for many of the Company's products have generally decreased over the products' life cycles in the past and are expected to decrease in the future. Accordingly, the Company's future success will depend, in part, on its ability to develop and introduce on a timely basis new products and enhanced versions of its existing products which incorporate advanced features and command higher prices. The success of new product introductions and enhancements to existing products depends on several factors, including the Company's ability to develop and implement new product designs, achievement of acceptable production yields, and market acceptance of customers' end products. In the past, the Company has experienced delays in the development of certain new and enhanced products. Based upon the increasing complexity of both modified versions of existing products and planned new products, such delays could occur again in the future. Further, the cost of development can be significant and is difficult to forecast. In addition, there can be no assurance that any new or enhanced products will achieve or maintain market acceptance. If the Company is unable to design, develop and introduce competitive products or to develop new or modified designs on a timely basis, the Company's operating results will be materially adversely affected. Dependence on Foundries and Other Third Parties. On November 15, 1996, the Company sold its Fab to Orbit. Following the sale of the Fab, the Company and Orbit entered into a Wafer Manufacturing Agreement. Orbit will supply a quantity of wafers to the Company over a specified period of time to offset Orbit's payment obligations against the promissory notes delivered in connection with the sale. The Company is also in the process of seeking wafer supply from other offshore foundries, and anticipates that it will conduct business with other foundries by delivering written purchase orders specifying the particular product ordered, quantity, price, delivery date and shipping terms and, therefore, such foundries will not be obligated to supply products to the Company for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order. Reliance on outside foundries involves several risks, including constraints or delays in timely delivery of the Company's products, reduced control over delivery schedules, quality assurance, potential costs and loss of production due to seismic activity, weather conditions and other factors. To the extent a foundry terminates its relationship with the Company, or should the Company's supply from a foundry be interrupted or terminated for any other reason, the Company may not have a sufficient amount of time to replace the supply of products manufactured by the foundry. Should the Company be unable to obtain a sufficient supply of products to enable it to meet demand, it could be required to allocate available supply of its products among its customers. Until recently, there has been a worldwide shortage of advanced process technology foundry capacity and there can be no assurance that the Company will obtain sufficient foundry capacity to meet customer demand in the future, particularly if that demand should increase. The Company is continuously evaluating potential new sources of supply. However, the qualification process and the production ramp-up for additional foundries could take longer than anticipated, and there can be no assurance that such sources will be able or willing to satisfy the Company's requirements on a timely basis or at acceptable quality or per unit prices. -17- Constraints or delays in the supply of the Company's products, whether because of capacity constraints, unexpected disruptions at the current or future foundries or assembly houses, delays in obtaining additional production at the existing foundry or in obtaining production from new foundries, shortages of raw materials, or other reasons, could result in the loss of customers and other material adverse effects on the Company's operating results, including effects that may result should the Company be forced to purchase products from higher cost foundries or pay expediting charges to obtain additional supply. Semiconductor Industry; SRAM Market. The semiconductor industry is highly cyclical and has been subject to significant economic downturns at various times, characterized by diminished product demand, production overcapacity and accelerated erosion of average selling prices. During 1996 and early 1997, the market for certain SRAM devices experienced an excess supply relative to demand which resulted in a significant downward trend in prices. The Company expects to continue to experience a downward trend in pricing which could adversely affect the Company's operating margins. The selling prices that the Company is able to command for its products are highly dependent on industry-wide production capacity and demand, and as a consequence the Company could experience rapid erosion in product pricing which is not within the control of the Company and which could adversely effect the Company's operating results. The Company expects that additional SRAM production capacity will become increasingly available in the foreseeable future, and such additional capacity may adversely affect the Company's margins and competitive position. In addition, the Company may experience period-to-period fluctuations in operating results because of general semiconductor industry conditions, overall economic conditions, or other factors. The Company's business is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of semiconductor products. Litigation. On August 12, 1996, a securities class action lawsuit was filed in Santa Clara Superior Court against the Company and certain of its officers and directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists of purchasers of the Company's common stock from November 20, 1995 to March 22, 1996, inclusive. The complaint alleges negligent misrepresentation, fraud and deceit, breach of fiduciary duty, and violations of certain provisions of the California Corporate Securities Law and Civil Code. The plaintiffs seek an unspecified amount of compensatory and punitive damages. Plaintiffs allege, among other things, that the Paradigm Defendants wrongfully represented that the Company would have protection against adverse market conditions in the semiconductor market based on the Company's focus on high speed, high performance semiconductor products. On September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer as to all of the causes of action except for violation of certain provisions of the California Corporate Securities Law and Civil Code. The Court, however, granted plaintiffs leave to amend the complaint to attempt to cure the defects which caused the Court to sustain the demurrer. Plaintiffs failed to amend within the allotted time. On January 8, 1997, the Paradigm Defendants filed an answer to the complaint denying any liability for the acts and damages alleged by the plaintiffs. Plaintiffs have since served the -18- Paradigm Defendants with discovery requests for production of documents and interrogatories, to which the Paradigm Defendants have responded, with other responses not yet due. The Paradigm Defendants have served the plaintiffs with an initial set of discovery requests. Additional discovery is scheduled to take place prior to the hearing on the motion for class certification, tentatively scheduled for May 20, 1997. The Paradigm Defendants intend to vigorously defend the action, however, there can be no assurance that the Company will be successful in such defense. Even if Paradigm is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. Due to the inherent uncertainty of litigation, management is not able to reasonably estimate losses that may be incurred in relation to this litigation. However based on the facts presently known, management believes that the resolution of this matter will not have a material adverse impact on the Company's financial position, results of operations or cash flows. On February 21, 1997, an additional purported class action lawsuit was filed in Santa Clara County Superior Court against the Company and certain of its officers and directors, with causes of action and factual allegations essentially identical to those on the August 12, 1996 class action lawsuit. This second class action is asserted against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. The Paradigm Defendants have authorized counsel to acknowledge service. The Paradigm Defendants filed a demurrer to the complaint on May 9, 1997. A hearing on the demurrer has been scheduled for June 19, 1997. The Paradigm Defendants believe the new class action appears to be essentially identical to the causes of action and factual allegations of the August 12, 1996 class action. The only apparent major difference between the two suits is that the February 21 class action purports to be on behalf of holders of the Company's stock as opposed to purchasers on whose behalf the August 12 action was filed. Therefore, the Company believes that the February 21 class action may be subject to the demurrer which the Court sustained in the August 12 class action as to all causes of action asserted against Michael Gulett and all but one of the causes of action asserted against the remaining Paradigm Defendants. There can be no assurances that the Court will determine that the February 21 class action will be subject to the demurrer or that the Company will be successful in the defense of the class actions. Due to the inherent uncertainty of litigation, management is not able to reasonably estimate losses that may be incurred in relation to this litigation. However based on the facts presently known, management believes that the resolution of this matter will not have a material adverse impact on the Company's financial position, results of operations or cash flows. Product and Customer Concentration; Dependence on Telecommunications and Computer Industries. Currently, substantially all of the Company's sales are derived from the sale of SRAM products. Substantially all of the Company's products are incorporated into telecommunications and computer-related products. The telecommunications and computer industries have recently experienced strong unit sales growth, which has increased demand for integrated circuits, including the memory products offered by the Company. However, these industries have from time to time experienced cyclical, depressed business -19- conditions. Such industry downturns have historically resulted in reduced product demand and declining average selling prices. The Company's business and operating results could be materially and adversely affected by a downturn in the telecommunications or computer industries in the future. Competition. The semiconductor industry is intensely competitive and is characterized by rapidly changing technology, short product life cycles, cyclical oversupply and rapid price erosion. The Company competes with large domestic and international semiconductor companies, most of which have substantially greater financial, technical, marketing, distribution, and other resources than the Company. The Company's principal competitors in the high performance SRAM market include Motorola and Micron Technology. Other competitors in the SRAM market include Alliance Semiconductor, Cypress Semiconductor, Integrated Device Technology, Integrated Silicon Solution, Samsung and numerous other large and emerging semiconductor companies. In addition, other manufacturers can be expected to enter the high speed, high density SRAM market. The ability of the Company to compete successfully depends on elements outside its control, including the rate at which customers incorporate the Company's products into their systems, the success of such customers in selling those systems, the Company's protection of its intellectual property, the number, nature, and success of its competitors and their product introductions, and general market and economic conditions. In addition, the Company's success will depend in large part on its ability to develop, introduce, and manufacture in a timely manner products that compete effectively on the basis of product features (including speed, density, die size, and packaging), availability, quality, reliability, and price, together with other factors including the availability of sufficient manufacturing capacity and the adequacy of production yields. There is no assurance that the Company will be able to compete successfully in the future. Strategic Relationships; Potential Competition. The Company, pursuant to certain licenses of its technology, has entered into strategic relationships with NKK and Atmel. The Company has had a long-standing business relationship with NKK which began in October 1992. The Company, NKK and affiliates of NKK entered into several equity and debt transactions which provided start-up and development funding to the Company. Given the long-standing relationship, the Company and NKK entered into three technology license and development agreements which provide for NKK to supply the Company a specified number of 1M SRAMs for three years. These Agreements provided funding to the Company. The Company's business relationship with Atmel began in April 1995 when pursuant to certain agreements, Atmel purchased a substantial number of shares of the Company's stock from the Company, certain stockholders of the Company who had been unsecured creditors of the Company as of the Reorganization and from the Company's equipment lessors. Atmel also acquired certain warrants to purchase shares of the Company's Common Stock. In 1995, the Company and Atmel entered into a five-year License and Manufacturing Agreement pursuant to which Atmel would provide the capacity to manufacture wafers at its wafer manufacturing facility. The Company entered into such agreement with Atmel because -20- Atmel provided the Company with significant wafer manufacturing capacity when such capacity was in short supply. The Company previously licensed the design and process technology for substantially all of its products at such time, including certain of its 256K, 1M and 4M products, to NKK as a source of revenue. The Company has not licensed any of its current products to NKK. In the future, the Company may compete with NKK with respect to all of such products in certain Pacific Rim countries, North America and Europe and, as to certain of its 256K and 1M products, in the rest of the world. In 1995, NKK commenced production of products using the Company's design and process technologies, and therefore may become a more significant competitor of the Company. Because NKK has greater resources than the Company and is an SRAM manufacturer, any such competition could adversely affect the Company. Paradigm has also licensed to Atmel the right to produce certain of its SRAM products which provided significant wafer manufacturing capacity. As a result, the Company is likely to compete with Atmel with respect to such products. Because Atmel has greater resources than the Company and has foundry capacity, any such competition could adversely affect the Company. To the extent that the Company enters into similar arrangements with other companies, it may compete with such companies as well. Dependence on Patents, Licenses and Intellectual Property; Potential Litigation. The Company intends to continue to pursue patent, trade secret, and mask work protection for its semiconductor process technologies and designs. To that end, the Company has obtained certain patents and patent licenses and intends to continue to seek patents on its inventions and manufacturing processes, as appropriate. The process of seeking patent protection can be long and expensive, and there is no assurance that patents will be issued from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to the Company. In particular, there can be no assurance that any patents held by the Company will not be challenged, invalidated, or circumvented, or that the rights granted thereunder will provide competitive advantage to the Company. The Company also relies on trade secret protection for its technology, in part through confidentiality agreements with its employees, consultants and third parties. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known to or independently developed by others. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured, or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor industry. In the future, litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. The Company has from time to time received, and may in the future receive, communications alleging possible infringement of patents or other intellectual property rights of others. Any such litigation -21- could result in substantial cost to and diversion of effort by the Company, which could have a material adverse effect on the Company. Further, adverse determinations in such litigation could result in the Company's loss of proprietary rights, subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties, or prevent the Company from manufacturing or selling its products, any of which could have a material adverse effect on the Company. International Operations. A significant portion of the Company's sales is attributable to sales outside the United States, primarily in Asia and Europe, and the Company expects that international sales will continue to represent a significant portion of its sales. In addition, the Company expects that a significant portion of its products will be manufactured by independent third parties in Asia. Therefore, the Company is subject to the risks of conducting business internationally, and both manufacturing and sales of the Company's products may be adversely affected by political and economic conditions abroad. Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export compliance laws, or other trade policies, could adversely affect the Company's ability to have products manufactured or sell products in foreign markets. The Company cannot predict whether quotas, duties, taxes, or other charges or restrictions will be imposed by the United States, Hong Kong, Japan, Taiwan, or other countries upon the importation or exportation of the Company's products in the future, or what effect any such actions would have on its relationship with NKK or other manufacturing sources, or its general business, financial condition and results of operations. In addition, there can be no assurance that the Company will not be adversely affected by currency fluctuations in the future. The prices for the Company's products are denominated in dollars. Accordingly, any increase in the value of the dollar as compared to currencies in the Company's principal overseas markets would increase the foreign currency-denominated sales prices of the Company's products, which may negatively affect the Company's sales in those markets. The Company has not entered into any agreements or instruments to hedge the risk of foreign currency fluctuations. Currency fluctuations in the future may also increase the manufacturing costs of the Company's products. Although the Company has not to date experienced any material adverse effect on its operations as a result of such international risks, there can be no assurance that such factors will not adversely impact the Company's general business, financial condition and results of operations. Employees; Management of Growth. The Company's future success will be heavily dependent upon its ability to attract and retain qualified technical, managerial, marketing and financial personnel. The Company has experienced a high degree of turnover in personnel, including at the senior and middle management levels. The competition for such personnel is intense and includes companies with substantially greater financial and other resources to offer such personnel. There can be no assurance that the Company will be able to attract and retain the necessary personnel, or successfully manage its expansion, and any failure to do so could have a material adverse effect on the Company. Potential Volatility of Stock Price. The trading price of the Company's Common Stock is subject to wide fluctuations in response to variations in operating results of the -22- Company and other semiconductor companies, actual or anticipated announcements of technical innovations or new products by the Company or its competitors, general conditions in the semiconductor industry and the worldwide economy, and other events or factors. The Company's stock traded from a high of $37.25 in August 1995 to a low of $1.00 in May 1997. In addition, the stock market has in the past experienced extreme price and volume fluctuations, particularly affecting the market prices for many high technology companies, and these fluctuations have often been unrelated to the operating performance of the specific companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. Antitakeover Effect of Certain Charter Provisions. Certain provisions of the Company's Certificate of Incorporation and Bylaws and of Delaware law could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of the Common Stock. Such provisions may also inhibit fluctuations in the market price of the Common Stock that could result from takeover attempts. In addition, the Board of Directors, without further stockholder approval, may issue Preferred Stock that could have the effect of delaying or preventing a change in control of the Company. The issuance of Preferred Stock could also adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. -23- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. ----------------- On August 12, 1996, a securities class action lawsuit was filed in Santa Clara Superior Court against the Company and certain of its officers and directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists of purchasers of the Company's common stock from November 20, 1995 to March 22, 1996, inclusive. The complaint alleges negligent misrepresentation, fraud and deceit, breach of fiduciary duty, and violations of certain provisions of the California Corporate Securities Law and Civil Code. The plaintiffs seek an unspecified amount of compensatory and punitive damages. Plaintiffs allege, among other things, that the Paradigm Defendants wrongfully represented that the Company would have protection against adverse market conditions in the semiconductor market based on the Company's focus on high speed, high performance semiconductor products. On September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer as to all of the causes of action except for violation of certain provisions of the California Corporate Securities Law and Civil Code. The Court, however, granted plaintiffs leave to amend the complaint to attempt to cure the defects which caused the Court to sustain the demurrer. Plaintiffs failed to amend within the allotted time. On January 8, 1997, the Paradigm Defendants filed an answer to the complaint denying any liability for the acts and damages alleged by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with discovery requests for production of documents and interrogatories, to which the Paradigm Defendants have responded, with other responses not yet due. The Paradigm Defendants have served the plaintiffs with an initial set of discovery requests. Additional discovery is scheduled to take place prior to the hearing on the motion for class certification, tentatively scheduled for May 20, 1997. The Paradigm Defendants intend to vigorously defend the action, however, there can be no assurance that the Company will be successful in such defense. Even if Paradigm is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. Due to the inherent uncertainty of litigation, management is not able to reasonably estimate losses that may be incurred in relation to this litigation. However, based on the facts presently known, management believes that the resolution of this matter will not have a material adverse impact on the Company's financial position, results of operations or cash flows. On February 21, 1997, an additional purported class action lawsuit was filed in Santa Clara County Superior Court against the Company and certain of its officers and directors, with causes of action and factual allegations essentially identical to those on the August 12, 1996 class action lawsuit. This second class action is asserted against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. The Paradigm Defendants have authorized counsel to acknowledge service. The Paradigm Defendants filed a demurrer to the complaint on May 9, 1997. A hearing on the demurrer has been scheduled for June 19, 1997. The Paradigm Defendants believe the new class action appears to be essentially identical to the causes of action and factual allegations of the August 12, 1996 class action. The only -24- apparent major difference between the two suits is that the February 21 class action purports to be on behalf of holders of the Company's stock as opposed to purchasers on whose behalf the August 12 action was filed. Therefore, the Company believes that the February 21 class action may be subject to the demurrer which the Court sustained in the August 12 class action as to all causes of action asserted against Michael Gulett and all but one of the causes of action asserted against the remaining Paradigm Defendants. There can be no assurances that the Court will determine that the February 21 class action will be subject to the demurrer or that the Company will be successful in the defense of the class actions. Due to the inherent uncertainty of litigation, management is not able to reasonably estimate losses that may be incurred in relation to this litigation. However based on the facts presently known, management believes that the resolution of this matter will not have a material adverse impact on the Company's financial position, results of operations or cash flows. Other than as set forth above, there are no material pending legal proceedings against the Company or as to which any of its property is the subject. ITEM 2. CHANGES IN SECURITIES. --------------------- On January 17, 1997, the Company issued to ACMA Limited a warrant to purchase 150,000 shares of the Company's Common Stock for $4.125 per share in consideration for authorizing the Company to grant additional registration rights in connection with a private placement with Vintage Products, Inc. The warrant is exercisable until January 28, 2000. The warrant and the securities issuable upon the exercise thereunder were not registered under the Securities Act of 1933, as amended (the "Securities Act") in reliance upon the exemption contained in section 4(2) of the Securities Act. On January 23, 1997, Paradigm sold a total of 200 shares of Preferred Stock in a private placement to Vintage Products, Inc. at a price of $10,000 per share, for total proceeds (net of payments to third parties) of approximately $1,880,000. The Preferred Stock was not registered under the Securities Act in reliance upon the exemption contained in section 4(2) of the Securities Act. The Preferred Stock is convertible at the option of the holder into the number of fully paid and nonassessable shares of Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated dividends on the shares of Preferred Stock being converted by (B) the Conversion Price in effect at the time of conversion. The "Conversion Price" will be equal to the lower of (i) $2.25 or (ii) eighty-two percent (82%) of the average closing bid price of a share of Common Stock as quoted on the Nasdaq National Market over the five (5) consecutive trading days immediately preceding the date of notice of conversion of the Preferred Stock. The Company is not required to issue shares of Common Stock equal to or greater than twenty percent (20%) of the Common Stock outstanding on the date of the initial issuance of the Preferred Stock. At the time of the initial issuance of the Preferred Stock, the Company had outstanding 7,243,154 shares of Common Stock, twenty percent of which equaled approximately 1,448,631 shares. The Company has the option of seeking stockholder approval for the issuance of shares in excess of 1,448,631 shares, seeking Nasdaq National Market approval for the issuance of shares in excess of 1,448,631 shares or redeeming the shares in excess of 1,448,631 shares at a price of $12,190 per preferred share. -25- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. -------------------------------- (a) Exhibits 11.1 Computation of net income (loss) per share (see Note 2 of Notes to Condensed Financial Statements) 27.1 Financial Data Schedule (b) Reports on Form 8-K A Current Report on Form 8-K was filed with the Securities and Exchange Commission on February 6, 1997. The report announced the private placement of a total of 200 shares of the Registrant's 5% Series A Redeemable Convertible Preferred Stock to Vintage Products, Inc. at a price of $10,000 per share, for a total proceeds (net of payments to third parties) of approximately $1.9 million. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 14, 1997 PARADIGM TECHNOLOGY, INC. /s/ David G. Campbell ------------------------------------------ David G. Campbell Vice President Finance, CFO (Principal Financial and Accounting Officer) -26- EX-11.1 2 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11.1 PARADIGM TECHNOLOGY, INC. COMPUTATION OF NET INCOME (LOSS) PER SHARE (1) (in thousands, except net income per share)
Three Months Ended ------------------ Mar. 31, Mar. 31, 1997 1996 ---- ---- Net income (loss) from operations $ (2,622) $ 237 Accretion on Redeemable Convertible Preferred Stock (388) ------- ------- Net income (loss) available to Common Stockholders $ (3,010) $ 237 ------- ------- Weighted average shares outstanding: Common Stock 7,241 6,716 Common Stock issuable upon exercise of options and warrants -- 601 ------- ------ Weighted average common shares and equivalents 7,241 7,317 ------- ------ Net income (loss) per share $ (0.42) $ 0.03 ------- ------ (1) This Exhibit should be read with Note 2 of Notes to Condensed Financial Statements.
-27- EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1,355 0 4,565 1,748 3,637 9,461 9,482 3,360 15,721 10,069 339 0 2,201 36,355 0 15,721 3,572 3,572 3,314 3,314 2,808 179 42 (2,622) 0 0 0 0 0 (2,622) (0.42) (0.42)
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