-----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, AWUaZF09r8ohf+nL7p9eVdep5Bxef/k5kNHkByNpuVTDF1roHu1fVtJ92CuThHzH Hky672CJRFCWg159JIri6Q== 0001012870-98-001496.txt : 19980604 0001012870-98-001496.hdr.sgml : 19980604 ACCESSION NUMBER: 0001012870-98-001496 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980603 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARADIGM TECHNOLOGY INC /DE/ CENTRAL INDEX KEY: 0000945699 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770140882 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-26124 FILM NUMBER: 98642009 BUSINESS ADDRESS: STREET 1: 694 TASMAN DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089540500 MAIL ADDRESS: STREET 1: 71 VISTA MONTANA CITY: SAN JOSE STATE: CA ZIP: 95134 10-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Amendment No. 1 (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the Fiscal Year Ended.....................................December 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the Transition Period from ____________________ to ____________________ Commission File Number 0-26124 --------- PARADIGM TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) Delaware 770140882-5 --------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 694 Tasman Drive, Milpitas, CA 95035 --------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) (408) 954-0500 ------------------------------- (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value 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 at least the past 90 days. YES /X/ NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Indicate by check whether the registrant has filed all documents and reports required to be filed by Section 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. /X/ The aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $3,901,907 on March 19, 1998 based on the last sale price as reported by the NASDAQ/SmallCap Market. The aggregate number of outstanding shares of Common Stock, $0.01 par value, of the registrant was 1,604,511 shares as of March 19, 1998, after giving effect to the 10-for-1 reverse stock split effected on May 1, 1998. TABLE OF CONTENTS ----------------- Page ---- PART I .................................................................. 1 ITEM 1. BUSINESS............................................... 1 ITEM 2. PROPERTIES............................................. 22 ITEM 3. LEGAL PROCEEDINGS...................................... 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 24 PART II .................................................................. 24 ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS............................ 24 ITEM 6. SELECTED FINANCIAL DATA................................ 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION........... 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET........................................... 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................. 60 PART III .................................................................. 61 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................. 61 ITEM 11. EXECUTIVE COMPENSATION................................. 63 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 68 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 69 PART IV .................................................................. 71 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................... 71 SIGNATURES................................................................. 77 -i- When used in this Form 10-K, 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 "Business--Factors That May Affect Future Results." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release updates or revisions to these statements. Share information for all periods has been retroactively adjusted to reflect a ten-for-one reverse stock split of common stock effected on May 1, 1998. PART I ITEM 1. BUSINESS -------- Paradigm Technology, Inc. ("Paradigm" or the "Company") designs and markets high speed, high density static random access memory ("SRAM") semiconductor devices to meet the needs of advanced telecommunications devices, networks, workstations, high performance PCs, advanced modems and complex military/aerospace applications. The Company focuses on high performance, 10 nanosecond ("ns") and faster SRAMs. For the year ended December 31, 1997, 10ns and faster SRAMs accounted for approximately 49% of the Company's sales. Using a combination of innovative process architecture and design know-how, the Company was one of the first companies to introduce high speed CMOS SRAMs for three successive generations of product densities: 256 kilobit ("K"), one megabit ("M"), and 4M. Paradigm's customers in 1997 included Iomega, IKOS, Samsung and Motorola. RECENT DEVELOPMENTS The Company's operations for 1997 and 1996 have consumed substantial amounts of cash and have generated net losses. During this period, the Company has continued to experience a downward trend in product pricing which has contributed to the poor operating results. The Company expects to incur a net loss for the quarter ending March 31, 1998. The Company has been dependent on equity financings to fund its operations in 1997. In January 1997, the Company completed the private placement of 5% Series A Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") for net proceeds of approximately $1,880,000. In July 1997, the Company completed the private placement of 5% Series B Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") for net proceeds of approximately $1,870,000 and in November 1997, the Company completed the private placement of 5% Series C Convertible Preferred Stock (the "Series C Preferred Stock") for net proceeds of approximately $923,000. Should continued product pricing pressures or delayed acceptance of the Company's new products continue to adversely affect the Company's operating results, the Company will have to pursue alternative financing opportunities. Management has taken several steps to help ensure that adequate cash resources will continue to be available to the Company. Among these steps are further planned reductions in operating expenses and the potential sale of additional equity -1- securities. The Company believes it will acquire additional cash infusion from private placements of equity or other sources of liquidity, such as asset sales, to fund 1998 operations. If additional equity securities are issued, substantial dilution to existing stockholders could occur. No assurances can be given that such steps will be sufficient or that additional financing will be available on attractive terms or at all. As a result of these circumstances, the Company's independent accountants' report on the Company's December 31, 1997 financial statements includes an explanatory paragraph indicating that these matters raise a substantial doubt about the Company's ability to continue as a going concern. On March 6, 1998, the Company entered into a definitive merger agreement providing for the acquisition of all of the outstanding capital stock of IXYS Corporation ("IXYS") in exchange for Common Stock of the Company. The exchange ratio in the Merger for the IXYS equity securities will be the greater of two ratios. The first ratio provides that upon the Merger the holders of equity securities of IXYS hold 95% of the fully diluted capitalization of the combined company and that the holders of equity securities of the Company will hold 5% of the fully diluted capitalization of the combined company. (As used herein, fully diluted capitalization means the sum of the number of shares of common stock outstanding and issuable upon exercise or conversion of all outstanding preferred stock, warrants, options and other rights.) The second ratio provides that the value associated with the fully diluted capitalization of IXYS, at the time of consummation of the Merger, be at least $150 million, based upon an average of the closing prices of the Company's Common Stock prior to the Company's stockholders meeting. Consummation of the merger requires the approval of the Company's and IXYS' stockholders and various regulatory approvals. If approved, the transaction is anticipated to be accounted for as a purchase of the Company by IXYS for financial reporting purposes. SALE OF PREFERRED STOCK. On January 23, 1997, Paradigm sold a total of 200 shares of Series A Preferred Stock in a private placement to Vintage Products, Inc. at a price of $10,000 per share, for total proceeds (net of payments to third parties) of approximately $1,880,000. The Series A Preferred Stock is convertible at the option of the holder into the number of fully paid and nonassessable shares of Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated dividends on the shares of Series A Preferred Stock being converted by (B) the Series A Conversion Price in effect at the time of conversion. The "Series A Conversion Price" is equal to the lower of (i) $22.50 or (ii) eighty-two percent (82%) of the average closing bid price of a share of Common Stock as quoted on the Nasdaq SmallCap Market ("SCM") (or such other national or regional securities exchange or automated quotations system upon which the Common Stock is listed and principally traded) over the five (5) consecutive trading days immediately preceding the date of notice of conversion of the Series A Preferred Stock. As of March 6, 1998, the holders of the Series A Preferred Stock have converted 170 shares of Series A Preferred Stock into 347,167 shares of the Company's Common Stock. The remaining 30 shares of Series A Preferred Stock may be converted into Common Stock in the future at the option of the holder or the Company. The Common Stock issuable upon conversion of the Series A Preferred Stock has been registered on Form S-3. -2- On July 22, 1997, Paradigm sold a total of 200 shares of Series B Preferred Stock in a private placement to Lyford Ltd. at a price of $10,000 per share, for total proceeds (net of payments to third parties) of approximately $1,870,000. The Series B Preferred Stock is convertible at the option of the holder into the number of fully paid and non-assessable shares of Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated dividends on the shares of Series B Preferred Stock being converted by (B) the Series B Conversion Price in effect at the time of conversion. The "Series B Conversion Price" is equal to the lower of (i) $13.75 or (ii) eighty-two percent (82%) of the average closing bid price of a share of Common Stock as quoted on the SCM (or such other national or regional securities exchange or automated quotations system upon which the Common Stock is listed and principally traded) over the five (5) consecutive trading days immediately preceding the date of notice of conversion of the Series B Preferred Stock. As of March 6, 1998, 132 shares of Series B Preferred Stock have been converted into 302,881 shares of the Company's Common Stock. The remaining 68 shares of Series B Preferred Stock may be converted into Common Stock in the future at the option of the holder or the Company. The Common Stock issuable upon conversion of the Series B Preferred Stock have been registered on Form S-3. On November 26, 1997, Paradigm sold a total of 100 shares of Series C 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 $923,000. The Series C Preferred Stock is convertible at the option of the holder into the number of fully paid and non-assessable shares of Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated dividends on the shares of Series C Preferred Stock being converted by (B) the Series C Conversion Price in effect at the time of conversion. The "Series C Conversion Price" is equal to the lower of (i) $5.90 or (ii) eighty-two percent (82%) of the average closing bid price of a share of common stock as quoted on the SCM (or such other national or regional securities exchange or automated quotations system upon which the Common Stock is listed and principally traded) over the five (5) consecutive trading days immediately preceding the date of notice of conversion of the Series C Preferred Stock. As of March 6, 1998, 15 shares of Series C Preferred Stock have been converted into 52,700 shares of the Company's Common Stock. The remaining 85 shares of Series C Preferred Stock may be converted into Common Stock in the future at the option of the holder. The Common Stock issuable upon conversion of the Series C Preferred Stock has been registered on Form S-3. CONVERSION OF DEBT TO EQUITY. In September 1997, vendors with an aggregate trade accounts payable balance of $705,000 entered into agreements with the Company to accept an aggregate of 42,448 shares of the Company's Common Stock in lieu of payment of the trade payables. The agreement with one of the vendors provided for issuance of additional shares of Common Stock in certain circumstances. On October 1, 1997, an additional 8,092 shares of the Company's Common Stock was issued to that vendor under such agreement. LISTING OF THE COMPANY'S COMMON STOCK. Prior to August 22, 1997, the Company's Common Stock was listed on the Nasdaq National Market (the "NNM"). In order for continued listing on the NNM, however, the Company was required to, maintain (1) $4,000,000 in net tangible assets because it has sustained losses from continuing operations and/or net losses in -3- three of its four most recent fiscal years, (2) a $2,000,000 market value of the public float, (3) $1,000,000 in total capital and surplus, (4) a minimum bid price of $1.00 per share and (5) two market-makers. As of June 30, 1997, the Company was not in compliance with items (1) and (4) above. On July 15, 1997, the Nasdaq Stock Market ("Nasdaq") staff notified the Company of a bid price deficiency and provided a 90-day grace period within which to regain compliance with this requirement. On August 8, 1997, Nasdaq, based on a review of the Company's trading history from July 8 to August 8, 1997, indicated that the Company had regained compliance with the minimum closing bid price requirement of $1.00. On August 20, 1997, Nasdaq informed the Company that due to its failure to comply with the terms of the maintenance qualifications exception granted to the Company, the Company's Common Stock would be removed from the NNM and listed on the SCM effective August 22, 1997, pursuant to a waiver to the initial inclusion bid price requirement. On August 22, 1997, the Company announced that effective on such date the Company's Common Stock, formerly listed on the NNM, would be listed on the SCM, pursuant to a waiver to the initial inclusion bid price requirement. The Company's continued listing on the SCM is contingent upon the Company meeting the maintenance requirements. Substantial changes in Nasdaq initial listing and maintenance requirements became effective on February 23, 1998. These changes materially enhance the quantitative threshold criteria necessary to qualify for initial entry and continued listing on Nasdaq. In addition, corporate governance requirements, formerly applicable to the NNM for the first time, have been extended to the SCM. These changes require that companies listed on the SCM maintain (i) $2,000,000 in net tangible assets (total assets less total liabilities and goodwill), a market capitalization of $35,000,000, or $500,000 in net income for two of the last three years, (ii) a $1,000,000 market value for the public float, (iii) two market-makers, and (iv) a minimum bid price of $1.00 per share. After the new maintenance requirements became effective, the Company was notified that it was not in compliance with the new minimum bid price requirement and that the Company would have 90-calendar days, which expire May 28, 1998, in order to regain compliance. The Company may regain compliance if its securities trade at or above the minimum bid price requirement for at least 10-consecutive trade days. If after 90 days the Company has not regained compliance, Nasdaq will issue a delisting letter and the Company may request a hearing at that time, which will generally stay delisting until the hearing has been completed. The Company's stockholders, at a Special Meeting of Stockholders held on May 1, 1998, approved a ten-for-one reverse stock split of the Company's Common Stock such that every ten shares were combined into one share of Common Stock, par value $0.01 per share. The Company believes that the reverse stock split will increase the price per share of the Company's Common Stock and bring such price into compliance with the Nasdaq criteria. Although the Company's Common Stock has traded above $1.00 per share since the reverse stock split was effectuated, no assurances can be made that the reverse stock split will cause the Company's stock price to be in compliance with the Nasdaq listing requirements. If the Company's securities are delisted from Nasdaq, trading, if any, of the Company's securities would thereafter have to be conducted in the non-Nasdaq over-the-counter market. In -4- such event, 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 Company's Common Stock would also be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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.) The additional burdens imposed upon broker-dealers by such requirements could 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 investors to trade the Company's Common Stock. See "Risk Factors--Risks Relating to Low-Priced Stock" and "Risk Factors--Risks Relating to Low-Priced Stock; Possible Effect of 'Penny Stock' Rules on Liquidity for the Company's Securities." INDUSTRY BACKGROUND Virtually all digital electronic systems, including cellular telephones, workstations, PCs and modems, contain memory devices. Over the past decade, the drive to reduce the size and increase the speed and functionality of electronic systems has required concurrent increases in the density and speed of memory devices used in these systems. The most widely used memory devices are dynamic random access memories ("DRAMs") and SRAMs. DRAMs are commercially available with higher densities than SRAMs, while SRAMs generally are capable of significantly higher speeds than DRAMs of comparable density. SRAMs achieve this speed advantage principally by incorporating more transistors in each memory cell, rendering SRAMs larger and more costly to manufacture. Until recently, DRAMs have produced acceptable performance levels at a lower cost and reduced size compared to SRAMs. However, the increased computing speeds of digital signal processors contained in advanced telecommunications equipment and recently introduced processors, such as Intel's Pentium and the PowerPC, have exceeded the ability of DRAMs to provide timely access to data. For example, to take advantage of the significantly increased performance capabilities of these new processors in high performance PCs, SRAMs are often used as cache memory between the processor and the DRAM main memory. The cache memory stores the most frequently or most recently used data from the DRAM main memory, enabling quicker access by the processor. When SRAMs are used to provide access to a high percentage of the information the processor requests, data access speeds can be greatly enhanced. The vast majority of SRAMs currently sold are industry standard asynchronous SRAMs that have only relatively simple interface logic and are required to operate only at normal commercial temperatures. Synchronous SRAMs, which operate at the same clock speed as the processor, are more complex and difficult to produce than asynchronous SRAMs because they combine SRAM memory with additional logic. Synchronous burst mode SRAMs permit high-end processors, such as the Pentium and PowerPC, to access data more quickly by allowing data bits to be transferred in blocks rather than one bit at a time. Both synchronous and asynchronous SRAMs vary in performance features, such as speed, density and temperature tolerance, which enable them to support various high-end applications. In addition, the demand for reduced power -5- consumption in electronic products has resulted in an increasing demand for low voltage SRAM devices. Dataquest Incorporated, an information technology research firm, estimates that the worldwide market for SRAM products will grow from $6.7 billion in 1996 to $8.9 billion in 1999, with the market for sub-20ns SRAMs growing from $2.0 billion to $2.5 billion over the same period. In addition to high performance PCs, SRAMs are used in a variety of other electronics products. In commercial communications, SRAMs are used in both cellular base stations and digital cellular telephones. SRAMs are also increasingly used in high speed communication networks, such as Ethernet and FDDI-based networks. In military and aerospace systems, SRAMs can also provide the high performance memory required by fast military processors. For example, high speed military computers utilize high performance SRAMs in pattern recognition and command, control and communication applications embedded in today's advanced electronic weapons, planes and satellites. THE COMPANY'S PRODUCTS Paradigm designs, manufactures and sells a broad range of SRAM products with various density, speed, configuration, temperature range and packaging options for a wide range of commercial, industrial and military applications. The Company's products range in density from 256K to 4M. The Company's fastest products currently achieve 7ns access times, and for the year ended December 31, 1997, 10ns and faster SRAMs accounted for 49% of the Company's sales. The majority of Paradigm's products are available in two levels of power consumption, standard and low, and three temperature ranges, commercial, industrial and military. Paradigm also offers its products in a wide variety of packaging options to accommodate various product features and cost considerations. Paradigm designs its SRAM packages and pinouts to meet the standards prescribed by the Joint Electron Device Engineering Council ("JEDEC"). ASYNCHRONOUS SRAMS. Paradigm's asynchronous SRAM products include high speed 256K, 1M and 4M CMOS SRAMs. They are available in a variety of configurations and commercial and industrial temperature range versions, as well as military versions manufactured to comply with the most recent military specifications. SRAM MODULES. Paradigm offers SRAM modules in which multiple SRAMs are connected and grouped on a printed circuit board and sold as a single unit. Paradigm module offerings are designed to support the specific needs of the PC cache market and the requirements for JEDEC standard SRAM modules. The Company's PC cache module offerings include Intel COAST compliant modules and modules which support PowerPC CHRP based designs. The JEDEC standard module product offerings include modules ranging in size from 750K to 8M. These modules are used in a variety of applications including networking, communications, digital signal processing ("DSP") boards and memory testers. PRODUCTS UNDER DEVELOPMENT. Timely development and introduction of new products are essential to maintaining Paradigm's competitive position. Paradigm works closely with leading electronics manufacturers in order to anticipate and develop future generations of high performance SRAMs required by these customers. The Company's current design development -6- objectives include very fast SRAM products for the telecommunications, networking and military/aerospace industries. Products currently under development include: asynchronous, low voltage and high-speed SRAMs; and special configuration SRAMs for cellular phone and modem applications. In addition, by working closely with customers, Paradigm is developing a line of module offerings. The Company believes that these modules will provide high quality, high value SRAM-based industry standard products, as well as custom solutions. In addition to new product development, the Company is focused on redesigning existing products to reduce manufacturing costs, increase yields, and increase the speeds of its products. 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 1996 and throughout 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 such downward price trend to continue. See "Risk Factors--Semiconductor Industry; SRAM Market." The selling prices that the Company is able to command for its products are highly dependent on industry-wide production capacity and demand. In this regard, the Company did experience rapid erosion in product pricing during 1996 and 1997 which was not within the control of the Company. The Company could continue to experience a downward trend in pricing which could adversely effect the Company's operating results. See "Risk Factors--Semiconductor Industry; SRAM Market." The Company's future success will depend, in part, on its ability to offset expected price erosion through manufacturing cost savings, yield improvements and developing and introducing on a timely basis new products and enhanced versions of existing products which incorporate advanced features and command higher prices. CUSTOMERS AND APPLICATIONS Recent market trends, such as the rapid expansion of telecommunications, graphics, multimedia and networking applications and the proliferation of high-end workstations and PCs, have resulted in significant demand for high performance SRAMs. Paradigm has targeted this higher performance segment of the SRAM market, where it believes critical performance criteria such as speed and temperature tolerance are more highly valued. For the year ended December 31, 1997, Paradigm's sales of products to Samsung, IKOS, All American and Iomega accounted for 16%, 16%, 15% and 10% of sales, respectively. SALES AND MARKETING Paradigm sells its products in North America through a combination of a direct sales force, independent sales representatives and distributors. Direct sales personnel are responsible for calling on key accounts in North America and coordinating the activities of the Company's sales representatives. The Company has a sales manager in each of its regional sales offices in Dallas, Chicago and Milpitas. The Company sells its products in Asia and Europe through a -7- network of distributors and independent sales representatives. Paradigm intends to expand the size of its direct sales force and the number of outside sales representatives to provide additional customer service and broaden its customer base. The Company's sales representatives and distributors are not subject to minimum purchase requirements and can discontinue marketing the Company's products at any time. The Company's distributors are permitted to return to the Company any or all of the products purchased by them and are offered price protection. As is standard in the semiconductor industry, distributors are granted a credit for the difference, at the time of a price reduction, between the price they were originally charged for the products in inventory and the reduced price which the Company subsequently charges distributors. From time to time, distributors are also granted credit on an individual basis for Company-approved price reductions on specific transactions, usually to meet competitive prices. The Company believes that its relations with it sales representatives and distributors are good. The Company believes that customer service and technical support are important competitive factors in selling to key customers. Paradigm emphasizes on-time delivery and quick responses to the demand changes of its customers. Paradigm has trained employees of its sales representatives and distributors to provide technical support, with Paradigm technical support engineers available to provide assistance with more difficult questions. BACKLOG The Company's backlog includes all purchase orders that have been received, accepted and scheduled for delivery. The Company counts in its backlog only those orders which it believes will be shipped within the next six months. Most orders in backlog are subject to delivery rescheduling, price renegotiations and cancellation at the option of the purchaser, usually without penalty. As a result, although backlog may be useful for scheduling production, it may not be a reliable measure of sales for future periods. As of December 31, 1997, the Company's backlog was approximately $2.7 million. MANUFACTURING On November 15, 1996, the Company sold its Wafer Fab to Orbit. The Company has supply agreements with two offshore wafer foundries and conducts business with those foundries by delivering written purchase orders specifying the particular product ordered, quantity, price, delivery date and shipping terms and, therefore, such foundries are not 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 -8- to allocate available supply of its products among its customers. Currently, there is no shortage of supply, however, until late 1995, there had been a worldwide shortage of advanced process technology foundry capacity and there can be no assurance that there will not be such a shortage in the future. If such a shortage occurs, there can be no assurance that the Company will be able to obtain sufficient foundry capacity to meet customer demand in the future. The Company is continuously evaluating potential new sources of supply. However, the qualification process and the production ramp-up for additional foundries could take longer than anticipated, and there can be no assurance that such sources will be able or willing to satisfy the Company's requirements on a timely basis or at acceptable quality or per unit prices. Constraints or delays in the supply of the Company's products, whether because of capacity constraints, unexpected disruptions at the current or future foundries or assembly houses, delays in obtaining additional production at the existing foundry or in obtaining production from new foundries, shortages of raw materials, or other reasons, could result in the loss of customers 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. STRATEGIC RELATIONSHIPS NKK CORPORATION. Under several technology license and development agreements, the first two of which were executed in December 1990, Paradigm and NKK Corporation ("NKK") entered into various product development and technology licensing relationships, resulting in Paradigm's successful transfer of its 0.6 micron process technology to NKK's wafer fabrication facility in Japan. These relationships were modified on April 13, 1995 by an agreement (the "NKK Agreement") which significantly simplified the relationship between the parties and substantially ended each party's obligation to disclose or deliver technological improvements to the other. Under the NKK Agreement, NKK has agreed to supply Paradigm with a significant quantity of 1M SRAMs of Paradigm's design each month for a three year period in exchange for additional and expanded license rights with respect to certain proprietary technology. However, Paradigm is under no obligation to purchase the 1M SRAMs under the NKK Agreement. In effect, the NKK Agreement provides Paradigm with an important, discretionary ability to increase capacity on an as-needed basis. Therefore, Paradigm's rights under the NKK Agreement will not be affected if it does not purchase the 1M SRAMs contemplated by the NKK Agreement. The Company began shipping SRAMs produced by NKK during the fourth quarter of 1995. The NKK Agreement also rescinded NKK's right to restrict Paradigm from entering into other foundry relationships or granting additional licenses for the Company's products. The NKK Agreement will automatically terminate upon completion of the joint development work contemplated by the Agreement and may be terminated upon default by either party. The Company believes that if the NKK Agreement were terminated it would not have a material adverse effect on the Company's results, operations or financial condition. See "--Factors That May Affect Future Results" and "--Strategic Relationships; Potential Competition." -9- 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 Samsung. Other competitors in the SRAM market include Alliance Semiconductor, Cypress Semiconductor, Integrated Device Technology, Integrated Silicon Solution and numerous other large and emerging semiconductor companies. In addition, other manufacturers can be expected to enter the high speed, high density SRAM market. In 1995, NKK commenced production of products using the Company's design and process technologies, and therefore may become a more significant competitor of the Company. Paradigm has also licensed to Atmel Corporation ("Atmel") the right to produce certain of its SRAM products, and as a result may compete with Atmel with respect to such products. Because both NKK and Atmel have greater resources than the Company and have 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. See "--Strategic Relationships; Potential Competition." 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 can be no assurance that the Company will be able to compete successfully in the future. PATENTS AND LICENSED TECHNOLOGY The Company seeks to protect its proprietary technology by filing applications to obtain patents in the United States and foreign countries and by registering its circuit designs pursuant to the U.S. Semiconductor Chip Protection Act of 1984. The Company also relies on trade secrets and confidential technological know-how in the conduct of its business. As of December 31, 1997, the Company held 17 U.S. patents and one Canadian patent, and had four U.S. and 15 foreign patent applications pending. The Company believes that its patent portfolio strengthens its negotiating position with respect to technology ownership disputes that may occur in the future. 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, as appropriate. The process of seeking patent protection can be long and expensive, and there is -10- 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 be fully effective or 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 countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor industry. In the future, litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. The Company has from time to time received, and may in the future receive, communications alleging possible infringement of patents or other intellectual property rights of others. Any such litigation could result in substantial cost to and diversion of effort by the Company, which could have a material adverse effect on the Company. Further, adverse determinations in such litigation could result in the Company's loss of proprietary rights, subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties or prevent the Company from manufacturing or selling its products, any of which could have a material adverse effect on the Company. In December 1990, as part of an agreement terminating a strategic relationship with AT&T, the Company entered into a nonexclusive license agreement with AT&T giving the Company a license to use all AT&T-owned, semiconductor-related patents over a period of eight years. Under the agreement, the Company agreed to pay AT&T a royalty of 0.75% of revenue for each product produced by the Company. Under the same agreement, the Company licensed to AT&T its poly-iso structure for a similar royalty. The Company has also entered into certain license agreements with Atmel and NKK. See "--Strategic Relationships." ENVIRONMENTAL MATTERS The Company believes that compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will not have a material effect upon its capital expenditures, operations or competitive position. -11- EMPLOYEES As of December 31, 1997, the Company had 21 employees, of whom 2 were engaged in research and development and engineering, 5 in marketing, sales and customer support, 6 in manufacturing, 4 in finance and 4 in administration. The Company's employees are not represented by a collective bargaining organization and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. See "Factors That May Affect Future Results--Employees; Management of Growth." 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-K 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-K. UNCERTAINTY OF FUTURE PROFITABILITY; NEED FOR ADDITIONAL FUNDS. The Company's recent operations have consumed substantial amounts of cash and have generated net losses. The Company believes that it will require additional cash infusions from private placements or other equity financings to meet the Company's projected working capital and other cash requirements in 1998. 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. CONTINUING LOSSES AND DOUBTFUL ABILITY TO CONTINUE AS A GOING CONCERN. As a result of the Company's net losses, and the Company's dependance on additional financing, the Company's independent accountants' report on the Company's December 31, 1997 financial statements includes an explanatory paragraph indicating that these matters raise a substantial doubt about the Company's ability to continue as a going concern. The Company is seeking to raise additional equity. However, there can be no assurance that the Company's efforts will be successful. DILUTION OF COMMON STOCK. The issuance of additional shares of Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (collectively, the "Preferred Stock") will have a dilutive effect on the Common Stock outstanding prior to such issuances. 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 -12- devices and the products into which they are incorporated, and competitive pressures on prices. A decline in demand in the markets served by the Company, lack of success in developing new markets or new products, or increased research and development expenses relating to new product introductions could have a material adverse effect on the Company. Moreover, because the Company sets spending levels in advance of each quarter based, in part, on expectations of product orders and shipments during that quarter, a shortfall in revenue in any particular quarter as compared to the Company's plan could have a material adverse effect on the Company. DECLINING SRAM PRICES. Beginning in late 1995 and continuing into 1996 and 1997, the market for certain SRAM devices experienced a significant excess supply relative to demand, which resulted in a significant downward trend in prices. The market for the Company's products could continue to experience a downward trend in pricing which could adversely affect the Company's operating results. The Company's ability to maintain or increase revenues in light of the current downward trend in product prices will be highly dependent upon its ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling prices will also adversely affect the Company's gross margins unless the Company is able to reduce its costs per unit to offset such declines. There can be no assurance that the Company will be able to increase unit sales volumes, introduce and sell new products or reduce its costs per unit. 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 throughout 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. RISKS RELATING TO LOW-PRICED STOCKS. Prior to August 22, 1997, the Company's Common Stock was listed on the Nasdaq National Market (the "NNM"). In order for continued listing on the NNM, however, the Company was required to, maintain (1) $4,000,000 in net tangible assets because it has sustained losses from continuing operations and/or net losses in three of its four most recent fiscal years, (2) a $2,000,000 market value of the public float, (3) $1,000,000 in total capital and surplus, (4) a minimum bid price of $1.00 per share and (5) two market-makers. As of June 30, 1997, the Company was not in compliance with items (1) and (4) above. -13- On July 15, 1997, the Nasdaq Stock Market ("Nasdaq") staff notified the Company of a bid price deficiency and provided a 90-day grace period within which to regain compliance with this requirement. On August 8, 1997, Nasdaq, based on a review of the Company's trading history from July 8 to August 8, 1997, indicated that the Company had regained compliance with the minimum closing bid price requirement of $1.00. On August 20, 1997, Nasdaq informed the Company that due to its failure to comply with the terms of the maintenance qualifications exception granted to the Company, the Company's Common Stock would be removed from the NNM and listed on the SmallCap Market ("SCM") effective August 22, 1997, pursuant to a waiver to the initial inclusion bid price requirement. On August 22, 1997, the Company announced that effective on such date the Company's Common Stock, formerly listed on the NNM, would be listed on the SCM, pursuant to a waiver to the initial inclusion bid price requirement. The Company's continued listing on the SCM is contingent upon the Company meeting the maintenance requirements. Substantial changes in Nasdaq initial listing and maintenance requirements became effective on February 23, 1998. These changes materially enhance the quantitative threshold criteria necessary to qualify for initial entry and continued listing on Nasdaq. In addition, corporate governance requirements, formerly applicable to the NNM for the first time, have been extended to the SCM. These changes require that companies listed on the SCM maintain (i) $2,000,000 in net tangible assets (total assets less total liabilities and goodwill), a market capitalization of $35,000,000, or $500,000 in net income for two of the last three years, (ii) a $1,000,000 market value for the public float, (iii) two market-makers, and (iv) a minimum bid price of $1.00 per share. After the new maintenance requirements became effective, the Company was notified that it was not in compliance with the new minimum bid price requirement and that the Company would have 90-calendar days, which expire May 28, 1998, in order to regain compliance. The Company may regain compliance if its securities trade at or above the minimum bid price requirement for at least 10-consecutive trade days. If after 90 days the Company has not regained compliance, Nasdaq will issue a delisting letter and the Company may request a hearing at that time, which will generally stay delisting until the hearing has been completed. The Company's stockholders, at a Special Meeting of Stockholders held on May 1, 1998, approved a ten-for-one reverse stock split of the Company's Common Stock such that every ten shares were combined into one share of Common stock, par value $0.01 per share. The Company believes that the stock split will increase the price per share of the Company's Common Stock and bring such price into compliance with the Nasdaq criteria. Although the Company's Common Stock has traded above $1.00 per share since the reverse stock split was effectuated, no assurances can be made that the stock split will cause the Company's stock price to be in compliance with the Nasdaq listing requirements. If the Company's securities are delisted from Nasdaq, trading, if any, of the Company's securities would thereafter have to be conducted in the non-Nasdaq over-the-counter market. In such event, 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 Company's Common Stock would also be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as -14- amended (the "Exchange Act"), which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any nonNasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions.) The additional burdens imposed upon broker-dealers by such requirements could 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 investors to trade the Company's Common Stock. See "--Risks Relating to Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity for the Company's Securities." The Company's Common Stock continues to be below the $1.00 minimum bid price requirement. If the Company's securities remain below the minimum bid price requirement, it could result in the Company's securities being delisted from Nasdaq. There can be no assurances that the Company's securities will meet the minimum bid price requirements or any of the other continued listing requirements in the future. RISKS RELATING TO LOW-PRICED STOCK; POSSIBLE EFFECT OF "PENNY STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S SECURITIES. If the Company's securities were not listed on a national securities exchange nor listed on a qualified automated quotation system, they may become subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their spouse). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, such Rule may affect the ability of broker-dealers to sell the Company's securities and may affect the ability of purchasers to sell any of the Company's securities in the secondary market. The Securities and Exchange Commission (the "Commission") has adopted regulations that define a "penny stock" to be any equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock. The foregoing required penny stock restrictions will not apply to the Company's securities if the Company meets certain minimum net tangible assets or average revenue criteria. If applicable, there can be no assurance that the Company's securities will qualify for exemption from the penny stock restrictions. In any event, even if the Company's securities were exempt from such restrictions, the Company would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to restrict any person from participating in a distribution of penny stock, if the Commission finds that such a restriction would be in the public interest. -15- If the Company's securities were subject to the rules on penny stocks, the market liquidity for the Company's securities could be materially adversely affected. DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES. The market for the Company's products is characterized by rapidly changing technology, short product life cycles, cyclical oversupply and rapid price erosion. Average selling prices for many of the Company's products have generally decreased over the products' life cycles in the past and are expected to decrease in the future. Accordingly, the Company's future success will depend, in part, on its ability to develop and introduce on a timely basis new products and enhanced versions of its existing products which incorporate advanced features and command higher prices. The success of new product introductions and enhancements to existing products depends on several factors, including the Company's ability to develop and implement new product designs, achievement of acceptable production yields and market acceptance of customers' end products. In the past, the Company has experienced delays in the development of certain new and enhanced products. Based upon the increasing complexity of both modified versions of existing products and planned new products, such delays could occur again in the future. Further, the cost of development can be significant and is difficult to forecast. In addition, there can be no assurance that any new or enhanced products will achieve or maintain market acceptance. If the Company is unable to design, develop and introduce competitive products or to develop new or modified designs on a timely basis, the Company's operating results will be materially adversely affected. DEPENDENCE ON FOUNDRIES AND OTHER THIRD PARTIES. The Company is in the process of seeking wafer supply from other offshore foundries, and anticipates that it will conduct business with other foundries by delivering written purchase orders specifying the particular product ordered, quantity, price, delivery date and shipping terms and, therefore, such foundries will not be obligated to supply products to the Company for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order. Reliance on outside foundries involves several risks, including constraints or delays in timely delivery of the Company's products, reduced control over delivery schedules, quality assurance, potential costs and loss of production due to seismic activity, weather conditions and other factors. To the extent a foundry terminates its relationship with the Company, or should the Company's supply from a foundry be interrupted or terminated for any other reason, the Company may not have a sufficient amount of time to replace the supply of products manufactured by the foundry. Should the Company be unable to obtain a sufficient supply of products to enable it to meet demand, it could be required to allocate available supply of its products among its customers. Until recently, there has been a worldwide shortage of advanced process technology foundry capacity and there can be no assurance that the Company will obtain sufficient foundry capacity to meet customer demand in the future, particularly if that demand should increase. The Company is continuously evaluating potential new sources of supply. However, the qualification process and the production ramp-up for additional foundries could take longer than anticipated, and there can be no assurance that such sources will be able or willing to satisfy the Company's requirements on a timely basis or at acceptable quality or per unit prices. Constraints or delays in the supply of the Company's products, whether because of capacity constraints, unexpected disruptions at the current or future foundries or assembly houses, delays in obtaining additional production at the existing foundry or in obtaining production from -16- 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. LITIGATION. On August 12, 1996, a securities class action lawsuit was filed in Santa Clara County Superior Court against the Company and Michael Gulett, Robert McClelland, Richard A. Veldhouse and Chiang Lam (the "Paradigm Defendants") and PaineWebber, Inc. The class alleged by plaintiffs consisted of purchasers of the Company's Common Stock from November 20, 1995 to March 22, 1996, inclusive (the "Class Period"). 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. Plaintiffs allege that the Paradigm Defendants made these alleged misrepresntations to enable: (1) insiders to sell their shares at a profit, (ii) the Company's stock price to be positioned for a secondary offering of 243,250 shares of stock (which was later withdrawn) and (iii) the Company to acquire NewLogic (which acquisition was later accomplished in exchange for 31,440 shares of the Company's Common Stock and cash). Plaintiffs allege defendants McClelland, McDonald and Veldhouse respectively acquired 55, 54 and 63 shares of the Company's stock on January 2, 1996 at a price of $114.80 per share sold all of the stock on the same day at a price of $135.00 per share. Plaintiffs further allege (i) defendant McClelland sold 700 shares of the Company's stock on or about February 22, 1996 at a price of $145.00 per share, (ii) defendant Lam sold 313 shares of the Company's stock on or about February 23, 1996 at a price of $150.00 per share, which Shares were acquired by exercise of options on January 2, 1996 at a price of $5.00 per share and (iii) defendant McClelland sold 100 shares of the Company's stock on February 26, 1996 at a price of $165.00. The Paradigm Defendants intend to vigorously defend the action. On September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer as to all of the causes of action against Michael Gulett and as to all causes of actions, except for violation of certain provisions of the California Corporate Securities Law, against the remaining Paradigm Defendants. The Court, however, granted plaintiffs leave to amend the complaint to attempt to cure the defects which caused the Court to sustain the demurrer. Plaintiffs failed to amend within the allotted time. On January 8, 1997, the Paradigm Defendants filed an answer to the complaint denying any liability for the acts and damages alleged by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with discovery requests for production of documents and interrogatories, to which the Paradigm Defendants have responded. Plaintiffs have also subpoenaed documents from various third parties. The Paradigm Defendants have served the plaintiffs with an initial set of discovery requests, to which plaintiffs have responded. The Paradigm Defendants also took the depositions of the named plaintiffs on April 9, 1997. On January 15, 1997, plaintiffs filed a motion to certify the matter as a class action. Plaintiffs sought by their motion to certify a nationwide class of those who purchased the Company's stock during the Class Period. After several hearings and continuances, on February 9, 1998 the Court certified a class consisting only of California purchasers of the Company's stock during the Class Period. Plaintiffs have set a hearing date of April 9, 1998 for a motion to amend their complaint to incorporate factual allegations derived from the February 21, 1997 action described below. There can be no assurance that the Company will be successful in the defense of this action. Even if the Company is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. On February 21, 1997, an additional purported class action lawsuit was filed in Santa Clara County Superior Court against the Company and Michael Gulett, Robert McClelland, Richard A. Veldhouse, Chiang Lam, PaineWebber, Inc. and Smith Barney (the "Paradigm Defendants"), with causes of action and factual allegations essentially identical to those of the August 12, 1996 class action lawsuit. This second class action is asserted against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. Prior to the hearing on the Paradigm Defendants' demurrer to the initial complaint, plaintiff amended his complaint to incorporate factual allegations derived -17- from the May 19, 1997 lawsuit described below. The Paradigm Defendants filed a demurrer to the amended complaint, which was heard on September 9, 1997. On September 10, 1997, the Court issued an order sustaining the Paradigm Defendants' demurrer as to all causes of action without leave to amend. A judgment in favor of the Paradigm Defendants dismissing the entire complaint was entered by the Court on September 23, 1997. Plaintiffs have appealed the decision and filed a brief in support of its appeal. The Paradigm Defendants' responsive brief is due to be filed March 30, 1998. There can be no assurances that the Company will be successful in defeating the appeal. Even if Paradigm is successful in defeating the appeal, it may incur substantial legal fees and other expenses related to this appeal. If unsuccessful in defeating the appeal, the Company's business operating results and cash flows could be materially adversely affected. On May 19, 1997, former employees of the Company, Thomas Campbell, James Zulliger and Mark Wagenhals, filed an action in Santa Clara County Superior Court. The complaint names as defendants the Company, Michael Gulett, Richard Veldhouse, Dennis McDonald and Chiang Lam. Plaintiffs filed with the complaint a notice that they consider their case related legally and factually to the August 12, 1996 class action lawsuit described above. The Complaint alleges fraud, breach of fiduciary duty and violations of certain provisions of the California Corporate Securities Law and Civil Code. Plaintiffs allege that they purchased the Company's stock at allegedly inflated prices and were damaged thereby. The plaintiffs seek an unspecified amount of compensatory, rescissory and/or punitive damages. Defendants responded to the complaint on September 12, 1997 by filing a demurrer as to all causes of action. Prior to the hearing on the demurrer, Plaintiffs amended their complaint to identify two allegedly fraudulent sale transactions. In particular, Plaintiffs allege that the Company reported a sale of $1,650,000 worth of products to NexGen, Inc., one of the Company's customers, that was not a legitimate sale. Plaintiffs allege that the order was sent to the shipping floor during the evening shift on December 31, 1995, to be out before midnight, was included in year-end sales and was returned, apparently untouched, in April 1996. In addition, plaintiffs allege that on March 31, 1996, the Company shipped $1,440,080 worth of products to Arco, one of the Company's distributors, that was not a legitimate order. Plaintiffs allege this shipment was later returned untouched for full credit. On February 20, 1998, defendants filed a demurrer as to all causes of action in the amended complaint, which is set to be heard April 2, 1998. Plaintiffs have served the Company and two of the individual defendants with requests for production of documents, to which the Company and the individual defendants have responded. The Company has served plaintiff with form interrogatories, to which they have responded. There can be no assurance that the Company will be successful in such defense. Even if Paradigm is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. The Company is involved in various other litigation and potential claims. Due to the inherent uncertainty of litigation, management is not able to reasonably estimate losses that may be incurred in relation to this litigation. However, based on the facts presently known, management believes that the resolution of these matters will not have a material adverse impact on the results of operations or the financial position of the Company. PRODUCT AND CUSTOMER CONCENTRATION; DEPENDENCE ON TELECOMMUNICATIONS AND COMPUTER INDUSTRIES. Currently, substantially all of the Company's sales are derived from the sale of SRAM products. Substantially all of the Company's products are incorporated into telecommunications and computer-related products. The telecommunications and computer industries have recently experienced strong unit sales growth, which has increased demand for integrated circuits, including the memory products offered Paradigm. However, industries have from time to time experienced cyclical, depressed business conditions. Such industry downturns have historically resulted in reduced product demand and declining average selling prices. The Company's business and operating results could be materially and adversely affected by a downturn in the telecommunications or computer industries in the future. -18- 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 many 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 capital stock from the Company, certain stockholders of the Company who had been unsecured creditors of the Company as of the reorganization and from the Company's equipment lessors. Atmel also acquired certain warrants to purchase shares of the Company's Common Stock. In 1995, the Company and Atmel entered into a five-year License and Manufacturing Agreement pursuant to which Atmel would provide the capacity to manufacture wafers at its wafer manufacturing facility. The Company entered into such agreement with Atmel because Atmel provided the Company with significant wafer manufacturing capacity when such capacity was in short supply. The Company previously licensed the design and process technology for substantially all of its products at such time, including certain of its 256K, 1M and 4M products, to NKK as a source of revenue. The Company has not licensed any of its current products to NKK. In the future, the Company may compete with NKK with respect to all of such products in certain -19- Pacific Rim countries, North America and Europe and, as to certain of its 256K and 1M products, in the rest of the world. In 1995, NKK commenced production of products using the Company's design and process technologies, and therefore may become a more significant competitor of the Company. Any such competition with NKK could adversely affect the Company. Paradigm has also licensed to Atmel the right to produce certain of its SRAM products which provided significant wafer manufacturing capacity. As a result, the Company is likely to compete with Atmel with respect to such products. Because Atmel has greater resources than the Company and has foundry capacity, any such competition could adversely affect the Company. To the extent that the Company enters into similar arrangements with other companies, it may compete with such companies as well. DEPENDENCE ON PATENTS, LICENSES AND INTELLECTUAL PROPERTY; POTENTIAL LITIGATION. The Company intends to continue to pursue patent, trade secret, and mask work protection for its semiconductor process technologies and designs. To that end, the Company has obtained certain patents and patent licenses and intends to continue to seek patents on its inventions and manufacturing processes, as appropriate. The process of seeking patent protection can be long and expensive, and there is no assurance that patents will be issued from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to the Company. In particular, there can be no assurance that any patents held by the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantage to the Company. The Company also relies on trade secret protection for its technology, in part through confidentiality agreements with its employees, consultants and third parties. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known to or independently developed by others. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor industry. In the future, litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. The Company has from time to time received, and may in the future receive, communications alleging possible infringement of patents or other intellectual property rights of others. Any such litigation could result in substantial cost to and diversion of effort by the Company, which could have a material adverse effect on the Company. Further, adverse determinations in such litigation could result in the Company's loss of proprietary rights, subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties or prevent the Company from manufacturing or selling its products, any of which could have a material adverse effect on the Company. INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. A significant portion of the Company's sales are attributable to sales outside the United States, primarily in Asia and Europe. In fiscal 1997, Asia and Europe accounted for approximately 7% and 5%, respectively, of the Company's revenues. The Company expects that international sales will continue to represent a significant portion of its sales. The Company currently conducts business in Singapore, Japan, Taiwan, Hong Kong, United Kingdom, Belgium, Sweden, France, Germany and Israel. -20- 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 U.S. dollars and all of Paradigm's business transactions are in U.S. dollars. Accordingly, any increase in the value of the dollar as compared to currencies in the Company's principal overseas markets would increase the foreign currency-denominated sales prices of the Company's products, which may negatively affect the Company's sales in those markets. The Company has not entered into any agreements or instruments to hedge the risk of foreign currency fluctuations. Currency fluctuations in the future may also increase the manufacturing costs of the Company's products. Although the Company has not to date experienced any material adverse effect on its operations as a result of such international risks, there can be no assurance that such factors will not adversely impact the Company's general business, financial condition and results of operations. EMPLOYEES. The Company's future success will be heavily dependent upon its ability to attract and retain qualified technical, managerial, marketing and financial personnel. The Company has experienced a high degree of turnover in personnel, including at the senior and middle management levels. The competition for such personnel is intense and includes companies with substantially greater financial and other resources to offer such personnel. Recently, the Company has had to significantly reduce its work staff. There can be no assurance that the Company will be able to attract and retain the necessary personnel, and any failure to do so could have a material adverse effect on the Company. POTENTIAL VOLATILITY OF STOCK PRICE. The trading price of the Company's Common Stock is subject to wide fluctuations in response to variations in operating results of the Company and other semiconductor companies, actual or anticipated announcements of technical innovations or new products by the Company or its competitors, general conditions in the semiconductor industry and the worldwide economy, and other events or factors. The Company's stock traded from a high of $372.50 in August 1995 to a low of $1.25 in December 1997 (after giving effect to the ten-for-one reverse stock split). 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 -21- 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. YEAR 2000. The Year 2000 issue arises because most computer hardware and software was developed without considering the impact of the upcoming change in the century. The hardware and software were originally designed to accept two-digit entries rather than four-digit entries in the date code field. As a result, certain computer systems and software packages will not be able to correctly interpret dates beyond December 31, 1999 and thus, will interpret dates beginning January 1, 2000 to represent January 1, 1900. This could potentially result in computer failure or miscalculations, causing operating disruptions, including among other things, a temporary inability to process transactions, send invoices or engage in other ordinary activities. The Company has evaluated all of its computer software and database software to identify modifications, if any, that may be required to address Year 2000 issues. The Company does not believe there is significant risk associated with the Year 2000 problem. The Company primarily uses third-party software programs written and updated by outside firms, each of whom has indicated that its software is Year 2000 compliant. The Company intends to test all of its software programs during the first two quarters of 1998 to ensure that each will work in conjunction with the other after December 31, 1999. If unforeseeable problems arise during the testing phase, the Company intends to have them corrected prior to the end of the 1998 calendar year. The Company does not expect the financial cost associated with any required modifications to have a material adverse impact on the Company's results, operations or financial condition. The Company also relies on third parties to ship its products. The Company is currently investigating whether such parties are Year 2000 compliant. The Company does not expect that failure on the part of any third party to be Year 2000 compliant will have a material adverse impact on its business, results of operations or financial condition. ITEM 2. PROPERTIES ---------- The Company leases its 20,000 square foot principal facility in Milpitas, California pursuant to a lease that expires in January 2002. The Company also has domestic sales offices in the Boston, Chicago, Los Angeles and San Jose metropolitan areas. The Company believes that the size of its existing facility is adequate to meet its current needs. ITEM 3. LEGAL PROCEEDINGS ----------------- On August 12, 1996, a securities class action lawsuit was filed in Santa Clara County Superior Court against the Company and Michael Gulett, Robert McClelland, Richard A. Veldhouse and Chiang Lam (the "Paradigm Defendants") and PaineWebber, Inc. The class alleged by plaintiffs consisted of purchasers of the Company's Common Stock from November 20, 1995 to March 22, 1996, inclusive (the "Class Period"). 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 -22- semiconductor market based on the Company's focus on high speed, high performance semiconductor products. Plaintiffs allege that the Paradigm Defendants made these alleged misrepresntations to enable: (1) insiders to sell their shares at a profit, (ii) the Company's stock price to be positioned for a secondary offering of 243,250 shares of stock (which was later withdrawn) and (iii) the Company to acquire NewLogic (which acquisition was later accomplished in exchange for 31,440 shares of the Company's Common Stock and cash). Plaintiffs allege defendants McClelland, McDonald and Veldhouse respectively acquired 55, 54 and 63 shares of the Company's stock on January 2, 1996 at a price of $114.80 per share sold all of the stock on the same day at a price of $135.00 per share. Plaintiffs further allege (i) defendant McClelland sold 700 shares of the Company's stock on or about February 22, 1996 at a price of $145.00 per share, (ii) defendant Lam sold 313 shares of the Company's stock on or about February 23, 1996 at a price of $150.00 per share, which Shares were acquired by exercise of options on January 2, 1996 at a price of $5.00 per share and (iii) defendant McClelland sold 100 shares of the Company's stock on February 26, 1996 at a price of $165.00. The Paradigm Defendants intend to vigorously defend the action. On September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer as to all of the causes of action against Michael Gulett and as to all causes of actions, except for violation of certain provisions of the California Corporate Securities Law, against the remaining Paradigm Defendants. The Court, however, granted plaintiffs leave to amend the complaint to attempt to cure the defects which caused the Court to sustain the demurrer. Plaintiffs failed to amend within the allotted time. On January 8, 1997, the Paradigm Defendants filed an answer to the complaint denying any liability for the acts and damages alleged by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with discovery requests for production of documents and interrogatories, to which the Paradigm Defendants have responded. Plaintiffs have also subpoenaed documents from various third parties. The Paradigm Defendants have served the plaintiffs with an initial set of discovery requests, to which plaintiffs have responded. The Paradigm Defendants also took the depositions of the named plaintiffs on April 9, 1997. On January 15, 1997, plaintiffs filed a motion to certify the matter as a class action. Plaintiffs sought by their motion to certify a nationwide class of those who purchased the Company's stock during the Class Period. After several hearings and continuances, on February 9, 1998 the Court certified a class consisting only of California purchasers of the Company's stock during the Class Period. Plaintiffs have set a hearing date of April 9, 1998 for a motion to amend their complaint to incorporate factual allegations derived from the February 21, 1997 action described below. There can be no assurance that the Company will be successful in the defense of this action. Even if the Company is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. On February 21, 1997, an additional purported class action lawsuit was filed in Santa Clara County Superior Court against the Company and Michael Gulett, Robert McClelland, Richard A. Veldhouse, Chiang Lam, Paine Webber, Inc. and Smith Barney (the "Paradigm Defendants"), with causes of action and factual allegations essentially identical to those of the August 12, 1996 class action lawsuit. This second class action is asserted against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. Prior to the hearing on the Paradigm Defendants' demurrer to the initial complaint, plaintiff amended his complaint to incorporate factual allegations derived from the May 19, 1997 lawsuit described below. The Paradigm Defendants filed a demurrer to the amended complaint, which was heard on September 9, 1997. On September 10, 1997, the Court issued an order sustaining the Paradigm Defendants' demurrer as to all causes of action without leave to amend. A judgment in favor of the Paradigm Defendants dismissing the entire complaint was entered by the Court on September 23, 1997. Plaintiffs have appealed the decision and filed a brief in support of its appeal. The Paradigm Defendants' responsive brief is due to be filed March 30, 1998. There can be no assurances that the Company will be successful in defeating the appeal. Even if Paradigm is successful in defeating the appeal, it may incur substantial legal fees and other expenses related to this appeal. If unsuccessful in defeating the appeal, the Company's business operating results and cash flows could be materially adversely affected. On May 19, 1997, former employees of the Company, Thomas Campbell, James Zulliger and Mark Wagenhals, filed an action in Santa Clara County Superior Court. The complaint names as defendants the Company, Michael Gulett, -23- Richard Veldhouse, Dennis McDonald and Chiang Lam. Plaintiffs filed with the complaint a notice that they consider their case related legally and factually to the August 12, 1996 class action lawsuit described above. The Complaint alleges fraud, breach of fiduciary duty and violations of certain provisions of the California Corporate Securities Law and Civil Code. Plaintiffs allege that they purchased the Company's stock at allegedly inflated prices and were damaged thereby. The plaintiffs seek an unspecified amount of compensatory, rescissory and/or punitive damages. Defendants responded to the complaint on September 12, 1997 by filing a demurrer as to all causes of action. Prior to the hearing on the demurrer, Plaintiffs amended their complaint to identify two allegedly fraudulent sale transactions. In particular, Plaintiffs allege that the Company reported a sale of $1,650,000 worth of products to NexGen, Inc., one of the Company's customers, that was not a legitimate sale. Plaintiffs allege that the order was sent to the shipping floor during the evening shift on December 31, 1995, to be out before midnight, was included in year-end sales and was returned, apparently untouched, in April 1996. In addition, plaintiffs allege that on March 31, 1996, the Company shipped $1,440,080 worth of products to Arco, one of the Company's distributors, that was not a legitimate order. Plaintiffs allege this shipment was later returned untouched for full credit. On February 20, 1998, defendants filed a demurrer as to all causes of action in the amended complaint, which is set to be heard April 2, 1998. Plaintiffs have served the Company and two of the individual defendants with requests for production of documents, to which the Company and the individual defendants have responded. The Company has served plaintiff with form interrogatories, to which they have responded. There can be no assurance that the Company will be successful in such defense. Even if Paradigm is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. Other than as set forth above, there are no material pending legal proceedings against the Company or as to which any of its property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK- ------------------------------------------------------- HOLDER MATTERS -------------- (a) Common Stock Price Range. The Common Stock of the Company began ------------------------ trading publicly on the NNM on June 28, 1995 under the symbol PRDM. As of August 22, 1997, the Company's stock has been trading publicly on the SCM. Prior to June 28, 1995, there was no public market for the Common Stock. The Company has not paid cash dividends and has no present plans to do so. It is the present policy of the Company to reinvest earnings of the Company, if any, to finance expansion of the Company's operations, and the Company does not expect to pay dividends in the foreseeable future. The following table sets forth for the periods indicated the high and low sale prices of the Common Stock of the Company on the NNM prior to August 22, 1997 and the SCM subsequent to August 22, 1997. -24-
High Low ---- --- Fiscal Year ended December 31, 1995 Second Quarter (from June 28, 1995) $232.50 $172.50 Third Quarter 372.50 222.50 Fourth Quarter 302.50 120.00 Fiscal Year ended December 31, 1996 First Quarter 190.00 82.50 Second Quarter 120.00 62.50 Third Quarter 73.80 38.80 Fourth Quarter 55.00 20.60 Fiscal Year ended December 31, 1997 First Quarter 31.30 11.30 Second Quarter 18.80 6.90 Third Quarter 22.20 6.90 Fourth Quarter 15.00 1.25
(b) As of December 31, 1997, there were approximately 243 stockholders of record. The Company has never paid a dividend and has no current plans to do so. ITEM 6. SELECTED FINANCIAL DATA ----------------------- The following selected financial data should be read in conjunction with the Company's financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. -25- SELECTED FINANCIAL DATA (in thousands, except per share amounts)
Post-Reorganizatio(1) Pre-Reorganization(1) Year Ended Year Ended March 31, April 1 June 21 Dec. 31, --------------------- to to -------------------------------- June 20, Dec. 31, 1993 1994 1994 1994(2) 1995 1996(6) 1997 ---------- ---------- ---------- ---------- ---------- ---------- --------- STATEMENT OF OPERATIONS DATA: Sales, net.................................. $ 24,827 $ 31,844 $ 6,033 $ 19,690 $ 51,923 $ 23,202 $ 12,449 Cost of goods sold.......................... 28,465 26,283 5,895 12,881 31,033 36,364 11,946 --------- --------- --------- --------- --------- --------- --------- Gross profit (loss)......................... (3,638) 5,561 138 6,809 20,890 (13,162) 503 --------- --------- --------- --------- --------- --------- --------- Operating expenses: Research and development(3)................. 1,980 1,148 1,192 1,920 4,621 6,243 3,406 Selling, general and administrative......... 6,007 5,555 1,191 3,004 8,107 9,497 4,920 Write-off of in-process technology acquired (6) -- -- -- -- -- 3,841 -- Loss on sale of wafer fab(6)................ -- -- -- -- -- 4,632 -- --------- --------- --------- --------- --------- --------- --------- Total operating expenses.................... 7,987 6,703 2,383 4,924 12,728 24,213 8,326 --------- --------- --------- --------- --------- --------- --------- Operating income (loss)..................... (11,625) (1,142) (2,245) 1,885 8,162 (37,375) (7,823) Interest expense............................ 3,824 3,286 518 721 1,369 1,121 370 Other (income) expense, net(4).............. 2,417 (218) (17) (44) (615) (946) 718 --------- --------- --------- --------- --------- --------- --------- Income (loss) before extraordinary gain and provision (benefit) for income taxes..... (17,866) (4,210) (2,746) 1,208 7,408 (37,550) (8,911) Extraordinary gain(5)....................... -- -- 12,990 -- -- -- -- Provision (benefit) for income taxes........ -- -- -- -- 2,145 (1,125) -- --------- --------- --------- --------- --------- --------- --------- Net income (loss)........................... $ (17,866) $ (4,210) $ 10,244 $ 1,208 $ 5,263 $ (36,425) $ (8,911) ========= ========= ========= ========= ========= ========= ========= Accretion related to Preferred Stock........ (1,307) ========= Net loss attributable to common shareholders $ (10,218) ========= Basic income (loss) per share(7)............ 11.73 13.92 (51.59) (11.87) Diluted income (loss) per share(7).......... 2.25 9.14 (51.59) (11.87) Weighted average shares - basic(7).......... 103 378 706 861 Weighted average shares - diluted(7)........ 536 576 706 861 Pre-Reorganization(1) Post-Reorganization(1) ---------------------------------------- ------------------------------------- March 31, December 31, ---------------------------------------- ------------------------------------- 1993 1994 1994 1995 1996 1997 ------------ ------------ ------------ ------------ ----------- ---------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments $ 311 $ 52 $ 135 $ 21,213 $ 587 $ 461 Working capital (deficit)................... (28,226) (26,324) (2,243) 26,624 (392) 415 Total assets................................ 24,238 18,591 19,421 56,732 17,742 9,290 Total debt and obligations under capital leases 26,471 25,847 12,620 7,636 374 534 Retained earnings (accumulated deficit)..... (50,654) (54,864) 1,208 6,471 (29,954) (40,172) Total stockholders' equity (deficit)........ (45,292) (49,488) 2,345 39,349 6,344 3,009 Mandatorily redeemable preferred stock...... 32,821 33,753 -- -- -- -- - - ---------- (1) On June 21, 1994, the Company consummated a plan of reorganization (the "Reorganization") which established a new accounting basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the lack of comparability of periods before and after the Reorganization. Net income/loss per share for the periods prior to the Reorganization has not been presented as they are not considered to be meaningful. (2) The period ended December 31, 1994 had ten more days than the normal six month period. (3) Net of co-development funding from a stockholder of $5,177 and $4,283 for the years ended March 31, 1993 and 1994, respectively. (4) The year ended March 31, 1993 includes a penalty payment of $2,000 related to a lease consolidation agreement. (5) The period ended June 20, 1994 includes a $12,990 extraordinary gain resulting from the cancellation of liabilities in the Reorganization. (6) The year ended December 31, 1996 includes charges of $4,632 resulting from the sale of the Company's wafer fabrication facility and $3,841 related to the Company's acquisition of NewLogic. See Note 11 and Note 6, respectively, of Notes to Financial Statements. (7) As restated for the 10-for-1 reverse stock split effective May 1, 1998.
-26- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATION ---------------------------------- THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "BUSINESS--FACTORS THAT MAY AFFECT FUTURE RESULTS." OVERVIEW Paradigm was founded in January 1987 and focused its initial development efforts primarily on high speed 256K and 1M SRAMs, producing its first prototype product in 1988. In July 1989, the Company began operating its wafer fabrication facility in San Jose, California and in April 1990 shipped its first commercial products, high speed 256K SRAMs. In July 1990 and October 1993, respectively, Paradigm began shipping 1M SRAMs and limited quantities of 4M SRAMs. On November 15, 1996, the Company sold its Fab to Orbit. See "Sale of Wafer Fabrication Facility." From its inception through its Reorganization in June 1994, the Company incurred substantial operating losses as it developed its technology and manufacturing processes. During this period, the Company incurred significant indebtedness to fund its operations, including capital expenditures associated with its wafer fabrication facility. This increasing indebtedness resulted in a significant increase in interest expense, which negatively impacted cash flow. In addition, the Company incurred operating losses due to manufacturing inefficiencies and a less than optimal sales mix that was comprised primarily of customers in lower margin markets. Specifically, prior to the Reorganization, many of the Company's suppliers temporarily suspended shipments or demanded payment in cash prior to delivery of products. In addition, due to the Company's urgent cash needs, it sold the majority of its high performance SRAM products into lower margin commodity markets, resulting in reduced sales and lower margins than would otherwise have been achievable. In January 1994, the Company concluded that it could not meet its debt obligations and began to develop a plan for restructuring its debt and capital structure. See "Chapter 11 Reorganization." Prior to the Reorganization, Paradigm's new management team adopted a strategy of focusing on emerging markets for higher performance asynchronous and synchronous SRAMs and specialty products. This emphasis on the higher end of the SRAM market was facilitated by the Reorganization, which gave the Company the financial flexibility and time to target highend markets for its high performance products. As a result of Paradigm's change in marketing strategy, the Company made a transition from a customer base composed largely of contract manufacturers to one increasingly represented by market leading product developers, resulting in increased sales to the Company's targeted markets in the telecommunications, networking, workstation, high performance PC and military/aerospace industries. Beginning in late 1995 and continuing through 1997, the Company has experienced significant decreases in average selling prices for certain products. Such price decreases have -27- had an adverse effect on the Company's operating results. Accordingly, the Company's ability to maintain or increase revenues 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. CHAPTER 11 REORGANIZATION On February 23, 1994, the Company entered into a letter of intent with ACMA Limited ("ACMA") and a letter of intent with National Semiconductor Corporation ("NSC") to restructure its obligations and provide additional capital to the Company. On March 30, 1994 and pursuant to the ACMA letter of intent, the Company filed in the United States Bankruptcy Court for the Northern District of California (the "Court") a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On April 7, 1994, the Company filed its initial Plan of Reorganization with the Court. On May 24, 1994, after further negotiations between the Company and the Official Committee of Unsecured Creditors in its bankruptcy proceeding, the Company filed its Third Amended Joint Plan of Reorganization (the "Plan"). On June 7, 1994, the Court confirmed the Plan, which became effective on June 21, 1994. The Plan provided for the elimination of a significant portion of the Company's indebtedness and a significant reduction in its interest expense. At the time of filing of the Company's Chapter 11 proceeding, the Company's indebtedness, consisting of bank and other borrowings, capital lease obligations and trade payables, amounted to $33.9 million, and the Company had an accumulated deficit of $52.7 million. The Plan provided for a substantial restructuring of this indebtedness through reduction or elimination of certain amounts owed, based on the order of priority of claims in the Reorganization. Accordingly, bank borrowings and secured borrowings were repaid in full, capital lease obligations were restructured, and holders of trade payables and other unsecured borrowings received cash in the amount of 5% of allowed claims, promissory notes in the amount of 25% of allowed claims, and shares of Common Stock of the Company equal to 8.5% of the capital stock of the Company on a fully diluted basis. Under the Plan, the rights and interests of the Company's equity holders at that time were terminated. In addition, pursuant to letters of intent with the Company, ACMA and NSC purchased shares of preferred stock of the Company for an aggregate purchase price of $6.0 million. In connection with the Reorganization, the Company's basis of accounting for financial reporting purposes changed, effective June 21, 1994, as follows: (i) the Company's assets and liabilities reflect a reorganization value generally approximating the fair value of the Company as a going concern on an unleveraged basis, (ii) the Company's accumulated deficit was eliminated, and (iii) the Company's capital structure was adjusted to reflect consummation of the Plan. Accordingly, the Company's results of operations after June 20, 1994 are not comparable to the results of operations prior to that date, and the results of operations for the periods from April 1, 1994 to June 20, 1994 and from June 21, 1994 to December 31, 1994 have not been aggregated. Further, the financial position of the Company on or after June 21, 1994 is not comparable to its financial position at any date prior thereto. -28- SALE OF WAFER FABRICATION FACILITY In fiscal 1996, the Company adopted a strategy of having its products manufactured at outside foundries to provide greater flexibility and lower fixed costs. In that respect, 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 whereby Orbit supplied a quantity of wafers to the Company over a specified period of time. Orbit paid to the Company aggregate consideration of $20,000,000 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 aggregate principal amounts of $5.8 million. 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, a reserve for an adverse purchase commitment related to the wafer manufacturing agreement and accruals for other costs. See Note 11 of Notes to Financial Statements. 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. The Company also implemented a reduction in the work force of approximately 35 employees and took a charge of approximately $150,000 in the fourth quarter of 1997 associated with severance payments and other related costs. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31, 1996. SALES Sales decreased by 46% to $12.4 million in the year ended December 31, 1997, from $23.2 million in the year ended December 31, 1996. The Company experienced a significant downward trend in pricing during 1997 and 1996, caused by an excess supply relative to demand for certain SRAM products. The Company expects the downward price trend in the industry to continue. The decrease in unit prices was offset by a higher volume of units shipped in 1997 compared to 1996. Unit shipments increased by 33% from 1996 to 1997. The SRAM business is highly cyclical and has been subject to significant downturns at various times. These downturns have been characterized by diminished product demand, production overcapacity, intense competition and accelerated erosion of average selling prices. GROSS PROFIT Gross profit increased to a profit of $503,000 in the year ended December 31, 1997, from a loss of $(13.2) million in the year ended December 31, 1996. As a percentage of sales, gross -29- profit in the year ended December 31, 1997 was 4%, compared to (57%) for the year ended December 31, 1996. The increase in gross profit resulted primarily from the implementation of a strict company-wide cost reduction program which enabled the company to reduce its external wafer fabrication subcontract costs and internal test and assembly costs. During the year ended December 31, 1997, in response to the continuing erosion of average selling prices, the Company made lower of cost or market provisions of $650,000. During the year ended December 31, 1996, the Company provided lower of cost or market provisions of $2,475,000 and write-offs of $3,325,000 related to older generation SRAM products to reflect reduced product demand and current industry pricing trends. RESEARCH AND DEVELOPMENT Research and development expenses decreased by 45% to $3.4 million in the year ended December 31, 1997, from $6.2 million in the year ended December 31, 1996. The decrease in expenses in 1997 resulted from headcount reductions, the decision in early 1997 to shut down product development associated with the NewLogic acquisition made in 1996, and a more direct focus on core SRAM products and markets. As a percent of sales, research and development expenses were approximately 27% in 1997 and 1996. SELLING AND ADMINISTRATIVE Selling, General and Administrative expenses decreased by 48% to $4.9 million in the year ended December 31, 1997, from $9.5 million in the year ended December 31, 1996. The decrease resulted from headcount reductions and the Company's cost reduction program implemented in mid-1997. OTHER OPERATING EXPENSES The Company recorded a loss of $4.6 million in the year ended December 31, 1996 as a result of the sale of its wafer fabrication facility. This charge included the excess of the net book value of leasehold improvements, wafer fabrication equipment, fabrication work in process inventory and other assets sold to Orbit over the proceeds received from Orbit, an accrual for professional fees incurred to complete the transaction, a reserve for an adverse purchase commitment related to the wafer manufacturing agreement and accruals for other estimated costs to be incurred. In June 1996, the Company acquired, through a stock purchase and merger transaction, NewLogic, a company which developed and manufactured logic designs with large memory arrays. In exchange for its purchase of the NewLogic capital stock, the Company issued 31,439 shares of the Company's common stock, with a market value of approximately $2,656,000, and approximately $825,000 in cash. In addition, the Company incurred transaction costs of approximately $237,000. The fair value of NewLogic's tangible net assets at the date of acquisition was a deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of the fair market value of the net tangible assets was allocated to in-process technology which the Company wrote off in the quarter ended June 30, 1996. Approximately $250,000 was allocated -30- to other intangibles. The unamortized balance of these other intangibles was written off in connection of the shutdown of NewLogic in early 1997. INTEREST EXPENSE Interest expense decreased to $370,000 in the year ended December 31, 1997, from $1.1 million in the year ended December 31, 1996. The decrease reflects the reduced level of debt in 1997 following the repayment of certain outstanding debt in 1996, and the Company's efforts to reduce its operating expenses and capital equipment spending in 1997. OTHER (INCOME) EXPENSE, NET For the year ended December 31, 1997, other expenses, net, mainly consisted of losses on sales of, and write offs of, equipment. For the year ended December 31, 1996, other income, net, reflected interest income earned on the remaining portion of net proceeds of the Company's 1995 public offering and a gain on the sale of certain fixed assets. TAXES The Company has a tax year that ends in March. In 1997 and 1996, the Company's effective tax rates were 0% and (3%), respectively. The 1996 tax benefit reflects the benefit at the statutory rate of the operating losses reduced by valuation allowances on tax losses not recognized due to the uncertainty of realizing the benefit of these losses. No net benefit was recognized in 1997. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31, 1995 SALES Sales decreased by 55% to $23.2 million in the year ended December 31, 1996 from $51.9 million in the year ended December 31, 1995. The Company experienced a significant downward trend in pricing during 1996 that was caused by an excess supply relative to demand for certain SRAM devices. The Company expects this downward price trend to continue. In addition, the Company shipped lower volumes of units in 1996 compared to 1995. Unit shipments declined 48% from 1995 to 1996. 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. GROSS PROFIT Gross profit decreased from $20.9 million in the year ended December 31, 1995 to a loss of ($13.2) million in the year ended December 31, 1996 and, as a percentage of sales, from 40% to (57%), respectively. The decrease in gross profit resulted principally from industry-wide -31- pricing pressures experienced by the Company in 1996 caused by an oversupply in the SRAM marketplace. These pricing pressures directly impacted profits as average selling prices for the Company's products declined during the year ended December 31, 1996 when compared to 1995. In addition, during 1996 the Company provided lower of cost or market provisions of $2,475,000 and write-offs of $3,325,000 related to older generation SRAM products to reflect reduced product demand and current industry pricing trends. The Company's conversion of its internal fabrication facility from five-inch to six-inch wafer manufacturing was completed in 1996 and caused temporary declines in output and reductions in yield. This facility was sold in November 1996 to provide the Company increased flexibility and lower fixed costs. RESEARCH AND DEVELOPMENT Research and development expenses increased by 35% to $6.2 million in the year ended December 31, 1996, from $4.6 million in the year ended December 31, 1995. As a percentage of sales, research and development expenses have increased from 9% in 1995 to 27% in 1996. Increased expenses result primarily from increased headcount required to support the Company's co-development activities with Atmel, new product development and other development activities. In addition, research and development expenses increased in 1996 as a result of the Company's acquisition of NewLogic in June 1996. Research and development expenses, as a percentage of revenue, have also increased as a result of the decline in revenue in 1996 compared to 1995. In June 1996, the Company acquired NewLogic with the strategy to expand Paradigm's product line beyond SRAMs. 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. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased by 17% to $9.5 million in the year ended December 31, 1996 from $8.1 million in the year ended December 31, 1995. Selling, general and administrative expenses include approximately $1.4 million in bad debt expense in 1996 compared to $.1 million in 1995 due to financial problems at several of the Company's customers. INTEREST EXPENSE Interest expense decreased to $1.1 million in the year ended December 31, 1996, from $1.4 million in the year ended December 31, 1995. This decrease in interest expense reflects repayment of certain outstanding debt by the Company from the proceeds of its initial public offering, which was subsequently replaced in 1996 with new debt at lower interest rates. See "Liquidity and Capital Resources." -32- OTHER INCOME, NET For the years ended December 31, 1996 and December 31, 1995, other income, net, reflects interest income earned on the investment of the net proceeds to the Company from its initial public offering. In addition, other income in 1996 includes a gain on the sale of fixed assets. TAXES The Company has a tax year that ends in March. The Company's tax provision for the resultant nine month tax period ended December 31, 1995 reflected the statutory rate reduced by net operating loss benefits and other credits. The amount of net operating loss the Company may utilize in any year is limited due to the change of ownership which occurred as a result of the Reorganization. The Company incurred a net loss for its tax year ended March 31, 1995 and thus no provision has been reflected in the quarters in the period from the reorganization through March 31, 1995. In 1996 the Company's effective tax rate was (3%) which reflects the benefit of the statutory rate of the operating loss reduced by tax losses not recognized due to the uncertainty of realizing the benefit of these losses. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 1997, the Company's operating, investing and financing activities used $126,000 of cash, compared to using cash of $3.4 million during the year ended December 31, 1996, and generating cash of $3.9 million during the year ended December 31, 1995. During the year ended December 31, 1997, $5.3 million of cash was used in operations, compared to the use of $15.6 million of cash during the year ended December 31, 1996 and $8.1 million in cash generated from operations in 1995. The $5.3 million of cash used by operations during the year ended December 31, 1997, was mainly attributed to the net loss for the year of $8.9 million and a reduction of accounts payable and other liabilities of $4.2 million, offset by non-cash charges of $1.7 million for depreciation and amortization, a loss of $1.7 million on the sale of and write off of fixed assets, a reduction in other assets of $4.3 million, including $3.1 million related to the sale of the wafer fabrication facility in 1996 and proceeds from a refund of Federal income taxes of $1.2 million. The $15.6 million of cash used by operations during the year ended December 31, 1996, was mainly attributable to the net loss for the year of $36.4 million and a reduction in other liabilities of $3.7 million, offset by non-cash charges of $5.7 million for depreciation and amortization, the write-off of in-process technology associated with the New Logic acquisition of $3.8 million, a loss of $4.6 million on the sale of the Company's wafer fabrication facility and a reduction of $6.1 million in accounts receivable that reflects the lower sales volume in 1996 compared to 1995. The $8.1 million of cash generated from operations during the year ended December 31, 1995, was mainly attributable to the net profit for the year of $5.3 million and an increase in accounts payable of $3.5 million as the Company re-established its relationship with suppliers subsequent to the 1994 Reorganization, and other liabilities (primarily income taxes payable) of $3.0 million. In addition, an increase of $5.7 -33- million in accounts receivable was offset by non-cash charges of $5.1 million for depreciation and amortization. Investing activities generated $504,000 in 1997, compared to $9.7 million generated in 1996, and $30.8 million used in 1995. Funds generated in 1997 are primarily attributable to proceeds from the sale of fixed assets. In 1996, the sale of $19.9 million of short-term investments funded the Company's conversion of its wafer fabrication facility to 6" wafers ($14 million). In 1995, $18.7 million of short-term investments were purchased from the net proceeds of the Company's initial public offering in June of 1995. In addition, $13.7 million was used to convert the wafer fabrication facility to 6" wafers and expand the Company's test floor. Cash generated from financing activities amounted to $4.6 million during the year ended December 31, 1997, and resulted primarily from the issuance of Series A, B, and C Convertible Preferred Stock. Cash generated from financing activities in the amount of $2.5 million in 1996 resulted primarily from an increase of $2.0 million in borrowings from the Company's line of credit and the issuance of $11.3 million of notes payable, offset by $11.6 million of payments made on notes payable. Cash provided from financing activities in 1995 amounted to $26.8 million and is mainly attributable to the Company's initial public offering on June 28, 1995, which provided net proceeds to the Company of approximately $28.3 million, and issuance of notes payable ($9.3 million), partially offset by payments on capital leases ($7.7 million) and the decrease in a line of credit ($4.6 million). In addition, in April 1995 the Company sold a total of 42,500 shares of Common Stock to Atmel for an equity investment of $3.4 million. In November 1996, the Company replaced an existing line of credit with a new line of credit from Greyrock Business Credit with a borrowing limit of $6 million of which $513,000 was available at December 31, 1996. Borrowings under this line of credit were limited to up to 80% of eligible receivables and interest is at the greater of LIBOR plus 5.25% or 9%. At December 31, 1996, the outstanding balance under this line of credit was $2.0 million. In October 1997, the Company renewed its line of credit with Greyrock Business Credit, with some modifications. Borrowing is limited to the lesser of $5 million or the sum of (a) 80% of the amount of eligible receivables owing from original equipment manufacturers; plus (b) 70% of the amount of eligible receivables owing from distributors. The interest rate remained unchanged from the November 1996 agreement. The line of credit is subject to renewal again in October 1998, unless prior notice is given by either party to terminate the agreement. The line of credit is secured by the Company's trade receivables, inventory, equipment and general intangibles. At December 31, 1997, the outstanding balance under the line of credit was $1.7 million. In November 1996, the Company sold its wafer fabrication operations to Orbit. Orbit assumed $7.5 million of outstanding borrowings with the CIT Group that were secured by wafer fabrication equipment that was purchased. The Company used approximately $2.2 million of the cash proceeds from the sale of the wafer fabrication facility to pay off existing borrowings under lines of credit. -34- The Company's recent operations have consumed substantial amounts of cash. During 1997, the Company completed the private placement of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock for aggregate net proceeds of approximately $4,673,000. (See Note 7 of Notes to Financial Statements.) The Company believes that it will require additional cash infusion from similar private placements of equity or other sources of liquidity, such as asset sales and equipment financing to meet the Company's projected working capital and other 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. On March 6, 1998, the Company entered into a definitive merger agreement providing for the acquisition of all of the outstanding capital stock of IXYS Corporation ("IXYS") in exchange for Common Stock of the Company. The exchange ratio in the Merger for the IXYS equity securities will be the greater of two ratios. The first ratio provides that upon the Merger the holders of equity securities of IXYS hold 95% of the fully diluted capitalization of the combined company and that the holders of equity securities of the Company will hold 5% of the fully diluted capitalization of the combined company. (As used herein, fully diluted capitalization means the sum of the number of shares of common stock outstanding and issuable upon exercise or conversion of all outstanding preferred stock, warrants, options and other rights.) The second ratio provides that the value associated with the fully diluted capitalization of IXYS, at the time of the consummation of the Merger, be at least $150 million, based upon an average of the closing prices of the Company's Common Stock prior to the Company's stockholders meeting. Consummation of the merger requires the approval of the Company's and IXYS' stockholders and various regulatory approvals. If approved, the transaction is anticipated to be accounted for as a purchase of the Company by IXYS for financial reporting purposes. LITIGATION On August 12, 1996, a securities class action lawsuit was filed in Santa Clara County Superior Court against the Company and Michael Gulett, Robert McClelland, Richard A. Veldhouse and Chiang Lam (the "Paradigm Defendants") and PaineWebber, Inc. The class alleged by plaintiffs consisted of purchasers of the Company's Common Stock from November 20, 1995 to March 22, 1996, inclusive (the "Class Period"). 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. Plaintiffs allege that the Paradigm Defendants made these alleged misrepresntations to enable: (1) insiders to sell their shares at a profit, (ii) the Company's stock price to be positioned for a secondary offering of 243,250 shares of stock (which was later withdrawn) and (iii) the Company to acquire NewLogic (which acquisition was later accomplished in exchange for 31,440 shares of the Company's Common Stock and cash). Plaintiffs allege defendants McClelland, McDonald and Veldhouse respectively acquired 55, 54 and 63 shares of the Company's stock on January 2, 1996 at a price of $114.80 per share sold all of the stock on the same day at a price of $135.00 per share. Plaintiffs further allege (i) defendant McClelland sold 700 shares of the Company's stock on or about February 22, 1996 at a price of $145.00 per share, (ii) defendant Lam sold 313 shares of the Company's stock on or about February 23, 1996 at a price of $150.00 per share, which Shares were acquired by exercise of options on January 2, 1996 at a price of $5.00 per share and (iii) defendant McClelland sold 100 shares of the Company's stock on February 26, 1996 at a price of $165.00. The Paradigm Defendants intend to vigorously defend the action. On September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer as to all of the causes of action against Michael Gulett and as to all causes of actions, except for violation of certain provisions of the California Corporate Securities Law, against the remaining Paradigm Defendants. The Court, however, granted plaintiffs leave to amend the complaint to attempt to cure the defects which caused the Court to sustain the demurrer. Plaintiffs failed to amend within the allotted time. On January 8, 1997, the Paradigm Defendants filed an answer -35- to the complaint denying any liability for the acts and damages alleged by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with discovery requests for production of documents and interrogatories, to which the Paradigm Defendants have responded. Plaintiffs have also subpoenaed documents from various third parties. The Paradigm Defendants have served the plaintiffs with an initial set of discovery requests, to which plaintiffs have responded. The Paradigm Defendants also took the depositions of the named plaintiffs on April 9, 1997. On January 15, 1997, plaintiffs filed a motion to certify the matter as a class action. Plaintiffs sought by their motion to certify a nationwide class of those who purchased the Company's stock during the Class Period. After several hearings and continuances, on February 9, 1998 the Court certified a class consisting only of California purchasers of the Company's stock during the Class Period. Plaintiffs have set a hearing date of April 9, 1998 for a motion to amend their complaint to incorporate factual allegations derived from the February 21, 1997 action described below. There can be no assurance that the Company will be successful in the defense of this action. Even if the Company is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. On February 21, 1997, an additional purported class action lawsuit was filed in Santa Clara County Superior Court against the Company and Michael Gulett, Robert McClelland, Richard A. Veldhouse, Chiang Lam, PaineWebber, Inc. and Smith Barney (the "Paradigm Defendants") with causes of action and factual allegations essentially identical to those of the August 12, 1996 class action lawsuit. This second class action is asserted against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. Prior to the hearing on the Paradigm Defendants' demurrer to the initial complaint, plaintiff amended his complaint to incorporate factual allegations derived from the May 19, 1997 lawsuit described below. The Paradigm Defendants filed a demurrer to the amended complaint, which was heard on September 9, 1997. On September 10, 1997, the Court issued an order sustaining the Paradigm Defendants' demurrer as to all causes of action without leave to amend. A judgment in favor of the Paradigm Defendants dismissing the entire complaint was entered by the Court on September 23, 1997. Plaintiffs have appealed the decision and filed a brief in support of its appeal. The Paradigm Defendants' responsive brief is due to be filed March 30, 1998. There can be no assurances that the Company will be successful in defeating the appeal. Even if Paradigm is successful in defeating the appeal, it may incur substantial legal fees and other expenses related to this appeal. If unsuccessful in defeating the appeal, the Company's business operating results and cash flows could be materially adversely affected. On May 19, 1997, former employees of the Company, Thomas Campbell, James Zulliger and Mark Wagenhals, filed an action in Santa Clara County Superior Court. The complaint names as defendants the Company, Michael Gulett, Richard Veldhouse, Dennis McDonald and Chiang Lam. Plaintiffs filed with the complaint a notice that they consider their case related legally and factually to the August 12, 1996 class action lawsuit described above. The Complaint alleges fraud, breach of fiduciary duty and violations of certain provisions of the California Corporate Securities Law and Civil Code. Plaintiffs allege that they purchased the Company's stock at allegedly inflated prices and were damaged thereby. The plaintiffs seek an unspecified amount of compensatory, rescissory and/or punitive damages. Defendants responded to the complaint on September 12, 1997 by filing a demurrer as to all causes of action. Prior to the hearing on the demurrer, Plaintiffs amended their complaint to identify two allegedly fraudulent sale transactions. In particular, Plaintiffs allege that the Company reported a sale of $1,650,000 worth of products to NexGen, Inc., one of the Company's customers, that was not a legitimate sale. Plaintiffs allege that the order was sent to the shipping floor during the evening shift on December 31, 1995, to be out before midnight, was included in year-end sales and was returned, apparently untouched, in April 1996. In addition, plaintiffs allege that on March 31, 1996, the Company shipped $1,440,080 worth of products to Arco, one of the Comapny's distributors, that was not a legitimate order. Plaintiffs allege this shipment was later returned untouched for full credit. On February 20, 1998, -36- defendants filed a demurrer as to all causes of action in the amended complaint, which is set to be heard April 2, 1998. Plaintiffs have served the Company and two of the individual defendants with requests for production of documents, to which the Company and the individual defendants have responded. The Company has served plaintiff with form interrogatories, to which they have responded. There can be no assurance that the Company will be successful in such defense. Even if Paradigm is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. The Company is involved in various other litigation and potential claims which management believes, based on facts presently known, will not have a material adverse effect on the results of operations, existing sources of liquidity or the financial position of the Company. FACTORS AFFECTING FUTURE RESULTS The Company's operating results have been, and in the future may be, subject to fluctuations due to a wide variety of factors, including the timing of new product and process technology, announcements and introductions by the Company or its competitors, competitive pricing pressures, fluctuations in manufacturing yields, changes in the mix of products sold, availability and costs of raw materials, industry-wide shifts in the supply of and demand for SRAMs, intellectual property disputes and litigation, and other risks, including risks disclosed in this Annual Report on Form 10-K and other filings with the Commission. There can be no assurance that the Company will be able to effectively compete in the future against existing or potential competitors or that the Company's operating results or financial condition will not continue to be adversely affected by increased price competition. The semiconductor industry is highly cyclical and has been subject to significant downturns at various times and by diminished product demand, production overcapacity and accelerated erosion of average selling prices. During 1996 and 1997, the Company experienced, and expects it will continue to experience, significant decreases in selling prices for its SRAM products. Such price decreases could have a material adverse effect on the Company's operating results. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustment and unrealized gain/loss on available for sale securities. The disclosure prescribed by SFAS must be made beginning with the first quarter of fiscal 1998 and will have no impact on the Company's financial position or results of operations. In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an Enterprise and Related Information." This statement establishes standards for the way companies report -37- information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The disclosures prescribed by SFAS 131 are effective in fiscal 1998. YEAR 2000 The Year 2000 issue arises because most computer hardware and software was developed without considering the impact of the upcoming change in the century. The hardware and software were originally designed to accept two-digit entries rather than four-digit entries in the date code field. As a result, certain computer systems and software packages will not be able to interpret dates beyond December 31, 1999 and thus, will interpret dates beginning January 1, 2000 to represent January 1, 1900. This could potentially result in computer failure or miscalculations, causing operating disruptions, including among other things, a temporary inability to process transactions, send invoices or engage in other ordinary activities. The Company has evaluated all of its computer software and database software to identify modifications, if any, that may be required to address Year 2000 issues. The Company does not believe there is significant risk associated with the Year 2000 problem. The Company primarily uses third-party software programs written and updated by outside firms, each of whom has indicated that its software is Year 2000 compliant. The Company intends to test all of its software programs during the first two quarters of 1998 to ensure that each will work in conjunction with the other after December 31, 1999. If unforeseeable problems arise during the testing phase, the Company intends to have them corrected prior to the end of the 1998 calendar year. The Company does not expect the financial cost associated with any required modifications to have a material adverse impact on the Company's results, operations or financial condition. The Company also relies on third parties to ship its products. The Company is currently investigating whether such parties are Year 2000 compliant. The Company does not expect that failure on the part of any third party to be Year 2000 compliant will have a material adverse impact on its business, results of operations or financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET ----------------------------------------------------- RISK ---- Pursuant to the General Instructions to Rule 305 of Regulation S-K, the quantitative and qualitative disclosures called for by this Item 7A and by Rule 305 of Regulation S-K are inapplicable to the Company at this time. -38- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF PARADIGM TECHNOLOGY, INC. In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Paradigm Technology, Inc. at December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and will require additional cash to fund 1998 operations. These matters raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Price Waterhouse LLP San Jose, California February 21, 1998, except as to Note 13, which is as of March 9, 1998, and except as to the first paragraph of Note 2, which is as of May 1, 1998. -39- BALANCE SHEETS (in thousands except per share amounts)
December 31, --------------------------- 1996 1997 ------------ ----------- ASSETS: Current assets: Cash and cash equivalents............................................. $ 587 $ 461 Accounts receivable, net of allowances of $1,569 and $65.............. 2,800 2,705 Accounts receivable, related party.................................... 137 -- Inventory............................................................. 2,472 2,580 Prepaid expenses and other............................................ 4,918 544 ------------ ----------- Total current assets.............................................. 10,914 6,290 Property and equipment, net........................................... 6,638 2,737 Other assets.......................................................... 190 263 ------------ ----------- $ 17,742 $ 9,290 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Line of credit........................................................ $ 2,015 $ 1,719 Accounts payable...................................................... 6,103 2,177 Accounts payable, related party....................................... 140 -- Accrued expenses and other liabilities................................ 2,766 1,787 Current portion of debt obligations................................... 282 192 ------------ ----------- Total current liabilities......................................... 11,306 5,875 Debt obligations, net of current portion.............................. 92 342 Deferred rent......................................................... -- 64 ------------ ----------- Total liabilities................................................. 11,398 6,281 ------------ ----------- Commitments and contingencies (Notes 10 and 12) Stockholders' equity: Preferred stock, $0.01 par value; 5,000 shares authorized, -0- and 257 shares issued and outstanding................................. -- -- Common stock, $0.01 par value; 25,000,000 shares authorized; 722,500 and 1,160,100 shares issued and outstanding............... 7 12 Additional paid-in capital............................................ 36,291 43,169 Accumulated deficit................................................... (29,954) (40,172) ------------ ----------- Total stockholders' equity........................................ 6,344 3,009 ------------ ----------- $ 17,742 $ 9,290 ============ =========== The accompanying notes are an integral part of these financial statements.
-40- STATEMENTS OF OPERATIONS (in thousands except per share amounts)
Year Ended December 31, --------------------------------------- 1995 1996 1997 ---------- ---------- ----------- Sales, net..................................................... $ 51,923 $ 23,202 $ 12,449 Cost of goods sold............................................. 31,033 36,364 11,946 ---------- ---------- ----------- Gross profit (loss)............................................ 20,890 (13,162) 503 ---------- ---------- ----------- Operating expenses: Research and development..................................... 4,621 6,243 3,406 Selling, general and administrative.......................... 8,107 9,497 4,920 Loss on sale of wafer fabrication facility................... -- 4,632 -- Write-off of in-process technology acquired.................. -- 3,841 -- ---------- ---------- ----------- Total operating expenses................................. 12,728 24,213 8,326 ---------- ---------- ----------- Operating income (loss)........................................ 8,162 (37,375) (7,823) Interest expense............................................... 1,369 1,121 370 Other (income) expense, net.................................... (615) (946) 718 ---------- ---------- ----------- 7,408 (37,550) (8,911) Provision (benefit) for income taxes........................... 2,145 (1,125) -- ---------- ---------- ----------- Net income (loss).............................................. 5,263 (36,425) (8,911) Accretion related to Preferred Stock........................... -- -- (1,307) ---------- ---------- ----------- Net income (loss) attributable to common shareholders.......... $ 5,263 $ (36,425) $ (10,218) ---------- ---------- ============ Net income (loss) per share: Basic........................................................ $ 13.92 $ (51.59) $ (11.87) ---------- ---------- ----------- Diluted...................................................... $ 9.14 $ (51.59) $ (11.87) ---------- ---------- ----------- Weighted average common shares outstanding: Basic........................................................ 378 706 861 ---------- ---------- ----------- Diluted...................................................... 576 706 861 ---------- ---------- ----------- The accompanying notes are an integral part of these financial statements.
-41- STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands, except Preferred Stock shares)
Retained Preferred Stock Common Stock Additional Earnings ----------------------- ------------------- Paid In (Accumulated Shares Amount Shares Amount Capital Deficit) Total ------------ ---------- --------- -------- ----------- --------------- ---------- Balance, December 31, 1994.......... 6,400,000 $ 960 59 $ 18 $ 159 $ 1,208 $ 2,345 Reincorporation in Delaware ........ -- -- -- (16) 16 -- -- Initial public offering of common stock, net of costs............... -- -- 230 2 28,302 -- 28,304 Conversion of preferred stock to common stock...................... (6,400,000) (960) 320 3 957 -- -- Issuance of stock pursuant to Atmel agreement......................... -- -- 43 -- 3,400 -- 3,400 Stock options exercised............. -- -- 8 -- 37 -- 37 Net income.......................... -- -- -- -- -- 5,263 5,263 ----------- -------- -------- ------- ----------- ------------- --------- Balance, December 31, 1995.......... -- -- 660 7 32,871 6,471 39,349 Issuance of common stock to acquire New Logic................. -- -- 31 -- 2,656 -- 2,656 Issuance of common stock under employee stock plans.............. -- -- 31 -- 764 -- 764 Net loss............................ -- -- -- -- -- (36,425) (36,425) ----------- -------- -------- ------- ----------- ------------- --------- Balance, December 31, 1996.......... -- -- 722 7 36,291 (29,954) 6,344 Issuance of convertible preferred stock, net of offering costs...... 500 -- -- -- 4,673 -- 4,673 Issuance of common stock upon conversion of preferred........... (243) -- 376 4 (4) -- -- Issuance of common stock in payment of accounts payable....... -- -- 51 1 803 -- 804 Issuance of common stock under employee stock plans.............. -- -- 6 -- 49 -- 49 Issuance of common stock upon exercise of warrants.............. -- -- 5 -- 50 -- 50 Accretion related to preferred stock -- -- -- -- 1,307 (1,307) -- Net loss............................ -- -- -- -- -- (8,911) (8,911) ----------- -------- -------- ------- ----------- ------------- --------- Balance, December 31, 1997.......... 257 $ -- 1,160 $ 12 $ 43,169 $ (40,172) $ 3,009 =========== ======== ======== ======= =========== ============= ========= The accompanying notes are an integral part of these financial statements.
-42- STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ----------------------------------------- 1995 1996 1997 ------------ ----------- ----------- Cash flows from operating activities: Net income (loss)................................................. $ 5,263 $ (36,425) $ (8,911) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization................................. 5,141 5,716 1,668 Provision for doubtful accounts............................... 90 1,372 92 Loss on sale of wafer fabrication facility.................... -- 4,632 -- Write off in-process technology............................... -- 3,841 -- Loss (gain) on sale of and write-off of fixed assets.......... -- (532) 1,727 Changes in operating assets and liabilities: Accounts receivable........................................... (5,680) 6,115 140 Inventory..................................................... (814) 1,430 (108) Other assets.................................................. (1,361) (48) 4,301 Accounts payable.............................................. 3,475 2,023 (3,262) Pre-1994 reorganization liabilities paid...................... (1,007) (34) -- Other liabilities............................................. 3,012 (3,723) (915) ----------- ---------- ---------- Net cash provided by (used in) operating activities before reorganization items paid..................................... 8,119 (15,633) (5,268) Reorganization items paid..................................... (189) -- -- ----------- ---------- ---------- Net cash provided by (used in) operating activities........ 7,930 (15,633) (5,268) ----------- ---------- ---------- Cash flows from investing activities: Purchases of property and equipment............................... (13,609) (13,985) (430) Purchase of short-term investments................................ (18,689) (2,672) -- Sale of short-term investments.................................... 1,491 19,870 -- Sale of fixed assets.............................................. -- 549 936 Proceeds from sale of wafer fabrication facility.................. -- 6,665 -- Acquisition of NewLogic, net of cash acquired..................... -- (723) -- ----------- ---------- ---------- Net cash provided by (used) by investing activities........... (30,807) 9,704 506 ----------- ---------- ---------- Cash flows from financing activities: Line of credit increase (decrease)................................ (4,623) 2,015 (296) Payments on capital leases........................................ (7,747) -- (147) Issuance of notes payable......................................... 9,300 11,339 442 Principal payments on notes payable............................... (1,914) (11,601) (135) Issuance of common stock.......................................... 31,741 748 99 Issuance of preferred stock....................................... -- -- 4,673 ----------- ---------- ---------- Net cash provided by financing activities..................... 26,757 2,501 4,636 ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents.......... 3,880 (3,428) (126) Cash and cash equivalents: Beginning of period............................................... 135 4,015 587 ----------- ---------- ---------- End of period..................................................... $ 4,015 $ 587 $ 461 =========== ---------- ---------- Supplemental information: Interest paid..................................................... $ 1,335 $ 1,291 $ 370 ----------- ---------- ---------- Income taxes paid................................................. $ 348 $ 1,067 $ -- ----------- ---------- ---------- Supplemental disclosure of non-cash items: Issuance of warrant in connection with sale of Convertible Preferred Stock................................... $ 67 ---------- Accretion related to Convertible Preferred Stock.................. $ 1,307 ---------- Conversion of accounts payable to common stock.................... $ 804 ---------- The accompanying notes are an integral part of these financial statements.
-43- NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND ITS BUSINESS: Paradigm Technology, Inc. ("Paradigm" or the "Company") was originally incorporated in California in January 1987. Pursuant to the May 24, 1994, Third Amended Joint Plan of Reorganization (the "Plan") under Chapter 11 of the United States Bankruptcy Code, amended Articles of Incorporation were filed. On June 7, 1994, the Court confirmed the Plan, which became effective on June 21, 1994. The Company reincorporated in Delaware effective June 22, 1995, which involved the exchange of the Company's post-Reorganization common and preferred stock into shares of the Delaware Company stock. Pursuant to the reincorporation, the Company has authorized 25,000,000 shares of $0.01 par value common stock and 5,000,000 shares of $0.01 par value preferred stock. The Company markets high speed, high density Static Random Access Memory ("SRAM") products for uses in telecommunication devices, workstations and high performance PCs to OEMs and distributors in the United States, Europe and the Far East. The SRAM business is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity, and accelerated erosion of average selling prices. From the latter part of 1995 through 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 price that the Company is able to command for its products is highly dependent on industry-wide production capacity and demand. In this regard, the Company did experience rapid erosion in product pricing during 1996 and 1997 which was not within the control of the Company. The Company could continue to experience a downward trend in product pricing which could further adversely effect the Company's operating results. The Company's recent operations have consumed substantial amounts of cash. During 1997, the Company completed the private placement of Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock for net proceeds of approximately $4,673,000. The Company believes that it will require additional cash infusion from similar or related private placements and other sources of liquidity, such as asset sales and equipment financing to meet the Company's projected working capital and other cash requirements in 1998. See Note 13. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: REVERSE STOCK SPLIT Share information for all periods has been retroactively adjusted to reflect a 10-for-1 reverse stock split of common stock effected on May 1, 1998. -44- BASIS OF PRESENTATION The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less to be cash equivalents and investments with original maturities of greater than 90 days to be short-term investments. The Company accounts for its short-term investments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). As of December 31, 1996 and 1997, the Company had no short-term investments. CONCENTRATION OF CREDIT RISK Export sales, primarily to Europe and the Far East, represent 28%, 25%, and 12% of total sales for the years ended December 31, 1995, December 31, 1996, and December 31, 1997, respectively. The Company's sales have been denominated in U.S. dollars. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The following table summarizes the percentage of net sales to significant customers:
Year Ended December 31, ---------------------------------------- 1995 1996 1997 ---------- ---------- ---------- Customer A 28% 25% -- Customer B -- 13% 15% Customer C -- 13% -- Customer D -- -- 16% Customer E -- -- 16% Customer F -- -- 10%
As of December 31, 1996, accounts receivable from three customers accounted for approximately 16%, 17% and 18% of total gross accounts receivable, respectively. As of December 31, 1997, accounts receivable from three customers accounted for approximately 25%, 25%, and 15% of total gross accounts receivable, respectively. The Company maintains allowances for potential credit losses based upon expected collectibility of all accounts receivable. -45- INVENTORY Inventory is stated at the lower of cost (determined on a first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of certain equipment impairment charges. Depreciation is computed using the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of" ("SFAS 121"), the Company reviews long-lived assets, including the identifiable intangible assets and goodwill and will record impairment charges, whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. REVENUE RECOGNITION Revenue from product sales is generally recognized upon shipment and a reserve is provided for estimated returns. The Company's sales to distributors are made under agreements allowing certain rights of return and price protection on products unsold by the distributors. Accordingly, the Company defers recognition of revenue on such sales until the products are sold by the distributors. RESEARCH AND DEVELOPMENT Research and development expenses are charged to the statement of operations as incurred. STOCK BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not require companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company provides additional pro forma disclosures as required by FAS 123. -46- NET INCOME (LOSS) PER SHARE During the quarter ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires presentation of both Basic EPS and Diluted EPS. Basic EPS is computed by dividing net income available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during a period. In computing Diluted EPS, the average price for the period is used in determining the number of shares assumed to be purchased from exercise of stock options, warrants and Convertible Preferred Stock. Net income (loss) per share for all prior periods presented has been restated to conform to the provisions of SFAS 128. Following is a reconciliation of the numerators and denominators of the Basic and Diluted EPS computations for the periods presented below:
1995 1996 1997 ----------- ------------ ----------- (in thousands, except per share data) Net income (loss)........................................ $ 5,263 $ (36,425) $ (8,911) Accretion related to Convertible Preferred Stock......... -- -- (1,307) ----------- ------------ ----------- Net income attributable to common shareholders........... $ 5,263 $ (36,425) $ (10,218) =========== ============ =========== Shares calculation: Average shares outstanding--basic......................... 378 706 861 Effect of dilutive securities: Stock options and warrants............................ 38 -- -- Convertible Preferred Stock........................... 160 -- -- ----------- ------------ ----------- Average shares outstanding--diluted....................... 576 706 861 =========== ============ =========== Net income (loss) per share--basic........................ $ 13.87 $ (51.59) $ (11.87) =========== ============ =========== Net income (loss) per share--diluted...................... $ 9.14 $ (51.59) $ (11.87) =========== ============ ===========
Options to purchase 112,900 shares of common stock at prices ranging from $2.50 to $20.60 per share were outstanding during 1997 and approximately 1,067,000 shares issuable on the conversion of the 257 shares of Convertible Preferred Stock, based on the conversion factor at December 31, 1997, were not included in the computation of diluted EPS because the inclusion of such options and shares would have been antidilutive. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustment and unrealized gain/loss on available for sale securities. The disclosure prescribed by SFAS must be made beginning with the first quarter of fiscal 1998 and will have no impact on the Company's financial position or results of operations. -47- In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an Enterprise and Related Information." This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The disclosures prescribed by SFAS 131 are effective in fiscal 1998. NOTE 3 -- BALANCE SHEET DETAIL: (in thousands)
December 31, ------------------------------- 1996 1997 ------------ ------------ Inventory: Raw materials......................... $ 16 $ -- Work in process....................... 1,778 1,562 Finished goods........................ 678 1,018 ------------ ------------ $ 2,472 $ 2,580 ============ ============ Property and equipment: Machinery and equipment............... $ 9,488 $ 4,081 Leasehold improvements................ -- 245 Furniture and fixtures................ 19 115 ------------ ------------ 9,507 4,441 Less accumulated depreciation......... (2,869) (1,704) ------------ ------------ $ 6,638 $ 2,737 ============ ============ Accrued Liabilities: Accrued payroll and commissions....... $ 804 $ 366 Other................................. 1,962 1,421 ------------ ------------ $ 2,766 $ 1,787 ============ ============
NOTE 4 -- RELATED PARTY TRANSACTIONS: As a result of the Company's 1994 reorganization, certain of the Company's creditors became stockholders. Transactions with stockholders consist of the following: During the years ended December 31, 1995, 1996 and 1997, the Company purchased product with a value of $3,237,000, $6,111,000 and $2,667,000, respectively, from NKK Corporation ("NKK"). There was no amount due NKK at December 31, 1996 or December 31, 1997. In April 1995, NKK and the Company modified their previous technology license and development agreements. This 1995 agreement provides for payment of royalties to the Company by NKK on certain quantities of 1M SRAM's sold and, with certain exceptions, cancels further obligations of each party to deliver technology improvements or design updates to the other. -48- On April 28, 1995, pursuant to certain agreements with certain of the Company's stockholders, Atmel Corporation ("Atmel") acquired 42,500 shares of common stock from the Company, 30,000 shares of common stock from certain stockholders of the Company who had been unsecured creditors of the Company as of the reorganization, and 12,805 shares of common stock from the Company's equipment lessors all of which shares were purchased at a price of $80.00 per share (the "Atmel Stock"). Atmel also acquired certain warrants to purchase 17,500 shares of common stock at an exercise price of $10.00 per share, for a purchase price of $70.00 per share subject to the warrants. In connection with these transactions, the Company entered into an Agreement with Atmel (the "Stock Purchase Agreement") pursuant to which Atmel agreed to certain transfer restrictions for a period of three years. Atmel also agreed to certain standstill provisions, including an agreement not to increase its beneficial ownership above 19.9% of the voting power of the Company on a fully diluted basis for a period of five years from the date of the Stock Purchase Agreement. The foregoing restrictions terminate on the date on which a person or entity acquires more than 50% of the voting power of the Company. In addition, Atmel agreed that, for a period of ten years from the date of the Stock Purchase Agreement, it will vote the Atmel Stock in proportion to the votes cast by the other stockholders of the Company, except with respect to certain material events. The voting and standstill restrictions terminate at such time as Atmel beneficially owns less than 5% of the common stock of the Company. On April 28, 1995, Atmel also entered into a Licensing and Manufacturing Agreement (the "Agreement") with the Company. This Agreement provides Atmel with a nonexclusive, royalty bearing license to manufacture, use and sell certain of the Company's products. The royalty fee is based on a percentage of the average selling price of the products sold. In addition, under the Agreement, a certain wafer manufacturing capacity per week has been made available to the Company by Atmel. The Agreement does not include a purchase commitment by the Company. However, to the extent the Company provides Atmel with its three-month demand forecast, it is committed to purchase the three-month forecasted quantities. No obligation to purchase wafers existed as of December 31, 1997. The price of the wafers has been fixed at the current fair market value. The Agreement expires on April 28, 2000. There were no purchases from Atmel in 1997, and there was no amount due Atmel at December 31, 1997. The value of product purchased from Atmel in the year ended December 31, 1996 was $429,000 of which $140,000 is included in the accounts payable, related party balance at December 31, 1996. NOTE 5 -- LINE OF CREDIT AND DEBT OBLIGATIONS: In November 1996, the Company replaced an existing line of credit with a new line of credit from Greyrock Business Credit with a borrowing limit of $6,000,000. Borrowings under this line of credit were limited to 80% of eligible receivables and interest was at the greater of LIBOR plus 5.25% or 9%. At December 31, 1996, the outstanding balance under this line of credit was $2,015,000. In October 1997, the Company renewed its line of credit with Greyrock Business Credit. Borrowing is limited to the lesser of $5,000,000 or the sum of (a) 80% of the amount of eligible receivables owing from original equipment manufacturers; plus (b) 70% of the amount of eligible receivables owing from distributors. The interest rate remained unchanged from the November 1996 agreement. The line of credit is subject to renewal again in October 1998, unless prior -49- notice is given by either party to terminate the agreement. The line of credit is secured by the Company's trade receivables, inventory, equipment and general intangibles. At December 31, 1997, the outstanding balance under the line of credit was $1,719,000. Debt obligations aggregating $534,000 consist of outstanding promissory notes which bear interest at rates ranging from 8.0% to 19.8% at December 31, 1997, and were repayable at various dates through 1999. These notes are secured by the related equipment purchased. NOTE 6 -- NEWLOGIC ACQUISITION In June 1996, the Company acquired, through a stock purchase and merger transaction, NewLogic, a company which develops and manufactures logic designs with large memory arrays. In exchange for its purchase of the NewLogic capital stock, the Company issued 31,439 shares of the Company's common stock, with a market value of approximately $2,656,000, and approximately $825,000 in cash. In addition, the Company incurred transaction costs of approximately $237,000. The fair value of NewLogic's tangible net assets at the date of acquisition was a deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of the fair market value of the net tangible assets was allocated to in-process technology which the Company wrote off in the quarter ended June 30, 1996. Approximately $250,000 was allocated to other intangibles. The unamortized balance of these other intangibles was written off in connection of the shutdown of NewLogic in early 1997. The Company accounted for this acquisition using the purchase method of accounting and accordingly, the results of operations and cash flows of the acquisition were included only from the date of acquisition. Excluding the $3,841,000 write-off of purchased in-process technology, the pro forma impact on the Company's results of operations had the acquisition been consummated on January 1, 1995 was not materially different from the results presented in the accompanying statement of operations. NOTE 7 -- CONVERTIBLE PREFERRED STOCK On January 23, 1997, the Company sold a total of 200 shares of Series A Preferred Stock in a private placement, at a price of $10,000 per share, for total proceeds (net of payments to third parties) of approximately $1,880,000. The Series A Preferred Stock includes cumulative dividends at 5% per annum. The Series A Preferred Stock also includes an embedded discount on conversion which was accreted from the issuance date through April 23, 1997, the date upon which the Series A Preferred Stock became convertible. The accretion of the embedded discount and the cumulative dividends were treated as a charge to accumulated deficit. Also in connection with the sale of the Series A Preferred Stock the Company issued a warrant to purchase 15,000 shares of its Common Stock for $41.25 per share. The warrant is exercisable until January 22, 2000. The Company valued these warrants at $67,000 using the Black/Scholes option pricing model. The Series A Preferred Stock is convertible at the option of the holder into the number of fully paid and non-assessable shares of Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated dividends on -50- the shares of Series A Preferred Stock being converted by (B) the Series A Conversion Price in effect at the time of conversion. The "Series A Conversion Price" is equal to the lower of (i) $22.50 or (ii) eighty-two percent (82%) of the average closing bid price of a share of Common Stock as quoted on the SCM (or quoted on such other national or regional securities exchange or automated quotation system upon which the Common Stock is listed and principally traded) over the five (5) consecutive trading days immediately preceding the date of notice of conversion of the Series A Preferred Stock. During 1997, the holders of the Series A Preferred Stock converted 149 shares of the Series A Preferred Stock into 239,605 shares of the Company's Common Stock. As of December 31, 1997, there were 51 shares of the Series A Preferred Stock outstanding. On July 22, 1997, the Company sold a total of 200 shares of Series B Preferred Stock in a private placement at a price of $10,000 per share, for total proceeds (net of payments to third parties) of approximately $1,870,000. The Series B Preferred Stock includes cumulative dividends at 5% per annum. The Series B Preferred Stock also includes an embedded discount on conversion which was accreted from the issuance date through September 10, 1997, the date upon which the Series B Preferred Stock became convertible. The accretion of the embedded discount and the cumulative dividends have been treated as a charge to accumulated deficit. The Series B Preferred Stock is convertible at the option of the holder into the number of fully paid and non-assessable shares of Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated dividends on the shares of Series B Preferred Stock being converted by (B) the Series B Conversion Price in effect at the time of conversion. The "Series B Conversion Price" will be equal to the lower of (i) $13.75 or (ii) eighty-two percent (82%) of the average closing bid price of a share of Common Stock as quoted on the SCM (or quoted on such other national or regional securities exchange or automated quotation system upon which the Common Stock is listed and principally traded) over the five (5) consecutive trading days immediately preceding the date of notice of conversion of the Series B Preferred Stock. During 1997, the holders of the Series B Preferred Stock converted 94 shares of the Series B Preferred Stock into 136,040 shares of the Company's Common Stock. As of December 31, 1997, there were 106 shares of the Series B Preferred Stock outstanding. The Series A Preferred Stock and Series B Preferred Stock agreements contained restrictions on the number of shares of Common Stock that were issuable on the conversion of the Series A Preferred Stock and Series B Preferred Stock. Shares of Preferred Stock which were not convertible as a result of these restrictions were redeemable by the Company for cash. On September 26, 1997 at a Special Meeting of Shareholders, the Stockholders approved the elimination of the restrictions on the number of shares of Common Stock issuable on the conversion of the Series A Preferred Stock and Series B Preferred Stock. On November 27, 1997, the Company sold a total of 100 shares of Series C Preferred Stock in a private placement at a price of $10,000 per share, for total proceeds (net of payments to third parties) of approximately $923,000. The Series C Preferred Stock includes cumulative dividends at 5% per annum. The Series C Preferred Stock also includes an embedded discount on conversion which was accreted from the issuance date through January 27, 1998, the date -51- upon which the Series C Preferred Stock became convertible. The accretion of the embedded discount and the cumulative dividends have been treated as a charge to accumulated deficit. The Series C Preferred Stock is convertible at the option of the holder into the number of fully paid and non-assessable shares of Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated dividends on the shares of Series C Preferred Stock being converted by (B) the Series C Conversion Price in effect at the time of conversion. The "Series C Conversion Price" will be equal to the lower of (i) $5.90 or (ii) eighty-two percent (82%) of the average closing bid price of a share of Common Stock as quoted on the SCM (or quoted on such other national or regional securities exchange or automated quotation system upon which the Common Stock is listed and principally traded) over the five (5) consecutive trading days immediately preceding the date of notice of conversion of the Series C Preferred Stock. During 1997, none of the Series C Preferred Stock was converted into shares of the Company's Common Stock. NOTE 8 -- STOCK COMPENSATION PLANS: The 1994 Stock Option Plan ("Option Plan") was established on June 21, 1994. Under the Option Plan, the maximum aggregate number of shares which may be issued under the Option Plan upon exercise of options is 149,800 shares (subject to a 3% increase each January 1st). Nonstatutory stock options may be granted to employees, outside directors and consultants, whereas incentive stock options can only be granted to employees. Options are generally granted at fair market value subject to the following: (a) With respect to options granted to an employee who, at the time of the grant owns stock representing more than 10% of the voting power of all classes of stock of the Company or any parent or subsidiary, the per share exercise price shall be no less than 110% of the fair market value on the date of the grant for incentive and nonstatutory stock options. (b) With respect to options granted to any employee other than described in the preceding paragraph, the exercise price shall be no less than 100% for incentive stock options and 85% for nonstatutory stock options of the fair market value on the date of the grant. The Option Plan separately reserves 15,000 shares of common stock for option grants to outside directors. Grant of options to the Company's outside directors are made upon appointment to the Board of Directors and in annual increments thereafter. The exercise price of options granted is the fair market value at the date of grant. -52- Nonstatutory stock option activity under the Option Plan was as follows (in thousands):
1995 1996 1997 ---------------- ---------------- --------------- Outstanding at beginning of period........ 73 90 114 Granted.......................... 41 118 105 Canceled......................... (16) (70) (108) Exercised........................ (8) (24) (4) --------------- --------------- --------------- Outstanding at December 31................ 90 114 107 --------------- --------------- --------------- Exercisable at December 31................ 38 30 42 --------------- --------------- --------------- Available for Grant at December 31........ 31 15 18 --------------- --------------- ---------------
Weighted average option exercise price information for the years 1995, 1996 and 1997 as follows:
1995 1996 1997 ---------------- ---------------- ---------------- Outstanding at beginning of period........ $ 3.20 $ 43.00 $ 45.40 Granted during the year................... 102.60 62.00 15.30 Canceled during the year.................. 33.50 82.40 48.50 Exercised during the year................. 4.30 5.80 3.00 Outstanding at December 31................ 43.00 45.40 12.20 Exercisable at December 31................ 13.60 27.70 11.70
Significant option groups outstanding at December 31, 1997, and related weighted average price and life information follows (options in thousands):
Weighted Outstanding Exercisable Average ------------------- -------------------- Remaining Exercise Prices Shares Price Shares Price Life (Years) - ------------------------- -------- -------- ---------- -------- ------------ $2.50-3.00............... 30 $ 2.80 17 $ 3.00 8.1 $3.10-13.10.............. 25 11.50 5 10.90 9.5 $13.80-18.10............. 22 14.60 6 14.80 9.4 $18.80-20.60............. 30 20.60 14 20.60 8.0
Options granted vest over a period of four years. The term of the options shall be no longer than 10 years. All options were granted at an exercise price equal to the fair market value of the Company's common stock at the date of grant. The weighted average fair value at date of grant for options granted during 1995, 1996 and 1997 was $53.40, $27.40 and $14.40 per option, -53- respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following assumptions:
1995 1996 1997 --------- -------- ------- Expected life (years)....... 5 5 5 Risk free interest rate..... 6.9% 6.6% 6.2% Volatility.................. 48% 50% 168% Dividend yield.............. -- -- --
In April 1995, the board of directors of the Company adopted the Paradigm Technology, Inc. Employee Stock Purchase Plan (the "ESPP") to provide employees of the Company with an opportunity to purchase common stock through payroll deductions. The ESPP became effective upon the closing of the Company's initial public offering in July 1995. Under the ESPP, 25,000 shares of common stock have been reserved for issuance to full-time employees employed with the Company for at least three consecutive months. Under the ESPP, the purchase price of the common stock will be equal to 85% of the lower of (i) the market price of common stock immediately before the beginning of the applicable participation period or (ii) the market price of common stock at the time of purchase. In general, each participation period is 24 months long, with a new participation period beginning every six months. During 1996 and 1997, 7,678 and 2,500 shares were issued under the plan. The fair value of the employee's purchase rights was estimated using the Black-Scholes model with the following assumptions for 1995, 1996 and 1997, respectively; dividend yield of 0% in all years; an expected life of two years for each purchase period; expected volatility of 48%, 50% and 168%; and risk free interest rates of 6.2%, 6.3% and 6.2%. The weighted-average fair value of these purchase rights granted in 1995, 1996 and 1997 was $53.70, $47.80 and $18.70, respectively. -54- Had compensation expense for the Company's stock-based compensation plans been determined based on the methods prescribed by SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been as follows (in thousands, except per share amounts):
Year Ended December 31, -------------------------------------- 1995 1996 1997 ---------- ----------- ---------- Net income (loss): As reported................................. $ 5,263 $ (36,425) $ (8,911) Pro forma................................... 5,024 (37,272) (9,704) Diluted Net income (loss) per share: As reported................................. $ 9.14 $ (51.59) $ (11.87) Pro forma................................... 8.72 (52.79) (12.79)
NOTE 9 -- INCOME TAXES: The provision (benefit) for income taxes consists of the following (in thousands):
Year Ended December 31, -------------------------------------- 1995 1996 1997 ---------- ----------- ---------- Federal: Current................. $ 1,673 $ (1,125) $ -- State: Current................. 472 -- -- ---------- ---------- ---------- $ 2,145 $ (1,125) $ -- ========== ========== ==========
The components of the net deferred tax asset were as follows (in thousands): December 31, --------------------------- 1996 1997 ----------- ----------- Inventory and other reserves................. $ 3,052 $ 899 Depreciation and capital leases.............. 972 328 Other........................................ 551 122 Net operating losses......................... 13,885 20,232 ----------- ----------- 18,460 21,581 Less valuation allowance..................... (18,460) (21,581) ----------- ----------- $ -- $ -- =========== ===========
-55- The Company's effective tax rate for 1995, 1996 and 1997 was 29%, (3%) and (0%), respectively. This rate differs from the federal statutory rate due principally to the following:
Year Ended December 31, ------------------------ 1995 1996 1997 ---- ---- ---- Tax at statutory rate.............................. 34% (34)% (34)% State taxes, net of federal benefit................ 6 (6) (6) Tax losses not recognized.......................... (11) 37 40 ---- ---- ---- Net operating losses and tax credits utilized...... 29% (3)% 0% ==== ==== ====
The Company has established a valuation allowance equal to its deferred tax assets on the basis that realization of such assets is not probable. Management's assessment is based on the Company's current net operating losses. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. The Company experienced ownership changes as a result of the Reorganization of the Company in 1994. As a result of the conversion of Preferred Stock to Common Stock, the Company experienced a change in ownership subsequent to December 31, 1997. As a result of this change in ownership, approximately $4 million of net operating losses will be available to the Company through 2012. NOTE 10 -- CAPITAL LEASE OBLIGATIONS AND COMMITMENTS: In December 1996, the Company entered into an agreement to lease its new principal administrative facility under an operating lease expiring in 2002. Future minimum payments under noncancelable operating leases at December 31, 1997 are as follows (in thousands):
Year Ending December 31, Operating Leases -------------- ---------------- 1998 $ 460 1999 473 2000 485 2001 490 2002 40 ------- $1,948 =======
Rent expense for the years ended December 31, 1995, 1996 and 1997 was $715,000, $680,000 and $475,000, respectively. -56- NOTE 11 -- 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 Semiconductor, Inc. ("Orbit") over the proceeds received from Orbit, professional fees, a reserve for an adverse purchase commitment related to the wafer manufacturing agreement and accruals for other estimated costs. 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 $4.8 million promissory note was issued in connection with a wafer supply agreement that required Orbit to supply Paradigm with approximately 9,750 of certain fabricated wafers through May 1997 at $500 per wafer purchased by Paradigm. In accordance with the terms of the promissory note and wafer supply agreement, for each wafer purchased from Orbit no cash payment was required to be made, however, the amount of the promissory note receivable was reduced by $500 for each wafer purchased. Accordingly, as Paradigm purchased wafers from Orbit, the outstanding balance of the promissory note receivable was reduced and inventory was recorded. No balance remained on this note at December 31, 1997. The $1.0 million promissory note was held in escrow to satisfy certain representation and warranties made by the Company. In July 1997, the Company negotiated an accelerated payment on the $1.0 million promissory note held in escrow. As part of the agreement, the Company allowed Orbit to retain $250,000 for repairs on equipment purchased as part of the Fab sale and certain additional amounts for other matters, and Paradigm received a net payment of $750,000 in 1997. No balance remained on this note at December 31, 1997. 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 12 -- LITIGATION: On August 12, 1996, a securities class action lawsuit was filed in Santa Clara County Superior Court against the Company and certain of its officers and directors (the "Paradigm Defendants") and PaineWebber, Inc. The class alleged by plaintiffs consisted of purchasers of the Company's Common Stock from November 20, 1995 to March 22, 1996, inclusive (the "Class Period"). 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. The Paradigm Defendants intend to vigorously defend the action. On -57- September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer as to all of the causes of action against Michael Gulett and as to all causes of actions, except for violation of certain provisions of the California Corporate Securities Law, against the remaining Paradigm Defendants. The Court, however, granted plaintiffs leave to amend the complaint to attempt to cure the defects which caused the Court to sustain the demurrer. Plaintiffs failed to amend within the allotted time. On January 8, 1997, the Paradigm Defendants filed an answer to the complaint denying any liability for the acts and damages alleged by the plaintiffs. Plaintiffs have since served the Paradigm Defendants with discovery requests for production of documents and interrogatories, to which the Paradigm Defendants have responded. Plaintiffs have also subpoenaed documents from various third parties. The Paradigm Defendants have served the plaintiffs with an initial set of discovery requests, to which plaintiffs have responded. The Paradigm Defendants also took the depositions of the named plaintiffs on April 9, 1997. On January 15, 1997, plaintiffs filed a motion to certify the matter as a class action. Plaintiffs sought by their motion to certify a nationwide class of those who purchased the Company's stock during the Class Period. After several hearings and continuances, on February 9, 1998 the Court certified a class consisting only of California purchasers of the Company's stock during the Class Period. Plaintiffs have set a hearing date of April 9, 1998 for a motion to amend their complaint to incorporate factual allegations derived from the February 21, 1997 action described below. There can be no assurance that the Company will be successful in the defense of this action. Even if Paradigm is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. On February 21, 1997, an additional purported class action lawsuit was filed in Santa Clara County Superior Court against the Company and certain of its officers and directors, with causes of action and factual allegations essentially identical to those of the August 12, 1996 class action lawsuit. This second class action is asserted against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. Prior to the hearing on the Paradigm Defendants' demurrer to the initial complaint, plaintiff amended his complaint to incorporate factual allegations derived from the May 19, 1997 lawsuit described below. The Paradigm Defendants filed a demurrer to the amended complaint, which was heard on September 9, 1997. On September 10, 1997, the Court issued an order sustaining the Paradigm Defendants' demurrer as to all causes of action without leave to amend. A judgment in favor of the Paradigm Defendants dismissing the entire complaint was entered by the Court on September 23, 1997. Plaintiffs have appealed the decision and filed a brief in support of its appeal. The Paradigm Defendants' responsive brief is due to be filed March 30, 1998. There can be no assurances that the Company will be successful in defeating the appeal. Even if Paradigm is successful in defeating the appeal, it may incur substantial legal fees and other expenses related to this appeal. If unsuccessful in defeating the appeal, the Company's business operating results and cash flows could be materially adversely affected. On May 19, 1997, several former employees of the Company filed an action in Santa Clara County Superior Court. The complaint names as defendants the Company, Michael Gulett, Richard Veldhouse, Dennis McDonald and Chiang Lam. Plaintiffs filed with the complaint a notice that they consider their case related legally and factually to the August 12, 1996 class -58- action lawsuit described above. The Complaint alleges fraud, breach of fiduciary duty and violations of certain provisions of the California Corporate Securities Law and Civil Code. Plaintiffs allege that they purchased the Company's stock at allegedly inflated prices and were damaged thereby. The plaintiffs seek an unspecified amount of compensatory, rescissory and/or punitive damages. Defendants responded to the complaint on September 12, 1997 by filing a demurrer as to all causes of action. Prior to the hearing on the demurrer, Plaintiffs amended their complaint to identify two allegedly fraudulent sale transactions. On February 20, 1998, defendants filed a demurrer as to all causes of action in the amended complaint, which is set to be heard April 2, 1998. Plaintiffs have served the Company and two of the individual defendants with requests for production of documents, to which the Company and the individual defendants have responded. The Company has served plaintiff with form interrogatories, to which they have responded. There can be no assurance that the Company will be successful in such defense. Even if Paradigm is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. The Company is involved in various other litigation and potential claims which management believes, based on facts presently known, will not have a material adverse effect on the results of operations or the financial position of the Company. NOTE 13 -- SUBSEQUENT EVENTS: In January and February, 1998, holders of the Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock converted additional shares of the Preferred Stock into the Company's Common Stock, as follows:
Shares of Shares of Preferred Stock Common Stock Series Converted Issued ---------- --------------- ------------ A 21 107,565 B 38 166,840 C 15 52,700
-59- On March 6, 1998, the Company entered into a definitive merger agreement providing for the acquisition of all of the outstanding capital stock of IXYS Corporation ("IXYS") in exchange for Common Stock of the Company. The exchange ratio in the Merger for the IXYS equity securities will be the greater of two ratios. The first ratio provides that upon the Merger the holders of equity securities of IXYS hold 95% of the fully diluted capitalization of the combined company and that the holders of equity securities of the Company will hold 5% of the fully diluted capitalization of the combined company. (As used herein, fully diluted capitalization means the sum of the number of shares of common stock outstanding and issuable upon exercise or conversion of all outstanding preferred stock, warrants, options and other rights.) The second ratio provides that the value associated with the fully diluted capitalization of IXYS, at the time of the consummation of the Merger, be at least $150 million, based upon an average of the closing prices of the Company's Common Stock prior to the Company's stockholders meeting. Consummation of the merger requires the approval of the Company's and IXYS' stockholders and various regulatory approvals. If approved, the transaction is anticipated to be accounted for as a purchase of the Company by IXYS for financial reporting purposes. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE ----------------------------------- None. -60- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors of the Registrant. --------------------------- MICHAEL GULETT, 45, the Company's President and Chief Executive Officer, joined Paradigm in March 1992. Mr. Gulett, was elected President in February 1993, was appointed Chief Executive Officer in July 1993 and was appointed to the board in March 1994. Prior to joining Paradigm, Mr. Gulett was a consultant from May 1989 until March 1992. From July 1987 until May 1989, Mr. Gulett was the Director of ASIC Operations at VLSI Technology, Inc., a semiconductor manufacturer. He has also worked for NCR Microelectronics, California Devices, Intel Corporation and Burroughs Corporation. Mr. Gulett received his B.S. in electrical engineering from the University of Dayton. GEORGE J. COLLINS, 55, has served as a Director of the Company since October 1995. Mr. Collins has been a professor of electrical engineering at Colorado State University since 1973. Mr. Collins is a Fellow with the American Physical Society and the Institute of Electrical Engineers. Mr. Collins is a Director of Quantum Research Corporation. Mr. Collins received his B.S.E.E. from Manhattan University and his M.S. and Ph.D. in engineering from Yale University. JAMES L. KOCHMAN, 48, has served as Director of the Company since June 1994 and has been a partner with the investment banking firm of Alliant Partners LLP (formerly, Bentley, Hall, Von Gehr International) since April 1992. He was formerly President and Chief Executive Officer of TEKNA/S-TRON, a consumer products company. Prior to joining TEKNA, he spent six years with FMC Corporation in a variety of corporate staff and operating assignments, including Director of Manufacturing and Director of Technology and Business Development with FMC's Ordinance Division in San Jose. Previously Mr. Kochman worked for International Harvester Company. Mr. Kochman received his B.S. in mechanical engineering from the University of Illinois and an M.B.A. from the University of Chicago. (b) Executive Officers of the Registrant. ------------------------------------ MICHAEL GULETT, the Company's President and Chief Executive Officer, joined Paradigm in March 1992. Mr. Gulett was elected President in February 1993, was appointed Chief Executive Officer in July 1993 and was appointed to the board in March 1994. Prior to joining Paradigm, Mr. Gulett was a consultant from May 1989 until March 1992. From July 1987 until May 1989, Mr. Gulett was the Director of ASIC Operations at VLSI Technology, Inc., a semiconductor manufacturer. He has also worked for NCR Microelectronics, California Devices, Intel Corporation and Burroughs Corporation. Mr. Gulett received his B.S. in electrical engineering from the University of Dayton. DAVID G. CAMPBELL has served as Paradigm's Vice President of Finance and Chief Financial Officer since April 1997. For the year prior to joining Paradigm, Mr. Campbell was Vice President of Finance and Administration of Image Quest Technologies, Inc., a flat-panel display company. From September 1987, to April 1996, Mr. Campbell was Vice President of -61- Finance and Administration and Chief Financial Officer of Ascent Logic Corporation, a system design engineering software company. Mr. Campbell holds a B.S. degree in Accounting from La Salle College, an M.B.A. from San Jose State University, and a Ph.D. in Business Administration from La Salle University. Mr. Campbell also holds C.P.A. and C.M.A. certifications. JAMES H. BOSWELL has served as Paradigm's Vice President, Sales for Europe since October 1997. Mr. Boswell who has also served as Paradigm's Vice President, Sales and Marketing from December 1996 to October 1997, joined the Company in November 1995 as Director of Marketing. Prior to joining Paradigm, Mr. Boswell was the Sales Manager of Sharp from 1994 to 1995. Mr. Boswell was in the marketing and sales department of Hitachi from 1989 to 1994. Mr. Boswell received his B.S. from University of New Mexico and his M.B.A. from the University of Arizona. RICHARD MORLEY has served as Paradigm's Vice President, Operations since February 1997. Prior to joining Paradigm, Mr. Morley worked in other IC based Operations, notably Kopin Corporation as General Manager of Display Manufacturing from 1994 to 1996, and was Director of Operations for Zilog's Nampa Mod II and Mod III CMOS wafer fabrication facilities from 1988 to 1994. Mr. Morley has also worked for other IC manufacturing companies such as General Instrument, NCR, Sprague Solid State, California Devices and VLSI Technology. Mr. Morley received his B.S. in chemistry from Manhattan College. SUNEEL RAJPAL has served as Paradigm's Vice President, Sales and Marketing since October 1997, and joined the Company in April 1997 as Director of Marketing. He has responsibility for sales in America and Asia. Prior to joining Paradigm, Mr. Rajpal held sales, marketing and engineering management positions at Monolithic Memories, Integrated Device Technology, Quality Semiconductor and Qlogic Corporation. Mr. Rajpal received his B. Tech. from the Indian Institute of Technology and a M.A.Sc. degree from University of Toronto. -62- ITEM 11. EXECUTIVE COMPENSATION ---------------------- EXECUTIVE COMPENSATION The following table provides certain summary information concerning compensation paid to the Company's Chief Executive Officer, and each of the other four most highly compensated executive officers, who were serving as executive officers on December 31, 1997 (the "Named Executive Officers") and whose aggregate salary and bonus exceeded $100,000, for the fiscal years ended December 31, 1995, 1996 and 1997. SUMMARY COMPENSATION TABLE
Long-Term Compensation Payouts Annual Compensation ------------ ------------------------------------------------- Securities Other Annual Underlying Name and Principal Position Year Salary($) Bonus($)(1) Compensation($) Options(#) --------------------------- ---- ------------- ----------- --------------- ------------ Michael R. Gulett 1997 $ 243,408 $ -- $ -- $ -- President and Chief 1996 249,185 85,000 -- 2,500(2) Executive Officer 1995 219,692 115,000 -- 1,500(3) James Boswell (4) 1997 144,779 9,000 7,477(5) -- Vice President, Sales 1996 119,638 9,174 1,385(6) 2,625(7) and Marketing 1995 6,250 -- -- 1,500(8) Dennis McDonald (9) 1997 103,037 -- -- -- Former Vice President, 1996 134,302 19,174 -- 1,700(10) Human Resources 1995 70,400 175 -- 2,500(11) Richard Morley(12) 1997 124,471 -- -- -- Vice President of Operations - -------------- (1) Represents cash bonuses, profit sharing and commissions paid during the year. (2) Includes options granted on February 3, 1997 for 2,500 shares upon cancellation of a previous option granted on July 24, 1996. (3) Includes options granted on February 3, 1997 for 1,500 shares upon cancellation of a previous option granted on June 15, 1995. (4) Mr. Boswell was hired by the Company in November 1995. (5) Represents car allowance. (6) Represents automobile expenses. (7) Includes options granted on February 3, 1997 for 1,500 shares and 1,125 shares upon cancellation of previous options granted on July 24, 1996 and November 21, 1996, respectively. (8) Includes options granted on February 3, 1997 for 1,500 shares upon cancellation of previous options granted on December 28, 1995. (9) Mr. McDonald, hired by the Company in May 1997, became a consultant with the Company in March 1997. (10) Includes options granted on February 3, 1997 for 500 shares and 12,000 shares upon cancellation of previous options granted on January 1, 1996 and July 24, 1996, respectively. (11) Includes options granted on February 3, 1997 for 2,500 shares upon cancellation of a previous option granted on May 24, 1995. (12) Mr. Morley was hired by the Company in February 1997.
-63- The following table sets forth certain information regarding options granted during the fiscal year ended December 31, 1997 to the Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates Number of of Stock Price Securities Percent of Total Appreciation for Option Underlying Options Granted Exercise or Term(3) Options to Employees in Base Price Expiration ---------------------------- Granted(1) Fiscal Year(2) ($/Share) Date 5% ($) 10% ($) ------------- ---------------- ----------- ---------- ------------- ----------- Michael R. Gulett 2,550 2.3% 14.70 08/18/07 23,558 59,700 James H. Boswell 2,375 2.1 12.50 04/25/07 18,670 47,314 1,125 1.0 14.70 08/18/97 10,393 26,339 1,000 * 2.50 12/23/07 1,572 3,984 Dennis McDonald -- -- -- -- -- -- Richard Morley 1,125 1.0 14.70 08/18/07 10,393 26,339 300 * 2.50 12/23/07 472 1,195 - ---------- * Less than one percent. (1) Six months after the original grant date, 1/8th of the shares will be vested and thereafter the remaining shares will vest over four years at 1/48th per month. (2) Based on options to purchase an aggregate of 112,900 shares of Common Stock granted during fiscal 1997. (3) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date and are not presented to forecast possible future appreciation, if any, in the price of the Common Stock. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the options or the sale of the underlying shares. The actual gains, if any, on the stock option exercises will depend on the future performance of the Common Stock, the optionee's continued employment through applicable resting periods and the date on which the options are exercised.
-64- The following table shows stock options exercised by the Named Executive Officers as of December 31, 1997. In addition, this table includes the number of shares of Common Stock represented by outstanding stock options held by each of the Named Executive Officers as of December 31, 1997. The closing price of the Company's Common Stock at fiscal year-end was $3.44. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Options at FY-End(#) at FY-End($)(1) Acquired on Value ---------------------------- ---------------------------- Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - - ------------------- ------------ ------------ ----------- ------------- ----------- ------------- Michael R. Gulett -- $ -- 19,763 3,288 $ 7,260 $ -- James Boswell -- -- 2,063 6,562 -- 940 Dennis McDonald -- -- 2,040 2,160 -- -- Richard Morley -- -- 750 8,675 -- 282 - - -------------- (1) Value is calculated by (i) subtracting the exercise price per share from the year-end closing price of $3.44 per share; and (ii) multiplying the number of shares subject to the option.
-65- TEN-YEAR OPTION REPRICINGS REPRICING OF STOCK OPTIONS In February 1997, the Company's Board agreed that additional incentives were needed since many of the Company's exployees and directors held stock options with grants priced significantly higher than the fair market value of the Company's common stock. Therefore, the Company implemented a program whereby option holders could exchange higher priced option shares for the same number of lower priced option shares. The new options were issued on February 3, 1997 at the then fair market value of $20.625 per share. Executive officers must remain active on the Company's payroll until August 3, 1997 to exercise their new options. All executive officers and directors holding options were eligible to participate in this program. The total options owned by directors and executive officers prior to the repricing represented 5% and 35%, respectively. Data for executive officers and directors who were eligible to reprice options are shown in the first table entitled "Ten-Year Option Repricings." The following table sets forth the repricing of options held by the Named Executive Officers and directors.
Length of Market Original Number of Price of Exercise Option Term Securities Number Stock at Price at Remaining Underlying of New Time of Time of New at Date of Options Options Repricing Repricing Exercise Repricing Name Date Repriced (#) Granted ($) ($) Price ($) (years.months) - - ----------------------- ----------- -------------- ------------ ----------- ------------ ----------- -------------- Michael Gulett 02/03/97 1,500 1,500 $ 20.625 $ 90.00 $ 20.625 8.4 02/03/97 2,500 2,500 20.625 45.00 20.625 9.5 Robert C. McClelland 02/03/97 1,000 1,000 20.625 9.00 20.625 8.4 02/03/97 500 500 20.625 135.00 20.625 8.10 02/03/97 800 800 20.625 45.00 20.625 9.5 Philip Siu 02/03/97 6,250 6,250 20.625 85.00 20.625 8.2 02/03/97 1,000 1,000 20.625 135.00 20.625 8.10 02/03/97 1,200 1,200 20.625 45.00 20.625 9.5 Dennis McDonald 02/03/97 2,500 2,500 20.625 90.00 20.625 8.3 02/03/97 500 500 20.625 135.00 20.625 8.10 02/03/97 1,200 1,200 20.625 45.00 20.625 9.5 James Boswell 02/03/97 1,500 1,500 20.625 45.00 20.625 9.5 02/03/97 1,125 1,125 20.625 25.00 20.625 9.9 02/03/97 1,500 1,500 20.625 135.00 20.625 8.9 George Collins 02/03/97 1,250 1,250 20.625 250.00 20.625 8.8 James Kochman 02/03/97 1,250 1,250 20.625 60.00 20.625 8 Atiq Raza 02/03/97 1,250 1,250 20.625 135.00 20.625 8.10
COMPENSATION OF DIRECTORS The Company's non-employee directors ("Outside Directors") receive a fee of $3,000 per quarter. All Outside Directors are also reimbursed for expenses incurred in connection with attending Board and committee meetings. The Company's 1994 Stock Option Plan (the "Option Plan") provides for the grant of options to Outside Directors pursuant to a nondiscretionary, automatic grant mechanism, whereby each Outside Director is granted an option at fair market value to purchase 313 shares of Common Stock on the date of each Annual Meeting of Stockholders, provided such director is re-elected. These options vest over four years at the rate of 25% per year so long as the optionee remains an Outside Director of the Company. Each new Outside Director who joins the Board is automatically granted an option at fair market value to -66- purchase 1,250 shares of Common Stock upon the date on which such person first becomes an Outside Director. These options vest over four years at the rate of 25% per year. EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with Michael Gulett on August 26, 1996 (the "Agreement"), which provides for a base salary of $255,000 and the right to participate in the Company's executive compensation program. The Company may terminate Mr. Gulett's employment at any time with or without cause upon 90 days' advance written notice; provided, however, that if he is terminated without cause (other than as a result of disability or change of control of the Company), he will receive salary continuation for six months. In the event Mr. Gulett's employment is terminated during the term of the Agreement and within the first six-month period after the occurrence of a change of control of the Company, as defined in the Agreement, Mr. Gulett will be entitled to receive one and a half times his annual rate of base salary as in effect on the date of the employment termination, plus one and a half times the last annual bonus awarded by the Company. -67- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT ---------- The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 6, 1998 by: (i) each person known to the Company to beneficially own more than five percent (5%) of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers of the Company as a group. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such person subject to community property laws where applicable. Shares Beneficially Name of Beneficial Owner Owned Percent ------------------------ ------------ ------- Lyford Ltd.(1) 28 Hagvura Karni-Shomron, Israel ......................... 204,611 13.7% Vintage Products, Inc.(2) Arlozorv Street Telaviv, Israel ............................... 342,165 23.0 Chiang Lam(3).................................. 125,000 8.3 ACMA Limited(4) 17 Jurong Port Road Singapore 2261................................. 125,000 8.3 Michael R. Gulett(5)........................... 21,988 1.4 Philip Siu(6).................................. 9,488 * James L. Kochman(7)............................ 3,125 * Richard Morley(8).............................. 3,913 * James Boswell(9)............................... 3,406 * George J. Collins(10).......................... 625 * David G. Campbell(11).......................... 2,825 * Suneel Rajpal(12).............................. 1,325 * All directors and executive officers as a group (8 persons)(13).......................... 46,694 3.1 - ---------- * Less than one percent (1%). (1) Represents up to 204,611 shares of Common Stock issuable upon conversion of the Company's 5% Series B Convertible Redeemable Preferred Stock (the "Series B Preferred Stock"). For purposes of determining the number of shares of Common Stock owned by Lyford Ltd., the number of shares of Common Stock calculated to be issuable upon conversion of the Series B Preferred Stock is based on a conversion price of $3.434. Such conversion price is arbitrarily selected and is 82% of the average closing bid price over the five consecutive trading days preceding March 6, 1998 of $4.188. The number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock is subject to adjustment depending on the date of the conversion thereof and could be materially less or more than such estimated amount depending on factors which cannot be predicted by the Company including, among other things, the future market price of the Common Stock. The natural persons who share beneficial ownership of the shares of Common Stock owned by Lyford Ltd. are unknown to the Company. John Gainsford is a director of Lyford who has voting and investment power with respect to the shares held by Lyford. (2) Represents up to 342,165 shares of Common Stock issuable upon conversion of the Company's 5% Series A Convertible Redeemable Preferred Stock and 5% Series C Convertible Preferred Stock (the "Preferred Stock"). For purposes of determining the number of shares of Common Stock owned by Vintage Products, Inc., the number of shares of Common Stock calculated to be issuable upon conversion of the Preferred Stock is based on a conversion price of $3.434. Such conversion price is -68- arbitrarily selected and is 82% of the average closing bid price over the five consecutive trading days preceding March 6, 1998 of $4.188. The number of shares of Common Stock issuable upon conversion of the Preferred Stock is subject to adjustment depending on the date of the conversion thereof and could be materially less or more than such estimated amount depending on factors which cannot be predicted by the Company including, among other things, the future market price of the Common Stock. The natural persons who share beneficial ownership of the shares of Common Stock owned by Vintage are unknown to the Company. John Gainsford and Brian Bell are directors of Vintage who share voting and investment power with respect to the shares held by Vintage. (3) Includes 105,000 shares held by ACMA and 20,000 shares issuable upon exercise of outstanding warrants. Mr. Lam is a consultant and advisor to ACMA. Mr. Lam disclaims beneficial ownership of the shares held by ACMA. (4) Includes 20,000 shares issuable upon exercise of outstanding warrants. ACMA is a publicly held Singapore Corporation. The directors of ACMA who share voting and investment power with respect to the shares held by ACMA are as follows: Quek Sim Pin, Executive Chairman; Tan Chee Jin; Tan Seng Tjie; Rai Rajen, Managing Director; Low Seow Chye; Kwok Chee Wai; Tan Keng Lin; and Chou Kong Seng, Finance Director. See note 3 above. (5) Includes 20,738 shares subject to stock options that are exercisable or will become exercisable within 60 days of March 6, 1998. (6) Includes 9,488 shares subject to stock options that are exercisable or will become exercisable within 60 days of March 6, 1998. (7) Includes 3,125 shares subject to stock options that are exercisable or will become exercisable within 60 days of March 6, 1998. (8) Includes 1,163 shares subject to stock options that are exercisable or will become exercisable within 60 days of March 6, 1998. (9) Includes 3,406 shares subject to stock options that are exercisable or will become exercisable within 60 days of March 6, 1998. (10) Includes 625 shares subject to stock options that are exercisable or will become exercisable within 60 days of March 6, 1998. (11) Includes 2,263 shares subject to stock options that are exercisable or will become exercisable within 60 days of March 6, 1998. (12) Includes 1,325 shares subject to stock options that are exercisable or will become exercisable within 60 days of March 6, 1998. (13) Includes 42,131 shares subject to stock options that are exercisable or will become exercisable within 60 days of March 6, 1998. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules of the Securities and Exchange Commission (the "Commission") thereunder require the Company's directors, executive officers and 10% beneficial owners to file reports of their ownership and changes in ownership of Common Stock with the Commission. Personnel of the Company generally prepare these reports on the basis of information obtained from the Company's directors and officers. Based on such information, the Company believes that all reports required by Section 16(a) of the Exchange Act to be filed by its directors and executive officers during the last fiscal year were filed on time, except that Dennis McDonald inadvertently filed a Form 3 late relating to the acquisition of Common Stock in January 1997, James Boswell inadvertently filed a Form 3 and Form 5 late relating to grants of nonstatutory stock options in July 1997 and November 1997. Although each is a greater than 10% beneficial owner of the Company's Common Stock, the Company believes that Vintage Products, Inc. and Lyford Ltd. made no filings required by Section 16(a) of the Exchange Act. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- ALLIANT PARTNERS LLP James Kochman, a director of the Company, is a partner of Alliant Partners LLP ("Alliant") (formerly Bentley, Hall, Von Gehr International), an investment banking firm which performed investment banking services for the Company during the 12 months ended December 31, 1997. Such services related to matters concerning potential sources of equity financing and/or strategic partnering. Compensation to Alliant during 1997 was $6,000, which did not exceed 5% of Alliant's consolidated gross revenues for its most recent fiscal year. -69- Alliant may also perform investment banking services for the Company from time to time in the future. -70- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON ------------------------------------------------------- FORM 8-K -------- (a) Financial Statements. -------------------- The financial statements listed below appear on the page indicated: Page Number ----------- Report of Independent Accountants.................................... 39 Balance Sheets, December 31, 1996 and December 31, 1997.............. 40 Statements of Operations for the years ended December 31, 1995, December 31, 1996 and December 31, 1997..................... 41 Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, December 31, 1996 and December 31, 1997........................................................ 42 Statements of Cash Flows for the years ended December 31, 1995, December 31, 1996 and December 31, 1997..................... 43 Notes to Financial Statements........................................ 44 (b) Reports on Form 8-K. ------------------- A Current Report on Form 8-K was filed with the Commission on December 5, 1997. The report announced the private placement of a total of 100 shares of the Registrant's 5% Series C Convertible Preferred Stock to Vintage Products, Inc. at a price of $10,000 per share, for total proceeds of approximately $923,000. (c) Exhibits. -------- The exhibits listed in the accompanying index to exhibits have been filed or incorporated by reference as part of this annual report. (d) Financial Statement Schedules. ----------------------------- Financial statement schedules are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto included as part of the Company's 1997 Annual Report on Form 10-K. -71- INDEX TO EXHIBITS Exhibit Number Exhibit ------- ------- 1.3 Agreement and Plan of Merger between the Registrant and Paradigm Technology Delaware Corporation, a Delaware corporation.(1) 1.4 Agreement and Plan of Merger dated as of June 5, 1996 between the Registrant and NewLogic Corp.(8) 2.1 Third Amended Joint Plan of Reorganization effective June 21, 1994.(1) 2.2 Stock Purchase Agreement, dated as of January 21, 1997, by and between Paradigm Technology, Inc. and Vintage Products, Inc.(7) 2.3 Securities Purchase Agreement dated as of April 22, 1996 between the Registrant, NewLogic Corp. and certain securityholders of NewLogic Corp.(8) 2.4 First Amendment to Securities Purchase Agreement dated as of April 22, 1996 between the Registrant, NewLogic Corp. and certain securityholders of NewLogic Corp.(8) 2.5 Investor Securities Purchase Agreement dated as of May 29, 1996 between the Registrant and certain Investors listed on Schedule A attached thereto.(8) 3.1 Amended and Restated Certificate of Incorporation.(1) 3.2 Bylaws of the Registrant, as amended.(1) 4.1 Certificate of Designation of the 5% Series A Convertible Redeemable Preferred Stock as filed with the Secretary of State of the State of Delaware.(7) 4.2 Certificate of Designation of the 5% Series B Convertible Redeemable Preferred Stock as filed with the Secretary of the State of Delaware.(10) 4.3 Certificate of Designation of the 5% Series C Convertible Preferred Stock as filed with the Secretary of the State of Delaware.(11) 4.4 Certificate of Amendment.(9) 9.1 Voting Trust Agreement dated as of May 24, 1996 between Hans Olsen and the persons listed on Schedule A attached thereto.(8) 10.1 Amended and Restated 1994 Stock Option Plan of the Registrant (the "Plan").(5) 10.2 Form of Incentive Stock Option Agreement under the Plan.(1) 10.3 Form of Nonstatutory Stock Option Agreement under the Plan.(1) 10.4 1995 Employee Stock Purchase Plan of the Registrant.(1) -72- Exhibit Number Exhibit ------- ------- 10.5 Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated December 7, 1988.(1) 10.6 Second Amendment to Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated June 18, 1990.(1) 10.7 First Amendment to Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated May 4, 1989.(1) 10.8 Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated January 17, 1992.(1)(2) 10.9 Side Letter to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated January 17, 1992.(1) 10.10 Amendment No. 1 to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated October 23, 1992.(1)(2) 10.11 Amendment No. 2 to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated October 30, 1992.(1) 10.12 Amendment No. 3 to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated February 16, 1995.(1)(2) 10.13 Restated Technology Development Agreement for 4Mb SRAM Process and Design between NKK Corporation and the Registrant dated May 26, 1992.(1)(2) 10.14 Amendment No. 1 to Restated Technology Development Agreement for 4Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 23, 1992.(1)(2) 10.15 Amendment No. 2 to Restated Technology Development Agreement for 4Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 30, 1992.(1) 10.16 Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated May 26, 1992.(1)(2) -73- Exhibit Number Exhibit ------- ------- 10.17 Amendment No. 1 to Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 23, 1992.(1)(2) 10.18 Amendment No. 2 to Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 30, 1992.(1) 10.19 Amendment No. 3 to Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated August 16, 1994.(1)(2) 10.20 Agreement on 1M SRAM Sales Right and OEM Supply and Modification of Existing Agreements between NKK Corporation and the Registrant dated April 18, 1995.(1)(2) 10.21 Marketing and Resale Agreement between the Registrant and National Semiconductor Corporation dated October 13, 1994.(1)(2) 10.22 License and Manufacturing Agreement between the Registrant and Atmel Corporation dated April 28, 1995.(1)(2) 10.23 Patent License Agreement between the Registrant and American Telephone and Telegraph Company dated December 13, 1990.(1) 10.24 Amended and Restated Registration Rights Agreement between the Registrant and certain stockholders of the Registrant dated April 28, 1995.(1) 10.25 Amended Warrant for 50,000 shares of Common Stock of the Registrant issued to ACMA Limited on June 23, 1994 (share amount does not reflect the 10-for-1 reverse stock split effected on May 1, 1998).(1) 10.26 Warrant for 100,000 shares of Common Stock transferred by ACMA Limited to Chiang Lam on December 9, 1994 (share amount does not reflect the 10-for-1 reverse stock split effected on May 1, 1998).(1) 10.27 Warrant for 50,000 shares of Common Stock issued by the Registrant to ACMA Limited on January 25, 1995 between the Registrant and Atmel Corporation (share amount does not reflect the 10-for-1 reverse stock split effected on May 1, 1998).(1) 10.28 Warrant for 350,000 shares of Common Stock of the Registrant transferred by ACMA Limited to Atmel Corporation on May 1, 1995 (share amount does not reflect the 10-for-1 reverse stock split effected on May 1, 1998).(1) 10.29 Loan and Security Agreement between the Registrant and Greyrock Business Credit dated February 28, 1995.(1) 10.30 Amendment to Loan Documents between the Registrant and Greyrock Business Credit dated April 7, 1995.(1) -74- Exhibit Number Exhibit ------- ------- 10.31 Amendment to Loan Documents between the Registrant and Greyrock Business Credit dated May 1, 1995.(1) 10.32 Form of Indemnification Agreement.(1) 10.33 General Release and Covenant Not to Sue dated May 24, 1995 between Anthony C. Langley and the Registrant.(1) 10.34 Stock Purchase Agreement dated as of April 28, 1995 between the Registrant and Atmel Corporation.(1) 10.35 Letter of Credit dated March 2, 1995 issued by Royal Bank of Canada Singapore on behalf of ACMA Limited in favor of Greyrock Business Credit.(1) 10.36 Observation Rights Agreement dated June 16, 1995 between ACMA Limited and the Registrant.(1) 10.37 Third Amendment to Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated December 21, 1995.(3) 10.38 Loan and Security Agreement dated February 9, 1996 between Bank of the West and the Registrant.(3) 10.39 Loan and Security Agreement dated February 14, 1996 between the Registrant and the CIT Group/Equipment Financing, Inc.(4) 10.40 Agreement of Purchase and Sale of Assets dated as of November 7, 1996 between the Registrant and Orbit Semiconductor, Inc. Exhibits to this Agreement omitted from this report will be furnished to the Securities and Exchange Commission upon request.(6) 10.41 Wafer Manufacturing Agreement dated as of November 7, 1996 between the Registrant and Orbit Semiconductor, Inc.(6) 10.42 Promissory Note dated November 15, 1996 in the aggregate principal amount of $4,800,000 issued by Orbit Semiconductor, Inc. to the Registrant.(6) 10.43 Promissory Note dated November 15, 1996 in the aggregate principal amount of $1,000,000 issued by Orbit Semiconductor, Inc. to the Registrant.(6) 10.44 Office Building Lease Agreement dated December 26, 1996 between the Registrant, John Arrillaga, Trustee, UTA dated 7/20/77 and Richard T. Perry, Trustee, UTA dated 7/20/77.(8) 10.45 Loan and Security Agreement dated October 25, 1996 between the Registrant and Greyrock Business Credit.(8) -75- Exhibit Number Exhibit ------- ------- 10.46 Employee letter agreement dated May 23, 1996 between the Registrant and Hans Olsen.(8) 10.47 Employee letter agreement dated May 24, 1996 between the Registrant and Bruce Campbell.(8) 10.48 Employee letter agreement dated May 23, 1996 between the Registrant and Gregory Roberts.(8) 10.49 Executive Compensation Agreement dated August 26, 1996 between the Registrant and Michael Gulett.(8) 10.50 Stock Purchase Agreement dated as of January 23, 1997 by and between the Registrant and Vintage Products, Inc.(7) 10.51 Stock Purchase Agreement dated as of July 22, 1997 by and between the Registrant and Lyford Ltd.(10) 10.52 Transition Plan/Employment Agreement dated October 23, 1997 between the Registrant and Dennis McDonald.(9) 10.53 Standard Sublease dated November 24, 1997 between the Registrant and EG&G IC Sensors.(9) 10.54 Stock Purchase Agreement dated as of November 26, 1997 by and between the Registrant and Vintage Products, Inc.(11) 10.55 Consent to Sublease dated December 10, 1997 between the Registrant and Peeryl Arrillaga.(9) 10.56 Letter Agreement dated December 27, 1997 between the Registrant and Suneel Rajpal.(9) 10.57 Warrant to Purchase Stock dated June 30, 1997 between the Registrant and Greyrock Business Credit.(9) 10.58 Amendment to Loan Documents dated January 29, 1998 between the Registrant and Greyrock Business Credit.(9) 10.59 Agreement and Plan of Merger and Reorganization dated March 6, 1998 by and among the Registrant, Paradigm Enterprises, Inc. and IXYS Corporation.(9) 23.1 Consent of Price Waterhouse LLP, Independent Accountants. 27.1 Financial Data Schedule, for the period ending December 31, 1997. 27.2 Financial Data Schedule, for the period ending March 29, 1997. 27.3 Financial Data Schedule, for the period ending September 30, 1997. 27.4 Financial Data Schedule, for the period ending June 30, 1997. -76- Exhibit Number Exhibit ------- ------- 27.5 Financial Data Schedule, for the period ending March 31, 1997. 27.6 Financial Data Schedule, for the period ending December 31, 1996. 27.7 Financial Data Schedule, for the period ending September 30, 1996. 27.8 Financial Data Schedule, for the period ending June 30, 1996. - -------------------- (1) Filed with the Company's Registration Statement on Form S-1 (Reg. No. 33-92390) and incorporated herein by reference. (2) Confidential treatment granted as to certain portions. (3) Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. (4) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, and incorporated herein by reference. (5) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference. (6) Filed with the Company's Current Report on Form 8-K filed on December 2, 1996, and incorporated herein by reference. (7) Filed with the Company's Current Report on Form 8-K filed on February 6, 1997, and incorporated herein by reference. (8) Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. (9) Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. (10) Filed with the Company's Current Report on Form 8-K filed July 29, 1997, and incorporated herein by reference. (11) Filed with the Company's Current Report on Form 8-K filed on December 4, 1997, and incorporated herein by reference. -77- 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. Dated: June 3, 1998. PARADIGM TECHNOLOGY, INC. By /s/ MICHAEL GULETT ------------------------------------- Michael Gulett President and Chief Executive Officer Signature and Title Date By /s/ Michael Gulett June 3, 1998 ------------------------------------------------ Michael Gulett President, Chief Executive Officer and Director (Principal Executive Officer) By /s/ David G. Campbell June 3, 1998 ------------------------------------------------ David G. Campbell Vice President of Finance and Chief Financial Officer (Principal Financial Officer) By * June 3, 1998 ------------------------------------------------ George Collins Director By * June 3, 1998 ------------------------------------------------ James Kochman Director * By power of attorney /s/ Michael Gulett ------------------------------------------------ Attorney-in-Fact -78- EX-23.1 2 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-4412) and Forms S-3 (No. 333-21505, No. 333-34247 and No. 333-39793) of Paradigm Technology, Inc. of our report dated February 21, 1998, except as to Note 13, which is as of March 9, 1998, and except as to the first paragraph of Note 2, which is as of May 1, 1998, appearing on page 39 of this annual Report on Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP San Jose, California May 29, 1998 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 461 0 2,797 (92) 2,580 6,290 4,441 (1,700) 9,290 5,875 0 0 3,699 39,483 0 9,290 12,449 12,449 11,946 11,946 8,326 0 370 (8,911) 0 0 0 0 0 (8,911) (11.87) (11.87)
EX-27.2 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-29-1998 218 0 1,388 (42) 2,722 4,683 4,441 (1,923) 7,464 4,989 526 0 1,622 41,905 0 7,464 1,914 1,914 1,770 1,770 1,048 (50) 71 (937) 0 0 0 0 0 (937) (0.68) (0.68)
EX-27.3 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 863 0 5,297 1,724 2,371 7,427 6,977 2,730 11,793 7,706 195 0 2,750 39,149 0 11,793 10,647 10,647 10,320 10,320 7,196 (31) 183 (6,739) 0 0 0 0 0 (6,739) (10.01) (10.01)
EX-27.4 6 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 879 0 4,494 1,755 3,564 8,664 8,139 2,584 14,344 9,749 313 1,777 0 37,165 0 14,344 7,038 7,038 6,360 6,360 4,775 179 116 (3,707) 0 0 0 0 0 (3,707) (5.98) (5.98)
EX-27.5 7 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) (4.16) (4.16)
EX-27.6 8 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 587 0 7,275 1,569 2,472 10,914 9,507 (2,869) 17,742 11,306 374 36,298 0 0 0 17,742 23,202 23,202 36,364 24,213 (946) 0 1,121 (37,550) (1,125) (37,550) 0 0 0 (36,425) (51.59) (51.59)
EX-27.7 9 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 871 0 3,836 1,260 4,185 12,020 38,537 11,970 38,868 19,287 10,016 0 0 36,293 0 38,868 5,191 5,191 8,501 8,501 4,180 0 305 (7,280) 0 (7,280) 0 0 0 (7,280) (10.10) (10.10)
EX-27.8 10 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 APR-01-1996 JUN-30-1996 2,089 8,945 5,593 1,096 4,560 24,267 37,308 10,507 51,415 17,854 10,941 0 0 36,036 0 51,415 4,002 4,002 13,994 13,994 7,782 413 364 (17,939) (1,247) (16,692) 0 0 0 (16,692) (24.20) (24.20)
-----END PRIVACY-ENHANCED MESSAGE-----