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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the Fiscal Year Ended .................................... December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the Transition Period from ____________________ to ____________________
Commission File Number 0-26124
PARADIGM TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 770140882-5
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
694 Tasman Drive, Milpitas, CA 95035
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(Address of principal executive offices) (Zip Code)
(408) 954-0500
-------------------------------
(Registrant's telephone number,
including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. |X|
The aggregate market value of the voting stock held by nonaffiliates of
the registrant was approximately $7,582,869 on February 20, 1997 based on the
last sale price as reported by the NASDAQ/National Market System.
The aggregate number of outstanding shares of Common Stock, $.01 par
value, of the registrant was 7,241,086 shares as of February 20, 1997.
When used in this Form 10-K, the words "estimate," "project," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially, including factors relating to the
impact of competitive products and pricing, the timely development and market
acceptance of new products and upgrades to existing products, availability and
cost of products from Paradigm's suppliers and market conditions in the PC
industry. For discussion of certain such risk factors, see "Business--Factors
That May Affect Future Results." Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release updates or
revisions to these statements.
TABLE OF CONTENTS
Page
Item ----
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PART I .................................................................... 1
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 16
ITEM 3. LEGAL PROCEEDINGS.......................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.................................................... 18
PART II .................................................................... 18
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS ............................... 18
ITEM 6. SELECTED FINANCIAL DATA ................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION .............. 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 59
PART III .................................................................... 60
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT ................................................ 60
ITEM 11. EXECUTIVE COMPENSATION .................................... 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ..................................... 65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 67
PART IV .................................................................... 69
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K ....................................... 69
SIGNATURES................................................................... 76
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PART I
ITEM 1. BUSINESS.
Paradigm Technology, Inc. ("Paradigm" or the "Company") designs and
markets high speed, high density static random access memory ("SRAM")
semiconductor devices to meet the needs of advanced telecommunications devices,
networks, workstations, high performance PCs, advanced modems and complex
military/aerospace applications. The Company focuses on high performance, 10
nanosecond ("ns") and faster SRAMs. For the year ended December 31, 1996, 10ns
and faster SRAMs accounted for approximately 36% of the Company's sales.
Paradigm believes its proprietary CMOS process and design technologies enable it
to offer SRAMs with high speeds and small die sizes. Using a combination of
innovative process architecture and design know-how, the Company was one of the
first companies to introduce high speed CMOS SRAMs for three successive
generations of product densities: 256 kilobit ("K"), one megabit ("M"), and 4M.
Paradigm's customers include Hughes Network Systems, Motorola and US Robotics.
Recent Developments
Sale of Manufacturing Operations. On November 15, 1996, Paradigm sold
its wafer fabrication facility (the "Fab") to Orbit Semiconductor, Inc., a
wholly owned subsidiary of DII Group, Inc. ("Orbit"). The Company received
aggregate consideration of $20 million consisting of $6.7 million in cash, $7.5
million in debt assumption, and promissory notes in the aggregate principal
amount of $5.8 million. The sale of the Fab resulted in a loss of $4.6 million,
which was recorded in the fourth quarter of 1996.
As a result of the sale of the Fab, Paradigm's future needs for wafers
will need to be supplied by third parties. Orbit has agreed to supply the
Company a specified quantity of wafers in exchange for specified credits against
the promissory notes delivered in connection with the sale. The Company is also
in the process of seeking wafer supply from offshore foundries who would provide
8-inch wafers using 0.35 micron process technology. See "Factors That May Affect
Future Results-Dependence on Foundries and Other Third Parties."
Sale of Preferred Stock. On January 23, 1997, Paradigm sold a total of
200 shares of 5% Series A Convertible Redeemable Preferred Stock (the "Preferred
Stock") in a private placement to Vintage Products, Inc. at a price of $10,000
per share, for total proceeds (net of payments to third parties) of
approximately $1,880,000. The Preferred Stock is convertible at the option of
the holder into the number of fully paid and nonassessable shares of Common
Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the
amount of all accrued but unpaid or accumulated dividends on the shares of
Preferred Stock being converted by (B) the Conversion Price in effect at the
time of conversion. The "Conversion Price" will be equal to the lower of (i)
$2.25 or (ii) eighty-two percent (82%) of the average closing bid price of a
share of Common Stock as quoted on the Nasdaq National Market over the five (5)
consecutive trading days immediately preceding the date of notice of conversion
of the Preferred Stock. The Preferred Stock is redeemable by the Company under
certain limited
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circumstances. The Company shall not be required to issue shares of Common Stock
equal to or greater than twenty percent (20%) of the Common Stock outstanding on
the date of the initial issuance of the Preferred Stock. The Company is
registering the maximum number of shares of Common Stock issuable upon
conversion of the Preferred Stock.
Shutdown of NewLogic Corporation Operations. In June 1996, the Company
acquired NewLogic Corp. ("NewLogic") with the strategy to expand Paradigm's
product line beyond SRAMs. In early 1997, the Company believed that it was in
Paradigm's best interest to shut down the NewLogic operation and focus on
Paradigm's core SRAM products and markets.
Industry Background
Virtually all digital electronic systems, including cellular
telephones, workstations, PCs and modems, contain memory devices. Over the past
decade, the drive to reduce the size and increase the speed and functionality of
electronic systems has required concurrent increases in the density and speed of
memory devices used in these systems. The most widely used memory devices are
dynamic random access memories ("DRAMs") and SRAMs. DRAMs are commercially
available with higher densities than SRAMs, while SRAMs generally are capable of
significantly higher speeds than DRAMs of comparable density. SRAMs achieve this
speed advantage principally by incorporating more transistors in each memory
cell, rendering SRAMs larger and more costly to manufacture. Until recently,
DRAMs have produced acceptable performance levels at a lower cost and reduced
size compared to SRAMs. However, the increased computing speeds of digital
signal processors contained in advanced telecommunications equipment and
recently introduced processors, such as Intel's Pentium and the PowerPC, have
exceeded the ability of DRAMs to provide timely access to data. For example, to
take advantage of the significantly increased performance capabilities of these
new processors in high performance PCs, SRAMs are often used as cache memory
between the processor and the DRAM main memory. The cache memory stores the most
frequently or most recently used data from the DRAM main memory, enabling
quicker access by the processor. When SRAMs are used to provide access to a high
percentage of the information the processor requests, data access speeds can be
greatly enhanced.
The vast majority of SRAMs currently sold are industry standard
asynchronous SRAMs that have only relatively simple interface logic and are
required to operate only at normal commercial temperatures. Synchronous SRAMs,
which operate at the same clock speed as the processor, are more complex and
difficult to produce than asynchronous SRAMs because they combine SRAM memory
with additional logic. Synchronous burst mode SRAMs permit high- end processors,
such as the Pentium and PowerPC, to access data more quickly by allowing data
bits to be transferred in blocks rather than one bit at a time. Both synchronous
and asynchronous SRAMs vary in performance features, such as speed, density and
temperature tolerance, which enable them to support various high-end
applications. In addition, the demand for reduced power consumption in
electronic products has resulted in an increasing demand for low voltage SRAM
devices.
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Dataquest Incorporated, an information technology research firm,
estimates that the worldwide market for SRAM products will grow from $6.7
billion in 1996 to $8.9 billion in 1999, with the market for sub-20ns SRAMs
growing from $2.0 billion to $2.5 billion over the same period. In addition to
high performance PCs, SRAMs are used in a variety of other electronics products.
In commercial communications, SRAMs are used in both cellular base stations and
digital cellular telephones. SRAMs are also increasingly used in high speed
communication networks, such as Ethernet and FDDI-based networks. In military
and aerospace systems, SRAMs can also provide the high performance memory
required by fast military processors. For example, high speed military computers
utilize high performance SRAMs in pattern recognition and command, control, and
communication applications embedded in today's advanced electronic weapons,
planes, and satellites.
The Company's Products
Paradigm designs, manufactures and sells a broad range of SRAM products
with various density, speed, configuration, temperature range and packaging
options for a wide range of commercial, industrial, and military applications.
The Company's products range in density from 256K to 4M. The Company's fastest
products currently achieve 7ns access times, and for the year ended December 31,
1996, 10ns and faster SRAMs accounted for 36% of the Company's sales. The
majority of Paradigm's products are available in two levels of power
consumption, standard and low, and three temperature ranges, commercial,
industrial, and military. Paradigm also offers its products in a wide variety of
packaging options to accommodate various product features and cost
considerations. Paradigm designs its SRAM packages and pinouts to meet the
standards prescribed by the Joint Electron Device Engineering Council.
Asynchronous SRAMs. Paradigm's asynchronous SRAM products include high
speed 256K, 1M and 4M CMOS SRAMs. They are available in a variety of
configurations and commercial and industrial temperature range versions, as well
as military versions manufactured to comply with the most recent military
specifications. Cellular phones represent a key application for Paradigm's
asynchronous SRAMs, due largely to the wide temperature tolerances and speed of
the Company's products.
Synchronous SRAMs. Paradigm has introduced a family of high speed,
synchronous burst mode CMOS SRAM devices, and has completed development of a
family of pipelined burst mode devices. Key applications for the Company's
synchronous SRAMs include workstations, high performance PCs and file servers
with significant cache memory requirements.
SRAM Modules. Paradigm offers SRAM modules in which multiple SRAMs are
connected and grouped on a printed circuit board and sold as a single unit.
Paradigm module offerings are designed to support the specific needs of the PC
cache market and the requirements for JEDEC standard SRAM modules. The Company's
PC cache module offerings include Intel COAST compliant modules and modules
which support PowerPC CHRP based designs. The JEDEC standard module product
offerings include modules ranging in size from
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750Kb to 8Mb. These modules are used in a variety of applications including
networking, communications, digital signal processing ("DSP") boards and memory
testers.
Products Under Development. Timely development and introduction of new
products are essential to maintaining Paradigm's competitive position. The
Company currently develops all of its products internally. Paradigm works
closely with leading electronics manufacturers in order to anticipate and
develop future generations of high performance SRAMs required by these
customers. The Company's current design development objectives include
synchronous SRAM devices for Pentium cache memory. The Company also intends to
develop products to provide cache memory for the next generation of x86
processors, while continuing to design and produce very fast SRAM products for
the telecommunications, networking and military/aerospace industries. Products
currently under development include: asynchronous, low voltage SRAMs;
synchronous burst pipelined SRAMs; modules for 90Mhz and faster Pentium cache
memory; and special configuration SRAMs for cellular phone and modem
applications. In addition, by working closely with customers, Paradigm is
developing a line of module offerings. The Company believes that these modules
will provide high quality, high value SRAM-based industry standard products, as
well as custom solutions. In addition to new product development, the Company is
focused on redesigning existing products to reduce manufacturing costs, increase
yields, and increase the speeds of its products.
The SRAM business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity, and accelerated erosion of
average selling prices. During the latter part of 1995 and throughout 1996, the
market for certain SRAM devices experienced an excess supply relative to demand
which resulted in a significant downward trend in prices. The Company expects
such downward price trend to continue.
The selling prices that the Company is able to command for its products
are highly dependent on industry-wide production capacity and demand. In this
regard, the Company did experience rapid erosion in product pricing during 1996
which was not within the control of the Company. The Company could continue to
experience a downward trend in pricing which could adversely effect the
Company's operating results.
The Company's future success will depend, in part, on its ability to
offset expected price erosion through manufacturing cost savings, yield
improvements and developing and introducing on a timely basis new products and
enhanced versions of existing products which incorporate advanced features and
command higher prices.
Customers and Applications
Recent market trends, such as the rapid expansion of
telecommunications, graphics, multimedia and networking applications and the
proliferation of high-end workstations and PCs, have resulted in significant
demand for high performance SRAMs. Paradigm has targeted this higher performance
segment of the SRAM market, where it believes critical performance criteria such
as speed and temperature tolerance are more highly valued.
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For the year ended December 31, 1995, Paradigm's sales of products to
Motorola accounted for 28% of sales. Sales to Motorola during this period
represented sales to several separate divisions of Motorola, which the Company
believes make independent purchasing decisions. For the year ended December 31,
1996, Motorola, All American Semiconductor and Micron Technology accounted for
25%, 13% and 13%, respectively, of the Company's sales.
Sales and Marketing
Paradigm sells its products in North America through a combination of a
direct sales force, independent sales representatives and distributors. Direct
sales personnel are responsible for calling on key accounts in North America and
coordinating the activities of the Company's sales representatives. The Company
has a sales manager in each of its regional sales offices in Boston, Chicago,
Los Angeles, and San Jose. The Company sells its products in Asia and Europe
through a network of distributors and independent sales representatives.
Paradigm intends to expand the size of its direct sales force and the number of
outside sales representatives to provide additional customer service and broaden
its customer base.
The Company's sales representatives and distributors are not subject to
minimum purchase requirements and can discontinue marketing the Company's
products at any time. The Company's distributors are permitted to return to the
Company any or all of the products purchased by them and are offered price
protection. As is standard in the semiconductor industry, distributors are
granted a credit for the difference, at the time of a price reduction, between
the price they were originally charged for the products in inventory and the
reduced price which the Company subsequently charges distributors. From time to
time, distributors are also granted credit on an individual basis for
Company-approved price reductions on specific transactions, usually to meet
competitive prices. The Company believes that its relations with it sales
representatives and distributors are good.
In September 1994, Paradigm entered into a strategic relationship with
National Semiconductor under which National Semiconductor made an equity
investment in the Company and was granted exclusive marketing and sales rights
to Paradigm's products in the military/aerospace market. Paradigm believes that
National Semiconductor's significant expertise and longstanding customer
relationships in the military/aerospace industries benefit the Company by
facilitating access to these higher-margin markets.
The Company believes that customer service and technical support are
important competitive factors in selling to key customers. Paradigm emphasizes
on-time delivery and quick responses to the demand changes of its customers.
Paradigm has trained employees of its sales representatives and distributors to
provide technical support, with Paradigm technical support engineers available
to provide assistance with more difficult questions.
Backlog
The Company's backlog includes all purchase orders that have been
received, accepted, and scheduled for delivery. The Company counts in its
backlog only those orders which it
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believes will be shipped within the next six months. Most orders in backlog are
subject to delivery rescheduling, price renegotiations, and cancellation at the
option of the purchaser, usually without penalty. As a result, although backlog
may be useful for scheduling production, it may not be a reliable measure of
sales for future periods. As of December 31, 1996, the Company's backlog was
approximately $2.6 million.
Manufacturing
On November 15, 1996, the Company sold its Fab to Orbit. Following the
sale of the Fab, the Company and Orbit entered into a Wafer Manufacturing
Agreement whereby Orbit will supply a quantity of wafers to the Company over a
specified period of time. The Company is also in the process of seeking wafer
supply from other offshore foundries, and anticipates that it will conduct
business with other foundries by delivering written purchase orders specifying
the particular product ordered, quantity, price, delivery date and shipping
terms and, therefore, such foundries will not be obligated to supply products to
the Company for any specific period, in any specific quantity or at any
specified price, except as may be provided in a particular purchase order.
Reliance on outside foundries involves several risks, including constraints or
delays in timely delivery of the Company's products, reduced control over
delivery schedules, quality assurance, potential costs and loss of production
due to seismic activity, weather conditions and other factors. To the extent a
foundry terminates its relationship with the Company, or should the Company's
supply from a foundry be interrupted or terminated for any other reason, the
Company may not have a sufficient amount of time to replace the supply of
products manufactured by the foundry. Should the Company be unable to obtain a
sufficient supply of products to enable it to meet demand, it could be required
to allocate available supply of its products among its customers. Until late
1995, there had 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.
Strategic Relationships
Atmel Corporation. On April 28, 1995 Paradigm signed a five year
License and Manufacturing Agreement (the "License Agreement") with Atmel,
pursuant to which the
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Company and Atmel installed the Company's 0.6 micron CMOS manufacturing process
at Atmel's advanced wafer fabrication facility in Colorado Springs, Colorado in
1996. Pursuant to the License Agreement, each company will have a license to use
this process technology as installed at Atmel's facility. The Atmel facility has
agreed to manufacture six-inch wafers for the Company's current and future
products using the Company's CMOS process. Atmel has agreed to sell to the
Company, at predetermined prices, a committed quantity of sub-micron wafers each
year during the five-year term of the License Agreement. Paradigm and Atmel also
agreed to work together to migrate the CMOS process technology to 0.5 micron and
0.4 micron feature sizes. Pursuant to the License Agreement, Atmel also obtained
a license to certain of the Company's existing SRAM products, and the Company
obtained a license to a future Atmel SRAM product, in each case with specified
royalties.
NKK Corporation. Under several technology license and development
agreements, the first two of which were executed in December 1990, Paradigm and
NKK entered into various product development and technology licensing
relationships, resulting in Paradigm's successful transfer of its 0.6 micron
process technology to NKK's wafer fabrication facility in Japan. These
relationships were modified in April 1995 by an agreement (the "1995 Agreement")
which significantly simplified the relationship between the parties and
substantially ended each party's obligation to disclose or deliver technological
improvements to the other. Under the 1995 Agreement, NKK has agreed to supply
Paradigm with a significant quantity of 1M SRAMs of Paradigm's design each month
for a three year period in exchange for additional and expanded license rights
with respect to certain proprietary technology. However, Paradigm is under no
obligation to purchase the 1M SRAMs under the 1995 Agreement. In effect, the
1995 Agreement provides Paradigm with an important, discretionary ability to
increase capacity on an as-needed basis. The Company began shipping SRAMs
produced by NKK during the fourth quarter of 1995. The 1995 Agreement also
rescinded NKK's right to restrict Paradigm from entering into other foundry
relationships or granting additional licenses for the Company's products.
National Semiconductor Corporation. In September 1994, Paradigm entered
into a strategic relationship with National Semiconductor under which National
Semiconductor markets Paradigm's products to customers in the military/aerospace
industries. National Semiconductor also made an equity investment in the Company
in connection with this strategic relationship.
Competition
The semiconductor industry is intensely competitive and is
characterized by rapidly changing technology, short product life cycles,
cyclical oversupply and rapid price erosion. The Company competes with large
domestic and international semiconductor companies, most of which have
substantially greater financial, technical, marketing, distribution, and other
resources than the Company. The Company's principal competitors in the high
performance SRAM market include Motorola and Micron Technology. Other
competitors in the SRAM market include Alliance Semiconductor, Cypress
Semiconductor, Integrated Device Technology, Integrated Silicon Solution,
Samsung and numerous other large and emerging semiconductor companies. In
addition, other manufacturers can be expected to enter the high speed, high
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density SRAM market. The Company has also licensed the design and process
technology for substantially all of its current products, including certain of
its 256K, 1M and 4M products, to NKK Corporation ("NKK") and in the future 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 Corporation ("Atmel") the right to produce certain of its SRAM
products, and as a result 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.
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.
Patents and Licensed Technology
The Company seeks to protect its proprietary technology by filing
patent applications to obtain patents in the United States and foreign countries
and by registering its circuit designs pursuant to the U.S. Semiconductor Chip
Protection Act of 1984. The Company also relies on trade secrets and
confidential technological know-how in the conduct of its business. As of
December 31, 1996, the Company held 15 U.S. patents and one Canadian patent, and
had four U.S. and 15 foreign patent applications pending. The Company believes
that its patent portfolio strengthens its negotiating position with respect to
technology disputes that may occur in the future.
The Company intends to continue to pursue patent, trade secret, and
mask work protection for its semiconductor process technologies and designs. To
that end, the Company has obtained certain patents and patent licenses and
intends to continue to seek patents on its inventions, as appropriate. The
process of seeking patent protection can be long and expensive, and there is 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
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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.
In December 1990, as part of an agreement terminating a strategic
relationship with AT&T, the Company entered into a nonexclusive license
agreement with AT&T giving the Company a license to use all AT&T-owned,
semiconductor-related patents over a period of eight years. Under the agreement,
the Company agreed to pay AT&T a royalty of 0.75% of revenue for each product
produced by the Company. Under the same agreement, the Company licensed to AT&T
its poly-iso structure for a similar royalty.
The Company has also entered into certain technology agreements with
Atmel and NKK.
Environmental Matters
The Company believes that compliance with federal, state, and local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment will not have a material
effect upon its capital expenditures, operations, or competitive position.
Employees
As of December 31, 1996, the Company had 85 employees, of whom 18 were
engaged in research and development and engineering, 10 in marketing, sales, and
customer support, 44 in manufacturing, 8 in finance and 5 in administration. The
Company's employees are not
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represented by a collective bargaining organization and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are good.
Factors That May Affect Future Results
The operations and business prospects of the Company are subject to
certain qualifications based on potential business risks faced by the Company.
This Form 10-K should be reviewed in light of the potential effects of events
that may occur as outlined in the following risk factors. Readers of this report
should consider carefully the following risk factors in addition to the other
information presented in this Form 10-K.
Uncertainty of Future Profitability; Need for Additional Funds. For the
year ended December 31, 1996 the Company reported a net loss of $36.4 million.
The sale of the Company's wafer fabrication facility in November 1996, resulted
in a loss of $4.6 million, which was recorded in the fourth quarter of 1996.
The Company's recent operations have consumed substantial amounts of
cash. The Company believes that cash flow from operations and other existing and
potential sources of liquidity will be sufficient to meet its projected working
capital and other cash requirements through at least the remainder of 1997.
However, there can be no assurance that the Company will not need additional
capital and if so that such capital can be successfully obtained on terms
acceptable to the Company or at all. The sale or issuance of additional equity
or convertible debt securities could result in additional dilution to the
Company's stockholders. There can be no assurance that additional financing, if
required, will be available when needed or, if available, will be on terms
acceptable to the Company.
Fluctuations in Quarterly Results. The Company has experienced
significant quarterly fluctuations in operating results and anticipates that
these fluctuations will continue. These fluctuations have been caused by a
number of factors, including changes in manufacturing yields by contracted
manufacturers, changes in the mix of products sold, the timing of new product
introductions by the Company or its competitors, cancellation or delays of
purchases of the Company's products, the gain or loss of significant customers,
the cyclical nature of the semiconductor industry and the consequent
fluctuations in customer demand for the Company's devices and the products into
which they are incorporated, and competitive pressures on prices. A decline in
demand in the markets served by the Company, lack of success in developing new
markets or new products, or increased research and development expenses relating
to new product introductions could have a material adverse effect on the
Company. Moreover, because the Company sets spending levels in advance of each
quarter based, in part, on expectations of product orders and shipments during
that quarter, a shortfall in revenue in any particular quarter as compared to
the Company's plan could have a material adverse effect on the Company.
Beginning in late 1995 and continuing into 1996, 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
-10-
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.
Dependence on New Products and Technologies. The market for the
Company's products is characterized by rapidly changing technology, short
product life cycles, cyclical oversupply and rapid price erosion. Average
selling prices for many of the Company's products have generally decreased over
the products' life cycles in the past and are expected to decrease in the
future. Accordingly, the Company's future success will depend, in part, on its
ability to develop and introduce on a timely basis new products and enhanced
versions of its existing products which incorporate advanced features and
command higher prices. The success of new product introductions and enhancements
to existing products depends on several factors, including the Company's ability
to develop and implement new product designs, achievement of acceptable
production yields, and market acceptance of customers' end products. In the
past, the Company has experienced delays in the development of certain new and
enhanced products. Based upon the increasing complexity of both modified
versions of existing products and planned new products, such delays could occur
again in the future. Further, the cost of development can be significant and is
difficult to forecast. In addition, there can be no assurance that any new or
enhanced products will achieve or maintain market acceptance. If the Company is
unable to design, develop and introduce competitive products or to develop new
or modified designs on a timely basis, the Company's operating results will be
materially adversely affected.
Dependence on Foundries and Other Third Parties. On November 15, 1996,
the Company sold its Fab to Orbit. Following the sale of the Fab, the Company
and Orbit entered into a Wafer Manufacturing Agreement whereby Orbit will supply
a quantity of wafers to the Company over a specified period of time. The Company
is also in the process of seeking wafer supply from other offshore foundries,
and anticipates that it will conduct business with other foundries by delivering
written purchase orders specifying the particular product ordered, quantity,
price, delivery date and shipping terms and, therefore, such foundries will not
be obligated to supply products to the Company for any specific period, in any
specific quantity or at any specified price, except as may be provided in a
particular purchase order. Reliance on outside foundries involves several risks,
including constraints or delays in timely delivery of the Company's products,
reduced control over delivery schedules, quality assurance, potential costs and
loss of production due to seismic activity, weather conditions and other
factors. To the extent a foundry terminates its relationship with the Company,
or should the Company's supply from a foundry be interrupted or terminated for
any other reason, the Company may not have a sufficient amount of time to
replace the supply of products manufactured by the foundry. Should the Company
be unable to obtain a sufficient supply of products to enable it to meet demand,
it could be required to allocate available supply of its products among its
customers. Until recently, there has been a worldwide shortage of advanced
process technology foundry
-11-
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.
Semiconductor Industry; SRAM Market. The semiconductor industry is
highly cyclical and has been subject to significant economic downturns at
various times, characterized by diminished product demand, production
overcapacity and accelerated erosion of average selling prices. During 1996, the
market for certain 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 margins. The selling prices that the Company is able to
command for its products are highly dependent on industry-wide production
capacity and demand, and as a consequence the Company could experience rapid
erosion in product pricing which is not within the control of the Company and
which could adversely effect the Company's operating results. The Company
expects that additional SRAM production capacity will become increasingly
available in the foreseeable future, and such additional capacity may adversely
affect the Company's margins and competitive position. In addition, the Company
may experience period-to-period fluctuations in operating results because of
general semiconductor industry conditions, overall economic conditions, or other
factors. The Company's business is also subject to the risks associated with the
imposition of legislation and regulations relating to the import or export of
semiconductor products.
Litigation. On August 12, 1996, a securities class action lawsuit was
filed in Santa Clara Superior Court against the Company and certain of its
officers and directors (the "Paradigm Defendants"). The class alleged by
plaintiffs consists of purchasers of the Company's common stock from November
20, 1995 to March 22, 1996, inclusive. The complaint alleges negligent
misrepresentation, fraud and deceit, breach of fiduciary duty, and violations of
certain provisions of the California Corporate Securities Law and Civil Code.
The plaintiffs seek an unspecified amount of compensatory and punitive damages.
Plaintiffs allege, among other things, that the Paradigm Defendants wrongfully
represented that the Company would have protection against adverse market
conditions in the semiconductor market based on the Company's focus on high
speed, high performance semiconductor products. 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
-12-
prejudice. On December 12, 1996, the Court sustained the demurrer as to all of
the causes of action except for violation of certain provisions of the
California Corporate Securities Law and Civil Code. The Court, however, granted
plaintiffs leave to amend the complaint to attempt to cure the defects which
caused the Court to sustain the demurrer. Plaintiffs failed to amend within the
allotted time. On January 8, 1997, the Paradigm Defendants filed an answer to
the complaint denying any liability for the acts and damages alleged by the
plaintiffs. Plaintiffs have served the Paradigm Defendants with a first set of
requests to produce documents, to which the Paradigm Defendants are currently
responding. Plaintiffs have also filed a motion for class certification which is
set for hearing on April 15, 1997. No other motions have been filed with the
court by plaintiffs or defendants, and no discovery has yet been conducted.
There can be no assurance that the Company will be successful in such defense.
Even if Paradigm is successful in such defense, it may incur substantial legal
fees and other expenses related to this claim. If unsuccessful in the defense of
any such claim, the Company's business, operating results and cash flows could
be materially adversely affected.
On February 21, 1997, an additional purported class action, with causes
of action and factual allegations essentially identical to those of the August
12, 1996 class action lawsuit, was filed. This second class action is asserted
against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. None
of the Paradigm Defendants have been served in this new action. The Paradigm
Defendants believe because the new action appears redundant it is subject to the
demurrer which the Court sustained in the first class action as to all causes of
action asserted against Michael Gulett and all but one of the causes of action
asserted against the remaining Paradigm Defendants.
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. Additionally, a substantial portion of
the Company's sales is derived from a relatively small number of customers. For
the year ended December 31, 1995, Motorola accounted for 28% of the Company's
sales, and for the year ended December 31, 1996, Motorola, All American
Semiconductor and Micron Technology accounted for 25%, 13% and 13%,
respectively, of the Company's sales. 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
-13-
performance SRAM market include Motorola and Micron Technology. Other
competitors in the SRAM market include Alliance Semiconductor, Cypress
Semiconductor, Integrated Device Technology, Integrated Silicon Solution,
Samsung and numerous other large and emerging semiconductor companies. In
addition, other manufacturers can be expected to enter the high speed, high
density SRAM market. The Company has also licensed the design and process
technology for substantially all of its current products, including certain of
its 256K, 1M and 4M products, to NKK Corporation ("NKK") and in the future 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 Corporation ("Atmel") the right to produce certain of its SRAM
products, and as a result 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.
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.
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,
-14-
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. Approximately 28% and 25% of the Company's
sales in the years ended December 31, 1995 and 1996, respectively, were
attributable to sales outside the United States, primarily in Asia and Europe,
and the Company expects that international sales will continue to represent a
significant portion of its sales. In addition, the Company expects that a
significant portion of its products will be manufactured by independent third
parties in Asia. Therefore, the Company is subject to the risks of conducting
business internationally, and both manufacturing and sales of the Company's
products may be adversely affected by political and economic conditions abroad.
Protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export compliance
laws, or other trade policies, could adversely affect the Company's ability to
have products manufactured or sell products in foreign markets. The Company
cannot predict whether quotas, duties, taxes, or other charges or restrictions
will be imposed by the United States, Hong Kong, Japan, Taiwan, or other
countries upon the importation or exportation of the Company's products in the
future, or what effect any such actions would have on its relationship with NKK
or other manufacturing sources, or its general business, financial condition and
results of operations. In addition, there can be no assurance that the Company
will not be adversely affected by currency fluctuations in the future. The
prices for the Company's products are denominated in dollars. Accordingly, any
increase in the value of the dollar as compared to currencies in the Company's
principal overseas markets would increase the foreign currency-denominated sales
prices of the Company's products, which may negatively affect the Company's
sales in those markets. Currency fluctuations in the future may also increase
the manufacturing costs of the Company's products. Although the Company has not
to date experienced any material adverse effect on its operations as a result of
such international risks, there can be no assurance that such factors will not
adversely impact the Company's general business, financial condition and results
of operations.
Employees; Management of Growth. The Company's future success will be
heavily dependent upon its ability to attract and retain qualified technical,
managerial, marketing and
-15-
financial personnel. The Company has experienced a high degree of turnover in
personnel, including at the senior and middle management levels. The competition
for such personnel is intense and includes companies with substantially greater
financial and other resources to offer such personnel. There can be no assurance
that the Company will be able to attract and retain the necessary personnel, or
successfully manage its expansion, and any failure to do so could have a
material adverse effect on the Company.
Potential Volatility of Stock Price. The trading price of the Company's
Common Stock is subject to wide fluctuations in response to variations in
operating results of the Company and other semiconductor companies, actual or
anticipated announcements of technical innovations or new products by the
Company or its competitors, general conditions in the semiconductor industry and
the worldwide economy, and other events or factors. The Company's stock traded
from a high of $37.25 in August 1995 to a low of $1.38 in February 1997. In
addition, the stock market has in the past experienced extreme price and volume
fluctuations, particularly affecting the market prices for many high technology
companies, and these fluctuations have often been unrelated to the operating
performance of the specific companies. These market fluctuations may adversely
affect the market price of the Company's Common Stock.
Antitakeover Effect of Certain Charter Provisions. Certain provisions
of the Company's Certificate of Incorporation and Bylaws and of Delaware law
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit fluctuations in the market price of the
Common Stock that could result from takeover attempts. In addition, the Board of
Directors, without further stockholder approval, may issue Preferred Stock that
could have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could also adversely affect the voting
power of the holders of Common Stock, including the loss of voting control to
others.
ITEM 2. PROPERTIES.
The Company leases its 20,000 square foot principal facility in
Milpitas, California pursuant to a lease that expires in January 2002. The
Company also has domestic sales offices in the Boston, Chicago, Los Angeles and
San Jose metropolitan areas. The Company believes that the size of its existing
facility is adequate to meet its current needs.
-16-
ITEM 3. LEGAL PROCEEDINGS.
On August 12, 1996, a securities class action lawsuit was filed in
Santa Clara Superior Court against the Company and certain of its officers and
directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists
of purchasers of the Company's common stock from November 20, 1995 to March 22,
1996, inclusive. The complaint alleges negligent misrepresentation, fraud and
deceit, breach of fiduciary duty, and violations of certain provisions of the
California Corporate Securities Law and Civil Code. The plaintiffs seek an
unspecified amount of compensatory and punitive damages. Plaintiffs allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company would have protection against adverse market conditions in the
semiconductor market based on the Company's focus on high speed, high
performance semiconductor products. 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 action
except for violation of certain provisions of the California Corporate
Securities Law and Civil Code. The Court, however, granted plaintiffs leave to
amend the complaint to attempt to cure the defects which caused the Court to
sustain the demurrer. Plaintiffs failed to amend within the allotted time. On
January 8, 1997, the Paradigm Defendants filed an answer to the complaint
denying any liability for the acts and damages alleged by plaintiffs. Plaintiffs
have served the Paradigm Defendants with a first set of requests to produce
documents, to which the Paradigm Defendants are currently responding. Plaintiffs
have also filed a motion for class certification which is set for hearing on
April 15, 1997. No other motions have been filed with the court by plaintiffs or
defendants, and no discovery has yet been conducted. The Paradigm Defendants
will vigorously defend the action and, subject to the inherent uncertainties of
litigation and based upon facts presently known, management believes that the
resolution of this matter will not have a material adverse impact on the
Company's financial position or results of operations. However, should the
outcome of this action be unfavorable, the Company may be required to pay
damages and other expenses, which could have a material adverse effect on the
Company's financial position or results of operations.
On February 21, 1997, an additional purported class action, with causes
of action and factual allegations essentially identical to those of the August
12, 1996 class action lawsuit, was filed. This second class action is asserted
against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. None
of the Paradigm Defendants have been served in this new action. The Paradigm
Defendants believe because the new action appears redundant it is subject to the
demurrer which the Court sustained in the first class action as to all causes of
action asserted against Michael Gulett and all but one of the causes of action
asserted against the remaining Paradigm Defendants.
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.
-17-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
(a) Common Stock Price Range. The Common Stock of the Company began
trading publicly on the Nasdaq National Market on June 28, 1995 under the symbol
PRDM. Prior to that date, there was no public market for the Common Stock. The
Company has not paid cash dividends and has no present plans to do so. It is the
present policy of the Company to reinvest earnings of the Company to finance
expansion of the Company's operations, and the Company does not expect to pay
dividends in the foreseeable future. The following table sets forth for the
periods indicated the high and low sale prices of the Common Stock on the Nasdaq
National Market.
High Low
---- ---
Fiscal Year ended December 31, 1995
Second Quarter (from June 28, 1995) $23.25 $17.25
Third Quarter 37.25 22.25
Fourth Quarter 30.25 12.00
Fiscal Year ended December 31, 1996
First Quarter 19.00 8.25
Second Quarter 12.00 6.25
Third Quarter 7.38 3.88
Fourth Quarter 5.50 2.06
(b) As of December 31, 1996, there were approximately 259 stockholders
of record. The Company has never paid a dividend and has no current plans to do
so.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the Company's financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.
-18-
Selected Financial Data
(in thousands, except per share amounts)
Pre-Reorganization(1) Post-Reorganization(1)
------------------------------------------------------ --------------------------------
April 1 June 21
to to Year Ended
Year Ended March 31, June 20, Dec. 31, Dec. 31,
------------------------------------------- -------- -------- --------------------
1991 1992 1993 1994 1994(2) 1994(2) 1995 1996
-------- -------- -------- -------- -------- -------- -------- --------
Statement of Operations Data:
Sales, net ......................... $ 3,253 $ 12,602 $ 24,827 $ 31,844 $ 6,033 $ 19,690 $ 51,923 $ 23,202
License income ..................... 4,000 2,000 -- -- -- -- -- --
Cost of goods sold ................. 7,635 15,123 28,465 26,283 5,895 12,881 31,033 36,364
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit (loss) ................ (382) (521) (3,638) 5,561 138 6,809 20,890 (13,162)
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development(3) ........ 2,251 1,291 1,980 1,148 1,192 1,920 4,621 6,243
Selling, general and administration 3,475 4,681 6,007 5,555 1,191 3,004 8,107 9,497
Loss on sale of wafer fabrication
facility ....................... -- -- -- -- -- -- -- 4,632(7)
Write-off of in-process technology
acquired ....................... -- -- -- -- -- -- -- 3,841(7)
Contract termination ............... 2,250 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses ........... 7,976 5,972 7,987 6,703 2,383 4,924 12,728 24,213
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ............ (8,358) (6,493) (11,625) (1,142) (2,245) 1,885 8,162 (37,375)
Interest expense ................... 958 2,609 3,824 3,286 518 721 1,369 1,121
Other (income) expense, net(4) ..... 682 381 2,417 (218) (17) (44) (615) (946)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
gain and provision (benefit)
for income taxes ............... (9,998) (9,483) (17,866) (4,210) (2,746) 1,208 7,408 (37,550)
Extraordinary gain(5) .............. -- -- -- -- 12,990 -- -- --
Provision (benefit) for income taxes -- -- -- -- -- -- 2,145 (1,125)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) .................. $ (9,998) $ (9,483) $(17,866) $ (4,210) $ 10,244 $ 1,208 $ 5,263 $(36,425)
======== ======== ======== ======== ======== -------- ======== ========
Net income (loss) per share(6) ..... $ 0.23 $ 0.83 $ (5.16)
-------- -------- --------
Weighted average shares(6) ......... 5,355 6,314 7,060
Pre-Reorganization(1) Post-Reorganization(1)
------------------------------------------------------ ------------------------------
March 31, December 31,
------------------------------------------------------ ------------------------------
1991 1992 1993 1994 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------
Balance Sheet Data:
Cash, cash equivalents and short-term
investments ...................... $ 2,501 $ -- $ 311 $ 52 $ 135 $ 21,213 $ 587
Working capital (deficit) ............ (774) (14,964) (28,226) (26,324) (2,243) 26,624 (392)
Total assets ......................... 21,134 31,013 24,238 18,591 19,421 56,732 17,742(8)
Total debt and obligations under
capital leases ................... 11,097 20,440 26,471 25,847 12,620 7,636 374
Retained earnings (accumulated deficit (22,244) (32,788) (50,654) (54,864) 1,208 6,471 (29,954)
Total stockholders' equity (deficit) . 6,485 (31,743) (45,292) (49,488) 2,345 39,349 6,344
Mandatorily redeemable preferred stock 27,835 27,835 32,821 33,753 -- -- --
- - ----------
(1) On June 21, 1994, the Company consummated a plan of reorganization (the "Reorganization") which established a new
accounting basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4
of Notes to Financial Statements for a discussion of the lack of comparability of periods before and after the
Reorganization.
(2) The period ended December 31, 1994 had ten more days than the normal six month period.
(3) Net of co-development funding from a stockholder of $1,423, $5,957, $5,177 and $4,283 for the years ended March 31, 1991,
1992, 1993 and 1994, respectively.
(4) The year ended March 31, 1993 includes a penalty payment of $2,000 related to a lease consolidation agreement.
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(5) The period ended June 20, 1994 includes a $12,990 extraordinary gain resulting from the cancellation of liabilities in the
Reorganization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of
Notes to Financial Statements.
(6) See Note 2 of Notes to Financial Statements for an explanation of the computation of net income (loss) per share. Per
share data for the periods preceding the consummation of the Reorganization is not presented because it is not comparable
to the similar information for the periods after the Reorganization.
(7) The year ended December 31, 1996 includes charges of $4,632 resulting from the sale of the Company's wafer fabrication
facility and $3,841 related to the Company's acquisition of NewLogic. See Note 13 and Note 8, respectively, of Notes to
Financial Statements.
(8) The Company sold its wafer fabrication facility in 1996. See Note 13 of Notes to Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in such forward-looking statements.
Factors that may cause such a difference include, but are not limited to, those
discussed in "Factors That May Affect Future Results."
Overview
Paradigm was founded in January 1987 and focused its initial
development efforts primarily on high speed 256K and 1M SRAMs, producing its
first prototype product in 1988. In July 1989 the Company began operating its
wafer fabrication facility in San Jose, California and in April 1990 shipped its
first commercial products, high speed 256K SRAMs. In July 1990 and October 1993,
respectively, Paradigm began shipping 1M SRAMs and limited quantities of 4M
SRAMs. On November 15, 1996, the Company sold its Fab to Orbit. See "Sale of
Wafer Fabrication Facility."
From its inception through its Reorganization in June 1994, the Company
incurred substantial operating losses as it developed its technology and
manufacturing processes. During this period, the Company incurred significant
indebtedness to fund its operations, including capital expenditures associated
with its wafer fabrication facility. This increasing indebtedness resulted in a
significant increase in interest expense, which negatively impacted cash flow.
In addition, the Company incurred operating losses due to manufacturing
inefficiencies and a less than optimal sales mix that was comprised primarily of
customers in lower margin markets. Specifically, prior to the Reorganization,
many of the Company's suppliers temporarily suspended shipments or demanded
payment in cash prior to delivery of products. In addition, due to the Company's
urgent cash needs, it sold the majority of its high performance SRAM products
into lower margin commodity markets, resulting in reduced sales and lower
margins than would otherwise have been achievable. In January 1994 the Company
concluded that it could not meet its debt obligations and began to develop a
plan for restructuring its debt and capital structure. See "Chapter 11
Reorganization."
Prior to the Reorganization, Paradigm's new management team adopted a
strategy of focusing on emerging markets for higher performance asynchronous and
synchronous SRAMs
-20-
and specialty products. This emphasis on the higher end of the SRAM market was
facilitated by the Reorganization, which gave the Company the financial
flexibility and time to target high- end markets for its high performance
products. As a result of Paradigm's change in marketing strategy, the Company
made a transition from a customer base composed largely of contract
manufacturers to one increasingly represented by market leading product
developers, resulting in increased sales to the Company's targeted markets in
the telecommunications, networking, workstation, high performance PC and
military/aerospace industries.
Beginning in late 1995 and continuing into 1996 the Company has
experienced significant decreases in average selling prices for certain
products. Such price decreases have had an adverse effect on the Company's
operating results. Accordingly, the Company's ability to maintain or increase
revenues will be highly dependent upon its ability to increase unit sales
volumes of existing products and to introduce and sell new products in
quantities sufficient to compensate for the anticipated declines in average
selling prices of existing products. Declining average selling prices will also
adversely affect the Company's gross margins unless the Company is able to
reduce its costs per unit to offset such declines.
Chapter 11 Reorganization
On February 23, 1994, the Company entered into a letter of intent with
ACMA Limited ("ACMA") and a letter of intent with National Semiconductor
Corporation ("National Semiconductor") to restructure its obligations and
provide additional capital to the Company. On March 30, 1994 and pursuant to the
ACMA letter of intent, the Company filed in the United States Bankruptcy Court
for the Northern District of California (the "Court") a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. On April 7, 1994,
the Company filed its initial Plan of Reorganization with the Court. On May 24,
1994, after further negotiations between the Company and the Official Committee
of Unsecured Creditors in its bankruptcy proceeding, the Company filed its Third
Amended Joint Plan of Reorganization (the "Plan"). On June 7, 1994, the Court
confirmed the Plan, which became effective on June 21, 1994.
The Plan provided for the elimination of a significant portion of the
Company's indebtedness and a significant reduction in its interest expense. At
the time of filing of the Company's Chapter 11 proceeding, the Company's
indebtedness, consisting of bank and other borrowings, capital lease obligations
and trade payables, amounted to $33.9 million, and the Company had an
accumulated deficit of $52.7 million. The Plan provided for a substantial
restructuring of this indebtedness through reduction or elimination of certain
amounts owed, based on the order of priority of claims in the Reorganization.
Accordingly, bank borrowings and secured borrowings were repaid in full, capital
lease obligations were restructured, and holders of trade payables and other
unsecured borrowings received cash in the amount of 5% of allowed claims,
promissory notes in the amount of 25% of allowed claims, and shares of Common
Stock of the Company equal to 8.5% of the capital stock of the Company on a
fully diluted basis. Under the Plan, the rights and interests of the Company's
equity holders at that time were terminated. In addition, pursuant to letters of
intent with the Company, ACMA and
-21-
National Semiconductor purchased shares of preferred stock of the Company for an
aggregate purchase price of $6.0 million. See Note 3 of Notes to Financial
Statements.
In connection with the Reorganization, the Company's basis of
accounting for financial reporting purposes changed, effective June 21, 1994, as
follows: (i) the Company's assets and liabilities reflect a reorganization value
generally approximating the fair value of the Company as a going concern on an
unleveraged basis, (ii) the Company's accumulated deficit was eliminated, and
(iii) the Company's capital structure was adjusted to reflect consummation of
the Plan. Accordingly, the Company's results of operations after June 20, 1994
are not comparable to the results of operations prior to that date, and the
results of operations for the periods from April 1, 1994 to June 20, 1994 and
from June 21, 1994 to December 31, 1994 have not been aggregated. Further, the
financial position of the Company on or after June 21, 1994 is not comparable to
its financial position at any date prior thereto. See Note 4 of Notes to
Financial Statements.
Sale of Wafer Fabrication Facility
In fiscal 1996 the Company adopted a strategy of having its products
manufactured at outside foundries to provide greater flexibility and lower fixed
costs. In that respect, on November 15, 1996, the Company sold its Fab to Orbit.
Following the sale of the Fab, the Company and Orbit entered into a Wafer
Manufacturing Agreement whereby Orbit will supply a quantity of wafers to the
Company over a specified period of time. The Company is also in the process of
seeking wafer supply from other offshore foundries, and anticipates that it will
conduct business with other foundries by delivering written purchase orders
specifying the particular product ordered, quantity, price, delivery date and
shipping terms and, therefore, such foundries will not be obligated to supply
products to the Company for any specific period, in any specific quantity or at
any specified price, except as may be provided in a particular purchase order.
Reliance on outside foundries involves several risks, including constraints or
delays in timely delivery of the Company's products, reduced control over
delivery schedules, quality assurance, potential costs and loss of production
due to seismic activity, weather conditions and other factors. To the extent a
foundry terminates its relationship with the Company, or should the Company's
supply from a foundry be interrupted or terminated for any other reason, the
Company may not have a sufficient amount of time to replace the supply of
products manufactured by the foundry. Should the Company be unable to obtain a
sufficient supply of products to enable it to meet demand, it could be required
to allocate 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 product 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.
-22-
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.
The Company recorded a loss of $4.6 million in the quarter ended
December 31, 1996 as a result of the sale of its wafer fabrication facility.
This charge included the excess of the net book value of leasehold improvements,
wafer fabrication equipment, fabrication work in process inventory and other
assets sold to Orbit over the proceeds received from Orbit, an accrual for
professional fees incurred to complete the transaction, a reserve for an adverse
purchase commitment related to the wafer manufacturing agreement and accruals
for other estimated costs to be incurred. See Note 13 of Notes to Financial
Statements.
Orbit paid to the Company aggregate consideration of $20,000,000
consisting of $6.7 million in cash, assumption of $7.5 million of indebtedness
associated with and secured by the Fab, and promissory notes in the aggregate
principal amounts of $5.8 million. The Company also executed a short-term
sublease with Orbit pursuant to which it will occupy office space at its
principal offices not associated with the Fab.
The following table sets forth the total costs of $4.6 million recorded
in 1996 related to the sale of the wafer fabrication facility (in thousands):
Benefit (Charge)
Recorded in 1996
----------------
Sale proceeds.............................. $ 20,000
Less: Cost of inventory, fixed
assets and other assets sold............... (21,480)
---------
(1,480)
Adverse purchase commitment................ (1,920)
Professional fees.......................... (360)
Lease buyout............................... (225)
Other costs................................ (647)
---------
Loss on sale............................... $ (4,632)
=========
In connection with the sale of the Fab, substantially all of the 109
employees associated with the Fab were terminated and became employees of Orbit.
No severance payments were made to employees transferred to Orbit.
The Company also implemented a reduction in the work force of
approximately 35 employees and took a charge of approximately $150,000 in the
fourth quarter associated with severance payments and other related costs.
-23-
The following tables set forth certain unaudited statement of
operations data for each of the eleven quarters in the period ended December 31,
1996, and such data expressed as a percentage of the Company's total revenues
for the periods indicated. This data has been derived from unaudited financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information and have been prepared on the same basis as the
audited financial statements. Such statement of operations data should be read
in conjunction with the Company's audited financial statements and notes
thereto. The results of operations for any quarter are not necessarily
indicative of the results to be expected for any future period. See "Factors
That May Affect Future Results--Fluctuations in Quarterly Results."
Quarterly Financial Data
(in thousands)
(Unaudited) Post-Reorganization
---------------------------------------------------------
Three-Month Period Ended Year
-------------------------------------------- Ended
March 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1996 1996 1996 1996 1996
-------- -------- -------- -------- --------
Sales, net ................................... $ [ $ 4,002 $ 5,191 $ 3,082 $ 23,202
Cost of goods sold ........................... 7,275 13,994 8,501 6,594 36,364
-------- -------- -------- -------- --------
Gross profit (loss) ........................ 3,652 (9,992) (3,310) (3,512) (13,162)
-------- -------- -------- -------- --------
Operating expenses:
Research and development ................... 1,316 1,623 1,657 1,647 6,243
Selling, general and administrative ........ 1,940 2,318 2,523 2,716 9,497
Loss on sale of wafer fabrication facility ... -- -- -- 4,632 4,632
Write-off of in-process technology acquired .. -- 3,841 -- -- 3,841
-------- -------- -------- -------- --------
Total operating expenses ............... 3,256 7,782 4,180 8,995 24,213
-------- -------- -------- -------- --------
Operating income (loss) ...................... 396 (17,774) (7,490) (12,507) (37,375)
Interest expense ............................. 241 364 305 211 1,121
Other income, net ............................ (204) (199) (515) (28) (946)
-------- -------- -------- -------- --------
Income (loss) before provision (benefit) for
income taxes ............................... 359 (17,939) (7,280) (12,690) (37,550)
Provision (benefit) for income taxes ......... 122 (1,247) -- -- (1,125)
-------- -------- -------- -------- --------
Net income (loss) ............................ $ 237 $(16,692) $ (7,280) $(12,690) $(36,425)
======== ======== ======== ======== ========
Post-Reorganization
---------------------------------------------------------
Three-Month Period Ended Year
-------------------------------------------- Ended
March 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1996 1996 1996 1996 1996
-------- -------- -------- -------- --------
Sales, net.................................... 100% 100% 100% 100% 100%
Cost of goods sold ........................... 67 350 164 214 157
---- ---- ---- ---- ----
Gross profit (loss) ........................ 33 (250) (64) (114) (57)
---- ---- ---- ---- ----
Operating expenses:
Research and development.................... 12 40 32 54 27
Selling, general and administrative......... 18 58 48 88 41
Loss on sale of wafer fabrication facility ... -- -- -- 150 20
Write-off of in-process technology acquired .. -- 96 -- -- 16
---- ---- ---- ---- ----
Total operating expenses................ 30 194 80 292 104
---- ---- ---- ---- ----
Operating income (loss) ...................... 3 (444) (144) (406) (161)
Interest expense ............................. 2 9 6 7 5
Other income, net ............................ (2) (5) (10) (1) (4)
---- ---- ---- ---- ----
Income (loss) before provision (benefit) for
income taxes................................ 3 (448) (140) (412) (162)
Provision (benefit) for income taxes ......... 1 (31) -- -- (5)
---- ---- ---- ---- ----
Net income (loss) ............................ 2% (417)% (140)% (412)% (157)%
==== ==== ==== ==== ====
-24-
Quarterly Financial Data
(in thousands)
(Unaudited) Post-Reorganization
---------------------------------------------------------
Three-Month Period Ended Year
-------------------------------------------- Ended
March 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1995 1995 1995 1995 1995
-------- -------- -------- -------- --------
Sales, net ................... $ 10,837 $ 12,077 $ 14,003 $ 15,006 $ 51,923
Cost of goods sold ........... 6,584 7,244 8,328 8,877 31,033
-------- -------- -------- -------- --------
Gross profit ............... 4,253 4,833 5,675 6,129 20,890
-------- -------- -------- -------- --------
Operating expenses:
Research and development ... 891 1,213 1,263 1,254 4,621
Selling, general and
administrative ......... 1,914 1,971 2,049 2,173 8,107
-------- -------- -------- -------- --------
Total operating expenses 2,805 3,184 3,312 3,427 12,728
-------- -------- -------- -------- --------
Operating income ............. 1,448 1,649 2,363 2,702 8,162
Interest expense ............. 382 398 326 263 1,369
Other income, net ............ (32) (3) (295) (285) (615)
-------- -------- -------- -------- --------
Income before provision for
income taxes ............... 1,098 1,254 2,332 2,724 7,408
Provision for income taxes ... -- 427 792 926 2,145
-------- -------- -------- -------- --------
Net income ................... $ 1,098 $ 827 $ 1,540 $ 1,798 $ 5,263
======== ======== ======== ======== ========
Post-Reorganization
---------------------------------------------------------
Three-Month Period Ended Year
-------------------------------------------- Ended
March 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1995 1995 1995 1995 1995
-------- -------- -------- -------- --------
Sales, net.............................. 100% 100% 100% 100% 100%
Cost of goods sold ..................... 61 60 59 59 60
--- --- --- --- ---
Gross profit.......................... 39 40 41 41 40
--- --- --- --- ---
Operating expenses:
Research and development.............. 8 10 9 8 9
Selling, general and
administrative.................... 18 16 15 15 15
--- --- --- --- ---
Total operating expenses.......... 26 26 24 23 24
--- --- --- --- ---
Operating income........................ 13 14 17 18 16
Interest expense....................... 3 3 2 2 3
Other income, net....................... -- -- (2) (2) (1)
--- --- --- --- ---
Income before provision for
income taxes.......................... 10 11 17 18 14
Provision for income taxes.............. -- 4 6 6 4
--- --- --- --- ---
Net income.............................. 10% 7% 11% 12% 10%
=== === === === ===
-25-
Quarterly Financial Data
(in thousands)
(Unaudited) Pre-Reorganization Post-Reorganization
------------------ -------------------
Three Month Period Ended
----------------------------------------
June 20, Sept. 30, Dec. 31,
1994(1) 1994(1) 1994
-------- -------- ---------
Sales, net ............................ $ 6,033 $ 9,684 $ 10,006
Cost of goods sold .................... 5,895 6,574 6,307
-------- -------- --------
Gross profit ........................ 138 3,110 3,699
-------- -------- --------
Operating expenses:
Research and development ............ 1,192 1,028 892
Selling, general and administrative . 1,191 1,433 1,571
-------- -------- --------
Total operating expenses ......... 2,383 2,461 2,463
-------- -------- --------
Operating income (loss) ............... (2,245) 649 1,236
Interest expense ...................... 518 383 338
Other income, net ..................... (17) (2) (42)
-------- -------- --------
Income (loss) before extraordinary gain
and provision for income taxes ...... (2,746) 268 940
Extraordinary gain .................... 12,990 -- --
Provision for income taxes ............ -- -- --
-------- -------- --------
Net income ............................ $ 10,244 $ 268 $ 940
======== ======== ========
Pre-Reorganization Post-Reorganization
------------------ -------------------
Three Month Period Ended
----------------------------------------
June 20, Sept. 30, Dec. 31,
1994(1) 1994(1) 1994
-------- -------- ---------
Sales, net............................. 100% 100% 100%
Cost of goods sold..................... 98 68 63
--- -- --
Gross profit......................... 2 32 37
--- -- --
Operating expenses:
Research and development............. 20 10 9
Selling, general and administrative.. 19 15 16
--- -- --
Total operating expenses.......... 39 25 25
--- -- --
Operating income (loss)................ (37) 7 12
Interest expense....................... 9 4 3
Other income, net...................... -- -- --
--- -- --
Income (loss) before extraordinary gain
and provision for income taxes....... (46) 3 9
Extraordinary gain..................... 215 -- --
Provision for income taxes............. -- -- --
--- -- --
Net income............................. 169% 3% 9%
=== === ==
- - ----------
(1) The period ended June 20, 1994 had ten fewer days than the normal second
quarter period and the period ended September 30, 1994 had ten more days
than the normal third quarter period.
-26-
Comparison of Results of Operations for the Year Ended December 31, 1996 to the
Year Ended December 31, 1995
Sales
Sales decreased by 55% to $23.2 million in the year ended December 31,
1996 from $51.9 million in the year ended December 31, 1995. The Company
experienced a significant downward trend in pricing during 1996 that was caused
by an excess supply relative to demand for certain SRAM devices. The Company
expects this downward price trend to continue. In addition, the Company shipped
lower volumes of units in 1996 compared to 1995. Unit shipments declined 48%
from 1995 to 1996.
The SRAM business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity, and accelerated erosion of
average selling prices.
Gross Profit
Gross profit decreased from $20.9 million in the year ended December
31, 1995 to a loss of $(13.2) million in the year ended December 31, 1996 and,
as a percentage of sales, from 40% to (57)%, respectively. The decrease in gross
profit resulted principally from industry-wide pricing pressures experienced by
the Company in 1996 caused by an oversupply in the SRAM marketplace. These
pricing pressures directly impacted profits as average selling prices for the
Company's products declined during the year ended December 31, 1996 when
compared to 1995. In addition, during 1996 the Company provided lower of cost or
market provisions of $2,475,000 and write-offs of $3,325,000 related to older
generation SRAM products to reflect reduced product demand and current industry
pricing trends.
Gross profit for future periods may be affected by an agreement between
the Company and Atmel, pursuant to which Atmel has agreed to sell to the
Company, at predetermined prices, a committed quantity of sub-micron wafers for
five years, beginning in 1996, and by an agreement between the Company and NKK
pursuant to which NKK has agreed to supply the Company with a significant
quantity of 1M SRAMs of Paradigm's design each month for a three year period.
The Company is not obligated to make any purchases under the agreements with
Atmel and NKK. To the extent that market prices for 1M SRAM sub-micron wafers
are higher than the prices payable to Atmel or NKK under these agreements, the
Company's gross profit would tend to be higher than if the Company were to
purchase sub-micron wafers or 1M SRAMs at market prices. The Company's
conversion of its internal fabrication facility from five-inch to six-inch wafer
manufacturing was completed in 1996 and caused temporary declines in output and
reductions in yield. This facility was sold in November 1996 to provide the
Company increased flexibility and lower fixed costs.
-27-
Research and Development
Research and development expenses increased by 35% to $6.2 million in
the year ended December 31, 1996, from $4.6 million in the year ended December
31, 1995. As a percentage of sales, research and development expenses have
increased from 9% in 1995 to 27% in 1996. Increased expenses result primarily
from increased headcount required to support the Company's co-development
activities with Atmel, new product development and other development activities.
In addition, research and development expenses increased in 1996 as a result of
the Company's acquisition of NewLogic in June 1996. Research and development
expenses, as a percentage of revenue, have also increased as a result of the
decline in revenue in 1996 compared to 1995.
In June 1996, the Company acquired NewLogic with the strategy to expand
Paradigm's product line beyond SRAMs. In early 1997, the Company believed that
it was in Paradigm's best interest to shut down the NewLogic operation and focus
on Paradigm's core SRAM products and markets.
Selling, General and Administrative
Selling, general and administrative expenses increased by 17% to $9.5
million in the year ended December 31, 1996 from $8.1 million in the year ended
December 31, 1995. Selling, general and administrative expenses include
approximately $1.4 million in bad debt expense in 1996 compared to $.1 million
in 1995 due to financial problems at several of the Company's customers.
Other Operating Expenses
The Company recorded a loss of $4.6 million in the quarter ended
December 31, 1996 as a result of the sale of its wafer fabrication facility.
This charge included the excess of the net book value of leasehold improvements,
wafer fabrication equipment, fabrication work in process inventory and other
assets sold to Orbit over the proceeds received from Orbit, an accrual for
professional fees incurred to complete the transaction, a reserve for an adverse
purchase commitment related to the wafer manufacturing agreement and accruals
for other estimated costs to be incurred.
In June 1996, the Company acquired, through a stock purchase and merger
transaction, NewLogic, a company which develops and manufactures logic designs
with large memory arrays. In exchange for its purchase of the NewLogic capital
stock, the Company issued 314,394 shares of the Company's common stock, with a
market value of approximately $2,656,000, and approximately $825,000 in cash. In
addition, the Company incurred transaction costs of approximately $237,000. The
fair value of NewLogic's tangible net assets at the date of acquisition was a
deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of
the fair market value of the net tangible assets was allocated to in-process
technology which the Company wrote off in the quarter ended June 30, 1996.
Approximately $250,000
-28-
was allocated to other intangibles. The unamortized balance of these other
intangibles was written off in connection of the shutdown of NewLogic in early
1997.
Interest Expense
Interest expense decreased to $1.1 million in the year ended December
31, 1996, from $1.4 million in the year ended December 31, 1995. This decrease
in interest expense reflects repayment of certain outstanding debt by the
Company from the proceeds of its initial public offering, which was subsequently
replaced in 1996 with new debt at lower interest rates. See "Liquidity and
Capital Resources".
Other Income, Net
For the years ended December 31, 1996 and December 31, 1995, other
income, net, reflects interest income earned on the investment of the net
proceeds to the Company from its initial public offering. In addition, other
income in 1996 includes a gain on the sale of fixed assets of $.5 million.
Taxes
The Company has a tax year that ends in March. The Company's tax
provision for the resultant nine month tax period ended December 31, 1995
reflected the statutory rate reduced by net operating loss benefits and other
credits. The amount of net operating loss the Company may utilize in any year is
limited due to the change of ownership which occurred as a result of the
Reorganization. The Company incurred a net loss for its tax year ended March 31,
1995 and thus no provision has been reflected in the quarters in the period from
the reorganization through March 31, 1995. In 1996 the Company's effective tax
rate was (3%) which reflects the benefit of the statutory rate of the operating
loss reduced by tax losses not recognized due to the uncertainty of realizing
the benefit of these losses.
Comparison of Results of Operations for the Six
Post-Reorganization Quarters Ended December 31, 1995
Sales
Sales increased by 55% to $15.0 million in the quarter December 31,
1995, from $9.7 million in the quarter ended September 30, 1994. The increase in
sales over these post- Reorganization quarters was principally a result of
strong market demand, as well as increased product availability, and increased
average selling prices for the Company's high performance asynchronous and new
synchronous SRAM products.
The SRAM business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity, and accelerated erosion of
average selling prices. During the latter part of 1995,
-29-
the market for certain SRAM devices experienced an excess supply relative to
demand which resulted in a significant downward trend in prices.
Gross Profit
Gross profit increased from $3.1 million in the quarter ended September
30, 1994 to $6.1 million in the quarter ended December 31, 1995, and , as a
percentage of sales, from 32% to 41%, respectively. The improvement reflected
increased productivity as a result of improved capacity utilization and
associated manufacturing efficiencies, higher yields, and increased average
selling prices on many of the Company's SRAM products.
Research and Development
Research and Development expenses increased by 22% to $1.3 million in
the quarter ended December 31, 1995, from $1.0 million in the quarter ended
September 30, 1994. As a percentage of sales, research and development expenses
have been relatively constant over the same period. Research and development
expenses during the six post-Reorganization quarters ended December 31, 1995
have totaled approximately $6.5 million.
Selling, General and Administrative
Selling, general and administrative expenses increased by 52% to $2.2
million in the quarter ended December 31, 1995 from $1.4 million in the quarter
ended September 30, 1994. As a percentage of sales, these expenses have been
relatively constant except for the March 1995 quarter which reflected
nonrecurring costs associated with establishing the Company's strategic
relationship with Atmel and negotiating its agreements with NKK.
Interest Expense
Interest expense decreased to $0.3 million in the quarter ended
December 31, 1995, from $0.4 million in the quarter ended September 30, 1994.
This decrease in interest expense reflects repayment of certain debt by the
Company from the proceeds of its initial public offering.
Other Income, Net
For the quarters ended September 30, 1995 and December 31, 1995, other
income, net, reflects interest income earned on the investment of the net
process to the Company from its initial public offering.
Taxes
The Company has a tax year that ends in March. The Company's tax
provision for the resultant nine month tax period ended December 31, 1995
reflected the statutory rate reduced by net operating loss benefits and other
credits. The amount of net operating loss the Company may utilize in any year is
limited due to the change of ownership which occurred as a result
-30-
of the Reorganization. The Company incurred a net loss for its tax year ended
March 31, 1995 and thus no provision has been reflected in the quarters in the
period from the reorganization through March 31, 1995.
Results of Operations for the Pre-Reorganization
Quarter Ended June 20, 1994
Operating Results
Sales of $6.0 million in the quarter ended June 20, 1994, reflects the
Company's low productivity and sales volumes as a result of inefficiencies
related to cash unavailability in the quarters leading up to the Reorganization.
Gross margin during the Pre-Reorganization quarter reflects sales of the
Company's high performance 256K SRAMS to commodity markets and increased
supplier costs and manufacturing inefficiencies. Sales of the Company's products
into these commodity markets were attributable to the Company's urgent cash
needs and resulted in reduced sales and lower margins than would otherwise have
been achievable. Interest expense is attributable to the Company's substantial
indebtedness.
Extraordinary Gain
The $13.0 million of extraordinary gain for the June 20, 1994 quarter
reflects cancellation of indebtedness associated with the Reorganization. See
Notes 3 and 4 of Notes to Financial Statements.
Taxes
The Company has not reflected an income tax benefit for this
pre-reorganization quarter since realization of the net operating loss benefits
was not assured.
Liquidity and Capital Resources
During the year ended December 31, 1996, the Company's operating,
investing and financing activities used $3.4 million of cash, compared to
generating cash of $3.9 million during the year ended December 31, 1995. The
Company's operating, investing and financing activities, including commitments
relating to the Reorganization, used $5.8 million of cash in the period from
June 21, 1994 to December 31, 1994. Prior to the Reorganization, the Company's
operating, investing and financing activities generated $5.9 million of cash
during the period from April 1, 1994 to June 20, 1994, which was mainly
attributable to the sale of preferred stock to ACMA ($5.0 million) and National
Semiconductor ($1.0 million).
During the year ended December 31, 1996, $15.6 million of cash was used
in operations compared to $8.1 million of cash that was generated from
operations in 1995, and compared to a use of $1.8 million of cash in operations
during the period from June 21, 1994 to December 31, 1994 (in each case, before
Reorganization items). The $15.6 million of cash used by operations during the
year ended December 31, 1996, was mainly attributable to the
-31-
net loss for the year of $36.4 million and a reduction in other liabilities of
$3.7 million offset by non-cash charges of $5.7 million for depreciation and
amortization, the write-off of inprocess technology associated with the NewLogic
acquisition of $3.8 million, a loss of $4.6 million on the sale of the Company's
wafer fabrication facility and a reduction of $6.1 million in accounts
receivable that reflects the lower sales volume in 1996 compared to 1995. The
$8.1 million of cash generated from operations during the year ended December
31, 1995 was mainly attributable to the net profit for the year of $5.3 million
and an increase in accounts payable ($3.5 million) as the Company re-established
its relationships with suppliers subsequent to the Reorganization and other
liabilities ($3.0 million, primarily income taxes payable). In addition, an
increase of $5.7 million in accounts receivable was offset by non-cash charges
of $5.1 million for depreciation and amortization. Upon the Reorganization on
June 21, 1994, the Company had $6.0 million in cash, which was used during the
period immediately following the Reorganization principally to pay off a
substantial portion of the pre-petition liabilities ($3.0 million) and build the
Company's inventory ($1.2 million). In addition, accounts receivable increased
by $1.1 million as the Company's level of sales increased after the
Reorganization. Negative cash flow from operations during the period from June
21, 1994 to December 31, 1994 was partially offset by net income of $1.2 million
and non-cash charges of $2.8 million for depreciation and amortization.
Investing activities generated $9.7 million in 1996 compared to a use
of $30.8 million in 1995. The sale of $19.9 million of short-term investments
funded the Company's conversion of its wafer fabrication facility to 6" wafers
($14.0 million). In 1995, $18.7 million of short-term investments were purchased
from the net proceeds of the Company's initial public offering in June of 1995.
In addition, $13.7 million was used to convert the wafer fabrication facility to
6" wafers and expand the Company's test floor.
After the Reorganization and prior to the Company's initial public
offering, the Company financed its operations and capital requirements primarily
with cash contributed by ACMA and National Semiconductor in the Reorganization.
Cash used by financing activities amounted to $2.3 million during the period
from June 21, 1994 to December 31, 1994, principally due to payments on capital
leases ($2.0 million) and on notes payable ($.5 million). Cash provided by
financing activities during the year ended December 31, 1995 amounted to $26.8
million and is mainly attributable to the Company's initial public offering on
June 28, 1995, which provided net proceeds to the Company of approximately $28.3
million, and issuance of notes payable ($9.3 million), partially offset by
payments on capital leases ($7.7 million) and the decrease in the line of credit
($4.6 million). In addition, in April 1995 the Company sold a total of 425,000
shares of Common Stock to Atmel for an equity investment of $3.4 million.
Cash generated from Financing activities amounted to $2.5 million in
1996 and results primarily from an increase of $2.0 in borrowings from the
Company's line of credit and the issuance of $11.3 of notes payable offset by
$11.6 million of payments made on notes payable.
At December 31, 1995, the Company had outstanding borrowings of $7.6
million related to three term notes under a credit facility with Greyrock
Business Credit with a credit limit of $16.75 million. Under the agreement
borrowings were limited to 80% of eligible accounts
-32-
receivable (not to exceed $8.0 million), plus the aggregate amount outstanding
under certain term loans, plus $2.5 million until May 15, 1995 and $1.5 million
thereafter.
In February 1996 the Company replaced the existing line of credit with
Greyrock Business Credit with a line of credit from Bank of the West with a
borrowing limit of $10.0 million. Borrowings were limited to 80% of eligible
receivables and interest was at prime. The line of credit was secured by
accounts receivable. On February 27, 1996 the Company borrowed $5.6 million to
pay off the outstanding balance of the Greyrock term notes.
In addition to the Bank of the West line of credit, the Company
obtained a line of credit for equipment purchases from the CIT Group. The
aggregate principal amount of all loans under this commitment could not exceed
$15,000,000 and the commitment expired on December 30, 1996. Borrowings under
this line of credit bore interest at the U.S. Treasury rate for two year
maturities plus 2.96% and were limited to 80% of the cost of eligible equipment.
All borrowings under this commitment were secured by the equipment purchased.
In November 1996, the Company replaced the Bank of the West line of
credit with a new line of credit from Greyrock Business Credit with a borrowing
limit of $6,000,000 of which $513,000 was available at December 31, 1996.
Borrowings under this line of credit are limited to up to 80% of eligible
receivables and interest is at the greater of LIBOR plus 5.25% or 9%. At
December 31, 1996 the outstanding balance under this line of credit was $2.0
million.
In November 1996 the Company sold its wafer fabrication operations to
Orbit. Orbit assumed $7.5 million of outstanding borrowings with the CIT Group
that were secured by wafer fabrication equipment that was purchased. The Company
used approximately $2.2 million of the cash proceeds from the sale of the wafer
fabrication facility to pay off the remaining CIT Group borrowings.
The Company's recent operations have consumed substantial amounts of
cash. In January 1997, the Company completed the private placement of Series A
Convertible Preferred Stock for net proceeds of approximately $1,880,000 (See
Note 15 of Notes to Financial Statements). The Company believes that this cash
infusion together with existing cash balances and other sources of liquidity,
such as asset sales and equipment financing will be sufficient to meet the
Company's projected working capital and other cash requirements through at least
the end of 1997. If the cash generated from operations is insufficient to meet
the Company's cash requirements, the sale of additional equity or other
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that such additional financing, if required, can be
obtained on acceptable terms, if at all.
-33-
Litigation
On August 12, 1996, a securities class action lawsuit was filed in
Santa Clara Superior Court against the Company and certain of its officers and
directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists
of purchasers of the Company's common stock from November 20, 1995 to March 22,
1996, inclusive. The complaint alleges negligent misrepresentation, fraud and
deceit, breach of fiduciary duty, and violations of certain provisions of the
California Corporate Securities Law and Civil Code. The plaintiffs seek an
unspecified amount of compensatory and punitive damages. Plaintiffs allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company would have protection against adverse market conditions in the
semiconductor market based on the Company's focus on high speed, high
performance semiconductor products. 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 except for violation of certain provisions of the California Corporate
Securities Law and Civil Code. The Court, however, granted plaintiffs leave to
amend the complaint to attempt to cure the defects which caused the Court to
sustain the demurrer. Plaintiffs failed to amend within the allotted time and
independently expressed an intent to prosecute only the fourth cause of action.
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 served the Paradigm Defendants with a first set of requests to
produce documents, to which the Paradigm Defendants are currently responding.
Plaintiffs have also filed a motion for class certification which is set for
hearing on April 15, 1997. No other motions have been filed with the court by
plaintiffs or defendants, and no discovery has yet been conducted. There can be
no assurance that the Company will be successful in such defense. Even if
Paradigm is successful in such defense, it may incur substantial legal fees and
other expenses related to this claim. If unsuccessful in the defense of any such
claim, the Company's business, operating results and cash flows could be
materially adversely affected.
On February 21, 1997, an additional purported class action, with causes
of action and factual allegations essentially identical to those of the August
12, 1996 class action lawsuit, was filed. This second class action is asserted
against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. None
of the Paradigm Defendants have been served in this new action. The Paradigm
Defendants believe because the new action appears redundant it is subject to the
demurrer which the Court sustained in the first class action as to all causes of
action asserted against Michael Gulett and all but one of the causes of action
asserted against the remaining Paradigm Defendants.
The Company is involved in various other litigation and potential
claims which management believes, based on facts presently known, will not have
a material adverse effect on the results of operations, existing sources of
liquidity or the financial position of the Company.
-34-
Factors Affecting Future Results
The Company's operating results have been, and in the future may be,
subject to fluctuations due to a wide variety of factors, including the timing
of new product and process technology, announcements and introductions by the
Company or its competitors, competitive pricing pressures, fluctuations in
manufacturing yields, changes in the mix of products sold, availability and
costs of raw materials, industry-wide shifts in the supply of and demand for
SRAMs, intellectual property disputes and litigation, and other risks, including
risks disclosed in this Annual Report on Form 10-K and other filings with the
Securities and Exchange Commission. There can be no assurance that the Company
will be able to effectively compete in the future against existing or potential
competitors or that the Company's operating results or financial condition will
not be adversely affected by increased price competition.
The semiconductor industry is highly cyclical and has been subject to
significant downturns at various times and by diminished product demand,
production overcapacity and accelerated erosion of average selling prices.
During 1996, the Company experienced, and expects it will continue to
experience, significant decreases in selling prices for its SRAM products. Such
price decreases could have a material adverse effect on the Company's operating
results.
-35-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Accountants
To the Board of Directors and Stockholders
of Paradigm Technology, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the pre-reorganization results of its
operations and its cash flows for the period from April 1, 1994 to June 20, 1994
and the post-reorganization financial position of Paradigm Technology, Inc. at
December 31, 1995 and 1996 and the post-reorganization results of its operations
and its cash flows for the period from June 21, 1994 to December 31, 1994 and
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 3 to the financial statements, on June 21, 1994,
the Company's Third Amended Joint Plan of Reorganization was consummated. As of
that date, the Company adopted "fresh-start" reporting to account for the
reorganization, as set forth in Note 4 to the financial statements. Accordingly,
the financial statements for periods subsequent to the reorganization have been
prepared using a different basis of accounting and are, therefore, not
comparable to the pre-reorganization financial statements.
Price Waterhouse LLP
San Jose, California
January 23, 1997, except as to the second paragraph of Note 14, which is as of
February 21, 1997.
-36-
Balance Sheets
(in thousands except per share amounts)
December 31,
------------
1995 1996
-------- ---------
ASSETS:
Current assets:
Cash and cash equivalents ........................... $ 4,015 $ 587
Short-term investments .............................. 17,198 --
Accounts receivable, net of allowances of $675
and $1,569 ...................................... 10,085 2,800
Accounts receivable, related party .................. 339 137
Inventory ........................................... 5,702 2,472
Prepaid expenses and other .......................... 1,883 4,918
-------- --------
Total current assets ............................ 39,222 10,914
Property and equipment, net ......................... 17,331 6,638
Other assets ........................................ 179 190
-------- --------
$ 56,732 $ 17,742
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Line of credit ...................................... $ -- $ 2,015
Pre-petition liabilities ............................ 34 --
Accounts payable .................................... 2,855 6,103
Accounts payable, related party ..................... 1,319 140
Accrued expenses and other liabilities .............. 5,103 2,766
Current portion of debt obligations ................. 3,287 282
-------- --------
Total current liabilities ....................... 12,598 11,306
Debt obligations, net of current portion ............ 4,349 92
Deferred rent ....................................... 436 --
-------- --------
Total liabilities ............................... 17,383 11,398
-------- --------
Commitments and contingencies (Notes 7, 12 and 13)
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized, no shares issued and outstanding .... -- --
Common stock, $0.01 par value; 25,000 shares
authorized; 6,599 and 7,225 shares issued and
outstanding ..................................... 66 72
Additional paid-in capital .......................... 32,812 36,226
Retained earnings (accumulated deficit) ............. 6,471 (29,954)
-------- --------
Total stockholders' equity ...................... 39,349 6,344
-------- --------
$ 56,732 $ 17,742
======== ========
The accompanying notes are an integral part of these
financial statements.
-37-
Statements of Operations
(in thousands except per share amounts)
Pre-Reorganization Post-Reorganization
------------------ ------------------------------------------
Period from Period from
April 1 to June 21 to Year Ended Year Ended
June 20, December 31, December 31, December 31,
1994 1994 1995 1996
------------------ ------------ ------------ ------------
Sales, net ................... $ 6,033 $ 19,690 $ 51,923 $ 23,202
Cost of goods sold ........... 5,895 12,881 31,033 36,364
-------- -------- -------- --------
Gross profit (loss) .......... 138 6,809 20,890 (13,162)
-------- -------- -------- --------
Operating expenses:
Research and development ... 1,192 1,920 4,621 6,243
Selling, general and
administrative ........... 1,191 3,004 8,107 9,497
Loss on sale of wafer
fabrication facility
(Note 13) ................ -- -- -- 4,632
Write-off of in-process
technology acquired
(Note 8) ................. -- -- -- 3,841
-------- -------- -------- --------
Total operating expenses . 2,383 4,924 12,728 24,213
-------- -------- -------- --------
Operating income (loss) ...... (2,245) 1,885 8,162 (37,375)
Interest expense ............. 518 721 1,369 1,121
Other income, net ............ (17) (44) (615) (946)
-------- -------- -------- --------
Income (loss) before extra-
ordinary gain and provision
(benefit)for income taxes .. (2,746) 1,208 7,408 (37,550)
Extraordinary gain ........... 12,990 -- -- --
Provision (benefit) for income
taxes ...................... -- -- 2,145 (1,125)
-------- -------- -------- --------
Net income (loss) ............ $ 10,244 $ 1,208 $ 5,263 $(36,425)
======== ======== ======== ========
Net income (loss) per share
(Note 2).................... $ 0.23 $ 0.83 $ (5.16)
-------- -------- --------
Weighted average common
and common equivalent
shares outstanding (Note 2). 5,355 6,314 7,060
-------- -------- --------
The accompanying notes are an integral part of these
financial statements.
-38-
Statements of Stockholders' Equity (Deficit)
(in thousands)
Retained
Preferred Stock Common Stock Additional Earnings
------------------------ ------------------------ Paid In (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1994 ........ -- $ -- 10,393 $ 5,376 -- $(54,864) $(49,488)
Net loss ....................... -- -- -- -- -- (2,746) (2,746)
-------- -------- -------- -------- -------- -------- --------
Balance, June 20, 1994 pre-
reorganization ............... -- -- 10,393 5,376 -- (57,610) (52,234)
Adjustments for reorganization:
Extraordinary gain on debt ... -- -- -- -- -- 12,990 12,990
Fresh start reporting
adjustments ................ -- -- (10,393) (5,376) -- 44,620 39,244
Issuance of new stock ........ 6,400 960 550 165 -- -- 1,125
-------- -------- -------- -------- -------- -------- --------
Balance, June 21, 1994 post-
reorganization ............... 6,400 960 550 165 -- -- 1,125
Stock options exercised ........ -- -- 39 12 -- -- 12
Net income ..................... -- -- -- -- -- 1,208 1,208
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1994 ..... 6,400 960 589 177 -- 1,208 2,345
Reincorporation in Delaware
(Note 1) ..................... -- -- -- (171) 171 -- --
Initial public offering of common
stock, net of costs .......... -- -- 2,300 23 28,281 -- 28,304
Conversion of preferred stock to
common stock ................. (6,400) (960) 3,200 32 928 -- --
Issuance of stock pursuant to
Atmel agreement (Note 6) ..... -- -- 425 4 3,396 -- 3,400
Stock options exercised ........ -- -- 85 1 36 -- 37
Net income ..................... -- -- -- -- -- 5,263 5,263
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1995 ..... -- -- 6,599 66 32,812 6,471 39,349
Issuance of common stock to
acquire NewLogic (Note 8) .... -- -- 314 3 2,653 -- 2,656
Issuance of common stock under
employee stock plans ......... -- -- 312 3 761 -- 764
Net loss ....................... -- -- -- -- -- (36,425) (36,425)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 ..... -- $ -- 7,225 $ 72 $ 36,226 $(29,954) $ 6,344
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
-39-
Statements of Cash Flows
(in thousands)
Pre-Reorganization Post-Reorganization
------------------- --------------------------------------------
Period from Period from
April 1 to June 21 to Year Ended Year Ended
June 20, December 31, December 31, December 31,
---------- ------------ ----------- ------------
1994 1994 1995 1996
-------- -------- -------- --------
Cash flows from operating activities:
Net income (loss) ............................................. $ 10,244 $ 1,208 $ 5,263 $(36,425)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization .............................. 1,503 2,777 5,141 5,716
Provision for doubtful accounts ............................ 115 -- 90 1,372
Extraordinary gain ......................................... (12,990) -- -- --
Loss on sale of wafer fabrication facility ................. -- -- -- 4,632
Write off in-process technology ............................ -- -- -- 3,841
Gain on sale of fixed assets ............................... -- -- -- (532)
Changes in operating assets and liabilities:
Accounts receivable ........................................ (59) (1,077) (5,680) 6,115
Inventory .................................................. (520) (1,190) (814) 1,430
Other assets ............................................... 284 (356) (1,361) (48)
Accounts payable ........................................... (63) (47) 3,475 2,023
Pre-petition liabilities paid .............................. -- (2,981) (1,007) (34)
Other liabilities .......................................... 868 (168) 3,012 (3,723)
-------- -------- -------- --------
Net cash provided by (used in) operating activities
before reorganization items paid ........................... (618) (1,834) 8,119 (15,633)
Reorganization items paid .................................. (175) (889) (189) --
-------- -------- -------- --------
Net cash provided by (used in) operating activities ..... (793) (2,723) 7,930 (15,633)
-------- -------- -------- --------
Cash flows used in investing activities:
Purchases of property and equipment ........................... (263) (827) (13,609) (13,985)
Purchase of short-term investments ............................ -- -- (18,689) (2,672)
Sale of short-term investments ................................ -- -- 1,491 19,870
Sale of fixed assets .......................................... -- -- -- 549
Proceeds from sale of wafer fabrication facility............... -- -- -- 6,665
Acquisition of NewLogic, net of cash acquired ................. -- -- -- (723)
-------- -------- -------- --------
Net cash provided by (used) by investing activities ........ (263) (827) (30,807) 9,704
-------- -------- -------- --------
Cash flows from financing activities:
Line of credit increase (decrease) ............................ 973 171 (4,623) 2,015
Payments on capital leases .................................... -- (2,012) (7,747) --
Issuance of notes payable ..................................... -- -- 9,300 11,339
Principal payments on notes payable ........................... -- (455) (1,914) (11,601)
Issuance of common stock ...................................... -- 12 31,741 748
Issuance of preferred stock ................................... 6,000 -- -- --
-------- -------- -------- --------
Net cash provided by (used by) financing activities ........ 6,973 (2,284) 26,757 2,501
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents .............................................. 5,917 (5,834) 3,880 (3,428)
Cash and cash equivalents:
Beginning of period ........................................... 52 5,969 135 4,015
-------- -------- -------- --------
End of period ................................................. $ 5,969 $ 135 $ 4,015 $ 587
======== ======== ======== ========
Supplemental information:
Interest paid ................................................. $ 266 $ 1,060 $ 1,335 $ 1,291
-------- -------- -------- --------
Income taxes paid ............................................. $ -- $ -- $ 348 $ 1,067
-------- -------- -------- --------
The accompanying notes are an integral part of these financial statements.
-40-
Notes To Financial Statements
Note 1 -- The Company and its Business:
Paradigm Technology, Inc. ("Paradigm" or the "Company") was originally
incorporated in California in January 1987. Pursuant to the May 24, 1994, Third
Amended Joint Plan of Reorganization (the "Plan") under Chapter 11 of the United
States Bankruptcy Code (Note 3), amended Articles of Incorporation were filed.
On June 7, 1994, the Court confirmed the Plan, which became effective on June
21, 1994. The Company reincorporated in Delaware effective June 22, 1995, which
involved the exchange of the Company's post-Reorganization common and preferred
stock into shares of the Delaware Company stock. Pursuant to the
reincorporation, the Company has authorized 25,000,000 shares of $0.01 par value
common stock and 5,000,000 shares of $0.01 par value preferred stock.
The Company markets high speed, high density Static Random Access
Memory ("SRAM") products for uses in telecommunication devices, workstations and
high performance PCs to OEMs and distributors in the United States, Europe and
the Far East.
The SRAM business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity, and accelerated erosion of
average selling prices. During the latter part of 1995 and all of 1996, the
market for certain SRAM devices experienced an excess supply relative to demand
which resulted in a significant downward trend in prices.
The selling price that the Company is able to command for it's products
is highly dependent on industry-wide production capacity and demand. In this
regard, the Company did experience rapid erosion in product pricing during 1996
which was not within the control of the Company. The Company could continue to
experience a downward trend in product pricing which could adversely effect the
Company's operating results.
The Company's recent operations have consumed substantial amounts of
cash. In January 1997, the Company completed the private placement of Series A
Convertible Preferred Stock for net proceeds of approximately $1,880,000 (Note
15). The Company believes that this cash infusion together with existing cash
balances and other sources of liquidity, such as asset sales and equipment
financing will be sufficient to meet the Company's projected working capital and
other cash requirements through at least the end of 1997.
Note 2 -- Summary of Significant Accounting Policies:
Fiscal Year
Prior to consummation of the Reorganization, the Company's fiscal year
ended on the Sunday closest to March 31. Upon completion of the Reorganization,
the Company changed its fiscal year end to December 31. The periods from April
1, 1994 to June 20, 1994 and from June 21, 1994 to December 31, 1994 contained
12 and 27 weeks, respectively.
-41-
Reverse Stock Split
Share information for all periods has been retroactively adjusted to
reflect a 1-for-2 reverse stock split of common stock effected on June 22, 1995.
Basis of Presentation
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from those
estimates.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents and investments with
original maturities of greater than 90 days to be short-term investments. The
Company accounts for its short-term investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). As of December 31, 1995, the Company
had short-term investments comprising primarily of fixed- maturity securities of
$17.2 million, all of which had been classified as available for sale and which
all have contractual maturities of less than two years. These securities are
stated at fair market value. Unrealized gains and losses were immaterial at
December 31, 1995.
Concentration of Credit Risk
Export sales, primarily to Europe and the Far East, represent 15%, 26%,
28%, and 25% of total sales for the period from April 1, 1994 to June 20, 1994,
for the period from June 21, 1994 to December 31, 1994, and for the years ended
December 31, 1995 and December 31, 1996, respectively. The Company's sales have
been denominated in U.S. dollars.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The following table summarizes the
percentage of net sales to significant customers:
-42-
Pre-Reorganization Post-Reorganization
------------------ -----------------------------------------------
Period from Period from
April 1 to June 21 to Year Ended Year Ended
June 20, December 31, December 31, December 31,
1994 1994 1995 1996
------------- ------------- ------------ ------------
Customer A 20% 11% -- --
Customer B 11% 23% 28% 25%
Customer C -- 13% -- --
Customer D -- -- -- 13%
Customer E -- -- -- 13%
As of December 31, 1995, accounts receivable from three customers
accounted for approximately 11%, 11% and 15% of total gross accounts receivable,
respectively. As of December 31, 1996, accounts receivable from three customers
accounted for approximately 16%, 17%, and 18% of total gross accounts
receivable, respectively. The Company maintains allowances for potential credit
losses based upon expected collectibility of all accounts receivable.
Inventory
Inventory is stated at the lower of cost (determined on a first-in,
first-out method) or market. Included in cost of sales for the year ended
December 31, 1996 are lower of cost or market provisions of $2,475,000 and
write-offs of $3,325,000 related to older generation SRAM products.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over estimated useful lives of three to five
years. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life. During the quarter ended December 31, 1996 the
Company sold fixed assets with a net book value of $19.3 million related to its
wafer fabrication facility (Note 13).
Revenue Recognition
Revenue from product sales is generally recognized upon shipment and a
reserve is provided for estimated returns. The Company's sales to distributors
are made under agreements allowing certain rights of return and price protection
on products unsold by the distributors. Accordingly, the Company defers
recognition of revenue on such sales until the products are sold by the
distributors.
-43-
Research and Development
Research and development expenses are charged to the statement of
operations as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts under the provisions of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes" (Note
11).
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans based on the fair value of options granted. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
Net Income (Loss) Per Share
Net loss per share is computed using the weighted average number of
Common shares outstanding. Common stock equivalents are excluded as their effect
is anti-dilutive. Net income per share is computed using the weighted average
number of common stock and common stock equivalents outstanding. Common stock
equivalent shares consist of stock options and warrants. Pursuant to the
requirements of the Securities and Exchange Commission, common stock equivalent
shares relating to stock options and warrants issued during the twelve months
prior to the initial public offering are included in the computations for
periods presented through the initial public offering, whether they are
anti-dilutive or not. Net income per share for pre-reorganization periods is not
presented since such information is not comparable with post-reorganization net
income per share. The Company completed its initial public offering of common
shares on July 5, 1995 and shares issued are included in the weighted average
computation only from the date of issuance. Accordingly, these shares resulted
in a greater amount of average shares in 1996 compared to 1995.
Note 3 -- The Reorganization:
From its inception through fiscal 1994, the Company incurred
substantial losses and consumed all of the equity contributed by stockholders.
In addition, during this period, the Company continued to incur indebtedness to
fund its cash flow needs including capital expenditures associated with its
wafer fabrication facility. As a result of the significant interest
-44-
expense caused by this leverage and continued operating losses, the Company
concluded that it could not meet its debt obligations and developed a plan for
restructuring its debt and capital structure.
On February 23, 1994, the Company entered into a letter of intent with
ACMA Limited ("ACMA") and a letter of intent with National Semiconductor
Corporation ("National Semiconductor") to restructure its obligations and
provide additional capital to the Company. On March 30, 1994 and pursuant to the
ACMA letter of intent, the Company filed in the United States Bankruptcy Court
for the Northern District of California (the "Court") a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. On April 7, 1994,
the Company filed its initial Plan of Reorganization with the Court. On May 24,
1994, after further negotiations between the Company and the Official Committee
of Unsecured Creditors in its bankruptcy proceeding, the Company filed its Plan.
On June 7, 1994, the Court confirmed the Plan, which became effective on June
21, 1994.
The Plan provided for the elimination of a significant portion of the
Company's indebtedness and a significant reduction in its interest expense.
Pursuant to the Plan:
o ACMA paid $5.0 million in exchange for 2,295,000 shares of
Series A-1 voting preferred stock, 2,405,000 shares of Series
A-2 nonvoting preferred stock and warrants to purchase 250,000
shares of the post-reorganization new common stock (the "new
common stock") (Note 9) at an exercise price of $250,000, and
paid $1.0 million for a convertible note,
o ACMA guaranteed $1.5 million of the Company's line of credit
with CoastFed Business Credit Corporation ("CoastFed"),
o National Semiconductor paid $1.0 million for 500,000 shares of
Series A-1 voting preferred stock, the proceeds of which were
used to repay ACMA's convertible note,
o Mitsubishi International Corporation ("Mitsubishi") received a
cash payment of $300,000 and 465,116 shares of new Series B
preferred stock in exchange for the cancellation of $5.0
million of indebtedness,
o Equipment lessors received payments in full under a modified
payments schedule and new common stock equal to approximately
3.2% of the Company's capital stock on a fully diluted basis
(300,000 shares, pre-split),
o NUF Corporation, an affiliate of NKK Corporation, and NKK
Corporation received $345,000 in cash, 734,884 shares of new
Series B preferred stock and a license to sell Paradigm's 256K
product in North America in exchange for cancellation of $5.8
million of indebtedness,
o Claim holders of The Creditor Workout Agreement, who were
considered unsecured creditors, received 30% of their proof of
claim and new common stock equal to approximately 8.5% of the
Company's capital stock, on a fully diluted basis (800,000
shares, pre-split),
o A $526,000 term note was repaid in full to an equipment
supplier, and
o The rights and interests of the Company's previous equity
holders were terminated.
-45-
As of the effective date of the Plan, a claim by one of the Company's
equipment suppliers was in dispute. A provision of $250,000 was accrued as of
December 31, 1994 for the disputed claim. A total of $66,000 was paid on
pre-petition interest accrued prior to March 30, 1994 and pre-petition interest
accrued during the Chapter 11 proceedings. The Company recorded an extraordinary
gain of $13.0 million in the period ended June 20, 1994, as a result of the
Plan.
Note 4 -- Fresh Start Reporting:
In connection with the Reorganization under Chapter 11 of the U.S.
Bankruptcy Code described in Note 3, the Company's basis of accounting for
financial reporting purposes changed starting June 21, 1994 as follows: (i) the
Company's assets and liabilities were adjusted to reflect a reorganization value
(the "Reorganization Value"), generally approximating the fair value of the
Company as a going concern on an unleveraged basis, (ii) the accumulated deficit
was eliminated, and (iii) the Company's capital structure was adjusted to
reflect consummation of the Plan. Accordingly, the results of operations after
June 20, 1994 are not comparable to results of operations prior to such date.
The Reorganization Value of $1.1 million was determined based on
several factors including projected discounted cash flows and management's
estimate of the fair value of its common stock upon reorganization from
bankruptcy. The cash flow analysis gave effect to the corporate restructuring
and resultant debt obligations as well as other operating program changes,
limitations on the use of available net operating loss carryforwards and other
tax attributes, market share and position, competition and general economic
considerations, projected sales growth and profitability, and working capital
requirements.
Current assets and liabilities were recorded at their book value, which
approximated fair value. Property and equipment was recorded based upon the
Reorganization Value, which was less than its fair value in continued use, based
on an independent appraisal. Other noncurrent assets were recorded at net book
value, which approximates fair value and long-term debt was recorded at present
value of the obligation determined under the Plan as of June 21, 1994.
-46-
The effect of the Plan and the adoption of fresh start reporting on the
Company's balance sheet as of June 21, 1994 was as follows (in thousands):
Adjustment to Record the
Plan of Reorganization
----------------------------
Prior to Debt Subsequent to
Reorganization Exchange Fresh Start Reorganization
-------------- -------- ----------- --------------
ASSETS:
Cash and cash equivalents ............................... $ (31) $ -- $ 6,000 $ 5,969
Accounts receivable, net ................................ 3,757 -- -- 3,757
Inventories ............................................. 3,698 -- -- 3,698
Prepaid expenses and other .............................. 340 -- (195) 145
-------- -------- -------- --------
Total current assets ................................... 7,764 -- 5,805 13,569
-------- -------- -------- --------
Property and equipment, net ............................. 9,485 -- 1,328 10,813
Other assets ............................................ 199 -- -- 199
-------- -------- -------- --------
Total assets ........................................... $ 17,448 $ -- $ 7,133 $ 24,581
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Line of credit .......................................... $ 4,452 $ -- $ -- $ 4,452
Accounts payable ........................................ 5,808 (3,295) -- 2,513
Accrued payroll and related expenses .................... 1,048 16 (30) 1,034
Accrued expenses and other liabilities .................. 2,614 (265) 1,129 3,478
Accrued interest ........................................ 700 (614) -- 86
Capital leases, current portion ......................... 9,172 (5,132) -- 4,040
Notes payable ........................................... 11,527 (9,978) (127) 1,422
-------- -------- -------- --------
Total current liabilities .............................. 35,321 (19,268) 972 17,025
-------- -------- -------- --------
Capital leases, net of current portion .................. -- 5,933 -- 5,933
Deferred rent ........................................... 608 -- (110) 498
-------- -------- -------- --------
Total liabilities ...................................... 35,929 (13,335) 862 23,456
-------- -------- -------- --------
Common/preferred stock .................................. -- 345 780 1,125
Predecessor common/preferred stock ...................... 39,129 -- (39,129) --
Retained earnings (deficit) ............................. (57,610) 12,990 44,620 --
-------- -------- -------- --------
Total stockholders' equity (deficit) ................... (18,481) 13,335 6,271 1,125
-------- -------- -------- --------
Total liabilities and stockholders'
equity .............................................. $ 17,448 $ -- $ 7,133 $ 24,581
======== ======== ======== ========
Pre-petition liabilities paid in the years ended December 31, 1995 and
1996 consist of (in thousands):
Post-Reorganization
----------------------
1995 1996
------ ------
Accounts payable ............................... $ 715 $ --
Accrued payroll and related expenses ........... 146 --
Accrued expenses ............................... 146 34
------ ------
Total ......................................... $1,007 $ 34
====== ======
-47-
Note 5 -- Balance Sheet Detail:
(in thousands)
Post-Reorganization
December 31,
----------------------------
1995 1996
-------- --------
Inventory:
Raw materials ........................... $ 633 $ 16
Work in process ......................... 4,307 1,778
Finished goods .......................... 762 678
-------- --------
$ 5,702 $ 2,472
======== ========
Property and equipment:
Machinery and equipment ................. $ 21,315 $ 9,488
Leasehold improvements .................. 3,622 --
Furniture and fixtures .................. 264 19
-------- --------
25,201 9,507
Less accumulated depreciation ........... (7,870) (2,869)
-------- --------
$ 17,331 $ 6,638
======== ========
Accrued Liabilities:
Accrued payroll and commissions ......... $ 1,583 $ 804
Income taxes ............................ 1,797 --
Other ................................... 1,723 1,962
-------- --------
$ 5,103 $ 2,766
======== ========
Note 6 -- Related Party Transactions:
As a result of the Reorganization, certain of the Company's creditors
became stockholders (Note 3). Transactions with stockholders consist of the
following:
Gross sales to NKK were $359,000 for the period from June 21, 1994 to
December 31, 1994. Gross sales to NKK were insignificant during the years ended
December 31, 1995 and December 31, 1996. The value of product purchased from NKK
in the year ended December 31, 1995 was $3,237,000 of which $1,319,000 is
included in the accounts payable, related party balance at December 31, 1995.
During the year ended December 31, 1996, the Company purchased product with a
value of $6,111,000 from NKK. There was no amount due NKK at December 31, 1996.
Gross sales to National Semiconductor for the period from June 21, 1994
to December 31, 1994 and during the years ended December 31, 1995 and December
31, 1996 amounted to $1,700,000, $2,500,000, and $500,000, respectively, of
which $339,000 and
-48-
$137,000, respectively, is included in the accounts receivable, related party
balance at December 31, 1995 and December 31, 1996.
In April 1995, NKK and the Company modified their previous technology
license and development agreements. This 1995 agreement provides for payment of
royalties to the Company by NKK on certain quantities of 1M SRAM's sold and,
with certain exceptions, cancels further obligations of each party to deliver
technology improvements or design updates to the other.
On April 28, 1995, pursuant to certain agreements with certain of the
Company's stockholders, Atmel acquired 425,000 shares of common stock from the
Company, 300,000 shares of common stock from certain stockholders of the Company
who had been unsecured creditors of the Company as of the reorganization, and
128,050 shares of common stock from the Company's equipment lessors all of which
shares were purchased at a price of $8.00 per share (the "Atmel Stock"). Atmel
also acquired from ACMA certain warrants to purchase 175,000 shares of common
stock at an exercise price of $1.00 per share, for a purchase price of $7.00 per
share subject to the warrants. In connection with these transactions, the
Company entered into an Agreement with Atmel (the "Stock Purchase Agreement")
pursuant to which Atmel agreed to certain transfer restrictions for a period of
three years. Atmel also agreed to certain standstill provisions, including an
agreement not to increase its beneficial ownership above 19.9% of the voting
power of the Company on a fully diluted basis for a period of five years from
the date of the Stock Purchase Agreement. The foregoing restrictions terminate
on the date on which a person or entity acquires more than 50% of the voting
power of the Company. In addition, Atmel agreed that, for a period of ten years
from the date of the Stock Purchase Agreement, it will vote the Atmel Stock in
proportion to the votes cast by the other stockholders of the Company, except
with respect to certain material events. The voting and standstill restrictions
terminate at such time as Atmel beneficially owns less than 5% of the common
stock of the Company. On April 28, 1995, Atmel also entered into a Licensing and
Manufacturing Agreement (the "Agreement") with the Company. This Agreement
provides Atmel with a nonexclusive, royalty bearing license to manufacture, use
and sell certain of the Company's products. The royalty fee is based on a
percentage of the average selling price of the products sold. In addition, under
the Agreement, a certain wafer manufacturing capacity per week has been made
available to the Company by Atmel. The Agreement does not include a purchase
commitment by the Company. However, to the extent the Company provides Atmel
with its three-month demand forecast, it is committed to purchase the
three-month forecasted quantities. No obligation to purchase wafers existed as
of December 31, 1996. The price of the wafers has been fixed at the current fair
market value. The Agreement expires on April 28, 2000. There was no amount due
Atmel at December 31, 1995. The value of product purchased from Atmel in the
year ended December 31, 1996 was $429,000 of which $140,000 is included in the
accounts payable, related party balance at December 31, 1996.
-49-
Note 7 -- Debt Obligations:
Notes payable and debt, excluding the line of credit consist of the
following (in thousands):
Post-Reorganization
December 31,
--------------------------
1995 1996
------ ------
Promissory notes ....................... $ -- $ 374
Term loans ............................. 7,636 --
------ ------
7,636 374
Less current portion ................... 3,287 282
------ ------
$4,349 $ 92
====== ======
Outstanding promissory notes at December 31, 1996 bear interest at
rates ranging from 8.0% to 19.8% and are repayable at various dates through
1998. These notes are secured by the equipment purchased.
At December 31, 1995, the Company had outstanding borrowings of $7.5
million related to three term notes under a credit facility with Greyrock
Business Credit with a credit limit of $16.75 million. Under the agreement,
borrowings were limited to 80% of eligible accounts receivable (not to exceed
$8.0 million), plus the aggregate amount outstanding under certain term loans,
plus $2.5 million until May 15, 1995 and $1.5 million thereafter. The credit
facility was secured by all inventory, equipment, receivables and general
intangibles of the Company. ACMA issued a $2.5 million standby letter of credit
to guarantee the line of credit, and in connection therewith received a warrant
to purchase 25,000 shares of common stock (Note 9). In connection with the
repayment of the line of credit in August 1995, the standby letter of credit was
terminated.
In February 1996 the Company replaced the existing line of credit with
Greyrock Business Credit with a line of credit from Bank of the West with a
borrowing limit of $10.0 million. Borrowings were limited to 80% of eligible
receivables and interest was at prime. The line of credit was secured by
accounts receivable. On February 27, 1996 the Company borrowed $5.6 million to
pay off the outstanding balance of the Greyrock term notes.
In addition to the Bank of the West line of credit, the Company
obtained a line of credit for equipment purchases from the CIT Group. The
aggregate principal amount of all loans under this commitment could not exceed
$15,000,000 and the commitment expired on December 30, 1996. Borrowings under
this line of credit bore interest at the U.S. Treasury rate for two year
maturities plus 2.96% and were limited to 80% of the cost of eligible equipment.
All borrowings under this commitment were secured by the equipment purchased.
-50-
In November 1996, the Company replaced the Bank of the West line of
credit with a new line of credit from Greyrock Business Credit with a borrowing
limit of $6,000,000 of which $513,000 was available at December 31, 1996.
Borrowings under this line of credit are limited to 80% of eligible receivables
and interest is at the greater of LIBOR plus 5.25% or 9%. At December 31, 1996
the outstanding balance under this line of credit was $2,015,000.
In November 1996 the Company sold its wafer fabrication operations
(Note 13). The purchasing company assumed $7,500,000 of outstanding borrowings
with the CIT Group that were secured by wafer fabrication equipment that was
purchased. The Company used approximately $2,200,000 of the cash proceeds from
the sale of the wafer fabrication facility to pay off the remaining CIT Group
borrowings.
Note 8 -- NewLogic Acquisition
In June 1996, the Company acquired, through a stock purchase and merger
transaction, NewLogic, a company which develops and manufactures logic designs
with large memory arrays. In exchange for its purchase of the NewLogic capital
stock, the Company issued 314,394 shares of the Company's common stock, with a
market value of approximately $2,656,000, and approximately $825,000 in cash. In
addition, the Company incurred transaction costs of approximately $237,000. The
fair value of NewLogic's tangible net assets at the date of acquisition was a
deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of
the fair market value of the net tangible assets was allocated to in-process
technology which the Company wrote off in the quarter ended June 30, 1996.
Approximately $250,000 was allocated to other intangibles. The unamortized
balance of these other intangibles was written off in connection of the shutdown
of NewLogic in early 1997.
The Company accounted for this acquisition using the purchase method of
accounting and accordingly, the results of operations and cash flows of the
acquisition have been included only from the date of acquisition. Excluding the
$3,841,000 write-off of purchased in-process technology, the pro forma impact on
the Company's results of operations had the acquisition been consummated on
January 1, 1995 is not materially different from the results presented in the
accompanying statement of operations.
Note 9 -- Preferred Stock, New Common Stock and New Common Stock Warrants:
As a result of the Plan, the Company issued 2,295,000 voting shares of
Series A-1 preferred stock ("Series A-1") and 2,405,000 nonvoting shares of
Series A-2 preferred stock to ACMA for cash of $5.0 million. National
Semiconductor was issued 500,000 voting shares of Series A-1 for $1.0 million.
In addition, 1,200,000 shares of Series B voting preferred stock were issued to
NKK and Mitsubishi. These shares form part of the settlement against $10,750,000
of short-term notes owed by the Company prior to June 21, 1994. All preferred
stock was converted at a 2-for-1 ratio of preferred stock to common stock upon
the completion of the Company's initial public offering.
-51-
A total of 550,000 shares of the new common stock was issued to
creditors and lessors as part of the Plan. The 1994 Stock Option Plan was also
created (Note 10).
In exchange for its guarantee on the CoastFed line of credit in April
1994, ACMA was issued warrants to purchase 250,000 shares of new common stock at
an exercise price of $1.00 per share. There is a five year expiration date
placed on these warrants. On December 9, 1994, ACMA assigned a warrant to
purchase 50,000 shares of common stock to Chiang Lam (President of ACMA USA). In
January 1995, in exchange for a $1.0 million increase in its guarantee of the
line of credit, ACMA received an additional warrant to purchase 25,000 shares of
new common stock at an exercise price of $4.00 per share. No warrants were
exercised at December 31, 1995 and December 31, 1996. The value of the warrants
is considered nominal at the date of grant. On April 28, 1995 ACMA sold a
warrant to purchase 175,000 shares of new common stock to Atmel Corporation
("Atmel") (Note 6).
Note 10 -- Stock Compensation Plans:
Pursuant to the Plan, the 1994 Stock Option Plan was created on June
21, 1994.
Under the 1994 Stock Option Plan (the "Option Plan"), the maximum
aggregate number of shares which may be optioned is 1,498,000 shares.
Nonstatutory stock options may be granted to employees, outside directors and
consultants, whereas incentive stock options can only be granted to employees.
Options are generally granted at fair market value subject to the following:
(a) With respect to options granted to an employee who, at the time of the
grant owns stock representing more than 10% of the voting power of all
classes of stock of the Company or any parent or subsidiary, the per
share exercise price shall be no less than 110% of the fair market
value on the date of the grant for incentive and nonstatutory stock
options.
(b) With respect to options granted to any employee other than described in
the preceding paragraph, the exercise price shall be no less than 100%
for incentive stock options and 85% for nonstatutory stock options of
the fair market value on the date of the grant.
During 1994, the Company's directors and stockholders approved the
Directors' Stock Option Plan ("Directors' Plan") and reserved 150,000 shares of
common stock for issuance thereunder. Terms of the Directors' Plan provide for
the grant of options to the Company's independent directors in annual increments
commencing in 1995. The exercise price of options granted is the fair market
value at the date of grant.
-52-
Nonstatutory stock option activity under the Option Plan and Director's
Plan was as follows (in thousands):
1994 1995 1996
------ ------ ------
Outstanding at beginning of period ...... -- 730 896
Granted ................................ 857 414 1,175
Canceled ............................... (88) (163) (700)
Exercised .............................. (39) (85) (235)
------ ------ ------
Outstanding at December 31 .............. 730 896 1,136
Exercisable at December 31 .............. 256 384 298
------ ------ ------
Available for Grant at December 31 ...... 103 307 149
------ ------ ------
Weighted average option exercise price information for the years 1994,
1995 and 1996 follows:
1994 1995 1996
------ ------ ------
Outstanding at beginning of period ...... $ 0.00 $ 0.32 $ 4.30
Granted during the year ................. 0.31 10.26 6.20
Canceled during the year ................ 0.30 3.35 8.24
Exercised during the year ............... 0.30 0.43 0.58
Outstanding at December 31 .............. 0.32 4.30 4.54
Exercisable at December 31 .............. 0.31 1.36 2.77
Significant option groups outstanding at December 31, 1996, and related
weighted average price and life information follows (options in thousands):
Outstanding Exercisable
Range of ----------------- ----------------- Remaining
Exercise Prices Shares Price Shares Price Life (years)
- - --------------- ------ ----- ------ ----- ------------
$0.30-0.50 242 $ 0.32 202 $ 0.31 7.5
$2.50 234 2.50 -- 0.0 9.9
$3.25-5.00 379 4.49 28 4.50 9.2
$5.13-9.00 224 8.41 59 8.09 8.8
$13.50-25.00 57 16.02 9 17.49 9.0
Options granted vest over a period of four years. The terms of the
option shall be no longer than 10 years. All options were granted at an exercise
price equal to the fair market value of the Company's common stock at the date
of grant. The weighted average fair value at date of grant for options granted
during 1995 and 1996 was $5.34 and $2.74 per option,
-53-
respectively. The fair value of options at date of grant was estimated using the
Black-Scholes model with the following assumptions:
1995 1996
---- ----
Expected life (years) .................. 5 5
Risk free interest rate ................ 6.9% 6.6%
Volatility ............................. 48% 50%
Dividend yield ......................... -- --
In April 1995, the board of directors of the Company adopted the
Paradigm Technology, Inc. Employee Stock Purchase Plan (the "ESPP") to provide
employees of the Company with an opportunity to purchase common stock through
payroll deductions. The ESPP became effective upon the closing of the Company's
initial public offering in July 1995. Under the ESPP, 250,000 shares of common
stock have been reserved for issuance to full-time employees employed with the
Company for at least three consecutive months.
Under the ESPP, the purchase price of the common stock will be equal to
85% of the lower of (i) the market price of common stock immediately before the
beginning of the applicable participation period or (ii) the market price of
common stock at the time of purchase. In general, each participation period is
24 months long, with a new participation period beginning every six months.
During 1996, 76,783 shares were issued under the plan. The fair value of the
employee's purchase rights was estimated using the Black-Scholes model with the
following assumptions for 1995 and 1996, respectively; dividend yield of 0% in
both years; an expected life of two years for each purchase period; expected
volatility of 48% and 50%; and risk free interest rates of 6.0% and 6.3%. The
weighted-average fair value of these purchase rights granted in 1995 and 1996
was $5.37 and $4.78, respectively.
Had compensation expense for the Company's stock-based compensation
plans been determined based on the methods prescribed by SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been as
follows (in thousands, except per share amounts):
-54-
Year Ended Year Ended
December 31, December 31,
1995 1996
------------ ------------
Net income (loss):
As reported ............... $5,263 $(36,425)
Pro forma ................. 5,024 (37,272)
Net income (loss) per share:
As reported ............... $ 0.83 $ (5.16)
Pro forma ................. 0.79 (5.28)
Note 11 -- Income Taxes:
No provision has been recorded for any of the periods prior to December
31, 1994, since the Company incurred a net operating loss for tax purposes.
The provision (benefit) for income taxes consists of the following (in
thousands):
Year Ended Year Ended
December 31, December 31,
1995 1996
------------ -------------
Federal:
Current ...................... $ 1,673 $(1,125)
State:
Current ...................... 472 --
------- -------
$ 2,145 $(1,125)
======= =======
The components of the net deferred tax asset were as follows (in
thousands):
Post-Reorganization
December 31,
------------------------------
1995 1996
------- ---------
Inventory and other reserves.................. $ 589 $ 3,052
Depreciation and capital leases............... 2,425 972
Other......................................... 473 551
Net operating losses.......................... 1,822 13,885
------- --------
5,309 18,460
Less valuation allowance...................... (5,309) (18,460)
------- --------
$ -- $ --
======= ========
-55-
The Company's effective tax rate for 1995 and 1996 was 29% and (3)%,
respectively. This rate differs from the federal statutory rate due principally
to the following:
Year Ended Year Ended
December 31, December 31,
1995 1996
------------ ------------
Tax at statutory rate ............................ 34% (34)%
State taxes, net of federal benefit .............. 6 (6)
Tax losses not recognized ........................ -- 37
Net operating losses and tax credits
utilized ....................................... (11) --
--- ---
29% (3)%
=== ===
The Company has established a valuation allowance equal to its deferred
tax assets on the basis that realization of such assets is not assured.
Management's assessment is based on the Company's current net operating losses.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. The Company experienced such an ownership change as a
result of the Reorganization (Note 3), and the utilization of the carryforwards
was limited.
At December 31, 1996, the Company had net operating loss carryforwards
(reflecting limitation resulting from change in ownership) of approximately
$35.5 million available to offset future regular and alternative minimum taxable
income. The Company's net operating loss carryforwards expire through 2011, if
not utilized.
Note 12 -- Capital Lease Obligations and Commitments:
Until May 1, 1995 the Company leased its fab/manufacturing and lab and
test equipment from eleven equipment lessors. A modified payment stream
sufficient to cure all defaults under the original lease agreements was
confirmed by the Bankruptcy Court in June 1994. The Company was responsible for
all insurance, property tax and maintenance. On May 1, 1995, the Company
purchased this leased equipment effective March 31, 1995 with proceeds of a term
note from Greyrock Business Credit (Note 7).
The Company's principal manufacturing and administrative facility was
leased under an operating lease expiring in 2004. This lease was assumed by the
purchaser of the Company's wafer fabrication facility. Rent expense for the
period from April 1, 1994 to June 20, 1994, the period from June 21, 1994 to
December 31, 1994 and the years ended December 31, 1995 and December 31, 1996
was $164,000, $368,000, $715,000 and $680,000, respectively.
-56-
In December 1996 the Company entered into an agreement to lease its new
principal administrative facility under an operating lease expiring in 2002.
Future minimum payments under noncancelable operating leases at December 31,
1996 are as follows (in thousands):
Year Ending
December 31, Operating Leases
-------------- ----------------
1997 $ 382,000
1998 439,000
1999 452,000
2000 464,000
2001 476,000
Thereafter 40,000
-----------
$ 2,253,000
===========
Note 13 -- Sale of Wafer Fabrication Facility
The Company recorded a loss of $4.6 million in the quarter ended
December 31, 1996 as a result of the sale of its wafer fabrication facility.
This charge included the excess of the net book value of leasehold improvements,
wafer fabrication equipment, fabrication work in process inventory and other
assets sold to Orbit over the proceeds received from Orbit, an accrual for
professional fees incurred to complete the transaction, a reserve for an adverse
purchase commitment related to the wafer manufacturing agreement and accruals
for other estimated costs to be incurred.
Orbit paid to the Company aggregate consideration of $20 million
consisting of $6.7 million in cash, assumption of $7.5 million of indebtedness
associated with and secured by the Fab, and promissory notes in the principal
amounts of $4.8 million and $1.0 million. The Company also executed a short-term
sublease with Orbit pursuant to which it will occupy office space at its
principal offices not associated with the Fab.
The $4.8 million promissory note was issued in connection with a wafer
supply agreement that requires Orbit to supply Paradigm with approximately 9,750
of certain fabricated wafers through May 1997 at $500 per wafer purchased by
Paradigm. Per terms of the agreement, if the Company does not purchase the
wafers by the end of May 1997, the Company will forfeit any remaining amount
owed under the promissory note. At December 31, 1996, the Company is required to
purchase 6,684 wafers under this agreement which the Company fully expects to
receive by the end of May 1997. The $1.0 million promissory note is held in
escrow to satisfy certain representation and warranties made by the Company.
Orbit is required to make two payments of $500,000 plus interest of 4% in May
and November 1997. As of December 31, 1996 the outstanding balance under these
promissory notes was $4,342,000 which was classified as prepaid expenses and
other assets.
-57-
The following table sets forth the components of the $4.6 million loss
recorded in 1996 related to the sale of the wafer fabrication facility (in
thousands):
Benefit (Charge)
Recorded in 1996
----------------
Sale proceeds ........................................... $ 20,000
Less: Cost of inventory, fixed
assets and other assets sold ............................ (21,480)
--------
(1,480)
Adverse purchase commitment ............................. (1,920)
Professional fees ....................................... (360)
Lease buyout ............................................ (225)
Other costs ............................................. (647)
--------
Loss on sale ............................................ $ (4,632)
========
At December 31, 1996 the remaining adverse purchase commitment of
$1,337,000 is recorded in prepaid expenses and other as an offset to the note
receivable from Orbit.
In connection with the sale of the Fab, substantially all of the 109
employees associated with the Fab were terminated and became employees of Orbit.
No severance payments were made to employees transferred to Orbit.
Note 14 -- Litigation:
On August 12, 1996, a securities class action lawsuit was filed in
Santa Clara Superior Court against the Company and certain of its officers and
directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists
of purchasers of the Company's common stock from November 20, 1995 to March 22,
1996, inclusive. The complaint alleges negligent misrepresentation, fraud and
deceit, breach of fiduciary duty, and violations of certain provisions of the
California Corporate Securities Law and Civil Code. The plaintiffs seek an
unspecified amount of compensatory and punitive damages. Plaintiffs allege,
among other things, that the Paradigm Defendants wrongfully represented that the
Company would have protection against adverse market conditions in the
semiconductor market based on the Company's focus on high speed, high
performance semiconductor products. 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 action
except for violation of certain provisions of the California Corporate
Securities Law and Civil Code. The Court, however, granted plaintiffs leave to
amend the complaint to attempt to cure the defects which caused the Court to
sustain the demurrer. Plaintiffs failed to amend within the allotted time. On
January 8, 1997, the Paradigm Defendants filed an answer to the complaint
denying any liability for the acts and damages alleged by plaintiffs. Plaintiffs
have served the Paradigm
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Defendants with a first set of requests to produce documents, to which the
Paradigm Defendants are currently responding. Plaintiffs have also filed a
motion for class certification which is set for hearing on April 15, 1997. No
other motions have been filed with the court by plaintiffs or defendants, and no
discovery has yet been conducted. The Paradigm defendants will vigorously defend
the action and, subject to the inherent uncertainties of litigation and based
upon facts presently known, management believes that the resolution of this
matter will not have a material adverse impact on the Company's financial
position or results of operations.
On February 21, 1997, an additional purported class action, with causes
of action and factual allegations essentially identical to those of the August
12, 1996 class action lawsuit, was filed. This second class action is asserted
against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. None
of the Paradigm Defendants have been served in this new action. The Paradigm
Defendants believe because the new action appears redundant it is subject to the
demurrer which the Court sustained in the first class action.
The Company is involved in various other litigation and potential
claims which management believes, based on facts presently known, will not have
a material adverse effect on the results of operations or the financial position
of the Company.
Note 15 -- Subsequent Event:
On January 23, 1997, Paradigm sold a total of 200 shares of 5% Series A
Convertible Redeemable Preferred Stock (the "Preferred Stock") in a private
placement to Vintage Products, Inc. at a price of $10,000 per share, for total
proceeds (net of payments to third parties) of approximately $1,880,000. The
Preferred Stock is convertible at the option of the holder into the number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
(A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or
accumulated dividends on the shares of Preferred Stock being converted by (B)
the Conversion Price in effect at the time of conversion. The "Conversion Price"
will be equal to the lower of (i) $2.25 or (ii) eighty-two percent (82%) of the
average closing bid price of a share of Common Stock as quoted on the Nasdaq
National Market over the five (5) consecutive trading days immediately preceding
the date of notice of conversion of the Preferred Stock. The Preferred Stock is
redeemable by the Company under certain limited circumstances. The Company is
required to register the maximum number of shares of Common stock issuable upon
conversion of the Preferred Stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors of the Registrant.
Michael Gulett, 44, the Company's President and Chief Executive
Officer, joined Paradigm in March 1992. Mr. Gulett, was elected President in
February 1993, was appointed Chief Executive Officer in July 1993 and was
appointed to the board in March 1994. Prior to joining Paradigm, Mr. Gulett was
a consultant from May 1989 until March 1992. From July 1987 until May 1989, Mr.
Gulett was the Director of ASIC Operations at VLSI Technology, Inc., a
semiconductor manufacturer. He has also worked for NCR Microelectronics,
California Devices, Intel Corporation and Burroughs Corporation. Mr. Gulett
received his B.S. in electrical engineering from the University of Dayton.
George J. Collins, 54, has served as a Director of the Company since
October 1995. Mr. Collins has been a professor of electrical engineering at
Colorado State University since 1973. Mr. Collins is a Fellow with the American
Physical Society and the Institute of Electrical Engineers. Mr. Collins is a
Director of Quantum Research Corporation. Mr. Collins received his B.S.E.E. from
Manhattan University and his M.S. and Ph.D. in engineering from Yale University.
James L. Kochman, 47, has served as Director of the Company since June
1994 and has been a partner with the investment banking firm of Bentley, Hall,
Von Gehr International since April 1992. He was formerly President and Chief
Executive Officer of TEKNA/S-TRON, a consumer products company. Prior to joining
TEKNA, he spent six years with FMC Corporation in a variety of corporate staff
and operating assignments, including Director of Manufacturing and Director of
Technology and Business Development with FMC's Ordinance Division in San Jose.
Previously Mr. Kochman worked for International Harvester Company. Mr. Kochman
received his B.S. in mechanical engineering from the University of Illinois and
an M.B.A. from the University of Chicago.
(b) Executive Officers of the Registrant.
Michael Gulett, the Company's President and Chief Executive Officer,
joined Paradigm in March 1992. Mr. Gulett was elected President in February
1993, and was appointed Chief Executive Officer in July 1993. Prior to joining
Paradigm, Mr. Gulett was a consultant from May 1989 until March 1992. From July
1987 until May 1989, Mr. Gulett was the Director of ASIC Operations at VLSI
Technology, Inc., a semiconductor manufacturer. He has also worked for NCR
Microelectronics, California Devices, Intel Corporation and Burroughs
Corporation. Mr. Gulett received his B.S. in electrical engineering from the
University of Dayton.
Robert C. McClelland served as Paradigm's Vice President of Finance,
Chief Financial Officer from June 1993 to February 1997, and as Secretary from
April 1994 to February 1997. Prior to joining Paradigm, Mr. McClelland served as
Vice President of Finance at Beaver
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Computer Corporation, a manufacturer of notebook computers, from February 1991
through January 1993. From January 1982 through January 1991, Mr. McClelland was
a Vice President and Controller of Precision Monolithics, Inc., a manufacturer
of bipolar semiconductors. Mr. McClelland received his B.S. in finance from the
University of Vermont.
Douglas Schirle has served as Paradigm's Vice President of Finance and
Chief Financial Officer since February 1997. Mr. Schirle joined Paradigm in
December 1993 as the Corporate Controller. Prior to joining Paradigm, Mr.
Schirle was a product line controller and general accounting manager at Cypress
Semiconductor from January 1987 to September 1993. From June 1979 to December
1986, Mr. Schirle worked in the audit division of Arthur Andersen & Co. in San
Jose, California. Mr. Schirle received his B.S. in business administration from
San Jose State University and is a CPA in the State of California.
Dennis McDonald has served as Paradigm's Vice President, Human
Resources since May 1995. Mr. McDonald was Vice President of Human Resources for
Meta-Software from September 1994 to May 1995, and a Principal at Pragmatic
Human Resources Solutions from May 1990 to August 1994. Mr. McDonald has also
worked for VLSI Technology and Fairchild Semiconductor. Mr. McDonald received a
B.B.A. from St. John's University.
Philip Siu has served as Paradigm's Vice President, Engineering since
April 1995. Prior to joining Paradigm, Mr. Siu was the President of Saning
Electronic, a start-up analog and memory design company, since 1993. Mr. Siu was
Vice President of Engineering at ESS Technology, a semiconductor company, from
1991 to 1993 and was President of Micro Integration, a semiconductor company,
from 1987 to 1991. He has previously worked for VLSI Technology, Synertek and
American Microsystems. Mr. Siu received his B.S. in electrical engineering from
the University of Manitoba, Canada and an M.S. in electrical engineering from
San Jose State University.
James H. Boswell who has served as Paradigm's Vice President, Sales and
Marketing since December 1996, joined the Company in November 1995 as Director
of Marketing. Prior to joining Paradigm, Mr. Boswell was the Sales Manager of
Sharp from 1994 to 1995. Mr. Boswell was in the marketing and sales department
of Hitachi from 1989 to 1994. Mr. Boswell received his B.S. from University of
New Mexico and his M.B.A. from the University of Arizona.
Richard Morley has served as Paradigm's Vice President, Operations
since February 1997. Prior to joining Paradigm Mr. Morley worked in other IC
based Operations-notably Kopin Corporation as General Manager of Display
Manufacturing from 1994 to 1996 and was Director of Operations for Zilog's Nampa
Mod II and Mod III CMOS wafer fabrication facilities from 1988 to 1994. Mr.
Morley has also worked for other IC manufacturing companies such as General
Instrument, NCR, Sprague Solid State, California Devices and VLSI Technology.
Mr. Morley received his B.S. in chemistry from Manhattan College.
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ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning
compensation paid to the Company's Chief Executive Officer, and each of the
other four most highly compensated executive officers, who were serving as
executive officers on December 31, 1996 (the "Named Executive Officers") and
whose aggregate salary and bonus exceeded $100,000, for the fiscal years ended
December 31, 1994, 1995 and 1996.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation(1) Payouts
----------------------------------------------------- -------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary($) Bonus($)(2) Compensation($) Options(#)
--------------------------- ---- --------- ----------- --------------- ----------
Michael Gulett 1996 $249,185 $ 85,174 -- 25,000
President and Chief 1995 $219,692 $150,310 -- 15,000
Executive Officer 1994 $171,923 $ 55,000 -- 180,000
1996 $128,076 $ 17,155 -- 13,000
Robert C. McClelland 1995 $121,792 $ 30,484 -- 10,000
Chief Financial Officer 1994 $112,599 $ 10,000 -- 33,750
Dennis McDonald (3)
Vice President, Human 1996 $134,302 $ 19,174 -- 17,000
Resources 1995 $ 70,400 $ 175 -- 25,000
Philip Siu (3)
Vice President, 1996 $139,195 $ 25,174 -- 22,000
Engineering 1995 $ 92,308 $ 25,155 -- 62,500
James Boswell (3)
Vice President, Sales and 1996 $119,638 $ 9,174 $ 1,385(3) 26,250
Marketing 1995 $ 6,250 -- -- 15,000
- - --------------
(1) The Company changed its fiscal year-end from March 31 to December 31 in
June 1994. For purposes of the Summary Compensation Table, the 1994
fiscal year figures presented reflect annual compensation for the four
quarters ended December 31, 1994.
(2) Represents cash bonuses, profit sharing and commissions paid during the
year.
(3) Mr. Siu, Mr. McDonald and Mr. Boswell were hired by the Company in April,
May and November 1995, respectively.
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The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1996 to the Company's Named
Executive Officers.
Option Grants in Last Fiscal Year
Potential Realizable
Percent Value at Assumed
of Total Annual Rates of
Number of Options Stock Price
Securities Granted to Exercise Appreciation for
Underlying Employees or Base Option Term (3)
Options in Fiscal Price Expiration ---------------------
Granted(1) Year(2) ($/Share) Date 5% 10%
--------- --------- --------- ---------- ------- --------
Michael Gulett 25,000 2.15% $ 4.50 07/24/06 $70,751 $179,296
Robert C. McClelland 5,000 0.43% $13.50 01/01/06 $42,494 $107,715
8,000 0.69% $ 4.50 07/24/06 $22,640 $ 57,375
Philip Siu(4) 10,000 0.86% $13.50 01/01/06 $84,989 $215,430
12,000 1.03% $ 4.50 07/24/06 $33,960 $ 86,062
Dennis McDonald 5,000 0.43% $13.50 01/01/06 $42,494 $107,715
12,000 1.03% $ 4.50 07/24/06 $33,960 $ 86,062
James Boswell 15,000 1.29% $ 4.50 12/29/05 $39,450 $ 98,365
11,250 0.97% $ 2.50 11/21/06 $17,688 $ 44,824
- - ----------
(1) These options vest on the anniversary date of the grant at 25% per year.
(2) Based on options to purchase an aggregate of 1,161,812 shares of Common
Stock granted during fiscal 1996.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date and are not presented to forecast possible future
appreciation, if any, in the price of the Common Stock. The gains shown are
net of the option exercise price, but do not include deductions for taxes
or other expenses associated with the exercise of the options or the sale
of the underlying shares. The actual gains, if any, on the stock option
exercises will depend on the future performance of the Common Stock, the
optionee's continued employment through applicable resting periods and the
date on which the options are exercised.
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The following table shows stock options exercised by the Named
Executive Officers as of December 31, 1996. In addition, this table includes the
number of shares of Common Stock represented by outstanding stock options held
by each of the Named Executive Officers as of December 31, 1996. The closing
price of the Company's Common Stock at fiscal year-end was $2.38.
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at FY-End(#) at FY-End ($)(1)
on Value ------------------------------ ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
Michael Gulett 15,000 $146,313 166,837 381,163 $334,515 $ 7,860
Robert C. McClelland 20,058 $230,690 10,366 26,326 $ 17,619 $14,863
Philip Siu -- $ 0 27,292 57,208 $ 0 $ 0
Dennis McDonald -- $ 0 9,896 32,104 $ 0 $ 0
James Boswell -- $ 0 3,750 22,500 $ 0 $ 0
- - --------------
(1) Value is calculated by (i) subtracting the exercise price per share
from the year-end closing price of $2.38 per share; and (ii)
multiplying the number of shares subject to the option.
Compensation of Directors
The Company's non-employee directors ("Outside Directors") receive a
fee of $3,000 per quarter. All Outside Directors are also reimbursed for
expenses incurred in connection with attending Board and committee meetings. The
Company's 1994 Stock Option Plan (the "Option Plan") provides for the grant of
options to Outside Directors pursuant to a nondiscretionary, automatic grant
mechanism, whereby each Outside Director is granted an option at fair market
value to purchase 3,125 shares of Common Stock on the date of each Annual
Meeting of Stockholders, provided such director is re-elected. These options
vest over four years at the rate of 25% per year so long as the optionee remains
an Outside Director of the Company. Each new Outside Director who joins the
Board is automatically granted an option at fair market value to purchase 12,500
shares of Common Stock upon the date on which such person first becomes an
Outside Director. These options vest over four years at the rate of 25% per
year.
Employment Agreements
The Company entered into an employment agreement with Michael Gulett on
August 26, 1996 (the "Agreement"), which provides for a base salary of $255,000
and the right to participate in the Company's executive compensation program.
The Company may terminate Mr. Gulett's employment at any time with or without
cause upon 90 days' advance written notice; provided, however, that if he is
terminated without cause (other than as a result of disability or change of
control of the Company), he will receive salary continuation for six months. In
the event Mr. Gulett's employment is terminated during the term of the Agreement
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and within the first six-month period after the occurrence of a change of
control of the Company, as defined in the Agreement, Mr. Gulett will be entitled
to receive one and a half times his annual rate of base salary as in effect on
the date of the employment termination, plus one and a half times the last
annual bonus awarded by the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 20, 1997 by: (i) each
person known to the Company to beneficially own more than five percent of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of the
named executive officers, and (iv) all directors and executive officers of the
Company as a group. Except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by such person subject to
community property laws where applicable.
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Shares
Beneficially
Name of Beneficial Owner Owned Percent
------------------------ ----- -------
Vintage Products, Inc.(1)
Arlozorv Street
Telaviv, Israel .................................... 1,600,000 18.1%
ACMA Limited(2)
17 Jurong Port Road
Singapore 2261 ..................................... 1,500,000 20.2%
Atmel Corporation(3)
2125 O'Nel Drive
San Jose, CA 95131 ................................. 1,028,050 13.9%
Michael Gulett(4) .................................. 183,125 2.5%
Philip Siu(5) ...................................... 33,750 *
James L. Kochman(6) ................................ 21,875 *
Robert C. McClelland(7) ............................ 14,572 *
Dennis McDonald(8) ................................. 12,708 *
Richard Morley ..................................... 11,000 *
James Boswell(9) ................................... 3,750 *
George J. Collins(10) .............................. 3,125 *
S. Atiq Raza(11) ................................... 3,125 *
All directors and executive officers as a group
(10 persons)(12) ................................... 291,331 3.9%
- - ----------
* Less than one percent (1%).
(1) Represents shares issuable upon conversion of the Company's 5% Series A
Convertible Redeemable Preferred Stock. See "Business--Recent
Developments--Sale of Preferred Stock."
(2) Includes 175,000 shares issuable upon exercise of outstanding warrants.
(3) Includes 200,000 shares issuable upon exercise of outstanding warrants.
(4) Includes 171,875 shares subject to stock options that are exercisable
or will become exercisable within 60 days of February 20, 1997.
(5) Represents shares subject to stock options that are exercisable or will
become exercisable within 60 days of February 20, 1997.
(6) Represents shares subject to stock options that are exercisable or will
become exercisable within 60 days of February 20, 1997.
(7) Represents shares subject to stock options that are exercisable or will
become exercisable within 60 days of February 20, 1997.
(8) Represents shares subject to stock options that are exercisable or will
become exercisable within 60 days of February 20, 1997.
(9) Represents shares subject to stock options that are exercisable or will
become exercisable within 60 days of February 20, 1997.
(10) Represents shares subject to stock options that are exercisable or will
become exercisable within 60 days of February 20, 1997.
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(11) Represents shares subject to stock options that are exercisable or will
become exercisable within 60 days of February 20, 1997.
(12) Includes 270,081 shares subject to stock options that are exercisable
or will become exercisable within 60 days of February 20, 1997.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") and the rules of the Securities and Exchange Commission (the "Commission")
thereunder require the Company's directors and executive officers to file
reports of their ownership and changes in ownership of Common Stock with the
Commission. Personnel of the Company generally prepare these reports on the
basis of information obtained from each director and officer. Based on such
information, the Company believes that all reports required by Section 16(a) of
the Exchange Act to be filed by its directors and executive officers during the
last fiscal year were filed on time, except that a Form 4 for Richard Velhouse
was inadvertently filed late for his November 1996 transactions.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Atmel Relationship
On April 28, 1995, pursuant to certain agreements with certain of the
Company's stockholders, Atmel Corporation ("Atmel") acquired 425,000 shares of
Common Stock from the Company, 300,000 shares of Common Stock from certain
stockholders of the Company, and 128,050 shares of Common Stock from the
Company's equipment lessors, all of which shares were purchased at a price of
$8.00 per share. Atmel also acquired from ACMA Limited ("ACMA") certain warrants
to purchase 175,000 shares of Common Stock of the Company at an exercise price
of $1.00 per share, for a purchase price of $7.00 per share subject to the
warrants. In connection with these transactions, the Company entered into an
agreement with Atmel (the "Stock Purchase Agreement") pursuant to which Atmel
agreed to certain transfer restrictions for a period of three years. Atmel also
agreed to certain standstill provisions, including an agreement not to increase
its beneficial ownership above 19.9% of the voting power of the Company on a
fully diluted basis for a period of five years from the date of the Stock
Purchase Agreement. The foregoing restrictions terminate on the date on which a
person or entity acquires more than 50% of the voting power of the Company. In
addition, Atmel agreed that, for a period of ten years from the date of the
Stock Purchase Agreement, it will vote its shares of Common Stock of the Company
in proportion to the votes cast by the other stockholders of the Company, except
with respect to certain material events. The voting and standstill restrictions
terminate at such time as Atmel beneficially owns less than 5% of the Common
Stock of the Company. In connection with its acquisition of capital stock of the
Company, Atmel became a party to the Registration Rights Agreement which
provides Atmel with certain rights to register its shares of Common Stock of the
Company. On April 28, 1995, Atmel also entered into a Licensing and
Manufacturing Agreement with the Company.
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Bentley, Hall, Von Gehr International
James Kochman, a director of the Company, is a partner of Bentley,
Hall, Von Gehr International ("Von Gehr"), an investment banking firm which
performed investment banking services for the Company during the 12 months ended
December 31, 1996. Such services related to, among other things, the Company's
acquisition of NewLogic and the sale of the Company's wafer fabrication facility
to Orbit Semiconductor. Compensation to Von Gehr during 1996 exceeded 5% of the
Von Gehr's consolidated gross revenues for its most recent fiscal year. Von Gehr
may also perform investment banking services for the Company from time to time
in the future.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Financial Statements.
The financial statements listed below appear on the page
indicated:
Page Number
-----------
Report of Independent Accountants....................................... 36
Balance Sheets, December 31, 1996 and December 31, 1995................. 37
Statements of Operations for the years ended December 31, 1996
and December 31, 1995, the Period from June 21, 1994 to
December 31, 1994, and the Period from April 1, 1994 to
June 20, 1994.................................................. 38
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1996 and December 31, 1995, the Period from
June 21, 1994 to December 31, 1994, and the Period from
April 1, 1994 to June 20, 1994 ................................ 39
Statements of Cash Flows for the years ended December 31, 1996
and December 31, 1995, the Period from June 21, 1994 to
December 31, 1994, and the Period from April 1, 1994 to
June 20, 1994 ................................................. 40
Notes to Financial Statements........................................... 41
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed with the Securities and
Exchange Commission on December 2, 1996. The report announced
the sale of the Registrant's semiconductor wafer fabrication
manufacturing operation, including equipment and work in
process, and the assignment of the Registrant's rights and
obligations under the lease of its wafer fabrication facility.
A Current Report on Form 8-K was filed with the Securities and
Exchange Commission on February 6, 1997. The report announced
the private placement of a total of 200 shares of the
Registrant's 5% Series A Convertible Redeemable Preferred
Stock to Vintage Products, Inc. at a price of $10,000 per
share, for a total proceeds (net of payments to third parties)
of approximately $1,880,000.
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(c) Exhibits
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as part of this annual
report.
(d) Financial Statement Schedules
Financial statement schedules are omitted because they are not
required or are not applicable, or the required information is
shown in the financial statements or notes thereto included as
part of the Company's 1996 Annual Report on Form 10-K.
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INDEX TO EXHIBITS
Exhibit
Number Exhibit
------
1.3 Agreement and Plan of Merger between the Registrant and
Paradigm Technology Delaware Corporation, a Delaware
corporation.(1)
1.4 Agreement and Plan of Merger dated as of June 5, 1996 between
the Registrant and NewLogic Corp.
2.1 Third Amended Joint Plan of Reorganization effective June 21,
1994.(1)
2.2 Stock Purchase Agreement, dated as of January 21, 1997, by
and between Paradigm Technology, Inc. and Vintage Products,
Inc.(7)
2.3 Securities Purchase Agreement dated as of April 22, 1996
between the Registrant, NewLogic Corp. and certain
securityholders of NewLogic Corp.
2.4 First Amendment to Securities Purchase Agreement dated as of
April 22, 1996 between the Registrant, NewLogic Corp. and
certain securityholders of NewLogic Corp.
2.5 Investor Securities Purchase Agreement dated as of May 29,
1996 between the Registrant and certain Investors listed on
Schedule A attached thereto.
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Bylaws of the Registrant, as amended.(1)
4.1 Certificate of Designation of the 5% Series A Convertible
Redeemable Preferred Stock as filed with the Secretary of
State of the State of Delaware.(7)
9.1 Voting Trust Agreement dated as of May 24, 1996 between Hans
Olsen and the persons listed on Schedule A attached thereto.
10.1 Amended and Restated 1994 Stock Option Plan of the Registrant
(the "Plan").(5)
10.2 Form of Incentive Stock Option Agreement under the Plan.(1)
10.3 Form of Nonstatutory Stock Option Agreement under the
Plan.(1)
10.4 1995 Employee Stock Purchase Plan of the Registrant.(1)
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Exhibit
Number Exhibit
------
10.5 Office Building Lease between Sobrato Development Companies
#871, a California limited partnership and the Registrant
dated December 7, 1988.(1)
10.6 Second Amendment to Office Building Lease between Sobrato
Development Companies #871, a California limited partnership
and the Registrant dated June 18, 1990.(1)
10.7 First Amendment to Office Building Lease between Sobrato
Development Companies #871, a California limited partnership
and the Registrant dated May 4, 1989.(1)
10.8 Technology Development Agreement for SRAM/ASM Process
Technology and Design between NKK Corporation and the
Registrant dated January 17, 1992.(1)(2)
10.9 Side Letter to Technology Development Agreement for SRAM/ASM
Process Technology and Design between NKK Corporation and the
Registrant dated January 17, 1992.(1)
10.10 Amendment No. 1 to Technology Development Agreement for
SRAM/ASM Process Technology and Design between NKK
Corporation and the Registrant dated October 23, 1992.(1)(2)
10.11 Amendment No. 2 to Technology Development Agreement for
SRAM/ASM Process Technology and Design between NKK
Corporation and the Registrant dated October 30, 1992.(1)
10.12 Amendment No. 3 to Technology Development Agreement for
SRAM/ASM Process Technology and Design between NKK
Corporation and the Registrant dated February 16, 1995.(1)(2)
10.13 Restated Technology Development Agreement for 4Mb SRAM
Process and Design between NKK Corporation and the Registrant
dated May 26, 1992.(1)(2)
10.14 Amendment No. 1 to Restated Technology Development Agreement
for 4Mb SRAM Process and Design between NKK Corporation and
the Registrant dated October 23, 1992.(1)(2)
10.15 Amendment No. 2 to Restated Technology Development Agreement
for 4Mb SRAM Process and Design between NKK Corporation and
the Registrant dated October 30, 1992.(1)
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Exhibit
Number Exhibit
------
10.16 Restated Technology Transfer and License Agreement 256K/1Mb
SRAM Process and Design between NKK Corporation and the
Registrant dated May 26, 1992.(1)(2)
10.17 Amendment No. 1 to Restated Technology Transfer and License
Agreement 256K/1Mb SRAM Process and Design between NKK
Corporation and the Registrant dated October 23, 1992.(1)(2)
10.18 Amendment No. 2 to Restated Technology Transfer and License
Agreement 256K/1Mb SRAM Process and Design between NKK
Corporation and the Registrant dated October 30, 1992.(1)
10.19 Amendment No. 3 to Restated Technology Transfer and License
Agreement 256K/1Mb SRAM Process and Design between NKK
Corporation and the Registrant dated August 16, 1994.(1)(2)
10.20 Agreement on 1M SRAM Sales Right and OEM Supply and
Modification of Existing Agreements between NKK Corporation
and the Registrant dated April 18, 1995.(1)(2)
10.21 Marketing and Resale Agreement between the Registrant and
National Semiconductor Corporation dated October 13,
1994.(1)(2)
10.22 License and Manufacturing Agreement between the Registrant
and Atmel Corporation dated April 28, 1995.(1)(2)
10.23 Patent License Agreement between the Registrant and American
Telephone and Telegraph Company dated December 13, 1990.(1)
10.24 Amended and Restated Registration Rights Agreement between
the Registrant and certain stockholders of the Registrant
dated April 28, 1995.(1)
10.25 Amended Warrant for 50,000 shares of Common Stock of the
Registrant issued to ACMA Limited on June 23, 1994.(1)
10.26 Warrant for 100,000 shares of Common Stock transferred by
ACMA Limited to Chiang Lam on December 9, 1994.(1)
10.27 Warrant for 50,000 shares of Common Stock issued by the
Registrant to ACMA Limited on January 25, 1995 between the
Registrant and Atmel Corporation.(1)
10.28 Warrant for 350,000 shares of Common Stock of the Registrant
transferred by ACMA Limited to Atmel Corporation on May 1,
1995.(1)
-73-
Exhibit
Number Exhibit
------
10.29 Loan and Security Agreement between the Registrant and
Greyrock Business Credit dated February 28, 1995.(1)
10.30 Amendment to Loan Documents between the Registrant and
Greyrock Business Credit dated April 7, 1995.(1)
10.31 Amendment to Loan Documents between the Registrant and
Greyrock Business Credit dated May 1, 1995.(1)
10.32 Form of Indemnification Agreement.(1)
10.33 General Release and Covenant Not to Sue dated May 24, 1995
between Anthony C. Langley and the Registrant.(1)
10.34 Stock Purchase Agreement dated as of April 28, 1995 between
the Registrant and Atmel Corporation.(1)
10.35 Letter of Credit dated March 2, 1995 issued by Royal Bank of
Canada Singapore on behalf of ACMA Limited in favor of
Greyrock Business Credit.(1)
10.36 Observation Rights Agreement dated June 16, 1995 between ACMA
Limited and the Registrant.(1)
10.37 Third Amendment to Office Building Lease between Sobrato
Development Companies #871, a California limited partnership
and the Registrant dated December 21, 1995.(3)
10.38 Loan and Security Agreement dated February 9, 1996 between
Bank of the West and the Registrant.(3)
10.39 Loan and Security Agreement dated February 14, 1996 between
the Registrant and the CIT Group/Equipment Financing, Inc.(4)
10.40 Agreement of Purchase and Sale of Assets dated as of November
7, 1996 between the Registrant and Orbit Semiconductor, Inc.
Exhibits to this Agreement omitted from this report will be
furnished to the Securities and Exchange Commission upon
request.(6)
10.41 Wafer Manufacturing Agreement dated as of November 7, 1996
between the Registrant and Orbit Semiconductor, Inc.(6)
10.42 Promissory Note dated November 15, 1996 in the aggregate
principal amount of $4,800,000 issued by Orbit Semiconductor,
Inc. to the Registrant.(6)
-74-
Exhibit
Number Exhibit
------
10.43 Promissory Note dated November 15, 1996 in the aggregate
principal amount of $1,000,000 issued by Orbit Semiconductor,
Inc. to the Registrant.(6)
10.44 Office Building Lease Agreement dated December 26, 1996
between the Registrant, John Arrillaga, Trustee, UTA dated
7/20/77 and Richard T. Perry, Trustee, UTA dated 7/20/77.
10.45 Loan and Security Agreement dated October 25, 1996 between
the Registrant and Greyrock Business Credit.
10.46 Employee letter agreement dated May 23, 1996 between the
Registrant and Hans Olsen.
10.47 Employee letter agreement dated May 24, 1996 between the
Registrant and Bruce Campbel.
10.48 Employee letter agreement dated May 23, 1996 between the
Registrant and Gregory Roberts.
10.49 Executive Compensation Agreement dated August 26, 1996
between the Registrant and Michael Gulett.
11.1 Computation of Net Income (Loss) Per Share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
27.1 Financial Data Schedule
- - --------------------
(1) Incorporated by reference to Registration Statement on Form S-1 (Reg.
No. 33-92390).
(2) Confidential treatment granted as to certain portions.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 2, 1996.
(7) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 6, 1997.
-75-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 11, 1997 PARADIGM TECHNOLOGY, INC.
By /s/ Michael Gulett
----------------------------------------
Michael Gulett
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature and Title Date
------------------- ----
By /s/ Michael Gulett March 11, 1997
--------------------------------------------------
Michael Gulett
President, Chief Executive Officer and Director
(Principal Executive Officer)
By /s/ Douglas Schirle March 11, 1997
--------------------------------------------------
Douglas Schirle
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
By /s/ George Collins March 11, 1997
--------------------------------------------------
George Collins
Director
By /s/ James Kochman March 11, 1997
--------------------------------------------------
James Kochman
Director
-76-
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------ -------
1.3 Agreement and Plan of Merger between the
Registrant and Paradigm Technology Delaware
Corporation, a Delaware corporation.(1)
1.4 Agreement and Plan of Merger dated as of June
5, 1996 between the Registrant and NewLogic
Corp.
2.1 Third Amended Joint Plan of Reorganization
effective June 21, 1994.(1)
2.2 Stock Purchase Agreement, dated as of January
21, 1997, by and between Paradigm Technology,
Inc. and Vintage Products, Inc.(7)
2.3 Securities Purchase Agreement dated as of
April 22, 1996 between the Registrant,
NewLogic Corp. and certain securityholders of
NewLogic Corp.
2.4 First Amendment to Securities Purchase
Agreement dated as of April 22, 1996 between
the Registrant, NewLogic Corp. and certain
securityholders of NewLogic Corp.
2.5 Investor Securities Purchase Agreement dated
as of May 29, 1996 between the Registrant and
certain Investors listed on Schedule A
attached thereto.
3.1 Amended and Restated Certificate of
Incorporation.(1)
3.2 Bylaws of the Registrant, as amended.(1)
4.1 Certificate of Designation of the 5% Series A
Convertible Redeemable Preferred Stock as
filed with the Secretary of State of the State
of Delaware.(7)
9.1 Voting Trust Agreement dated as of May 24,
1996 between Hans Olsen and the persons listed
on Schedule A attached thereto.
10.1 Amended and Restated 1994 Stock Option Plan of
the Registrant (the "Plan").(5)
10.2 Form of Incentive Stock Option Agreement under
the Plan.(1)
10.3 Form of Nonstatutory Stock Option Agreement
under the Plan.(1)
10.4 1995 Employee Stock Purchase Plan of the
Registrant.(1)
10.5 Office Building Lease between Sobrato
Development Companies #871, a California
limited partnership and the Registrant dated
December 7, 1988.(1)
Exhibit
Number Exhibit
------ -------
10.6 Second Amendment to Office Building Lease
between Sobrato Development Companies #871, a
California limited partnership and the
Registrant dated June 18, 1990.(1)
10.7 First Amendment to Office Building Lease
between Sobrato Development Companies #871, a
California limited partnership and the
Registrant dated May 4, 1989.(1)
10.8 Technology Development Agreement for SRAM/ASM
Process Technology and Design between NKK
Corporation and the Registrant dated January
17, 1992.(1)(2)
10.9 Side Letter to Technology Development
Agreement for SRAM/ASM Process Technology and
Design between NKK Corporation and the
Registrant dated January 17, 1992.(1)
10.10 Amendment No. 1 to Technology Development
Agreement for SRAM/ASM Process Technology and
Design between NKK Corporation and the
Registrant dated October 23, 1992.(1)(2)
10.11 Amendment No. 2 to Technology Development
Agreement for SRAM/ASM Process Technology and
Design between NKK Corporation and the
Registrant dated October 30, 1992.(1)
10.12 Amendment No. 3 to Technology Development
Agreement for SRAM/ASM Process Technology and
Design between NKK Corporation and the
Registrant dated February 16, 1995.(1)(2)
10.13 Restated Technology Development Agreement for
4Mb SRAM Process and Design between NKK
Corporation and the Registrant dated May 26,
1992.(1)(2)
10.14 Amendment No. 1 to Restated Technology
Development Agreement for 4Mb SRAM Process and
Design between NKK Corporation and the
Registrant dated October 23, 1992.(1)(2)
10.15 Amendment No. 2 to Restated Technology
Development Agreement for 4Mb SRAM Process and
Design between NKK Corporation and the
Registrant dated October 30, 1992.(1)
10.16 Restated Technology Transfer and License
Agreement 256K/1Mb SRAM Process and Design
between NKK Corporation and the Registrant
dated May 26, 1992.(1)(2)
10.17 Amendment No. 1 to Restated Technology
Transfer and License Agreement 256K/1Mb SRAM
Process and Design between NKK Corporation and
the Registrant dated October 23, 1992.(1)(2)
Exhibit
Number Exhibit
------ -------
10.18 Amendment No. 2 to Restated Technology
Transfer and License Agreement 256K/1Mb SRAM
Process and Design between NKK Corporation and
the Registrant dated October 30, 1992.(1)
10.19 Amendment No. 3 to Restated Technology
Transfer and License Agreement 256K/1Mb SRAM
Process and Design between NKK Corporation and
the Registrant dated August 16, 1994.(1)(2)
10.20 Agreement on 1M SRAM Sales Right and OEM
Supply and Modification of Existing Agreements
between NKK Corporation and the Registrant
dated April 18, 1995.(1)(2)
10.21 Marketing and Resale Agreement between the
Registrant and National Semiconductor
Corporation dated October 13, 1994.(1)(2)
10.22 License and Manufacturing Agreement between
the Registrant and Atmel Corporation dated
April 28, 1995.(1)(2)
10.23 Patent License Agreement between the
Registrant and American Telephone and
Telegraph Company dated December 13, 1990.(1)
10.24 Amended and Restated Registration Rights
Agreement between the Registrant and certain
stockholders of the Registrant dated April 28,
1995.(1)
10.25 Amended Warrant for 50,000 shares of Common
Stock of the Registrant issued to ACMA Limited
on June 23, 1994.(1)
10.26 Warrant for 100,000 shares of Common Stock
transferred by ACMA Limited to Chiang Lam on
December 9, 1994.(1)
10.27 Warrant for 50,000 shares of Common Stock
issued by the Registrant to ACMA Limited on
January 25, 1995 between the Registrant and
Atmel Corporation.(1)
10.28 Warrant for 350,000 shares of Common Stock of
the Registrant transferred by ACMA Limited to
Atmel Corporation on May 1, 1995.(1)
10.29 Loan and Security Agreement between the
Registrant and Greyrock Business Credit dated
February 28, 1995.(1)
10.30 Amendment to Loan Documents between the
Registrant and Greyrock Business Credit dated
April 7, 1995.(1)
10.31 Amendment to Loan Documents between the
Registrant and Greyrock Business Credit dated
May 1, 1995.(1)
10.32 Form of Indemnification Agreement.(1)
Exhibit
Number Exhibit
------ -------
10.33 General Release and Covenant Not to Sue dated
May 24, 1995 between Anthony C. Langley and
the Registrant.(1)
10.34 Stock Purchase Agreement dated as of April 28,
1995 between the Registrant and Atmel
Corporation.(1)
10.35 Letter of Credit dated March 2, 1995 issued by
Royal Bank of Canada Singapore on behalf of
ACMA Limited in favor of Greyrock Business
Credit.(1)
10.36 Observation Rights Agreement dated June 16,
1995 between ACMA Limited and the
Registrant.(1)
10.37 Third Amendment to Office Building Lease
between Sobrato Development Companies #871, a
California limited partnership and the
Registrant dated December 21, 1995.(3)
10.38 Loan and Security Agreement dated February 9,
1996 between Bank of the West and the
Registrant.(3)
10.39 Loan and Security Agreement dated February 14,
1996 between the Registrant and the CIT
Group/Equipment Financing, Inc.(4)
10.40 Agreement of Purchase and Sale of Assets dated
as of November 7, 1996 between the Registrant
and Orbit Semiconductor, Inc. Exhibits to this
Agreement omitted from this report will be
furnished to the Securities and Exchange
Commission upon request.(6)
10.41 Wafer Manufacturing Agreement dated as of
November 7, 1996 between the Registrant and
Orbit Semiconductor, Inc.(6)
10.42 Promissory Note dated November 15, 1996 in the
aggregate principal amount of $4,800,000
issued by Orbit Semiconductor, Inc. to the
Registrant.(6)
10.43 Promissory Note dated November 15, 1996 in the
aggregate principal amount of $1,000,000
issued by Orbit Semiconductor, Inc. to the
Registrant.(6)
10.44 Office Building Lease Agreement dated December
26, 1996 between the Registrant, John
Arrillaga, Trustee, UTA dated 7/20/77 and
Richard T. Perry, Trustee, UTA dated 7/20/77.
10.45 Loan and Security Agreement dated October 25,
1996 between the Registrant and Greyrock
Business Credit.
10.46 Employee letter agreement dated May 23, 1996
between the Registrant and Hans Olsen.
Exhibit
Number Exhibit
------ -------
10.47 Employee letter agreement dated May 24, 1996
between the Registrant and Bruce Campbell.
10.48 Employee letter agreement dated May 23, 1996
between the Registrant and Gregory Roberts.
10.49 Executive Compensation Agreement dated August
26, 1996 between the Registrant and Michael
Gulett.
11.1 Computation of Net Income (Loss) Per Share.
23.1 Consent of Price Waterhouse LLP, Independent
Accountants.
27.1 Financial Data Schedule
- - --------------------
(1) Incorporated by reference to Registration Statement on Form S-1 (Reg.
No. 33-92390).
(2) Confidential treatment granted as to certain portions.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 2, 1996.
(7) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 6, 1997.
* Previously filed.