UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD
ENDED DECEMBER 31, 1998
OR
[_] SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NUMBER 000-26124
IXYS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 770140882-5
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3540 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054-2704
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 982-0700
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 periods 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 [_]
The number of shares of the Registrant's Common Stock outstanding as of December
31, 1998 was 11,959,354.
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets................................... 3
Condensed Consolidated Statements of Operations......................... 4
Condensed Consolidated Statements of Comprehensive Income (Loss)........ 5
Condensed Consolidated Statements of Cash Flows......................... 6
Notes to Condensed Consolidated Financial Statements.................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 10
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................... 14
ITEM 2. CHANGES IN SECURITIES................................................... 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................... 15
ITEM 5. OTHER INFORMATION....................................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................ 16
SIGNATURES....................................................................... 17
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IXYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS March 31, December 31,
1998 1998
-------- --------
(unaudited)
Cash and cash equivalents $ 10,594 $ 10,182
Trade accounts receivable, net of
allowance for doubtful accounts of $588
in 1998 and $613 in 1999 10,009 10,713
Inventories 17,103 18,453
Other 370
Deferred income taxes 1,617 1,617
-------- --------
Total current assets 39,323 41,335
Property and equipment, net 10,602 12,162
Goodwill and other tangible assets 4,863
Other 1,143 1,425
Deferred income taxes 3,272 2,672
-------- --------
Total assets $ 54,340 $ 62,457
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion, capital leases $ 428 $ 1,065
Current portion, long term debt 4,168 3,775
Current portion, mandatorily redeemable
convertible preferred stock 9,300
Accounts payable 4,474 4,807
Other accrued liabilities 7,119 8,746
-------- --------
Total current liabilities 25,489 18,393
Long term capital leases, net 814 2,302
Long term debt, net 6,624 7,815
Pension obligations, net 5,113 5,842
-------- --------
Total liabilities 38,040 34,352
-------- --------
Mandatorily redeemable convertible
preferred stock, net 28,256
Common stock, $0.01 par value:
Issued and outstanding: 4,176,879 in
1998 and 11,959,354 in 1999 42 120
Additional paid-in capital 1,031 43,281
Notes receivable from employees (936) (936)
Cumulative translation adjustment (734) 274
Accumulated deficit (11,359) (14,634)
-------- --------
Total mandatorily redeemable
convertible preferred stock
and stockholders' equity 16,300 28,105
-------- --------
Total liabilities and
stockholders' equity $ 54,340 $ 62,457
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
IXYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1997 1998 1997 1998
------- ------- ------- -------
Net revenues........................... $14,233 $16,890 $41,444 $49,607
Cost of goods sold..................... 9,032 12,123 26,414 34,198
------- ------- ------- -------
Gross profit........................ 5,201 4,767 15,030 15,409
------- ------- ------- -------
Operating expenses:
Research, development and engineering 782 1,008 2,276 3,101
Selling, general and administrative 2,316 2,772 6,699 7,464
Acquisition of in-process research and
development........................ 5,807
Amortization of goodwill and
intangibles 695 695
------- ------- ------- -------
Total operating expenses.......... 3,098 4,475 8,975 17,067
------- ------- ------- -------
Operating income.................. 2,103 292 6,055 (1,658)
Other income (expense), net............ (83) (93) (96) 4
------- ------- ------- -------
Income (loss) before income tax
provision............................. 2,020 199 5,959 (1,654)
Income tax provision................... 711 128 2,633 1,621
------- ------- ------- -------
Net income (loss)...................... $ 1,309 $ 71 $ 3,326 $(3,275)
======= ======= ======= =======
Net income (loss) per share - basic.... $ 0.33 $ 0.01 $ 0.88 $ (0.48)
======= ======= ======= =======
Number of shares used in per share
calculation - basic................... 3,955 11,841 3,772 6,845
======= ======= ======= =======
Net income (loss) per share - diluted.. $ 0.11 $ 0.01 $ 0.28 $ (0.48)
======= ======= ======= =======
Number of shares used in per share
calculation - diluted................. 11,861 12,146 11,825 6,845
======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
IXYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
---------------- ------------------
1997 1998 1997 1998
------ ----- ------ -------
Net income (loss) $1,309 $ 71 $3,326 $(3,275)
Other comprehensive income, net of tax:
Foreign currency translation
adjustments (46) (6) (128) 605
------ ----- ------ -------
Comprehensive income (loss) $1,263 $ 65 $3,198 $(2,670)
====== ===== ====== =======
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
IXYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
December 31,
----------------------
1997 1998
------- -------
Cash flows from operating activities:
Net income (loss) 3,326 $(3,275)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 820 2,791
Other 49 (682)
Provision for excess and obsolete
inventory 272 1,556
Loss on foreign currency translation 186 876
Amortization of goodwill and intangibles 695
Acquisition of in-process research and
development 5,807
Changes in operating assets and
liabilities:
Accounts receivable (779) 802
Inventories (2,816) (1,719)
Prepaid expenses and other
current assets (231) (965)
Other assets (90) (154)
Accounts payable 1,705 (2,308)
Accrued expenses and other
liabilities 1,951 (1,363)
Pension liabilities 90 (182)
------- -------
Net cash provided by
operating activities 4,483 1,879
------- -------
Cash flows used in investing activities:
Acquisition of Paradigm
Technology, Inc., net of
cash acquired (606)
Purchase of plant and
equipment (1,443) (3,171)
------- -------
Net cash used in
investing activities (1,443) (3,777)
------- -------
Cash flows from financing activities:
Proceeds from capital lease
obligations 2,166
Proceeds from bank loan 300
Principal payments on capital
lease obligations (228) (400)
Repayment of notes payable to
bank (836)
Other, net 4
------- -------
Net cash provided by
financing activities 72 934
------- -------
Effect of foreign exchange rate
fluctuations on cash and cash
equivalents (349) 552
------- -------
Net increase in cash
and cash equivalents 2,773 (412)
Cash and cash equivalents at beginning
of period 8,231 10,594
------- -------
Cash and cash equivalents at end of
period $11,004 $10,182
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements
6
IXYS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Information as of December 31, 1998 and for the three month and
nine month periods ended December 31, 1997 and 1998 and thereafter is unaudited)
1. Interim Financial Data (Unaudited):
The unaudited financial statements for the quarter and nine month periods
ended December 31, 1997 and 1998 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, include
all material adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and results of
operations in accordance with generally accepted accounting principles.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission"),
the Company believes the disclosures made are adequate to make the
information presented not misleading. It is suggested that the
accompanying financial statements be read in conjunction with the Company's
annual financial statements for the year ended March 31, 1998 which have
been included in Paradigm Technologies, Inc. Form S-4 filed with the
Commission (see Note 7).
The Company's balance sheet as of March 31, 1998 was derived from the
Company's audited financial statements, but does not include all
disclosures necessary for the presentation to be in accordance with
generally accepted accounting principles.
2. Foreign Currency Translation:
The local currency is considered to be the functional currency of the
operations of IXYS GmbH. Accordingly, assets and liabilities are
translated at the exchange rate in effect at year-end and revenues and
expenses are translated at average rates during the year. Adjustments
resulting from the translation of the accounts of IXYS GmbH into U.S.
dollars are included in cumulative translation adjustment, a separate
component of stockholders' equity. Foreign currency transaction gains and
losses are included as a component of other income and expense.
3. Earnings Per Share:
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," which is effective for all periods
ending after December 15, 1997. SFAS 128 requires dual presentation of
basic and diluted earnings per share ("EPS") for complex capital structures
on the face of the Statement of Income. Basic EPS is computed by dividing
net income by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution from the exercise
or conversion of other securities into common stock. For the nine months
ended December 31, 1998, common equivalent shares from restricted stock,
stock options, warrants and preferred stock have been excluded from the
computation as their effect is antidilutive.
4. Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information". This Statement
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting
for Segments of a Business Enterprise." The new standard becomes effective
for the Company's fiscal year 1999 and requires that comparative
7
information from earlier years be restated to conform to the requirements
of this standard. The Company is evaluating the requirements of SFAS 131
and the effects, if any, on the Company's current reporting and
disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheets and measure those
instruments at fair value. This Statement becomes effective for the
Company for fiscal years beginning after December 15, 1999. The Company is
evaluating the requirements of SFAS 133 and the effects, if any, on the
Company's current reporting and disclosures.
5. Comprehensive Income (Loss):
Effective in the first quarter of fiscal year 1999, the Company has adopted
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). Comprehensive income generally
represents all changes in stockholders' equity except those resulting from
investments or contributions by stockholders. The Company has reclassified
earlier financial statements for comparative purposes. The only component
of comprehensive income for the three months and nine months ended December
31, 1997 and 1998 was the change in the cumulative translation adjustment.
6. Inventories:
Inventories consist of the following (in thousands):
March 31, December 31,
1998 1998
------- -------
Raw materials $ 3,789 $ 3,802
Work in process 12,059 13,236
Finished goods 5,765 7,874
21,613 24,912
Less inventory reserve (4,510) (6,459)
------- -------
$17,103 $18,453
======= =======
7. Acquisition and Merger:
Effective September 23, 1998, the Company acquired and merged into a
subsidiary of Paradigm Technology, Inc. ("Paradigm"), a company that
designs and markets fast SRAM products. The acquisition was structured as a
reverse merger whereby Paradigm issued 11,513,821 shares of its common
stock in exchange for all outstanding shares of IXYS stock. At the
conclusion of the merger, IXYS stockholders held approximately 96% of the
combined company. For financial accounting purposes, IXYS is the surviving
company and the historic financial information is that of IXYS.
The purchase price for Paradigm, consisting of the value of Paradigm common
stock outstanding at the date of the merger, costs incurred by IXYS and the
Paradigm liabilities assumed, has been allocated to Paradigm's tangible and
intangible assets based on relative fair values as follows:
Current assets $ 484
Fixed assets 810
In-process research and development 5,807
Other intangibles 1,463
8
Goodwill 4,094
-------
$12,658
=======
The goodwill and other intangible assets recorded as part of the purchase
price allocation, in the total amount of approximately $5.6 million, will
be amortized over twenty-four months. The value of the in-process research
development acquired in the transaction, in the amount of $5.8 million, was
recorded as an expense immediately following the transaction as the
products under development had not reached technological feasibility and
there was no other alternative future use for the costs incurred.
In conjunction with the merger, all outstanding shares of mandatorily
redeemable convertible preferred stock were converted to common stock and
the carrying value of $37,556,000 has been reclassified as stockholders'
equity.
8. Computation of Net Income (Loss) per Share:
Basic and diluted earnings per share are calculated as follows (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
December 31, December 31,
----------------- -------------------
1997 1998 1997 1998
------- ------- ------- -------
Basic:
Weighted-average shares 3,955 11,841 3,772 6,845
======= ======= ======= =======
Net income (loss) $ 1,309 $ 71 $ 3,326 $(3,275)
======= ======= ======= =======
Net income (loss) per share $ 0.33 $ 0.01 $ 0.88 $ (0.48)
======= ======= ======= =======
Diluted:
Weighted-average shares 3,955 11,841 3,772 6,845
Restricted stock subject to
repurchase 241 115 424
Common equivalent shares from
stock options and warrants 1,221 190 1,185
Common equivalent shares from
preferred stock 6,444 6,444
------- ------- ------- -------
Shares used in per share
calculation 11,861 12,146 11,825 6,845
------- ------- ------- -------
Net income (loss) $ 1,309 $ 71 $ 3,326 $(3,275)
======= ======= ======= =======
Net income (loss) per share $ 0.11 $ 0.01 $ 0.28 $ (0.48)
======= ======= ======= =======
The calculation of diluted shares outstanding for the nine months ended December
31, 1998 excludes 1,843 shares of restricted stock, 4,753 stock options, and
warrants to issue 4,399 shares of common stock as their effect was antidilutive
for this period.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Discussion contains forward looking statements, which are subject
to certain risks and uncertainties, including without limitation as
detailed and included in the report of Paradigm (Registration no. 333-
57003) on Form S-4 (the "Form S-4"), as filed with the Commission,
which includes the IXYS financial statements as of March 31, 1998 and
1997 and the three years in the period ended March 31, 1998.
Actual results may differ materially from the results discussed in the
forward-looking statements. Important factors affecting the Company's
ability to achieve future revenue growth include whether, and the
extent to which, demand for the Company's products increases and
reflects real end-user demand; whether customer cancellations and
delays of outstanding orders increase; and whether the Company is able
to manufacture in a correct mix to respond to orders on hand and new
orders received in the future; whether the Company is able to achieve
its new product development and introduction goals, including, without
limitation, goals for recruiting, retaining, training, and motivating
engineers, particularly design engineers, and goals for conceiving and
introducing timely new products that are well received in the
marketplace; and whether the Company is able to successfully
commercialize its new technologies, which it has been investing in by
designing and introducing new products based on these new
technologies.
Other important factors that could cause actual results to differ
materially from those predicted include overall economic conditions,
such as the economic issues affecting Asian countries; fluctuations in
currency exchange ratios as the Company sells products in currencies
other than the U.S. dollar; demand for electronic products and
semiconductors generally; demand for the end-user products for which
the Company's semiconductors are suited; the availability of
alternative products from competitors and the impact of competition on
pricing of the Company's products; the level of utilization of the
Company's production capacity; timely availability of, and changes in
the cost of, raw materials, equipment, supplies and services;
unanticipated manufacturing problems; problems in obtaining products
from outside foundries that manufacture for the Company; increases in
production and engineering costs associated with initial manufacture
of new products; technological and product development risks;
competitors' actions; and other risk factors described in the
Company's filings with the Commission and in particular the risk
factors described in the Form S-4 regarding "Risks Relating to the
Business of IXYS" and "Risks Relating to the Business of Paradigm -
Litigation" and "- Declining SRAM Prices."
The impact of these and other factors on the Company's revenues and
operating results in any future period cannot be forecasted with
certainty. The Company's expense levels are based, in part, on its
expectations as to future revenues. Because the Company's sales are
generally made pursuant to purchase orders that are subject to
cancellation, modification, quantity reduction or rescheduling on
short notice and without significant penalties, the Company's backlog
as of any particular date may not be indicative of sales for any
future period, and such changes could cause the Company's net sales to
fall below expected levels. If revenue levels are below expectations,
operating results are likely to be materially adversely effected. Net
income, if any, and gross margins may be disproportionately affected
by a reduction in net sales because a proportionately smaller amount
of the Company's expenses varies with its revenues.
All forward-looking statements included in this document are made as
of the date hereof, based on the information available to the Company
as of the date hereof, and the Company assumes no obligation to update
any forward-looking statement.
Overview
On September 23, 1998, IXYS merged with Paradigm in a transaction
accounted for as a reverse merger. In the merger, the historic accounting
records of IXYS became those of the combined company, and, accordingly, Paradigm
formally changed its name to "IXYS Corporation."
The Company designs, develops and markets power semiconductors used
primarily in controlling energy in motor drives, power conversion (including
uninterruptible power supplies ("UPS") and switch mode power supplies ("SMPS"))
and medical electronics. The Company's power semiconductors convert electricity
at relatively high
10
voltage and current levels to create efficient power as required by a specific
application. The Company's target market includes segments of the power
semiconductor market that require medium to high power semiconductors, with a
particular emphasis on higher power semiconductors, which the Company considers
to be those capable of processing greater than 500 watts of power. The Company
offers a broad line of power semiconductors, including power MOSFETs, insulated
gate bipolar transistors ("IGBTs"), thyristors, silicon controlled rectifiers
("SCRs") and rectifiers, including fast recovery epitaxial diodes ("FREDs"). In
addition, the Company also 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.
Results of Operations
Net Sales. Net sales for the three months ended December 31, 1998
were $16.9 million, an increase of 18.7% from the $14.2 million reported in the
three months ended December 31, 1997. For the first nine months of fiscal 1999,
net sales of $49.6 million were $8.2 million, or 20% higher than the same period
in fiscal 1998. Unit sales volume for the three months ended December 31, 1998
and for the year to date period increased over the same periods in the prior
year and the effect on revenue was offset partially by declines in average
selling prices.
Gross Profit. Gross margin was 28.2% of net sales for the three
months ended December 31, 1998 as compared with 36.5% for the three months ended
December 31, 1997. Gross margin was 31.1% of net sales for the nine months ended
December 31, 1998 as compared to 36.3% for the nine-month period ended December
31, 1997. The decline in gross margin for the nine-month period ended December
31, 1998 as compared to the same period in 1997 was due to lower average selling
prices per unit. For the three months ended December 31, 1998 as compared to
the same period of 1997, the decline in gross margin was, in addition, the
result of production inefficiencies caused by the Company's traditional holiday
shutdown in Europe which was longer in 1998 than the prior year.
Research and Development. Research and development expenses increased
$226,000 in the three months ended December 31, 1998, compared to the same
period in 1997. Research and development expenses increased $825,000 in the nine
months ended December 31, 1998, compared to the same period in 1997. Research
and development expenses increased primarily due to the acquisition of Paradigm
and the expanded efforts in research development to support the Company's
overall plan.
Selling, General and Administrative. Selling, general and
administrative expenses increased $456,000 in the three months ended December
31, 1998, compared to the same period in the prior fiscal year. Selling, general
and administrative expenses increased $765,000 in the nine months ended
December 31, 1998, compared to the same period in the prior fiscal year. The
increase in selling, general and administrative expenses was primarily related
to increased selling costs on higher revenues and increased expenses as a
consequence of acquiring Paradigm.
Acquisition of in-process research and development. The nine month
period ended December 31, 1998 includes a one-time charge of $5.8 million in
connection with the acquisition of Paradigm.
Amortization of Goodwill and Intangibles. For the three month period
ended December 31, 1998, the Company recorded a charge of $695,000 in connection
with the amortization of goodwill and intangibles arising from the acquisition
of Paradigm.
Other Income and Expense, Net. Net other expense increased $10,000
during the three months ended December 31, 1998, compared to the same period in
the prior fiscal year. Net other income increased $100,000 during the nine
months ended December 31, 1998, compared to the same period in the prior fiscal
year.
Provision for Income Taxes. For the three months ended December 31,
1998, the Company recorded an income tax provision of $128,000 on income of
$199,000 (64%), after giving effect to the charge of $695,000 for amortization
of goodwill and intangibles arising from the acquisition of Paradigm, as
compared to an effective income tax rate of 35% for the three months ended
December 31, 1997 and 44% for the nine months ended December 31, 1997. The tax
provision for the three months ended December 31, 1998 gives effect to the non-
11
deductible tax items relating to the acquisition of Paradigm. The income tax
provision for the nine months ended December 31, 1998 reflects the Company's
expected effective tax rate for fiscal year 1999, prior to the effect of the
write-off of the one-time non-deductible charge of $5.8 million in connection
with the reverse merger acquisition of Paradigm, of approximately 39%.
Liquidity and Capital Resources
The Company has financed its operations to date through the private
sale of equity, lease financing and bank borrowings. As of December 31, 1998,
the cash and cash equivalents were $10.2 million, a decrease of $412,000 from
cash and cash equivalents of $10.6 million at March 31, 1998. The decrease in
cash and cash equivalents was primarily due to usage of cash in operations.
Line of credit facilities available to the Company are as follows: A
line of credit with a U.S. bank that as of December 31, 1998 consists of a $5.0
million commitment amount which is available through August 1999. The line bears
interest at the bank's prime rate (7.75% at December 31, 1998). The line is
collateralized by certain assets and contains certain general and financial
covenants, which include provisions stating that the Company cannot incur
additional debt or pledge assets without the prior approval of such bank. At
December 31, 1998, the Company had drawn $2.1 million against such line of
credit.
The accounts receivable at December 31, 1998 were $10.7 million, an
increase of 7.0% as compared to March 31, 1998. The inventories at December 31,
1998 were $18.5 million, an increase of 7.9% as compared to March 31, 1998. Net
plant and equipment at December 31, 1998 were $12.2 million, an increase of
14.7% as compared to March 31, 1998.
The Company evaluates the acquisition of businesses, products or
technologies that complement the Company's business. Any such transactions, if
consummated, may use a portion of the Company's working capital or require the
issuance of equity securities, which may result in further dilution to the
Company's stockholders.
The Company believes that cash generated from operations, if any, and
banking facilities will be sufficient to meet its cash requirements through
fiscal 1999. To the extent that funds generated from operations, together with
bank facilities are insufficient to meet its capital requirements, the Company
will be required to raise additional funds. No assurance can be given that
additional financing will be available on acceptable terms. The lack of such
financing if needed, would have a material adverse effect on the Company's
business, financial condition and results of operations.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segment
of an Enterprise and Related Information". This Statement establishes standards
for disclosures about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This Statement supersedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise". The new
standard becomes effective for the Company's fiscal year 1999 and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheets and measure those instruments at fair value. This Statement
becomes effective for the Company for fiscal years beginning after December 15,
1999. The Company is evaluating the requirements of SFAS 133 and the effects, if
any, on the Company's current reporting and disclosures.
12
Effective in the first quarter of 1998, the Company has adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" . Comprehensive income generally represents all changes in stockholders'
equity except those resulting from investments or contributions by stockholders.
The Company has reclassified earlier financial statements for comparative
purposes. The only component of comprehensive income for the three months and
nine months ended December 31, 1998 and 1997 was the change in the cumulative
translation adjustment.
Year 2000 Compliance
The Company has reviewed both its internal computer systems and its
products that could be affected by the "Year 2000" issue and has identified
certain minor software applications that will be affected. In the ordinary
course of replacing computer equipment and software, the Company attempts to
obtain replacements that are Year 2000 compliant. Utilizing both internal and
external resources to identify and assess needed Year 2000 remediation, the
Company currently anticipates that its internal Year 2000 identification,
assessment, remediation and testing efforts, will be completed on or about March
31, 1999, and that such efforts will be completed prior to any currently
anticipated impact on its internal computer equipment and software.
The Company presently believes, with modification to existing software
and conversion to new software, the "Year 2000" issues relating to internal
computer systems and products will not cause significant operational problems or
computer problems. Furthermore, the cost of implementing these solutions is not
anticipated to be material to the financial position or results of operations.
The plan is currently expected to result in non-recurring expenses through
calendar 1999 of approximately $750,000. However, if such modifications and
conversions are not made, or not completed, the Company does not expect the
"Year 2000" issue to have a material adverse impact on the operations of the
Company, as there are inexpensive alternatives available. Although the Company
has completed its internal assessment of the Year 2000 issue and believes that
it is substantially compliant, there can be no assurance that all potential
problem areas have been identified and the Year 2000 risks assessed. Should
there be systems that were not included in the assessment and which are not Year
2000 compliant, the Company may be unable to conduct business or manufacture its
products, which could cause a material adverse effect on the Company's results
of operations.
The Company has initiated formal communications with all of its
significant suppliers and large customers during fiscal 1999 to determine the
extent to which the Company is vulnerable to those third parties failure to
remediate their own "Year 2000" issues. There can be no guarantee that the
systems or products of other companies or significant suppliers will be
converted. A failure to convert by another company, or a conversion that is
incompatible with the Company's systems may have a material adverse impact on
the Company.
The Company's suppliers and customers may be adversely affected by
their respective failure to address the Year 2000 problem. Should any of the
Company's suppliers encounter Year 2000 problems that cause them to delay
manufacturing or shipments of key components, the Company may be forced to delay
or cancel shipments of its products, which would have a material adverse effect
on the Company's results of operations. The Company is currently working with
its suppliers to address their Year 2000 compliance in a timely manner. The
Company anticipates completion of this effort by June 1999; however, there can
be no assurance that any such effort will be successful.
Currently, the Company does not have a Year 2000 contingency plan in
place as it has completed its internal assessment and believes that it is
substantially compliant. However, the Company intends to create such a
contingency plan by July 1999 based on the outcome of its communications with
its suppliers.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 12, 1996, the Company and Michael Gulett, Robert McClelland,
Richard A. Veldhouse, Dennis McDonald and Chiang Lam (the "Paradigm Defendants")
were named, along with PaineWebber, Inc., as defendants in a purported class
action (entitled Bulwa et al. v. Paradigm Technology, Inc. et al., Santa Clara
County Superior Court Case No. CV759991) brought on behalf of stockholders who
purchased the Company's stock between November 20, 1995 and March 22, 1996 (the
"Class Period").
The complaint asserted six causes of action against the Paradigm
Defendants: negligent misrepresentation, fraud, breach of fiduciary duty,
violations of California Corporations Code sections 25400 and 25500 ("Sections
25400 and 25500"), violation of Corporations Code section 1507, and violation of
California Civil Code sections 1709 and 1710.
The Paradigm Defendants responded to the complaint by filing a
demurrer which challenged the legal sufficiency of all six causes of action. On
December 12, 1996, the Court sustained the demurrer as to all of the causes of
action except for the fourth cause of action for violation of Sections 25400 and
25500 (and as to all causes of action for defendant Michael Gulett). 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 and independently expressed an intent to
prosecute only the fourth cause of action. On January 8, 1997, the Paradigm
Defendants, with the exception of Michael Gulett (who by virtue of the ruling on
the demurrer has obtained a dismissal with prejudice as to all causes of action
asserted against him), 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. Plantiffs have expressed their intent to move to amend the class
certification order.
On April 9, 1998, the court granted plaintiffs' motion to amend their
complaint to incorporate factual allegations derived from the Campbell, et al.
action described below. The court overruled the Paradigm Defendants' demurrer to
the amended complaint on August 6, 1998. The Paradigm Defendants filed an answer
to the amended complaint on August 27, 1998.
Defendant McDonald's motion for summary judgment on plaintiffs' claims
is set for hearing on March 16, 1999. There can be no assurance that the
Company will be successful in the defense of this action. 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, with
causes of action and factual allegations essentially identical to those of the
Bulwa, et al. action, was filed by the law firm of Stull, Stull & Brody in the
Santa Clara County Superior Court on behalf of stockholders who held the
Company's stock between November 20, 1995 and March 22, 1996. The action is
entitled Chai, et al. v. Paradigm Technology Inc. et al. (Case No. CV764259),
and is asserted against the same Paradigm Defendants as in the Bulwa, et al.
action, 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 Campbell, et al. Action
described below. The Paradigm Defendants filed a demurrer to the amended
complaint, which was heard on September 9, 1997.
14
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 appealed the decision,
but on November 13, 1998 the Court of Appeal affirmed the judgment. Plaintiff's
petition for rehearing was denied. The time for filing a petition for review by
the Supreme Court has expired.
On May 19, 1997, Thomas Campbell, James Zulliger and Mark Wagenhals,
former employees of the Company, filed an action (Campbell, et al. v. Paradigm
Technology, Inc., et al., Case No. CV766271) in Santa Clara County Superior
Court. The complaint named as defendants the Company, Michael Gulett, Richard
Veldhouse, Dennis McDonald and Chiang Lam. The Campbell plaintiffs filed with
the complaint a notice that they considered their case related legally and
factually to the Bulwa action discussed above. The Campbell complaint contained
causes of action for fraud, breach of fiduciary duty, violations of California
Corporations Code sections 25400-25402, 25500-25502 and 25504 and violation of
California Civil Code sections 1709-1710. The Campbell complaint alleged that
the defendants misled them and committed fraud by allegedly overstating the
Company's back orders in the fourth quarter of 1995 and inflated reported sales
in the fourth quarter of 1995 and the first quarter of 1996, which allegedly
resulted in distorting the Company's financial condition, which allegedly
inflated its stock price. Plaintiffs alleged that they purchased the Company's
stock at the allegedly inflated prices and were damaged thereby. The complaint
sought 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. Defendants filed a
demurrer in response to the second amended complaint, which was heard on
September 3, 1998. That same day, the Court sustained the demurrer but granted
plaintiffs leave to file a third amended complaint by September 30, 1998.
Plaintiffs then filed a third amended complaint. Following defendants' filing of
a demurrer to the third amended complaint, plaintiffs agreed to dismiss their
claims with prejudice in exchange for defendants' agreement not to seek to
recover defendants' costs incurred in defending against the action. The third
amended complaint was dismissed with prejudice on December 11, 1998.
On May 19, 1998, the law firm that filed the Bulwa, et al. action
described above filed an additional securities class action lawsuit against the
Company, Michael Gulett, Robert McClelland, Richard A. Veldhouse and Chiang Lam,
this time in the United States District Court for the Northern District of
California. The complaint alleged violations of section 10(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Commission Rule 10b-5
and section 20(a) of the Exchange Act. Plaintiff alleged the same class and the
same substantive factual allegations that are contained in the Bulwa, et al.
action as amended. Defendants responded to the complaint on July 27, 1998 by
filing a motion to dismiss the complaint for failure to state claims upon which
relief can be granted and for various pleading inadequacies. In lieu of opposing
the motion, plaintiff filed a first amended complaint. Defendants renewed their
motion to dismiss, and on January 20, 1999 the Court issued an order granting
the motion and dismissing plaintiff's action and entered judgment thereon.
On February 3, 1999, the Court entered an amended judgment clarifying that the
judgment is with prejudice.
.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
15
Item 5. Other Information
The Board of Directors of the Company approved the Amended and
Restated Bylaws of the Company and a form of Indemnity Agreement to be entered
into by the Company and its directors. Both documents are attached as exhibits
to this Form 10-Q. Also attached to this Form 10-Q is the Company's 1994 Stock
Option Plan, amended to reflect the reverse stock split approved at the Annual
Meeting of Stockholders (the "Annual Meeting") held on August 4, 1998 and
adjourned to August 26, 1998, September 3, 1998 and September 10, 1998. Such
Annual Meeting is more fully described in the Company's Form 10-Q filed with the
Securities and Exchange Commission on November 16, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Amended and Restated Bylaws of the Company.
10.1 Form of Indemnity Agreement between the Company and its
directors.
10.2 The Company 1994 Stock Option Plan, as amended.
11 Computation of Per Share Earnings as set forth in Note 8 of
the Notes to Condensed Consolidated Financial Statements in
Part I of the Form 10-Q.
27 Financial Data Schedule.
(b) The Company did not file a Current Report on Form 8-K during this fiscal
period.
16
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.
IXYS CORPORATION
By: /s/ ARNOLD AGBAYANI
--------------------------
Arnold Agbayani, Vice President,
Finance and Administration
(Principal Financial Officer)
Date: February 12, 1999
17
Exhibit Index
-------------
3.1 Amended and Restated Bylaws of the Company.
10.1 Form of Indemnity Agreement between the Company and its directors.
10.2 The Company 1994 Stock Option Plan, as amended.
11 Computation of Per Share Earnings as set forth in Note 8 of the Notes
to Condensed Consolidated Financial Statements in Part I of the Form
10-Q.
27 Financial Data Schedule.
18