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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 of