UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 29, 1998, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-26124
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PARADIGM TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0140882
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
694 TASMAN DRIVE, MILPITAS, CALIFORNIA 95035
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(Address of principal executive offices) (Zip code)
(408) 954-0500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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The number of shares of the Registrant's Common Stock, $.01 par value,
outstanding as of March 29, 1998 was 1,604,282.
1
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Statements of Operations 3
Condensed Balance Sheet 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 13
Liquidity and Capital Resources 14
Factors That May Affect Future Results 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 26
Part II. Other Information
Item 1. Legal Proceedings 27
Item 4. Submissions of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
Exhibit 27.1 Financial Data Schedule
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
QUARTER ENDED
MAR. 29, MAR. 31,
1998 1997
------------------ ---------------
SALES, NET $1,914 $3,572
Cost of goods sold 1,770 3,314
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GROSS PROFIT 144 258
------------------- ----------------
OPERATING EXPENSES:
Research and development 304 1,183
Selling, general and administrative 744 1,625
------------------- ----------------
TOTAL OPERATING EXPENSES 1,048 2,808
------------------- ----------------
Operating loss (904) (2,550)
Interest expense 71 42
Other (income) expense, net (38) 30
------------------- ----------------
Net loss ($937) ($2,622)
=================== ================
Accretion on preferred stock ($30) ($388)
NET LOSS ATTRIBUTABLE
TO COMMON STOCKHOLDERS ($967) ($3,010)
=================== ================
BASIC AND DILUTED LOSS PER SHARE ($0.68) ($4.16)
=================== ================
WEIGHTED AVERAGE SHARES OUTSTANDING 1,420 724
=================== ================
See accompanying notes to condensed financial statements.
3
PARADIGM TECHNOLOGY, INC.
CONDENSED BALANCE SHEET
(In Thousands)
(unaudited)
MAR. 29 DEC. 31,
1998, 1997
--------------- -------------
ASSETS:
Cash and cash equivalents $218 $461
Accounts receivable, net 1,346 2,705
Inventory 2,722 2,580
Other current assets 397 544
--------------- -------------
Total current assets 4,683 6,290
Property and equipment, net 2,518 2,737
Other assets 263 263
--------------- -------------
TOTAL ASSETS $7,464 $9,290
=============== =============
Liabilities and stockholders' equity
Line of credit $1,265 $1,719
Accounts payable and other accrued liabilities 3,545 3,964
Current portion, long-term debt 179 192
--------------- -------------
TOTAL CURRENT LIABILITIES 4,989 5,875
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Long-term debt 347 342
Deferred rent 52 64
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TOTAL LIABILITIES 5,388 6,281
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Capital stock 43,215 43,181
Accumulated deficit (41,139) (40,172)
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Total stockholders' equity 2,076 3,009
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,464 $9,290
=============== =============
See accompanying notes to condensed financial statements.
4
PARADIGM TECHNOLOGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three months ended
Mar. 29, 1998 Mar. 31, 1997
------------- -------------
Cash flows from operating activities:
Net loss $ (937) $ (2,622)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 219 643
Loss on disposition of fixed assets - 290
Changes in operating assets and liabilities:
Accounts receivable 1,359 120
Inventory (142) (1,165)
Other assets 147 3,162
Accounts payable, accrued expenses and other liabilities (431) (1,164)
------------- -------------
Net Cash provided by (used in) operating activities 215 (736)
------------- -------------
Cash flows used in investing activities:
Purchases of capital equipment - (261)
Cash flows from financing activities:
Line if credit (454) (70)
Payments on capital leases (20) (35)
Issuance of notes payable 12 -
Issuance of common stock 4 (10)
Issuance of Convertible Preferred Stock - 1,880
------------- -------------
Net cash provided by financing activities (458) 1,765
------------- -------------
Net increase (decrease) in cash and cash equivalents (243) 768
Cash and cash equivalents:
Beginning of period 461 587
------------- -------------
End of period $ 218 $ 1,355
============= =============
Supplemental cash flow information:
Interest paid $ 71 $ 42
============= =============
Income taxes paid - -
============= =============
Supplemental disclosure of non cash items:
Issuance of warrant in connection with sale of
Convertible Preferred Stock $ - $ 67
============= =============
Accretion on Convertible Preferred Stock $ 30 $ 388
============= =============
See accompanying notes to condensed financial statements.
5
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: Basis of Presentation
The unaudited condensed financial statements have been prepared by Paradigm
Technology, Inc. ("Paradigm" or the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim condensed financial
statements included herein have been prepared on the same basis as the December
31, 1997 audited financial statements, contained in the Company's annual report
on Form 10-K filed on March 24, 1998 and include all adjustments, consisting of
only normal recurring adjustments, necessary to fairly state the information set
forth therein. Results for the three month period ended March 29, 1998 are not
necessarily indicative of the results to be expected for the entire year.
The preparation of the interim condensed financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the interim
condensed consolidated financial statements and the reported amounts of revenue
and expenses during the report period. Actual results could differ from
estimates.
The Company markets high speed high density Static Random Access Memory ("SRAM")
products for uses in telecommunication devices, workstations and high
performance personal computers to Original Equipment Manufacturers and
distributors in the United States, Europe and the Far East.
The SRAM business is highly cyclical and has been subject to significant
downturns at various times that have been characterized by diminished product
demand, production overcapacity, and accelerated erosion of average selling
prices. During the latter part of 1995 continuing into 1996, 1997 and the first
three months of 1998, the market for certain SRAM devices experienced an excess
supply relative to demand which resulted in a significant downward trend in
prices.
The selling prices that the Company is able to command for its products are
highly dependent on industry-wide production capacity and demand. In this
regard, the Company did experience rapid erosion in product pricing in 1996,
1997 and during the first three months of 1998 which was not within the control
of the Company. The Company could continue to experience a downward trend in
pricing which could adversely affect the Company's operating results.
The Company's recent operations have consumed substantial amounts of cash.
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. The
6
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
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.
As a result of these circumstances, the Company's independent accountants'
opinion 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 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 agency approvals. If approved, the transaction is anticipated to be
accounted for as a purchase of the Company by IXYS for financial reporting
purposes.
This report on Form 10-Q for the quarter ended March 29, 1998 should be read in
conjunction with the audited financial statements as of December 31, 1997, and
the notes thereto included in the Company's Annual Report on Form 10-K filed on
March 24, 1998.
NOTE 2: Reverse Stock Split
On May 1, 1998, the Company's stockholders approved a 10-for-1 reverse stock
split of the Company's common stock, such that every 10 shares shall be combined
into one share of common stock. All prior period common shares and per share
data in these financial statements have been restated to reflect this stock
split.
NOTE 3: 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
7
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
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 period presented below.
Quarter Ended
Mar. 29, Mar. 31,
1998 1997
-------------------------------
(In thousands, except per share data)
Net income (loss)................................................ $ (937) $ (2,622)
Accretion related to Convertible Preferred Stock................. (30) (388)
------------ -----------
Net income attributable to common shareholders................... $ 967 $ (3,010)
============ ===========
Shares calculation:
Average shares outstanding-basic................................. 1,420 724
Effect of dilutive securities:
Stock options and warrants............................... - -
Convertible Preferred Stock.............................. - -
------------ -----------
Average shares outstanding-diluted............................... 1,420 724
============ ===========
Net income (loss) per share-basic................................ $ (0.68) $ (4.16)
============ ===========
Net income (loss) per share-diluted.............................. $ (0.68) $ (4.16)
============ ===========
Options to purchase shares of common stock and shares issuable upon the
conversion of shares of Convertible Preferred Stock were not included in the
computation of diluted EPS because the inclusion of such options and shares
would have been antidilutive.
8
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 4: Balance Sheet Detail
Mar. 29, Dec. 31,
1998 1997
---- ----
Inventory (in thousands):
Work in process $1,743 $1,562
Finished goods 979 1,018
-------- --------
$2,722 $2,580
======== ========
Property and equipment (in thousands):
Machinery and equipment $4,081 $4,081
Leasehold improvements 245 245
Furniture and fixtures 115 115
-------- --------
4,441 4,441
Less accumulated depreciation (1,923) (1,704)
-------- --------
$2,518 $2,737
======== ========
NOTE 5: 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
alleged 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 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
9
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
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. On April
9, 1998, the Court granted plaintiff's motion to amend their complaint to
incorporate factual allegations derived from the May 19, 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. Plaintiff has appealed the decision and filed a brief in support of
his appeal. The Paradigm Defendants' responsive brief was filed on 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, three former employees of the Company filed an
action in Santa Clara County Superior Court. The complaint names as defendants
the Company, Michael Gulett, Richard Veldhouse, Dennis McDonald and Chiang Lam.
Plaintiffs filed with the complaint a notice that they consider their case
related legally and factually to the August 12, 1996 class action lawsuit
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.
Defendants filed a demurrer as to all causes of action in the amended complaint,
which was heard on April 2, 1998. That same day, the Court issued its order
sustaining the demurrer on multiple grounds, but granted plaintiffs leave to
amend the complaint by May 15, 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. Plaintiffs also took
the deposition of a third party on
10
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
April 23, 1998. The Company has served plaintiffs with form interrogatories and
requests for production of documents, to which they have responded. The Company
also took plaintiffs' depositions on April 20-22, 1998. The deposition of one of
the plaintiffs is continuing. 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.
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.
NOTE 6: Preferred Stock
During the quarter ended March 29, 1998, and cumulatively since issuance of
Convertible Preferred Stock, conversions of Convertible Preferred Stock into
common stock were as follows (restated for the 10-for-1 reverse stock split
effective May 1, 1998):
Quarter Ended
March 29, Cumulative
---------------------------------- ---------------------------------
Preferred Common Preferred Common
Shares Converted Shares Issued Shares Converted Shares Issued
---------------- ------------- ---------------- -------------
Series A 21 107,565 170 347,170
Series B 55 223,828 149 359,868
Series C 50 194,379 50 194,379
--- ------- --- -------
126 525,772 369 901,417
=== ======= === =======
As of March 31, 1998, shares of Convertible Preferred Stock outstanding were as
follows:
Series A 30
Series B 51
Series C 50
In April 1998, 8 shares of Series B Convertible Preferred Stock were converted
into 39,373 shares of common stock and 11 shares of Series C Convertible
Preferred Stock were converted into 53,263 shares of common stock.
NOTE 7: Option Repricing
In March 1998, the Company's Board agreed that in order to provide incentives to
its employees and directors, repricing of outstanding options was needed to
align the option exercise price more
11
PARADIGM TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
closely with the fair market value of the underlying Common Stock as determined
by the marketplace. 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 March 6, 1998 at $3.187 per
share, which is 85% of the fair market value of $3.75. Executive officers must
remain active on the Company's payroll to exercise their new options. All
executive officers and directors holding options were eligible to participate in
this program. A total of approximately 118,000 shares were repriced which will
result in compensation expense aggregating $67,000, which will be recorded over
the remaining vesting period of the repriced options.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
When used in this Form 10-Q, the words "estimate," "project," "intend," "expect"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to risks and uncertainties that could cause actual
results to differ materially, including factors relating to the impact of
competitive products and pricing, the timely development and market acceptance
of new products and upgrades to existing products, availability and cost of
products from Paradigm's suppliers and market conditions in the PC industry. For
discussion of certain such risk factors, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Factors That May
Affect Future Results." Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release updates or revisions to
these statements.
Results of Operations
Sales
The Company's net sales of $1.9 million for the three month period ended March
29, 1998 decreased 46% from sales of $3.6 million in corresponding period in
fiscal year 1997. The Company has continued to experience a significant downward
trend in pricing that began in late 1995 in addition to lower volumes of units
shipped when compared to 1997. The reduced selling prices of the Company's
products and reduced unit shipments are both principally a result of the
significant excess supply of SRAM devices relative to demand that the SRAM
market has been experiencing since late 1995.
The SRAM business is highly cyclical and has been subject to significant
downturns at various times that have been characterized by diminished product
demand, production overcapacity, and accelerated erosion of average selling
prices. During the latter part of 1995, continuing into 1996, 1997 and 1998, the
market for SRAM devices experienced an excess supply relative to demand which
resulted in a significant downward trend in prices. The Company could continue
to experience a downward trend in pricing which could adversely affect the
Company's operating results.
Gross Profit
Gross profit of $144,000 for the three month period ended March 29, 1998
decreased 44% from gross profit of $258,000 for the comparable period in fiscal
1997. The Company continues to experience industry-wide pricing pressures caused
by an oversupply in the worldwide SRAM marketplace. These pricing pressures
directly impacted profits as average selling prices of the Company's products
declined during the quarter ended March 29, 1998 when compared to the comparable
periods in 1997.
The Company's future needs for wafers will need to be supplied by third parties.
Constraints or delays in the supply of the Company's products, whether because
of capacity constraints, unexpected disruptions at the current or future
foundries or assembly houses, delays in obtaining additional production at the
existing foundry or in obtaining production from new foundries,
13
shortages of raw materials, or other reasons, could result in the loss
of customers and other material adverse effects on the Company's operating
results, including effects that may result should the Company be forced to
purchase products from higher cost foundries or pay expediting charges to obtain
additional supply.
Research and Development
Research and development expenses decreased to $304,000 in the three month
period ended March 29, 1998 from $1.2 million in the corresponding period in
fiscal 1997. As a percentage of revenues, these expenses have decreased to 16%
in the three month period ended March 29, 1998 from 33% in the corresponding
period of 1997. This decrease is due to the shutdown of NewLogic and other cost
cutting measures implemented by the Company.
Selling, General and Administrative
Selling, general and administrative expenses were $744,000 in the three month
period ended March 29, 1998 compared to $1.6 million in the comparable period in
1997. This decline is attributable to the cost cutting measures implemented by
the Company.
Interest Expense, Net
Interest expense, net, of $71,000, for the three month period ended March 29,
1998 compares to $42,000 in the corresponding period in fiscal 1997. This
increase in net interest expense for the three month period in 1998 reflects
higher average outstanding debit balances.
Taxes
The Company provides for income taxes during interim reporting periods based
upon an estimated annual tax rate. During the three month period ended March 29,
1998, the Company recorded a loss for tax purposes. The Company has net
operating loss carryforwards to offset future regular and alternative minimum
taxable income. The Company's net operating loss carryforwards expire through
2011, if not utilized.
Liquidity and Capital Resources
The Company's operating, investing and financing activities used $243,000 in
cash in the three month period ended March 29, 1998 compared to generating
$768,000 of cash in the comparable period in 1997. Operating activities provided
$215,000 in cash in 1998 compared to a use of $736,000 of cash in 1997. This
increase of $951,000 is primarily due to a smaller net loss as a result of
reductions in operating expenses and a decrease in accounts receivable balances.
There were no investing activities in the 1998 period compared to fixed asset
purchases of $261,000 in the 1997 period. This is due to the fact that the
Company has successfully transferred its manufacturing and testing activities to
outside foundries and sub contractors.
Financing activities used $458,000 in the 1998 period compared to providing $1.8
million in the 1997 period. Borrowing under the Company's line of credit
decreased by $680,000 in the 1998
14
period compared to the 1997 period. This is due to lower revenue in the 1998
period compared to the 1997 period and a change in the terms of the line of
credit agreement with Greyrock Business Credit.
In November 1996, the Company replaced an existing line of credit with a line of
credit from Greyrock Business Credit with a borrowing limit of $6,000,000.
Borrowings under this new line of credit with Greyrock Business Credit were
limited to up to 80% of eligible receivables and interest was at the greater of
LIBOR plus 5.25% or 9%.
In October 1997, the Company renewed its line of credit with Greyrock Business
Credit with certain modifications. Borrowing was 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.
In January 1998, the Company amended its line of credit with Greyrock Business
credit to limit borrowing 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) 50% of the amount of eligible receivables owing from distributors. The
interest rate remained unchanged from the November 1996 agreement. At March 29,
1998, the outstanding balance under this line of credit was approximately $1.3
million. The line of credit is secured by the Company's trade receivables,
inventory, equipment and general intangibles.
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. 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 assurance that such additional financing,
if required, can be obtained on acceptable terms, if at all.
As a result of these circumstances, the Company's independent accountants'
opinion 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 with the fully diluted
capitalization of IXYS, at the time of
15
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 agency approvals. If
approved, the transaction is anticipated to be accounted for as a purchase of
the Company by IXYS for financial reporting purposes.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE OPERATIONS AND BUSINESS PROSPECTS OF THE COMPANY ARE SUBJECT TO CERTAIN
QUALIFICATIONS BASED ON POTENTIAL BUSINESS RISKS FACED BY THE COMPANY. THIS FORM
10-Q SHOULD BE REVIEWED IN LIGHT OF THE POTENTIAL EFFECTS OF EVENTS THAT MAY
OCCUR AS OUTLINED IN THE FOLLOWING RISK FACTORS. READERS OF THIS REPORT SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER
INFORMATION PRESENTED IN THIS FORM 10-Q.
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 dependence 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 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
16
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, 1997 and
1998, 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 over capacity 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.
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
17
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 stockholders at a Special Meeting of Stockholders held on
May 1, 1998 approved a 10-for-1 reverse stock split of the Company's common
stock such that every 10 shares shall be combined into one share of common
stock, while retaining 25 million shares of common stock, authorized (unchanged
par value). The Company believes that this stock split will increase the price
per share of the Company's Common Stock and bring such price into compliance
with the Nasdaq criteria. 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 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 "--Risks Relating to
Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity for the
18
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.
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 PROCUTS 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
19
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. 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 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 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 alleged 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
20
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 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. On April 9, 1998, the Court granted plaintiff's motion to amend
their complaint to incorporate factual allegations derived from the May 19, 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. Plaintiff has appealed the decision and filed a brief in support of
his appeal. The Paradigm Defendants' responsive brief was filed on 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, three 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
21
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. Defendants filed a demurrer as to all causes of
action in the amended complaint, which was heard on April 2, 1998. That same
day, the Court issued its order sustaining the demurrer on multiple grounds, but
granted plaintiffs leave to amend the complaint by May 15, 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. Plaintiffs also took the deposition of a third party on April 23,
1998. The Company has served plaintiffs with form interrogatories and requests
for production of documents, to which they have responded. The Company also took
plaintiffs' depositions on April 20-22, 1998. The deposition of one of the
plaintiffs is continuing. 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.
The Company is involved in various other litigation and potential claims. Due to
the inherent uncertainty of litigation, management is not able to reasonably
estimate losses that may be incurred in relation to this litigation. However,
based on the facts presently known, management believes that the resolution of
these matters will not have a material adverse impact on the results of
operations or the financial position of the Company.
PRODUCT AND CUSTOMER CONCENTRATION; DEPENDENCE ON TELECOMMUNICATIONS AND
COMPUTER INDUSTRIES. Currently, substantially all of the Company's sales are
derived from the sale of SRAM products. Substantially all of the Company's
products are incorporated into telecommunications and computer-related products.
The telecommunications and computer industries have recently experienced strong
unit sales growth, which has increased demand for integrated circuits, including
the memory products offered by the Company. However, these industries have from
time to time experienced cyclical, depressed business conditions. Such industry
downturns have historically resulted in reduced product demand and declining
average selling prices. The Company's business and operating results could be
materially and adversely affected by a downturn in the telecommunications or
computer industries in the future.
COMPETITION. The semiconductor industry is intensely competitive and is
characterized by rapidly changing technology, short product life cycles,
cyclical oversupply and rapid price erosion. The Company competes with large
domestic and international semiconductor companies, most of which have
substantially greater financial, technical, marketing, distribution, and other
resources than the Company. The Company's principal competitors in the high
performance SRAM market include Motorola and Micron Technology. Other
competitors in the SRAM market include Alliance Semiconductor, Cypress
Semiconductor, Integrated Device Technology, Integrated Silicon Solution,
Samsung and numerous other large and emerging semiconductor companies.
22
In addition, other manufacturers can be expected to enter the high speed, high
density SRAM market. The ability of the Company to compete successfully depends
on elements outside its control, including the rate at which customers
incorporate the Company's products into their systems, the success of such
customers in selling those systems, the Company's protection of its intellectual
property, the number, nature, and success of its competitors and their product
introductions, and general market and economic conditions. In addition, the
Company's success will depend in large part on its ability to develop,
introduce, and manufacture in a timely manner products that compete effectively
on the basis of product features (including speed, density, die size, and
packaging), availability, quality, reliability, and price, together with other
factors including the availability of sufficient manufacturing capacity and the
adequacy of production yields. There is no assurance that the Company will be
able to compete successfully in the future.
STRATEGIC RELATIONSHIPS; POTENTIAL COMPETITION. The Company, pursuant to certain
licenses of its technology, has entered into strategic relationships with NKK
and Atmel. The Company has had a long-standing business relationship with NKK
which began in October 1992. The Company, NKK and affiliates of NKK entered into
several equity and debt transactions which provided start-up and development
funding to the Company. Given the long-standing relationship, the Company and
NKK entered into three technology license and development agreements which
provide for NKK to supply the Company a specified number of 1M SRAMs for three
years. These Agreements provided funding to the Company.
The Company's business relationship with Atmel began in April 1995 when pursuant
to certain agreements, Atmel purchased a substantial number of shares of the
Company's stock from the Company, certain stockholders of the Company who had
been unsecured creditors of the Company as of the Reorganization and from the
Company's equipment lessors. Atmel also acquired certain warrants to purchase
shares of the Company's Common Stock. In 1995, the Company and Atmel entered
into a five-year License and Manufacturing Agreement pursuant to which Atmel
would provide the capacity to manufacture wafers at its wafer manufacturing
facility. The Company entered into such agreement with Atmel because Atmel
provided the Company with significant wafer manufacturing capacity when such
capacity was in short supply.
The Company previously licensed the design and process technology for
substantially all of its products at such time, including certain of its 256K,
1M and 4M products, to NKK as a source of revenue. The Company has not licensed
any of its current products to NKK. In the future, the Company may compete with
NKK with respect to all of such products in certain Pacific Rim countries, North
America and Europe and, as to certain of its 256K and 1M products, in the rest
of the world. In 1995, NKK commenced production of products using the Company's
design and process technologies, and therefore may become a more significant
competitor of the Company. Paradigm has also licensed to Atmel the right to
produce certain of its SRAM products which provided significant wafer
manufacturing capacity. As a result, the Company is likely to compete with Atmel
with respect to such products. Because Atmel has greater resources than the
Company and has foundry capacity, any such competition could adversely affect
the Company. To the extent that the Company enters into similar arrangements
with other companies, it may compete with such companies as well.
23
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 is attributable to sales outside the United States, primarily in
Asia and Europe, and the Company expects that international sales will continue
to represent a significant portion of its sales. In addition, the Company
expects that a significant portion of its products will be manufactured by
independent third parties in Asia. Therefore, the Company is subject to the
risks of conducting business internationally, and both manufacturing and sales
of the Company's products may be adversely affected by political and economic
conditions abroad. Protectionist trade legislation in either the United States
or foreign countries, such as a change in the current tariff structures, export
compliance laws, or other trade policies, could adversely affect the Company's
ability to have products manufactured or sell products in foreign markets. The
Company cannot predict whether quotas, duties, taxes, or other charges or
restrictions will be imposed by the United States, Hong Kong, Japan, Taiwan, or
other countries upon the importation or exportation of the Company's products in
the future, or what effect any such actions would have on its relationship with
NKK or other manufacturing sources, or its general business, financial condition
and results of operations. In addition, there can be no assurance that the
Company will not be adversely
24
affected by currency fluctuations in the future. The prices for the Company's
products are denominated in dollars. Accordingly, any increase in the value of
the dollar as compared to currencies in the Company's principal overseas markets
would increase the foreign currency- denominated sales prices of the Company's
products, which may negatively affect the Company's sales in those markets. The
Company has not entered into any agreements or instruments to hedge the risk of
foreign currency fluctuations. Currency fluctuations in the future may also
increase the manufacturing costs of the Company's products. Although the Company
has not to date experienced any material adverse effect on its operations as a
result of such international risks, there can be no assurance that such factors
will not adversely impact the Company's general business, financial condition
and results of operations.
EMPLOYEES. 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
$37.25 in August 1995 to a low of $0.125 in December 1997. In addition, the
stock market has in the past experienced extreme price and volume fluctuations,
particularly affecting the market prices for many high technology companies, and
these fluctuations have often been unrelated to the operating performance of the
specific companies. These market fluctuations may adversely affect the market
price of the Company's Common Stock.
ANTI-TAKE OVER EFFECTS OF CERTAIN CHARTER PROVISIONS. Certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. Such provisions could diminish the opportunities for
a stockholder to participate in tender offers, including tender offers at a
price above the then current market value of the Common Stock. Such provisions
may also inhibit fluctuations in the market price of the Common Stock that could
result from takeover attempts. In addition, the Board of Directors, without
further stockholder approval, may issue Preferred Stock that could have the
effect of delaying or preventing a change in control of the Company. The
issuance of Preferred Stock could also adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others.
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,
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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.
Item 3. 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 3 and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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 alleged 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 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. On April
9, 1998, the Court granted plaintiff's motion to amend their complaint to
incorporate factual allegations derived from the May 19, 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
27
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. Plaintiff has appealed the decision and filed a brief in support of
his appeal. The Paradigm Defendants' responsive brief was filed on 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, three former employees of the Company filed an action in Santa
Clara County Superior Court. The complaint names as defendants the Company,
Michael Gulett, Richard Veldhouse, Dennis McDonald and Chiang Lam. Plaintiffs
filed with the complaint a notice that they consider their case related legally
and factually to the August 12, 1996 class action lawsuit 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. Defendants filed a demurrer as to all
causes of action in the amended complaint, which was heard on April 2, 1998.
That same day, the Court issued its order sustaining the demurrer on multiple
grounds, but granted plaintiffs leave to amend the complaint by May 15, 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. Plaintiffs also took the deposition of a third party
on April 23, 1998. The Company has served plaintiffs with form interrogatories
and requests for production of documents, to which they have responded. The
Company also took plaintiffs' depositions on April 20-22, 1998. The deposition
of one of the plaintiffs is continuing. 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.
The Company is involved in various other litigation and potential claims. Due to
the inherent uncertainty of litigation, management is not able to reasonably
estimate losses that may be incurred in relation to this litigation. However,
based on the facts presently known, management believes that the resolution of
these matters will not have a material adverse impact on the results of
operations or the financial position of the Company.
Other than as set forth above, there are no material pending legal proceedings
against the Company or as to which any of its property is the subject.
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Item 4. Submission of Matters to a Vote of Security Holders
On May 1, 1998, the Company's stockholders at a Special Meeting of Stockholders,
adopted the following proposals:
The stockholders approved an amendment to the Company's Amended and Restated
Certificate of Incorporation to effectuate a ten-for-one reverse stock split,
such that every ten shares of Common Stock shall be combined into one share of
Common Stock (the "Reverse Stock Split"), par value $0.01 per share, by the
following vote:
For : 14,322,778
Against : 762,980
Abstain : 144,268
Broker Non-Votes : 0
The stockholders approved an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
Common Stock of the Company to 50,000,000, par value $0.01 per share, by the
following vote:
For : 13,605,248
Against : 1,395,936
Abstain : 228,842
Broker Non-Votes : 0
As the Reverse Stock Split was approved the Company will take no action to
increase the number of authorized shares of Common Stock.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed with the Securities and Exchange
Commission (the "Commission") on March 10, 1998. The report announced the
signing of a definitive merger agreement with IXYS Corporation.
A Current Report on Form 8-K was filed with the Commission on May 5, 1998. The
report announced the results of a Special Meeting of Stockholders on May 1,
1998.
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
29
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 1998
PARADIGM TECHNOLOGY, INC.
/s/ David G. Campbell
--------------------------------------------
David G. Campbell
Vice President Finance, CFO
(Principal Financial and Accounting Officer)
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