-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MQsuWem0AvmhAu/y4JhFnbENq2ZQ67hsS4NAkbh2+k003bRSYzHulajXZX5nNLjn p0zNvPc67wzWFUWnaquzKg== 0000950005-97-000312.txt : 19970508 0000950005-97-000312.hdr.sgml : 19970508 ACCESSION NUMBER: 0000950005-97-000312 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970313 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARADIGM TECHNOLOGY INC /DE/ CENTRAL INDEX KEY: 0000945699 STANDARD INDUSTRIAL CLASSIFICATION: 3674 IRS NUMBER: 770140882 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26124 FILM NUMBER: 97555800 BUSINESS ADDRESS: STREET 1: 71 VISTA MONTANA CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089540500 MAIL ADDRESS: STREET 1: 71 VISTA MONTANA CITY: SAN JOSE STATE: CA ZIP: 95134 10-K 1 ANNUAL REPORT 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 - - ---------------------------------------- ---------- (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 ---- - - ---- 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 -i- 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 -1- 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. -2- 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 -3- 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. -4- 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 -5- 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 -6- 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 -7- 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 -8- 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 -9- 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. -19- (5) The period ended June 20, 1994 includes a $12,990 extraordinary gain resulting from the cancellation of liabilities in the Reorganization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of Notes to Financial Statements. (6) See Note 2 of Notes to Financial Statements for an explanation of the computation of net income (loss) per share. Per share data for the periods preceding the consummation of the Reorganization is not presented because it is not comparable to the similar information for the periods after the Reorganization. (7) The year ended December 31, 1996 includes charges of $4,632 resulting from the sale of the Company's wafer fabrication facility and $3,841 related to the Company's acquisition of NewLogic. See Note 13 and Note 8, respectively, of Notes to Financial Statements. (8) The Company sold its wafer fabrication facility in 1996. See Note 13 of Notes to Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Factors That May Affect Future Results." Overview Paradigm was founded in January 1987 and focused its initial development efforts primarily on high speed 256K and 1M SRAMs, producing its first prototype product in 1988. In July 1989 the Company began operating its wafer fabrication facility in San Jose, California and in April 1990 shipped its first commercial products, high speed 256K SRAMs. In July 1990 and October 1993, respectively, Paradigm began shipping 1M SRAMs and limited quantities of 4M SRAMs. On November 15, 1996, the Company sold its Fab to Orbit. See "Sale of Wafer Fabrication Facility." From its inception through its Reorganization in June 1994, the Company incurred substantial operating losses as it developed its technology and manufacturing processes. During this period, the Company incurred significant indebtedness to fund its operations, including capital expenditures associated with its wafer fabrication facility. This increasing indebtedness resulted in a significant increase in interest expense, which negatively impacted cash flow. In addition, the Company incurred operating losses due to manufacturing inefficiencies and a less than optimal sales mix that was comprised primarily of customers in lower margin markets. Specifically, prior to the Reorganization, many of the Company's suppliers temporarily suspended shipments or demanded payment in cash prior to delivery of products. In addition, due to the Company's urgent cash needs, it sold the majority of its high performance SRAM products into lower margin commodity markets, resulting in reduced sales and lower margins than would otherwise have been achievable. In January 1994 the Company concluded that it could not meet its debt obligations and began to develop a plan for restructuring its debt and capital structure. See "Chapter 11 Reorganization." Prior to the Reorganization, Paradigm's new management team adopted a strategy of focusing on emerging markets for higher performance asynchronous and synchronous SRAMs -20- and specialty products. This emphasis on the higher end of the SRAM market was facilitated by the Reorganization, which gave the Company the financial flexibility and time to target high- end markets for its high performance products. As a result of Paradigm's change in marketing strategy, the Company made a transition from a customer base composed largely of contract manufacturers to one increasingly represented by market leading product developers, resulting in increased sales to the Company's targeted markets in the telecommunications, networking, workstation, high performance PC and military/aerospace industries. Beginning in late 1995 and continuing into 1996 the Company has experienced significant decreases in average selling prices for certain products. Such price decreases have had an adverse effect on the Company's operating results. Accordingly, the Company's ability to maintain or increase revenues will be highly dependent upon its ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling prices will also adversely affect the Company's gross margins unless the Company is able to reduce its costs per unit to offset such declines. Chapter 11 Reorganization On February 23, 1994, the Company entered into a letter of intent with ACMA Limited ("ACMA") and a letter of intent with National Semiconductor Corporation ("National Semiconductor") to restructure its obligations and provide additional capital to the Company. On March 30, 1994 and pursuant to the ACMA letter of intent, the Company filed in the United States Bankruptcy Court for the Northern District of California (the "Court") a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On April 7, 1994, the Company filed its initial Plan of Reorganization with the Court. On May 24, 1994, after further negotiations between the Company and the Official Committee of Unsecured Creditors in its bankruptcy proceeding, the Company filed its Third Amended Joint Plan of Reorganization (the "Plan"). On June 7, 1994, the Court confirmed the Plan, which became effective on June 21, 1994. The Plan provided for the elimination of a significant portion of the Company's indebtedness and a significant reduction in its interest expense. At the time of filing of the Company's Chapter 11 proceeding, the Company's indebtedness, consisting of bank and other borrowings, capital lease obligations and trade payables, amounted to $33.9 million, and the Company had an accumulated deficit of $52.7 million. The Plan provided for a substantial restructuring of this indebtedness through reduction or elimination of certain amounts owed, based on the order of priority of claims in the Reorganization. Accordingly, bank borrowings and secured borrowings were repaid in full, capital lease obligations were restructured, and holders of trade payables and other unsecured borrowings received cash in the amount of 5% of allowed claims, promissory notes in the amount of 25% of allowed claims, and shares of Common Stock of the Company equal to 8.5% of the capital stock of the Company on a fully diluted basis. Under the Plan, the rights and interests of the Company's equity holders at that time were terminated. In addition, pursuant to letters of intent with the Company, ACMA and -21- National Semiconductor purchased shares of preferred stock of the Company for an aggregate purchase price of $6.0 million. See Note 3 of Notes to Financial Statements. In connection with the Reorganization, the Company's basis of accounting for financial reporting purposes changed, effective June 21, 1994, as follows: (i) the Company's assets and liabilities reflect a reorganization value generally approximating the fair value of the Company as a going concern on an unleveraged basis, (ii) the Company's accumulated deficit was eliminated, and (iii) the Company's capital structure was adjusted to reflect consummation of the Plan. Accordingly, the Company's results of operations after June 20, 1994 are not comparable to the results of operations prior to that date, and the results of operations for the periods from April 1, 1994 to June 20, 1994 and from June 21, 1994 to December 31, 1994 have not been aggregated. Further, the financial position of the Company on or after June 21, 1994 is not comparable to its financial position at any date prior thereto. See Note 4 of Notes to Financial Statements. Sale of Wafer Fabrication Facility In fiscal 1996 the Company adopted a strategy of having its products manufactured at outside foundries to provide greater flexibility and lower fixed costs. In that respect, on November 15, 1996, the Company sold its Fab to Orbit. Following the sale of the Fab, the Company and Orbit entered into a Wafer Manufacturing Agreement whereby Orbit will supply a quantity of wafers to the Company over a specified period of time. The Company is also in the process of seeking wafer supply from other offshore foundries, and anticipates that it will conduct business with other foundries by delivering written purchase orders specifying the particular product ordered, quantity, price, delivery date and shipping terms and, therefore, such foundries will not be obligated to supply products to the Company for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order. Reliance on outside foundries involves several risks, including constraints or delays in timely delivery of the Company's products, reduced control over delivery schedules, quality assurance, potential costs and loss of production due to seismic activity, weather conditions and other factors. To the extent a foundry terminates its relationship with the Company, or should the Company's supply from a foundry be interrupted or terminated for any other reason, the Company may not have a sufficient amount of time to replace the supply of products manufactured by the foundry. Should the Company be unable to obtain a sufficient supply of products to enable it to meet demand, it could be required to allocate supply of its products among its customers. Until recently, there has been a worldwide shortage of advanced process technology foundry capacity and there can be no assurance that the Company will obtain sufficient foundry capacity to meet customer demand in the future, particularly if that demand should increase. The Company is continuously evaluating potential new sources of supply. However, the qualification process and the product ramp-up for additional foundries could take longer than anticipated, and there can be no assurance that such sources will be able or willing to satisfy the Company's requirements on a timely basis or at acceptable quality or per unit prices. -22- Constraints or delays in the supply of the Company's products, whether because of capacity constraints, unexpected disruptions at the current or future foundries or assembly houses, delays in obtaining additional production at the existing foundry or in obtaining production from new foundries, shortages of raw materials, or other reasons, could result in the loss of customers and other material adverse effects on the Company's operating results, including effects that may result should the Company be forced to purchase products from higher cost foundries or pay expediting charges to obtain additional supply. The Company recorded a loss of $4.6 million in the quarter ended December 31, 1996 as a result of the sale of its wafer fabrication facility. This charge included the excess of the net book value of leasehold improvements, wafer fabrication equipment, fabrication work in process inventory and other assets sold to Orbit over the proceeds received from Orbit, an accrual for professional fees incurred to complete the transaction, a reserve for an adverse purchase commitment related to the wafer manufacturing agreement and accruals for other estimated costs to be incurred. See Note 13 of Notes to Financial Statements. Orbit paid to the Company aggregate consideration of $20,000,000 consisting of $6.7 million in cash, assumption of $7.5 million of indebtedness associated with and secured by the Fab, and promissory notes in the aggregate principal amounts of $5.8 million. The Company also executed a short-term sublease with Orbit pursuant to which it will occupy office space at its principal offices not associated with the Fab. The following table sets forth the total costs of $4.6 million recorded in 1996 related to the sale of the wafer fabrication facility (in thousands): Benefit (Charge) Recorded in 1996 ---------------- Sale proceeds.............................. $ 20,000 Less: Cost of inventory, fixed assets and other assets sold............... (21,480) --------- (1,480) Adverse purchase commitment................ (1,920) Professional fees.......................... (360) Lease buyout............................... (225) Other costs................................ (647) --------- Loss on sale............................... $ (4,632) ========= In connection with the sale of the Fab, substantially all of the 109 employees associated with the Fab were terminated and became employees of Orbit. No severance payments were made to employees transferred to Orbit. The Company also implemented a reduction in the work force of approximately 35 employees and took a charge of approximately $150,000 in the fourth quarter associated with severance payments and other related costs. -23- The following tables set forth certain unaudited statement of operations data for each of the eleven quarters in the period ended December 31, 1996, and such data expressed as a percentage of the Company's total revenues for the periods indicated. This data has been derived from unaudited financial statements that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information and have been prepared on the same basis as the audited financial statements. Such statement of operations data should be read in conjunction with the Company's audited financial statements and notes thereto. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period. See "Factors That May Affect Future Results--Fluctuations in Quarterly Results."
Quarterly Financial Data (in thousands) (Unaudited) Post-Reorganization --------------------------------------------------------- Three-Month Period Ended Year -------------------------------------------- Ended March 31, June 30, Sept. 30, Dec. 31, Dec. 31, 1996 1996 1996 1996 1996 -------- -------- -------- -------- -------- Sales, net ................................... $ [ $ 4,002 $ 5,191 $ 3,082 $ 23,202 Cost of goods sold ........................... 7,275 13,994 8,501 6,594 36,364 -------- -------- -------- -------- -------- Gross profit (loss) ........................ 3,652 (9,992) (3,310) (3,512) (13,162) -------- -------- -------- -------- -------- Operating expenses: Research and development ................... 1,316 1,623 1,657 1,647 6,243 Selling, general and administrative ........ 1,940 2,318 2,523 2,716 9,497 Loss on sale of wafer fabrication facility ... -- -- -- 4,632 4,632 Write-off of in-process technology acquired .. -- 3,841 -- -- 3,841 -------- -------- -------- -------- -------- Total operating expenses ............... 3,256 7,782 4,180 8,995 24,213 -------- -------- -------- -------- -------- Operating income (loss) ...................... 396 (17,774) (7,490) (12,507) (37,375) Interest expense ............................. 241 364 305 211 1,121 Other income, net ............................ (204) (199) (515) (28) (946) -------- -------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes ............................... 359 (17,939) (7,280) (12,690) (37,550) Provision (benefit) for income taxes ......... 122 (1,247) -- -- (1,125) -------- -------- -------- -------- -------- Net income (loss) ............................ $ 237 $(16,692) $ (7,280) $(12,690) $(36,425) ======== ======== ======== ======== ========
Post-Reorganization --------------------------------------------------------- Three-Month Period Ended Year -------------------------------------------- Ended March 31, June 30, Sept. 30, Dec. 31, Dec. 31, 1996 1996 1996 1996 1996 -------- -------- -------- -------- -------- Sales, net.................................... 100% 100% 100% 100% 100% Cost of goods sold ........................... 67 350 164 214 157 ---- ---- ---- ---- ---- Gross profit (loss) ........................ 33 (250) (64) (114) (57) ---- ---- ---- ---- ---- Operating expenses: Research and development.................... 12 40 32 54 27 Selling, general and administrative......... 18 58 48 88 41 Loss on sale of wafer fabrication facility ... -- -- -- 150 20 Write-off of in-process technology acquired .. -- 96 -- -- 16 ---- ---- ---- ---- ---- Total operating expenses................ 30 194 80 292 104 ---- ---- ---- ---- ---- Operating income (loss) ...................... 3 (444) (144) (406) (161) Interest expense ............................. 2 9 6 7 5 Other income, net ............................ (2) (5) (10) (1) (4) ---- ---- ---- ---- ---- Income (loss) before provision (benefit) for income taxes................................ 3 (448) (140) (412) (162) Provision (benefit) for income taxes ......... 1 (31) -- -- (5) ---- ---- ---- ---- ---- Net income (loss) ............................ 2% (417)% (140)% (412)% (157)% ==== ==== ==== ==== ====
-24-
Quarterly Financial Data (in thousands) (Unaudited) Post-Reorganization --------------------------------------------------------- Three-Month Period Ended Year -------------------------------------------- Ended March 31, June 30, Sept. 30, Dec. 31, Dec. 31, 1995 1995 1995 1995 1995 -------- -------- -------- -------- -------- Sales, net ................... $ 10,837 $ 12,077 $ 14,003 $ 15,006 $ 51,923 Cost of goods sold ........... 6,584 7,244 8,328 8,877 31,033 -------- -------- -------- -------- -------- Gross profit ............... 4,253 4,833 5,675 6,129 20,890 -------- -------- -------- -------- -------- Operating expenses: Research and development ... 891 1,213 1,263 1,254 4,621 Selling, general and administrative ......... 1,914 1,971 2,049 2,173 8,107 -------- -------- -------- -------- -------- Total operating expenses 2,805 3,184 3,312 3,427 12,728 -------- -------- -------- -------- -------- Operating income ............. 1,448 1,649 2,363 2,702 8,162 Interest expense ............. 382 398 326 263 1,369 Other income, net ............ (32) (3) (295) (285) (615) -------- -------- -------- -------- -------- Income before provision for income taxes ............... 1,098 1,254 2,332 2,724 7,408 Provision for income taxes ... -- 427 792 926 2,145 -------- -------- -------- -------- -------- Net income ................... $ 1,098 $ 827 $ 1,540 $ 1,798 $ 5,263 ======== ======== ======== ======== ========
Post-Reorganization --------------------------------------------------------- Three-Month Period Ended Year -------------------------------------------- Ended March 31, June 30, Sept. 30, Dec. 31, Dec. 31, 1995 1995 1995 1995 1995 -------- -------- -------- -------- -------- Sales, net.............................. 100% 100% 100% 100% 100% Cost of goods sold ..................... 61 60 59 59 60 --- --- --- --- --- Gross profit.......................... 39 40 41 41 40 --- --- --- --- --- Operating expenses: Research and development.............. 8 10 9 8 9 Selling, general and administrative.................... 18 16 15 15 15 --- --- --- --- --- Total operating expenses.......... 26 26 24 23 24 --- --- --- --- --- Operating income........................ 13 14 17 18 16 Interest expense....................... 3 3 2 2 3 Other income, net....................... -- -- (2) (2) (1) --- --- --- --- --- Income before provision for income taxes.......................... 10 11 17 18 14 Provision for income taxes.............. -- 4 6 6 4 --- --- --- --- --- Net income.............................. 10% 7% 11% 12% 10% === === === === ===
-25- Quarterly Financial Data (in thousands) (Unaudited) Pre-Reorganization Post-Reorganization ------------------ ------------------- Three Month Period Ended ---------------------------------------- June 20, Sept. 30, Dec. 31, 1994(1) 1994(1) 1994 -------- -------- --------- Sales, net ............................ $ 6,033 $ 9,684 $ 10,006 Cost of goods sold .................... 5,895 6,574 6,307 -------- -------- -------- Gross profit ........................ 138 3,110 3,699 -------- -------- -------- Operating expenses: Research and development ............ 1,192 1,028 892 Selling, general and administrative . 1,191 1,433 1,571 -------- -------- -------- Total operating expenses ......... 2,383 2,461 2,463 -------- -------- -------- Operating income (loss) ............... (2,245) 649 1,236 Interest expense ...................... 518 383 338 Other income, net ..................... (17) (2) (42) -------- -------- -------- Income (loss) before extraordinary gain and provision for income taxes ...... (2,746) 268 940 Extraordinary gain .................... 12,990 -- -- Provision for income taxes ............ -- -- -- -------- -------- -------- Net income ............................ $ 10,244 $ 268 $ 940 ======== ======== ======== Pre-Reorganization Post-Reorganization ------------------ ------------------- Three Month Period Ended ---------------------------------------- June 20, Sept. 30, Dec. 31, 1994(1) 1994(1) 1994 -------- -------- --------- Sales, net............................. 100% 100% 100% Cost of goods sold..................... 98 68 63 --- -- -- Gross profit......................... 2 32 37 --- -- -- Operating expenses: Research and development............. 20 10 9 Selling, general and administrative.. 19 15 16 --- -- -- Total operating expenses.......... 39 25 25 --- -- -- Operating income (loss)................ (37) 7 12 Interest expense....................... 9 4 3 Other income, net...................... -- -- -- --- -- -- Income (loss) before extraordinary gain and provision for income taxes....... (46) 3 9 Extraordinary gain..................... 215 -- -- Provision for income taxes............. -- -- -- --- -- -- Net income............................. 169% 3% 9% === === == - - ---------- (1) The period ended June 20, 1994 had ten fewer days than the normal second quarter period and the period ended September 30, 1994 had ten more days than the normal third quarter period. -26- Comparison of Results of Operations for the Year Ended December 31, 1996 to the Year Ended December 31, 1995 Sales Sales decreased by 55% to $23.2 million in the year ended December 31, 1996 from $51.9 million in the year ended December 31, 1995. The Company experienced a significant downward trend in pricing during 1996 that was caused by an excess supply relative to demand for certain SRAM devices. The Company expects this downward price trend to continue. In addition, the Company shipped lower volumes of units in 1996 compared to 1995. Unit shipments declined 48% from 1995 to 1996. The SRAM business is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity, and accelerated erosion of average selling prices. Gross Profit Gross profit decreased from $20.9 million in the year ended December 31, 1995 to a loss of $(13.2) million in the year ended December 31, 1996 and, as a percentage of sales, from 40% to (57)%, respectively. The decrease in gross profit resulted principally from industry-wide pricing pressures experienced by the Company in 1996 caused by an oversupply in the SRAM marketplace. These pricing pressures directly impacted profits as average selling prices for the Company's products declined during the year ended December 31, 1996 when compared to 1995. In addition, during 1996 the Company provided lower of cost or market provisions of $2,475,000 and write-offs of $3,325,000 related to older generation SRAM products to reflect reduced product demand and current industry pricing trends. Gross profit for future periods may be affected by an agreement between the Company and Atmel, pursuant to which Atmel has agreed to sell to the Company, at predetermined prices, a committed quantity of sub-micron wafers for five years, beginning in 1996, and by an agreement between the Company and NKK pursuant to which NKK has agreed to supply the Company with a significant quantity of 1M SRAMs of Paradigm's design each month for a three year period. The Company is not obligated to make any purchases under the agreements with Atmel and NKK. To the extent that market prices for 1M SRAM sub-micron wafers are higher than the prices payable to Atmel or NKK under these agreements, the Company's gross profit would tend to be higher than if the Company were to purchase sub-micron wafers or 1M SRAMs at market prices. The Company's conversion of its internal fabrication facility from five-inch to six-inch wafer manufacturing was completed in 1996 and caused temporary declines in output and reductions in yield. This facility was sold in November 1996 to provide the Company increased flexibility and lower fixed costs. -27- Research and Development Research and development expenses increased by 35% to $6.2 million in the year ended December 31, 1996, from $4.6 million in the year ended December 31, 1995. As a percentage of sales, research and development expenses have increased from 9% in 1995 to 27% in 1996. Increased expenses result primarily from increased headcount required to support the Company's co-development activities with Atmel, new product development and other development activities. In addition, research and development expenses increased in 1996 as a result of the Company's acquisition of NewLogic in June 1996. Research and development expenses, as a percentage of revenue, have also increased as a result of the decline in revenue in 1996 compared to 1995. In June 1996, the Company acquired NewLogic with the strategy to expand Paradigm's product line beyond SRAMs. In early 1997, the Company believed that it was in Paradigm's best interest to shut down the NewLogic operation and focus on Paradigm's core SRAM products and markets. Selling, General and Administrative Selling, general and administrative expenses increased by 17% to $9.5 million in the year ended December 31, 1996 from $8.1 million in the year ended December 31, 1995. Selling, general and administrative expenses include approximately $1.4 million in bad debt expense in 1996 compared to $.1 million in 1995 due to financial problems at several of the Company's customers. Other Operating Expenses The Company recorded a loss of $4.6 million in the quarter ended December 31, 1996 as a result of the sale of its wafer fabrication facility. This charge included the excess of the net book value of leasehold improvements, wafer fabrication equipment, fabrication work in process inventory and other assets sold to Orbit over the proceeds received from Orbit, an accrual for professional fees incurred to complete the transaction, a reserve for an adverse purchase commitment related to the wafer manufacturing agreement and accruals for other estimated costs to be incurred. In June 1996, the Company acquired, through a stock purchase and merger transaction, NewLogic, a company which develops and manufactures logic designs with large memory arrays. In exchange for its purchase of the NewLogic capital stock, the Company issued 314,394 shares of the Company's common stock, with a market value of approximately $2,656,000, and approximately $825,000 in cash. In addition, the Company incurred transaction costs of approximately $237,000. The fair value of NewLogic's tangible net assets at the date of acquisition was a deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of the fair market value of the net tangible assets was allocated to in-process technology which the Company wrote off in the quarter ended June 30, 1996. Approximately $250,000 -28- was allocated to other intangibles. The unamortized balance of these other intangibles was written off in connection of the shutdown of NewLogic in early 1997. Interest Expense Interest expense decreased to $1.1 million in the year ended December 31, 1996, from $1.4 million in the year ended December 31, 1995. This decrease in interest expense reflects repayment of certain outstanding debt by the Company from the proceeds of its initial public offering, which was subsequently replaced in 1996 with new debt at lower interest rates. See "Liquidity and Capital Resources". Other Income, Net For the years ended December 31, 1996 and December 31, 1995, other income, net, reflects interest income earned on the investment of the net proceeds to the Company from its initial public offering. In addition, other income in 1996 includes a gain on the sale of fixed assets of $.5 million. Taxes The Company has a tax year that ends in March. The Company's tax provision for the resultant nine month tax period ended December 31, 1995 reflected the statutory rate reduced by net operating loss benefits and other credits. The amount of net operating loss the Company may utilize in any year is limited due to the change of ownership which occurred as a result of the Reorganization. The Company incurred a net loss for its tax year ended March 31, 1995 and thus no provision has been reflected in the quarters in the period from the reorganization through March 31, 1995. In 1996 the Company's effective tax rate was (3%) which reflects the benefit of the statutory rate of the operating loss reduced by tax losses not recognized due to the uncertainty of realizing the benefit of these losses. Comparison of Results of Operations for the Six Post-Reorganization Quarters Ended December 31, 1995 Sales Sales increased by 55% to $15.0 million in the quarter December 31, 1995, from $9.7 million in the quarter ended September 30, 1994. The increase in sales over these post- Reorganization quarters was principally a result of strong market demand, as well as increased product availability, and increased average selling prices for the Company's high performance asynchronous and new synchronous SRAM products. The SRAM business is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity, and accelerated erosion of average selling prices. During the latter part of 1995, -29- the market for certain SRAM devices experienced an excess supply relative to demand which resulted in a significant downward trend in prices. Gross Profit Gross profit increased from $3.1 million in the quarter ended September 30, 1994 to $6.1 million in the quarter ended December 31, 1995, and , as a percentage of sales, from 32% to 41%, respectively. The improvement reflected increased productivity as a result of improved capacity utilization and associated manufacturing efficiencies, higher yields, and increased average selling prices on many of the Company's SRAM products. Research and Development Research and Development expenses increased by 22% to $1.3 million in the quarter ended December 31, 1995, from $1.0 million in the quarter ended September 30, 1994. As a percentage of sales, research and development expenses have been relatively constant over the same period. Research and development expenses during the six post-Reorganization quarters ended December 31, 1995 have totaled approximately $6.5 million. Selling, General and Administrative Selling, general and administrative expenses increased by 52% to $2.2 million in the quarter ended December 31, 1995 from $1.4 million in the quarter ended September 30, 1994. As a percentage of sales, these expenses have been relatively constant except for the March 1995 quarter which reflected nonrecurring costs associated with establishing the Company's strategic relationship with Atmel and negotiating its agreements with NKK. Interest Expense Interest expense decreased to $0.3 million in the quarter ended December 31, 1995, from $0.4 million in the quarter ended September 30, 1994. This decrease in interest expense reflects repayment of certain debt by the Company from the proceeds of its initial public offering. Other Income, Net For the quarters ended September 30, 1995 and December 31, 1995, other income, net, reflects interest income earned on the investment of the net process to the Company from its initial public offering. Taxes The Company has a tax year that ends in March. The Company's tax provision for the resultant nine month tax period ended December 31, 1995 reflected the statutory rate reduced by net operating loss benefits and other credits. The amount of net operating loss the Company may utilize in any year is limited due to the change of ownership which occurred as a result -30- of the Reorganization. The Company incurred a net loss for its tax year ended March 31, 1995 and thus no provision has been reflected in the quarters in the period from the reorganization through March 31, 1995. Results of Operations for the Pre-Reorganization Quarter Ended June 20, 1994 Operating Results Sales of $6.0 million in the quarter ended June 20, 1994, reflects the Company's low productivity and sales volumes as a result of inefficiencies related to cash unavailability in the quarters leading up to the Reorganization. Gross margin during the Pre-Reorganization quarter reflects sales of the Company's high performance 256K SRAMS to commodity markets and increased supplier costs and manufacturing inefficiencies. Sales of the Company's products into these commodity markets were attributable to the Company's urgent cash needs and resulted in reduced sales and lower margins than would otherwise have been achievable. Interest expense is attributable to the Company's substantial indebtedness. Extraordinary Gain The $13.0 million of extraordinary gain for the June 20, 1994 quarter reflects cancellation of indebtedness associated with the Reorganization. See Notes 3 and 4 of Notes to Financial Statements. Taxes The Company has not reflected an income tax benefit for this pre-reorganization quarter since realization of the net operating loss benefits was not assured. Liquidity and Capital Resources During the year ended December 31, 1996, the Company's operating, investing and financing activities used $3.4 million of cash, compared to generating cash of $3.9 million during the year ended December 31, 1995. The Company's operating, investing and financing activities, including commitments relating to the Reorganization, used $5.8 million of cash in the period from June 21, 1994 to December 31, 1994. Prior to the Reorganization, the Company's operating, investing and financing activities generated $5.9 million of cash during the period from April 1, 1994 to June 20, 1994, which was mainly attributable to the sale of preferred stock to ACMA ($5.0 million) and National Semiconductor ($1.0 million). During the year ended December 31, 1996, $15.6 million of cash was used in operations compared to $8.1 million of cash that was generated from operations in 1995, and compared to a use of $1.8 million of cash in operations during the period from June 21, 1994 to December 31, 1994 (in each case, before Reorganization items). The $15.6 million of cash used by operations during the year ended December 31, 1996, was mainly attributable to the -31- net loss for the year of $36.4 million and a reduction in other liabilities of $3.7 million offset by non-cash charges of $5.7 million for depreciation and amortization, the write-off of inprocess technology associated with the NewLogic acquisition of $3.8 million, a loss of $4.6 million on the sale of the Company's wafer fabrication facility and a reduction of $6.1 million in accounts receivable that reflects the lower sales volume in 1996 compared to 1995. The $8.1 million of cash generated from operations during the year ended December 31, 1995 was mainly attributable to the net profit for the year of $5.3 million and an increase in accounts payable ($3.5 million) as the Company re-established its relationships with suppliers subsequent to the Reorganization and other liabilities ($3.0 million, primarily income taxes payable). In addition, an increase of $5.7 million in accounts receivable was offset by non-cash charges of $5.1 million for depreciation and amortization. Upon the Reorganization on June 21, 1994, the Company had $6.0 million in cash, which was used during the period immediately following the Reorganization principally to pay off a substantial portion of the pre-petition liabilities ($3.0 million) and build the Company's inventory ($1.2 million). In addition, accounts receivable increased by $1.1 million as the Company's level of sales increased after the Reorganization. Negative cash flow from operations during the period from June 21, 1994 to December 31, 1994 was partially offset by net income of $1.2 million and non-cash charges of $2.8 million for depreciation and amortization. Investing activities generated $9.7 million in 1996 compared to a use of $30.8 million in 1995. The sale of $19.9 million of short-term investments funded the Company's conversion of its wafer fabrication facility to 6" wafers ($14.0 million). In 1995, $18.7 million of short-term investments were purchased from the net proceeds of the Company's initial public offering in June of 1995. In addition, $13.7 million was used to convert the wafer fabrication facility to 6" wafers and expand the Company's test floor. After the Reorganization and prior to the Company's initial public offering, the Company financed its operations and capital requirements primarily with cash contributed by ACMA and National Semiconductor in the Reorganization. Cash used by financing activities amounted to $2.3 million during the period from June 21, 1994 to December 31, 1994, principally due to payments on capital leases ($2.0 million) and on notes payable ($.5 million). Cash provided by financing activities during the year ended December 31, 1995 amounted to $26.8 million and is mainly attributable to the Company's initial public offering on June 28, 1995, which provided net proceeds to the Company of approximately $28.3 million, and issuance of notes payable ($9.3 million), partially offset by payments on capital leases ($7.7 million) and the decrease in the line of credit ($4.6 million). In addition, in April 1995 the Company sold a total of 425,000 shares of Common Stock to Atmel for an equity investment of $3.4 million. Cash generated from Financing activities amounted to $2.5 million in 1996 and results primarily from an increase of $2.0 in borrowings from the Company's line of credit and the issuance of $11.3 of notes payable offset by $11.6 million of payments made on notes payable. At December 31, 1995, the Company had outstanding borrowings of $7.6 million related to three term notes under a credit facility with Greyrock Business Credit with a credit limit of $16.75 million. Under the agreement borrowings were limited to 80% of eligible accounts -32- receivable (not to exceed $8.0 million), plus the aggregate amount outstanding under certain term loans, plus $2.5 million until May 15, 1995 and $1.5 million thereafter. In February 1996 the Company replaced the existing line of credit with Greyrock Business Credit with a line of credit from Bank of the West with a borrowing limit of $10.0 million. Borrowings were limited to 80% of eligible receivables and interest was at prime. The line of credit was secured by accounts receivable. On February 27, 1996 the Company borrowed $5.6 million to pay off the outstanding balance of the Greyrock term notes. In addition to the Bank of the West line of credit, the Company obtained a line of credit for equipment purchases from the CIT Group. The aggregate principal amount of all loans under this commitment could not exceed $15,000,000 and the commitment expired on December 30, 1996. Borrowings under this line of credit bore interest at the U.S. Treasury rate for two year maturities plus 2.96% and were limited to 80% of the cost of eligible equipment. All borrowings under this commitment were secured by the equipment purchased. In November 1996, the Company replaced the Bank of the West line of credit with a new line of credit from Greyrock Business Credit with a borrowing limit of $6,000,000 of which $513,000 was available at December 31, 1996. Borrowings under this line of credit are limited to up to 80% of eligible receivables and interest is at the greater of LIBOR plus 5.25% or 9%. At December 31, 1996 the outstanding balance under this line of credit was $2.0 million. In November 1996 the Company sold its wafer fabrication operations to Orbit. Orbit assumed $7.5 million of outstanding borrowings with the CIT Group that were secured by wafer fabrication equipment that was purchased. The Company used approximately $2.2 million of the cash proceeds from the sale of the wafer fabrication facility to pay off the remaining CIT Group borrowings. The Company's recent operations have consumed substantial amounts of cash. In January 1997, the Company completed the private placement of Series A Convertible Preferred Stock for net proceeds of approximately $1,880,000 (See Note 15 of Notes to Financial Statements). The Company believes that this cash infusion together with existing cash balances and other sources of liquidity, such as asset sales and equipment financing will be sufficient to meet the Company's projected working capital and other cash requirements through at least the end of 1997. If the cash generated from operations is insufficient to meet the Company's cash requirements, the sale of additional equity or other securities could result in additional dilution to the Company's stockholders. There can be no assurance that such additional financing, if required, can be obtained on acceptable terms, if at all. -33- Litigation On August 12, 1996, a securities class action lawsuit was filed in Santa Clara Superior Court against the Company and certain of its officers and directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists of purchasers of the Company's common stock from November 20, 1995 to March 22, 1996, inclusive. The complaint alleges negligent misrepresentation, fraud and deceit, breach of fiduciary duty, and violations of certain provisions of the California Corporate Securities Law and Civil Code. The plaintiffs seek an unspecified amount of compensatory and punitive damages. Plaintiffs allege, among other things, that the Paradigm Defendants wrongfully represented that the Company would have protection against adverse market conditions in the semiconductor market based on the Company's focus on high speed, high performance semiconductor products. The Paradigm Defendants intend to vigorously defend the action. On September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer as to all of the causes of action except for violation of certain provisions of the California Corporate Securities Law and Civil Code. The Court, however, granted plaintiffs leave to amend the complaint to attempt to cure the defects which caused the Court to sustain the demurrer. Plaintiffs failed to amend within the allotted time and independently expressed an intent to prosecute only the fourth cause of action. On January 8, 1997, the Paradigm Defendants filed an answer to the complaint denying any liability for the acts and damages alleged by the plaintiffs. Plaintiffs have served the Paradigm Defendants with a first set of requests to produce documents, to which the Paradigm Defendants are currently responding. Plaintiffs have also filed a motion for class certification which is set for hearing on April 15, 1997. No other motions have been filed with the court by plaintiffs or defendants, and no discovery has yet been conducted. There can be no assurance that the Company will be successful in such defense. Even if Paradigm is successful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claim, the Company's business, operating results and cash flows could be materially adversely affected. On February 21, 1997, an additional purported class action, with causes of action and factual allegations essentially identical to those of the August 12, 1996 class action lawsuit, was filed. This second class action is asserted against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. None of the Paradigm Defendants have been served in this new action. The Paradigm Defendants believe because the new action appears redundant it is subject to the demurrer which the Court sustained in the first class action as to all causes of action asserted against Michael Gulett and all but one of the causes of action asserted against the remaining Paradigm Defendants. The Company is involved in various other litigation and potential claims which management believes, based on facts presently known, will not have a material adverse effect on the results of operations, existing sources of liquidity or the financial position of the Company. -34- Factors Affecting Future Results The Company's operating results have been, and in the future may be, subject to fluctuations due to a wide variety of factors, including the timing of new product and process technology, announcements and introductions by the Company or its competitors, competitive pricing pressures, fluctuations in manufacturing yields, changes in the mix of products sold, availability and costs of raw materials, industry-wide shifts in the supply of and demand for SRAMs, intellectual property disputes and litigation, and other risks, including risks disclosed in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. There can be no assurance that the Company will be able to effectively compete in the future against existing or potential competitors or that the Company's operating results or financial condition will not be adversely affected by increased price competition. The semiconductor industry is highly cyclical and has been subject to significant downturns at various times and by diminished product demand, production overcapacity and accelerated erosion of average selling prices. During 1996, the Company experienced, and expects it will continue to experience, significant decreases in selling prices for its SRAM products. Such price decreases could have a material adverse effect on the Company's operating results. -35- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Accountants To the Board of Directors and Stockholders of Paradigm Technology, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the pre-reorganization results of its operations and its cash flows for the period from April 1, 1994 to June 20, 1994 and the post-reorganization financial position of Paradigm Technology, Inc. at December 31, 1995 and 1996 and the post-reorganization results of its operations and its cash flows for the period from June 21, 1994 to December 31, 1994 and for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 3 to the financial statements, on June 21, 1994, the Company's Third Amended Joint Plan of Reorganization was consummated. As of that date, the Company adopted "fresh-start" reporting to account for the reorganization, as set forth in Note 4 to the financial statements. Accordingly, the financial statements for periods subsequent to the reorganization have been prepared using a different basis of accounting and are, therefore, not comparable to the pre-reorganization financial statements. Price Waterhouse LLP San Jose, California January 23, 1997, except as to the second paragraph of Note 14, which is as of February 21, 1997. -36- Balance Sheets (in thousands except per share amounts) December 31, ------------ 1995 1996 -------- --------- ASSETS: Current assets: Cash and cash equivalents ........................... $ 4,015 $ 587 Short-term investments .............................. 17,198 -- Accounts receivable, net of allowances of $675 and $1,569 ...................................... 10,085 2,800 Accounts receivable, related party .................. 339 137 Inventory ........................................... 5,702 2,472 Prepaid expenses and other .......................... 1,883 4,918 -------- -------- Total current assets ............................ 39,222 10,914 Property and equipment, net ......................... 17,331 6,638 Other assets ........................................ 179 190 -------- -------- $ 56,732 $ 17,742 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Line of credit ...................................... $ -- $ 2,015 Pre-petition liabilities ............................ 34 -- Accounts payable .................................... 2,855 6,103 Accounts payable, related party ..................... 1,319 140 Accrued expenses and other liabilities .............. 5,103 2,766 Current portion of debt obligations ................. 3,287 282 -------- -------- Total current liabilities ....................... 12,598 11,306 Debt obligations, net of current portion ............ 4,349 92 Deferred rent ....................................... 436 -- -------- -------- Total liabilities ............................... 17,383 11,398 -------- -------- Commitments and contingencies (Notes 7, 12 and 13) Stockholders' equity: Preferred stock, $.01 par value; 5,000 shares authorized, no shares issued and outstanding .... -- -- Common stock, $0.01 par value; 25,000 shares authorized; 6,599 and 7,225 shares issued and outstanding ..................................... 66 72 Additional paid-in capital .......................... 32,812 36,226 Retained earnings (accumulated deficit) ............. 6,471 (29,954) -------- -------- Total stockholders' equity ...................... 39,349 6,344 -------- -------- $ 56,732 $ 17,742 ======== ======== The accompanying notes are an integral part of these financial statements. -37- Statements of Operations (in thousands except per share amounts)
Pre-Reorganization Post-Reorganization ------------------ ------------------------------------------ Period from Period from April 1 to June 21 to Year Ended Year Ended June 20, December 31, December 31, December 31, 1994 1994 1995 1996 ------------------ ------------ ------------ ------------ Sales, net ................... $ 6,033 $ 19,690 $ 51,923 $ 23,202 Cost of goods sold ........... 5,895 12,881 31,033 36,364 -------- -------- -------- -------- Gross profit (loss) .......... 138 6,809 20,890 (13,162) -------- -------- -------- -------- Operating expenses: Research and development ... 1,192 1,920 4,621 6,243 Selling, general and administrative ........... 1,191 3,004 8,107 9,497 Loss on sale of wafer fabrication facility (Note 13) ................ -- -- -- 4,632 Write-off of in-process technology acquired (Note 8) ................. -- -- -- 3,841 -------- -------- -------- -------- Total operating expenses . 2,383 4,924 12,728 24,213 -------- -------- -------- -------- Operating income (loss) ...... (2,245) 1,885 8,162 (37,375) Interest expense ............. 518 721 1,369 1,121 Other income, net ............ (17) (44) (615) (946) -------- -------- -------- -------- Income (loss) before extra- ordinary gain and provision (benefit)for income taxes .. (2,746) 1,208 7,408 (37,550) Extraordinary gain ........... 12,990 -- -- -- Provision (benefit) for income taxes ...................... -- -- 2,145 (1,125) -------- -------- -------- -------- Net income (loss) ............ $ 10,244 $ 1,208 $ 5,263 $(36,425) ======== ======== ======== ======== Net income (loss) per share (Note 2).................... $ 0.23 $ 0.83 $ (5.16) -------- -------- -------- Weighted average common and common equivalent shares outstanding (Note 2). 5,355 6,314 7,060 -------- -------- -------- The accompanying notes are an integral part of these financial statements.
-38- Statements of Stockholders' Equity (Deficit) (in thousands)
Retained Preferred Stock Common Stock Additional Earnings ------------------------ ------------------------ Paid In (Accumulated Shares Amount Shares Amount Capital Deficit) Total -------- -------- -------- -------- -------- -------- -------- Balance, March 31, 1994 ........ -- $ -- 10,393 $ 5,376 -- $(54,864) $(49,488) Net loss ....................... -- -- -- -- -- (2,746) (2,746) -------- -------- -------- -------- -------- -------- -------- Balance, June 20, 1994 pre- reorganization ............... -- -- 10,393 5,376 -- (57,610) (52,234) Adjustments for reorganization: Extraordinary gain on debt ... -- -- -- -- -- 12,990 12,990 Fresh start reporting adjustments ................ -- -- (10,393) (5,376) -- 44,620 39,244 Issuance of new stock ........ 6,400 960 550 165 -- -- 1,125 -------- -------- -------- -------- -------- -------- -------- Balance, June 21, 1994 post- reorganization ............... 6,400 960 550 165 -- -- 1,125 Stock options exercised ........ -- -- 39 12 -- -- 12 Net income ..................... -- -- -- -- -- 1,208 1,208 -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1994 ..... 6,400 960 589 177 -- 1,208 2,345 Reincorporation in Delaware (Note 1) ..................... -- -- -- (171) 171 -- -- Initial public offering of common stock, net of costs .......... -- -- 2,300 23 28,281 -- 28,304 Conversion of preferred stock to common stock ................. (6,400) (960) 3,200 32 928 -- -- Issuance of stock pursuant to Atmel agreement (Note 6) ..... -- -- 425 4 3,396 -- 3,400 Stock options exercised ........ -- -- 85 1 36 -- 37 Net income ..................... -- -- -- -- -- 5,263 5,263 -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1995 ..... -- -- 6,599 66 32,812 6,471 39,349 Issuance of common stock to acquire NewLogic (Note 8) .... -- -- 314 3 2,653 -- 2,656 Issuance of common stock under employee stock plans ......... -- -- 312 3 761 -- 764 Net loss ....................... -- -- -- -- -- (36,425) (36,425) -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1996 ..... -- $ -- 7,225 $ 72 $ 36,226 $(29,954) $ 6,344 ======== ======== ======== ======== ======== ======== ======== The accompanying notes are an integral part of these financial statements.
-39- Statements of Cash Flows (in thousands)
Pre-Reorganization Post-Reorganization ------------------- -------------------------------------------- Period from Period from April 1 to June 21 to Year Ended Year Ended June 20, December 31, December 31, December 31, ---------- ------------ ----------- ------------ 1994 1994 1995 1996 -------- -------- -------- -------- Cash flows from operating activities: Net income (loss) ............................................. $ 10,244 $ 1,208 $ 5,263 $(36,425) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization .............................. 1,503 2,777 5,141 5,716 Provision for doubtful accounts ............................ 115 -- 90 1,372 Extraordinary gain ......................................... (12,990) -- -- -- Loss on sale of wafer fabrication facility ................. -- -- -- 4,632 Write off in-process technology ............................ -- -- -- 3,841 Gain on sale of fixed assets ............................... -- -- -- (532) Changes in operating assets and liabilities: Accounts receivable ........................................ (59) (1,077) (5,680) 6,115 Inventory .................................................. (520) (1,190) (814) 1,430 Other assets ............................................... 284 (356) (1,361) (48) Accounts payable ........................................... (63) (47) 3,475 2,023 Pre-petition liabilities paid .............................. -- (2,981) (1,007) (34) Other liabilities .......................................... 868 (168) 3,012 (3,723) -------- -------- -------- -------- Net cash provided by (used in) operating activities before reorganization items paid ........................... (618) (1,834) 8,119 (15,633) Reorganization items paid .................................. (175) (889) (189) -- -------- -------- -------- -------- Net cash provided by (used in) operating activities ..... (793) (2,723) 7,930 (15,633) -------- -------- -------- -------- Cash flows used in investing activities: Purchases of property and equipment ........................... (263) (827) (13,609) (13,985) Purchase of short-term investments ............................ -- -- (18,689) (2,672) Sale of short-term investments ................................ -- -- 1,491 19,870 Sale of fixed assets .......................................... -- -- -- 549 Proceeds from sale of wafer fabrication facility............... -- -- -- 6,665 Acquisition of NewLogic, net of cash acquired ................. -- -- -- (723) -------- -------- -------- -------- Net cash provided by (used) by investing activities ........ (263) (827) (30,807) 9,704 -------- -------- -------- -------- Cash flows from financing activities: Line of credit increase (decrease) ............................ 973 171 (4,623) 2,015 Payments on capital leases .................................... -- (2,012) (7,747) -- Issuance of notes payable ..................................... -- -- 9,300 11,339 Principal payments on notes payable ........................... -- (455) (1,914) (11,601) Issuance of common stock ...................................... -- 12 31,741 748 Issuance of preferred stock ................................... 6,000 -- -- -- -------- -------- -------- -------- Net cash provided by (used by) financing activities ........ 6,973 (2,284) 26,757 2,501 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents .............................................. 5,917 (5,834) 3,880 (3,428) Cash and cash equivalents: Beginning of period ........................................... 52 5,969 135 4,015 -------- -------- -------- -------- End of period ................................................. $ 5,969 $ 135 $ 4,015 $ 587 ======== ======== ======== ======== Supplemental information: Interest paid ................................................. $ 266 $ 1,060 $ 1,335 $ 1,291 -------- -------- -------- -------- Income taxes paid ............................................. $ -- $ -- $ 348 $ 1,067 -------- -------- -------- -------- The accompanying notes are an integral part of these financial statements.
-40- Notes To Financial Statements Note 1 -- The Company and its Business: Paradigm Technology, Inc. ("Paradigm" or the "Company") was originally incorporated in California in January 1987. Pursuant to the May 24, 1994, Third Amended Joint Plan of Reorganization (the "Plan") under Chapter 11 of the United States Bankruptcy Code (Note 3), amended Articles of Incorporation were filed. On June 7, 1994, the Court confirmed the Plan, which became effective on June 21, 1994. The Company reincorporated in Delaware effective June 22, 1995, which involved the exchange of the Company's post-Reorganization common and preferred stock into shares of the Delaware Company stock. Pursuant to the reincorporation, the Company has authorized 25,000,000 shares of $0.01 par value common stock and 5,000,000 shares of $0.01 par value preferred stock. The Company markets high speed, high density Static Random Access Memory ("SRAM") products for uses in telecommunication devices, workstations and high performance PCs to OEMs and distributors in the United States, Europe and the Far East. The SRAM business is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity, and accelerated erosion of average selling prices. During the latter part of 1995 and all of 1996, the market for certain SRAM devices experienced an excess supply relative to demand which resulted in a significant downward trend in prices. The selling price that the Company is able to command for it's products is highly dependent on industry-wide production capacity and demand. In this regard, the Company did experience rapid erosion in product pricing during 1996 which was not within the control of the Company. The Company could continue to experience a downward trend in product pricing which could adversely effect the Company's operating results. The Company's recent operations have consumed substantial amounts of cash. In January 1997, the Company completed the private placement of Series A Convertible Preferred Stock for net proceeds of approximately $1,880,000 (Note 15). The Company believes that this cash infusion together with existing cash balances and other sources of liquidity, such as asset sales and equipment financing will be sufficient to meet the Company's projected working capital and other cash requirements through at least the end of 1997. Note 2 -- Summary of Significant Accounting Policies: Fiscal Year Prior to consummation of the Reorganization, the Company's fiscal year ended on the Sunday closest to March 31. Upon completion of the Reorganization, the Company changed its fiscal year end to December 31. The periods from April 1, 1994 to June 20, 1994 and from June 21, 1994 to December 31, 1994 contained 12 and 27 weeks, respectively. -41- Reverse Stock Split Share information for all periods has been retroactively adjusted to reflect a 1-for-2 reverse stock split of common stock effected on June 22, 1995. Basis of Presentation The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates. Cash Equivalents and Short-Term Investments The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less to be cash equivalents and investments with original maturities of greater than 90 days to be short-term investments. The Company accounts for its short-term investments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). As of December 31, 1995, the Company had short-term investments comprising primarily of fixed- maturity securities of $17.2 million, all of which had been classified as available for sale and which all have contractual maturities of less than two years. These securities are stated at fair market value. Unrealized gains and losses were immaterial at December 31, 1995. Concentration of Credit Risk Export sales, primarily to Europe and the Far East, represent 15%, 26%, 28%, and 25% of total sales for the period from April 1, 1994 to June 20, 1994, for the period from June 21, 1994 to December 31, 1994, and for the years ended December 31, 1995 and December 31, 1996, respectively. The Company's sales have been denominated in U.S. dollars. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The following table summarizes the percentage of net sales to significant customers: -42- Pre-Reorganization Post-Reorganization ------------------ ----------------------------------------------- Period from Period from April 1 to June 21 to Year Ended Year Ended June 20, December 31, December 31, December 31, 1994 1994 1995 1996 ------------- ------------- ------------ ------------ Customer A 20% 11% -- -- Customer B 11% 23% 28% 25% Customer C -- 13% -- -- Customer D -- -- -- 13% Customer E -- -- -- 13% As of December 31, 1995, accounts receivable from three customers accounted for approximately 11%, 11% and 15% of total gross accounts receivable, respectively. As of December 31, 1996, accounts receivable from three customers accounted for approximately 16%, 17%, and 18% of total gross accounts receivable, respectively. The Company maintains allowances for potential credit losses based upon expected collectibility of all accounts receivable. Inventory Inventory is stated at the lower of cost (determined on a first-in, first-out method) or market. Included in cost of sales for the year ended December 31, 1996 are lower of cost or market provisions of $2,475,000 and write-offs of $3,325,000 related to older generation SRAM products. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. During the quarter ended December 31, 1996 the Company sold fixed assets with a net book value of $19.3 million related to its wafer fabrication facility (Note 13). Revenue Recognition Revenue from product sales is generally recognized upon shipment and a reserve is provided for estimated returns. The Company's sales to distributors are made under agreements allowing certain rights of return and price protection on products unsold by the distributors. Accordingly, the Company defers recognition of revenue on such sales until the products are sold by the distributors. -43- Research and Development Research and development expenses are charged to the statement of operations as incurred. Income Taxes Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts under the provisions of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes" (Note 11). Stock Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not require companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Net Income (Loss) Per Share Net loss per share is computed using the weighted average number of Common shares outstanding. Common stock equivalents are excluded as their effect is anti-dilutive. Net income per share is computed using the weighted average number of common stock and common stock equivalents outstanding. Common stock equivalent shares consist of stock options and warrants. Pursuant to the requirements of the Securities and Exchange Commission, common stock equivalent shares relating to stock options and warrants issued during the twelve months prior to the initial public offering are included in the computations for periods presented through the initial public offering, whether they are anti-dilutive or not. Net income per share for pre-reorganization periods is not presented since such information is not comparable with post-reorganization net income per share. The Company completed its initial public offering of common shares on July 5, 1995 and shares issued are included in the weighted average computation only from the date of issuance. Accordingly, these shares resulted in a greater amount of average shares in 1996 compared to 1995. Note 3 -- The Reorganization: From its inception through fiscal 1994, the Company incurred substantial losses and consumed all of the equity contributed by stockholders. In addition, during this period, the Company continued to incur indebtedness to fund its cash flow needs including capital expenditures associated with its wafer fabrication facility. As a result of the significant interest -44- expense caused by this leverage and continued operating losses, the Company concluded that it could not meet its debt obligations and developed a plan for restructuring its debt and capital structure. On February 23, 1994, the Company entered into a letter of intent with ACMA Limited ("ACMA") and a letter of intent with National Semiconductor Corporation ("National Semiconductor") to restructure its obligations and provide additional capital to the Company. On March 30, 1994 and pursuant to the ACMA letter of intent, the Company filed in the United States Bankruptcy Court for the Northern District of California (the "Court") a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On April 7, 1994, the Company filed its initial Plan of Reorganization with the Court. On May 24, 1994, after further negotiations between the Company and the Official Committee of Unsecured Creditors in its bankruptcy proceeding, the Company filed its Plan. On June 7, 1994, the Court confirmed the Plan, which became effective on June 21, 1994. The Plan provided for the elimination of a significant portion of the Company's indebtedness and a significant reduction in its interest expense. Pursuant to the Plan: o ACMA paid $5.0 million in exchange for 2,295,000 shares of Series A-1 voting preferred stock, 2,405,000 shares of Series A-2 nonvoting preferred stock and warrants to purchase 250,000 shares of the post-reorganization new common stock (the "new common stock") (Note 9) at an exercise price of $250,000, and paid $1.0 million for a convertible note, o ACMA guaranteed $1.5 million of the Company's line of credit with CoastFed Business Credit Corporation ("CoastFed"), o National Semiconductor paid $1.0 million for 500,000 shares of Series A-1 voting preferred stock, the proceeds of which were used to repay ACMA's convertible note, o Mitsubishi International Corporation ("Mitsubishi") received a cash payment of $300,000 and 465,116 shares of new Series B preferred stock in exchange for the cancellation of $5.0 million of indebtedness, o Equipment lessors received payments in full under a modified payments schedule and new common stock equal to approximately 3.2% of the Company's capital stock on a fully diluted basis (300,000 shares, pre-split), o NUF Corporation, an affiliate of NKK Corporation, and NKK Corporation received $345,000 in cash, 734,884 shares of new Series B preferred stock and a license to sell Paradigm's 256K product in North America in exchange for cancellation of $5.8 million of indebtedness, o Claim holders of The Creditor Workout Agreement, who were considered unsecured creditors, received 30% of their proof of claim and new common stock equal to approximately 8.5% of the Company's capital stock, on a fully diluted basis (800,000 shares, pre-split), o A $526,000 term note was repaid in full to an equipment supplier, and o The rights and interests of the Company's previous equity holders were terminated. -45- As of the effective date of the Plan, a claim by one of the Company's equipment suppliers was in dispute. A provision of $250,000 was accrued as of December 31, 1994 for the disputed claim. A total of $66,000 was paid on pre-petition interest accrued prior to March 30, 1994 and pre-petition interest accrued during the Chapter 11 proceedings. The Company recorded an extraordinary gain of $13.0 million in the period ended June 20, 1994, as a result of the Plan. Note 4 -- Fresh Start Reporting: In connection with the Reorganization under Chapter 11 of the U.S. Bankruptcy Code described in Note 3, the Company's basis of accounting for financial reporting purposes changed starting June 21, 1994 as follows: (i) the Company's assets and liabilities were adjusted to reflect a reorganization value (the "Reorganization Value"), generally approximating the fair value of the Company as a going concern on an unleveraged basis, (ii) the accumulated deficit was eliminated, and (iii) the Company's capital structure was adjusted to reflect consummation of the Plan. Accordingly, the results of operations after June 20, 1994 are not comparable to results of operations prior to such date. The Reorganization Value of $1.1 million was determined based on several factors including projected discounted cash flows and management's estimate of the fair value of its common stock upon reorganization from bankruptcy. The cash flow analysis gave effect to the corporate restructuring and resultant debt obligations as well as other operating program changes, limitations on the use of available net operating loss carryforwards and other tax attributes, market share and position, competition and general economic considerations, projected sales growth and profitability, and working capital requirements. Current assets and liabilities were recorded at their book value, which approximated fair value. Property and equipment was recorded based upon the Reorganization Value, which was less than its fair value in continued use, based on an independent appraisal. Other noncurrent assets were recorded at net book value, which approximates fair value and long-term debt was recorded at present value of the obligation determined under the Plan as of June 21, 1994. -46- The effect of the Plan and the adoption of fresh start reporting on the Company's balance sheet as of June 21, 1994 was as follows (in thousands):
Adjustment to Record the Plan of Reorganization ---------------------------- Prior to Debt Subsequent to Reorganization Exchange Fresh Start Reorganization -------------- -------- ----------- -------------- ASSETS: Cash and cash equivalents ............................... $ (31) $ -- $ 6,000 $ 5,969 Accounts receivable, net ................................ 3,757 -- -- 3,757 Inventories ............................................. 3,698 -- -- 3,698 Prepaid expenses and other .............................. 340 -- (195) 145 -------- -------- -------- -------- Total current assets ................................... 7,764 -- 5,805 13,569 -------- -------- -------- -------- Property and equipment, net ............................. 9,485 -- 1,328 10,813 Other assets ............................................ 199 -- -- 199 -------- -------- -------- -------- Total assets ........................................... $ 17,448 $ -- $ 7,133 $ 24,581 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): Line of credit .......................................... $ 4,452 $ -- $ -- $ 4,452 Accounts payable ........................................ 5,808 (3,295) -- 2,513 Accrued payroll and related expenses .................... 1,048 16 (30) 1,034 Accrued expenses and other liabilities .................. 2,614 (265) 1,129 3,478 Accrued interest ........................................ 700 (614) -- 86 Capital leases, current portion ......................... 9,172 (5,132) -- 4,040 Notes payable ........................................... 11,527 (9,978) (127) 1,422 -------- -------- -------- -------- Total current liabilities .............................. 35,321 (19,268) 972 17,025 -------- -------- -------- -------- Capital leases, net of current portion .................. -- 5,933 -- 5,933 Deferred rent ........................................... 608 -- (110) 498 -------- -------- -------- -------- Total liabilities ...................................... 35,929 (13,335) 862 23,456 -------- -------- -------- -------- Common/preferred stock .................................. -- 345 780 1,125 Predecessor common/preferred stock ...................... 39,129 -- (39,129) -- Retained earnings (deficit) ............................. (57,610) 12,990 44,620 -- -------- -------- -------- -------- Total stockholders' equity (deficit) ................... (18,481) 13,335 6,271 1,125 -------- -------- -------- -------- Total liabilities and stockholders' equity .............................................. $ 17,448 $ -- $ 7,133 $ 24,581 ======== ======== ======== ========
Pre-petition liabilities paid in the years ended December 31, 1995 and 1996 consist of (in thousands): Post-Reorganization ---------------------- 1995 1996 ------ ------ Accounts payable ............................... $ 715 $ -- Accrued payroll and related expenses ........... 146 -- Accrued expenses ............................... 146 34 ------ ------ Total ......................................... $1,007 $ 34 ====== ====== -47- Note 5 -- Balance Sheet Detail: (in thousands) Post-Reorganization December 31, ---------------------------- 1995 1996 -------- -------- Inventory: Raw materials ........................... $ 633 $ 16 Work in process ......................... 4,307 1,778 Finished goods .......................... 762 678 -------- -------- $ 5,702 $ 2,472 ======== ======== Property and equipment: Machinery and equipment ................. $ 21,315 $ 9,488 Leasehold improvements .................. 3,622 -- Furniture and fixtures .................. 264 19 -------- -------- 25,201 9,507 Less accumulated depreciation ........... (7,870) (2,869) -------- -------- $ 17,331 $ 6,638 ======== ======== Accrued Liabilities: Accrued payroll and commissions ......... $ 1,583 $ 804 Income taxes ............................ 1,797 -- Other ................................... 1,723 1,962 -------- -------- $ 5,103 $ 2,766 ======== ======== Note 6 -- Related Party Transactions: As a result of the Reorganization, certain of the Company's creditors became stockholders (Note 3). Transactions with stockholders consist of the following: Gross sales to NKK were $359,000 for the period from June 21, 1994 to December 31, 1994. Gross sales to NKK were insignificant during the years ended December 31, 1995 and December 31, 1996. The value of product purchased from NKK in the year ended December 31, 1995 was $3,237,000 of which $1,319,000 is included in the accounts payable, related party balance at December 31, 1995. During the year ended December 31, 1996, the Company purchased product with a value of $6,111,000 from NKK. There was no amount due NKK at December 31, 1996. Gross sales to National Semiconductor for the period from June 21, 1994 to December 31, 1994 and during the years ended December 31, 1995 and December 31, 1996 amounted to $1,700,000, $2,500,000, and $500,000, respectively, of which $339,000 and -48- $137,000, respectively, is included in the accounts receivable, related party balance at December 31, 1995 and December 31, 1996. In April 1995, NKK and the Company modified their previous technology license and development agreements. This 1995 agreement provides for payment of royalties to the Company by NKK on certain quantities of 1M SRAM's sold and, with certain exceptions, cancels further obligations of each party to deliver technology improvements or design updates to the other. On April 28, 1995, pursuant to certain agreements with certain of the Company's stockholders, Atmel acquired 425,000 shares of common stock from the Company, 300,000 shares of common stock from certain stockholders of the Company who had been unsecured creditors of the Company as of the reorganization, and 128,050 shares of common stock from the Company's equipment lessors all of which shares were purchased at a price of $8.00 per share (the "Atmel Stock"). Atmel also acquired from ACMA certain warrants to purchase 175,000 shares of common stock at an exercise price of $1.00 per share, for a purchase price of $7.00 per share subject to the warrants. In connection with these transactions, the Company entered into an Agreement with Atmel (the "Stock Purchase Agreement") pursuant to which Atmel agreed to certain transfer restrictions for a period of three years. Atmel also agreed to certain standstill provisions, including an agreement not to increase its beneficial ownership above 19.9% of the voting power of the Company on a fully diluted basis for a period of five years from the date of the Stock Purchase Agreement. The foregoing restrictions terminate on the date on which a person or entity acquires more than 50% of the voting power of the Company. In addition, Atmel agreed that, for a period of ten years from the date of the Stock Purchase Agreement, it will vote the Atmel Stock in proportion to the votes cast by the other stockholders of the Company, except with respect to certain material events. The voting and standstill restrictions terminate at such time as Atmel beneficially owns less than 5% of the common stock of the Company. On April 28, 1995, Atmel also entered into a Licensing and Manufacturing Agreement (the "Agreement") with the Company. This Agreement provides Atmel with a nonexclusive, royalty bearing license to manufacture, use and sell certain of the Company's products. The royalty fee is based on a percentage of the average selling price of the products sold. In addition, under the Agreement, a certain wafer manufacturing capacity per week has been made available to the Company by Atmel. The Agreement does not include a purchase commitment by the Company. However, to the extent the Company provides Atmel with its three-month demand forecast, it is committed to purchase the three-month forecasted quantities. No obligation to purchase wafers existed as of December 31, 1996. The price of the wafers has been fixed at the current fair market value. The Agreement expires on April 28, 2000. There was no amount due Atmel at December 31, 1995. The value of product purchased from Atmel in the year ended December 31, 1996 was $429,000 of which $140,000 is included in the accounts payable, related party balance at December 31, 1996. -49- Note 7 -- Debt Obligations: Notes payable and debt, excluding the line of credit consist of the following (in thousands): Post-Reorganization December 31, -------------------------- 1995 1996 ------ ------ Promissory notes ....................... $ -- $ 374 Term loans ............................. 7,636 -- ------ ------ 7,636 374 Less current portion ................... 3,287 282 ------ ------ $4,349 $ 92 ====== ====== Outstanding promissory notes at December 31, 1996 bear interest at rates ranging from 8.0% to 19.8% and are repayable at various dates through 1998. These notes are secured by the equipment purchased. At December 31, 1995, the Company had outstanding borrowings of $7.5 million related to three term notes under a credit facility with Greyrock Business Credit with a credit limit of $16.75 million. Under the agreement, borrowings were limited to 80% of eligible accounts receivable (not to exceed $8.0 million), plus the aggregate amount outstanding under certain term loans, plus $2.5 million until May 15, 1995 and $1.5 million thereafter. The credit facility was secured by all inventory, equipment, receivables and general intangibles of the Company. ACMA issued a $2.5 million standby letter of credit to guarantee the line of credit, and in connection therewith received a warrant to purchase 25,000 shares of common stock (Note 9). In connection with the repayment of the line of credit in August 1995, the standby letter of credit was terminated. In February 1996 the Company replaced the existing line of credit with Greyrock Business Credit with a line of credit from Bank of the West with a borrowing limit of $10.0 million. Borrowings were limited to 80% of eligible receivables and interest was at prime. The line of credit was secured by accounts receivable. On February 27, 1996 the Company borrowed $5.6 million to pay off the outstanding balance of the Greyrock term notes. In addition to the Bank of the West line of credit, the Company obtained a line of credit for equipment purchases from the CIT Group. The aggregate principal amount of all loans under this commitment could not exceed $15,000,000 and the commitment expired on December 30, 1996. Borrowings under this line of credit bore interest at the U.S. Treasury rate for two year maturities plus 2.96% and were limited to 80% of the cost of eligible equipment. All borrowings under this commitment were secured by the equipment purchased. -50- In November 1996, the Company replaced the Bank of the West line of credit with a new line of credit from Greyrock Business Credit with a borrowing limit of $6,000,000 of which $513,000 was available at December 31, 1996. Borrowings under this line of credit are limited to 80% of eligible receivables and interest is at the greater of LIBOR plus 5.25% or 9%. At December 31, 1996 the outstanding balance under this line of credit was $2,015,000. In November 1996 the Company sold its wafer fabrication operations (Note 13). The purchasing company assumed $7,500,000 of outstanding borrowings with the CIT Group that were secured by wafer fabrication equipment that was purchased. The Company used approximately $2,200,000 of the cash proceeds from the sale of the wafer fabrication facility to pay off the remaining CIT Group borrowings. Note 8 -- NewLogic Acquisition In June 1996, the Company acquired, through a stock purchase and merger transaction, NewLogic, a company which develops and manufactures logic designs with large memory arrays. In exchange for its purchase of the NewLogic capital stock, the Company issued 314,394 shares of the Company's common stock, with a market value of approximately $2,656,000, and approximately $825,000 in cash. In addition, the Company incurred transaction costs of approximately $237,000. The fair value of NewLogic's tangible net assets at the date of acquisition was a deficit of $373,000. Approximately $3,841,000 of the purchase price in excess of the fair market value of the net tangible assets was allocated to in-process technology which the Company wrote off in the quarter ended June 30, 1996. Approximately $250,000 was allocated to other intangibles. The unamortized balance of these other intangibles was written off in connection of the shutdown of NewLogic in early 1997. The Company accounted for this acquisition using the purchase method of accounting and accordingly, the results of operations and cash flows of the acquisition have been included only from the date of acquisition. Excluding the $3,841,000 write-off of purchased in-process technology, the pro forma impact on the Company's results of operations had the acquisition been consummated on January 1, 1995 is not materially different from the results presented in the accompanying statement of operations. Note 9 -- Preferred Stock, New Common Stock and New Common Stock Warrants: As a result of the Plan, the Company issued 2,295,000 voting shares of Series A-1 preferred stock ("Series A-1") and 2,405,000 nonvoting shares of Series A-2 preferred stock to ACMA for cash of $5.0 million. National Semiconductor was issued 500,000 voting shares of Series A-1 for $1.0 million. In addition, 1,200,000 shares of Series B voting preferred stock were issued to NKK and Mitsubishi. These shares form part of the settlement against $10,750,000 of short-term notes owed by the Company prior to June 21, 1994. All preferred stock was converted at a 2-for-1 ratio of preferred stock to common stock upon the completion of the Company's initial public offering. -51- A total of 550,000 shares of the new common stock was issued to creditors and lessors as part of the Plan. The 1994 Stock Option Plan was also created (Note 10). In exchange for its guarantee on the CoastFed line of credit in April 1994, ACMA was issued warrants to purchase 250,000 shares of new common stock at an exercise price of $1.00 per share. There is a five year expiration date placed on these warrants. On December 9, 1994, ACMA assigned a warrant to purchase 50,000 shares of common stock to Chiang Lam (President of ACMA USA). In January 1995, in exchange for a $1.0 million increase in its guarantee of the line of credit, ACMA received an additional warrant to purchase 25,000 shares of new common stock at an exercise price of $4.00 per share. No warrants were exercised at December 31, 1995 and December 31, 1996. The value of the warrants is considered nominal at the date of grant. On April 28, 1995 ACMA sold a warrant to purchase 175,000 shares of new common stock to Atmel Corporation ("Atmel") (Note 6). Note 10 -- Stock Compensation Plans: Pursuant to the Plan, the 1994 Stock Option Plan was created on June 21, 1994. Under the 1994 Stock Option Plan (the "Option Plan"), the maximum aggregate number of shares which may be optioned is 1,498,000 shares. Nonstatutory stock options may be granted to employees, outside directors and consultants, whereas incentive stock options can only be granted to employees. Options are generally granted at fair market value subject to the following: (a) With respect to options granted to an employee who, at the time of the grant owns stock representing more than 10% of the voting power of all classes of stock of the Company or any parent or subsidiary, the per share exercise price shall be no less than 110% of the fair market value on the date of the grant for incentive and nonstatutory stock options. (b) With respect to options granted to any employee other than described in the preceding paragraph, the exercise price shall be no less than 100% for incentive stock options and 85% for nonstatutory stock options of the fair market value on the date of the grant. During 1994, the Company's directors and stockholders approved the Directors' Stock Option Plan ("Directors' Plan") and reserved 150,000 shares of common stock for issuance thereunder. Terms of the Directors' Plan provide for the grant of options to the Company's independent directors in annual increments commencing in 1995. The exercise price of options granted is the fair market value at the date of grant. -52- Nonstatutory stock option activity under the Option Plan and Director's Plan was as follows (in thousands): 1994 1995 1996 ------ ------ ------ Outstanding at beginning of period ...... -- 730 896 Granted ................................ 857 414 1,175 Canceled ............................... (88) (163) (700) Exercised .............................. (39) (85) (235) ------ ------ ------ Outstanding at December 31 .............. 730 896 1,136 Exercisable at December 31 .............. 256 384 298 ------ ------ ------ Available for Grant at December 31 ...... 103 307 149 ------ ------ ------ Weighted average option exercise price information for the years 1994, 1995 and 1996 follows: 1994 1995 1996 ------ ------ ------ Outstanding at beginning of period ...... $ 0.00 $ 0.32 $ 4.30 Granted during the year ................. 0.31 10.26 6.20 Canceled during the year ................ 0.30 3.35 8.24 Exercised during the year ............... 0.30 0.43 0.58 Outstanding at December 31 .............. 0.32 4.30 4.54 Exercisable at December 31 .............. 0.31 1.36 2.77 Significant option groups outstanding at December 31, 1996, and related weighted average price and life information follows (options in thousands): Outstanding Exercisable Range of ----------------- ----------------- Remaining Exercise Prices Shares Price Shares Price Life (years) - - --------------- ------ ----- ------ ----- ------------ $0.30-0.50 242 $ 0.32 202 $ 0.31 7.5 $2.50 234 2.50 -- 0.0 9.9 $3.25-5.00 379 4.49 28 4.50 9.2 $5.13-9.00 224 8.41 59 8.09 8.8 $13.50-25.00 57 16.02 9 17.49 9.0 Options granted vest over a period of four years. The terms of the option shall be no longer than 10 years. All options were granted at an exercise price equal to the fair market value of the Company's common stock at the date of grant. The weighted average fair value at date of grant for options granted during 1995 and 1996 was $5.34 and $2.74 per option, -53- respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following assumptions: 1995 1996 ---- ---- Expected life (years) .................. 5 5 Risk free interest rate ................ 6.9% 6.6% Volatility ............................. 48% 50% Dividend yield ......................... -- -- In April 1995, the board of directors of the Company adopted the Paradigm Technology, Inc. Employee Stock Purchase Plan (the "ESPP") to provide employees of the Company with an opportunity to purchase common stock through payroll deductions. The ESPP became effective upon the closing of the Company's initial public offering in July 1995. Under the ESPP, 250,000 shares of common stock have been reserved for issuance to full-time employees employed with the Company for at least three consecutive months. Under the ESPP, the purchase price of the common stock will be equal to 85% of the lower of (i) the market price of common stock immediately before the beginning of the applicable participation period or (ii) the market price of common stock at the time of purchase. In general, each participation period is 24 months long, with a new participation period beginning every six months. During 1996, 76,783 shares were issued under the plan. The fair value of the employee's purchase rights was estimated using the Black-Scholes model with the following assumptions for 1995 and 1996, respectively; dividend yield of 0% in both years; an expected life of two years for each purchase period; expected volatility of 48% and 50%; and risk free interest rates of 6.0% and 6.3%. The weighted-average fair value of these purchase rights granted in 1995 and 1996 was $5.37 and $4.78, respectively. Had compensation expense for the Company's stock-based compensation plans been determined based on the methods prescribed by SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been as follows (in thousands, except per share amounts): -54- Year Ended Year Ended December 31, December 31, 1995 1996 ------------ ------------ Net income (loss): As reported ............... $5,263 $(36,425) Pro forma ................. 5,024 (37,272) Net income (loss) per share: As reported ............... $ 0.83 $ (5.16) Pro forma ................. 0.79 (5.28) Note 11 -- Income Taxes: No provision has been recorded for any of the periods prior to December 31, 1994, since the Company incurred a net operating loss for tax purposes. The provision (benefit) for income taxes consists of the following (in thousands): Year Ended Year Ended December 31, December 31, 1995 1996 ------------ ------------- Federal: Current ...................... $ 1,673 $(1,125) State: Current ...................... 472 -- ------- ------- $ 2,145 $(1,125) ======= ======= The components of the net deferred tax asset were as follows (in thousands): Post-Reorganization December 31, ------------------------------ 1995 1996 ------- --------- Inventory and other reserves.................. $ 589 $ 3,052 Depreciation and capital leases............... 2,425 972 Other......................................... 473 551 Net operating losses.......................... 1,822 13,885 ------- -------- 5,309 18,460 Less valuation allowance...................... (5,309) (18,460) ------- -------- $ -- $ -- ======= ======== -55- The Company's effective tax rate for 1995 and 1996 was 29% and (3)%, respectively. This rate differs from the federal statutory rate due principally to the following: Year Ended Year Ended December 31, December 31, 1995 1996 ------------ ------------ Tax at statutory rate ............................ 34% (34)% State taxes, net of federal benefit .............. 6 (6) Tax losses not recognized ........................ -- 37 Net operating losses and tax credits utilized ....................................... (11) -- --- --- 29% (3)% === === The Company has established a valuation allowance equal to its deferred tax assets on the basis that realization of such assets is not assured. Management's assessment is based on the Company's current net operating losses. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. The Company experienced such an ownership change as a result of the Reorganization (Note 3), and the utilization of the carryforwards was limited. At December 31, 1996, the Company had net operating loss carryforwards (reflecting limitation resulting from change in ownership) of approximately $35.5 million available to offset future regular and alternative minimum taxable income. The Company's net operating loss carryforwards expire through 2011, if not utilized. Note 12 -- Capital Lease Obligations and Commitments: Until May 1, 1995 the Company leased its fab/manufacturing and lab and test equipment from eleven equipment lessors. A modified payment stream sufficient to cure all defaults under the original lease agreements was confirmed by the Bankruptcy Court in June 1994. The Company was responsible for all insurance, property tax and maintenance. On May 1, 1995, the Company purchased this leased equipment effective March 31, 1995 with proceeds of a term note from Greyrock Business Credit (Note 7). The Company's principal manufacturing and administrative facility was leased under an operating lease expiring in 2004. This lease was assumed by the purchaser of the Company's wafer fabrication facility. Rent expense for the period from April 1, 1994 to June 20, 1994, the period from June 21, 1994 to December 31, 1994 and the years ended December 31, 1995 and December 31, 1996 was $164,000, $368,000, $715,000 and $680,000, respectively. -56- In December 1996 the Company entered into an agreement to lease its new principal administrative facility under an operating lease expiring in 2002. Future minimum payments under noncancelable operating leases at December 31, 1996 are as follows (in thousands): Year Ending December 31, Operating Leases -------------- ---------------- 1997 $ 382,000 1998 439,000 1999 452,000 2000 464,000 2001 476,000 Thereafter 40,000 ----------- $ 2,253,000 =========== Note 13 -- Sale of Wafer Fabrication Facility The Company recorded a loss of $4.6 million in the quarter ended December 31, 1996 as a result of the sale of its wafer fabrication facility. This charge included the excess of the net book value of leasehold improvements, wafer fabrication equipment, fabrication work in process inventory and other assets sold to Orbit over the proceeds received from Orbit, an accrual for professional fees incurred to complete the transaction, a reserve for an adverse purchase commitment related to the wafer manufacturing agreement and accruals for other estimated costs to be incurred. Orbit paid to the Company aggregate consideration of $20 million consisting of $6.7 million in cash, assumption of $7.5 million of indebtedness associated with and secured by the Fab, and promissory notes in the principal amounts of $4.8 million and $1.0 million. The Company also executed a short-term sublease with Orbit pursuant to which it will occupy office space at its principal offices not associated with the Fab. The $4.8 million promissory note was issued in connection with a wafer supply agreement that requires Orbit to supply Paradigm with approximately 9,750 of certain fabricated wafers through May 1997 at $500 per wafer purchased by Paradigm. Per terms of the agreement, if the Company does not purchase the wafers by the end of May 1997, the Company will forfeit any remaining amount owed under the promissory note. At December 31, 1996, the Company is required to purchase 6,684 wafers under this agreement which the Company fully expects to receive by the end of May 1997. The $1.0 million promissory note is held in escrow to satisfy certain representation and warranties made by the Company. Orbit is required to make two payments of $500,000 plus interest of 4% in May and November 1997. As of December 31, 1996 the outstanding balance under these promissory notes was $4,342,000 which was classified as prepaid expenses and other assets. -57- The following table sets forth the components of the $4.6 million loss recorded in 1996 related to the sale of the wafer fabrication facility (in thousands): Benefit (Charge) Recorded in 1996 ---------------- Sale proceeds ........................................... $ 20,000 Less: Cost of inventory, fixed assets and other assets sold ............................ (21,480) -------- (1,480) Adverse purchase commitment ............................. (1,920) Professional fees ....................................... (360) Lease buyout ............................................ (225) Other costs ............................................. (647) -------- Loss on sale ............................................ $ (4,632) ======== At December 31, 1996 the remaining adverse purchase commitment of $1,337,000 is recorded in prepaid expenses and other as an offset to the note receivable from Orbit. In connection with the sale of the Fab, substantially all of the 109 employees associated with the Fab were terminated and became employees of Orbit. No severance payments were made to employees transferred to Orbit. Note 14 -- Litigation: On August 12, 1996, a securities class action lawsuit was filed in Santa Clara Superior Court against the Company and certain of its officers and directors (the "Paradigm Defendants"). The class alleged by plaintiffs consists of purchasers of the Company's common stock from November 20, 1995 to March 22, 1996, inclusive. The complaint alleges negligent misrepresentation, fraud and deceit, breach of fiduciary duty, and violations of certain provisions of the California Corporate Securities Law and Civil Code. The plaintiffs seek an unspecified amount of compensatory and punitive damages. Plaintiffs allege, among other things, that the Paradigm Defendants wrongfully represented that the Company would have protection against adverse market conditions in the semiconductor market based on the Company's focus on high speed, high performance semiconductor products. The Paradigm Defendants intend to vigorously defend the action. On September 30, 1996, the Paradigm Defendants filed a demurrer seeking to have plaintiffs' entire complaint dismissed with prejudice. On December 12, 1996, the Court sustained the demurrer as to all of the action except for violation of certain provisions of the California Corporate Securities Law and Civil Code. The Court, however, granted plaintiffs leave to amend the complaint to attempt to cure the defects which caused the Court to sustain the demurrer. Plaintiffs failed to amend within the allotted time. On January 8, 1997, the Paradigm Defendants filed an answer to the complaint denying any liability for the acts and damages alleged by plaintiffs. Plaintiffs have served the Paradigm -58- Defendants with a first set of requests to produce documents, to which the Paradigm Defendants are currently responding. Plaintiffs have also filed a motion for class certification which is set for hearing on April 15, 1997. No other motions have been filed with the court by plaintiffs or defendants, and no discovery has yet been conducted. The Paradigm defendants will vigorously defend the action and, subject to the inherent uncertainties of litigation and based upon facts presently known, management believes that the resolution of this matter will not have a material adverse impact on the Company's financial position or results of operations. On February 21, 1997, an additional purported class action, with causes of action and factual allegations essentially identical to those of the August 12, 1996 class action lawsuit, was filed. This second class action is asserted against the same Paradigm Defendants, PaineWebber, Inc. and Smith Barney. None of the Paradigm Defendants have been served in this new action. The Paradigm Defendants believe because the new action appears redundant it is subject to the demurrer which the Court sustained in the first class action. The Company is involved in various other litigation and potential claims which management believes, based on facts presently known, will not have a material adverse effect on the results of operations or the financial position of the Company. Note 15 -- Subsequent Event: On January 23, 1997, Paradigm sold a total of 200 shares of 5% Series A Convertible Redeemable Preferred Stock (the "Preferred Stock") in a private placement to Vintage Products, Inc. at a price of $10,000 per share, for total proceeds (net of payments to third parties) of approximately $1,880,000. The Preferred Stock is convertible at the option of the holder into the number of fully paid and nonassessable shares of Common Stock as is determined by dividing (A) the sum of (1) $10,000 plus (2) the amount of all accrued but unpaid or accumulated dividends on the shares of Preferred Stock being converted by (B) the Conversion Price in effect at the time of conversion. The "Conversion Price" will be equal to the lower of (i) $2.25 or (ii) eighty-two percent (82%) of the average closing bid price of a share of Common Stock as quoted on the Nasdaq National Market over the five (5) consecutive trading days immediately preceding the date of notice of conversion of the Preferred Stock. The Preferred Stock is redeemable by the Company under certain limited circumstances. The Company is required to register the maximum number of shares of Common stock issuable upon conversion of the Preferred Stock. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -59- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Directors of the Registrant. Michael Gulett, 44, the Company's President and Chief Executive Officer, joined Paradigm in March 1992. Mr. Gulett, was elected President in February 1993, was appointed Chief Executive Officer in July 1993 and was appointed to the board in March 1994. Prior to joining Paradigm, Mr. Gulett was a consultant from May 1989 until March 1992. From July 1987 until May 1989, Mr. Gulett was the Director of ASIC Operations at VLSI Technology, Inc., a semiconductor manufacturer. He has also worked for NCR Microelectronics, California Devices, Intel Corporation and Burroughs Corporation. Mr. Gulett received his B.S. in electrical engineering from the University of Dayton. George J. Collins, 54, has served as a Director of the Company since October 1995. Mr. Collins has been a professor of electrical engineering at Colorado State University since 1973. Mr. Collins is a Fellow with the American Physical Society and the Institute of Electrical Engineers. Mr. Collins is a Director of Quantum Research Corporation. Mr. Collins received his B.S.E.E. from Manhattan University and his M.S. and Ph.D. in engineering from Yale University. James L. Kochman, 47, has served as Director of the Company since June 1994 and has been a partner with the investment banking firm of Bentley, Hall, Von Gehr International since April 1992. He was formerly President and Chief Executive Officer of TEKNA/S-TRON, a consumer products company. Prior to joining TEKNA, he spent six years with FMC Corporation in a variety of corporate staff and operating assignments, including Director of Manufacturing and Director of Technology and Business Development with FMC's Ordinance Division in San Jose. Previously Mr. Kochman worked for International Harvester Company. Mr. Kochman received his B.S. in mechanical engineering from the University of Illinois and an M.B.A. from the University of Chicago. (b) Executive Officers of the Registrant. Michael Gulett, the Company's President and Chief Executive Officer, joined Paradigm in March 1992. Mr. Gulett was elected President in February 1993, and was appointed Chief Executive Officer in July 1993. Prior to joining Paradigm, Mr. Gulett was a consultant from May 1989 until March 1992. From July 1987 until May 1989, Mr. Gulett was the Director of ASIC Operations at VLSI Technology, Inc., a semiconductor manufacturer. He has also worked for NCR Microelectronics, California Devices, Intel Corporation and Burroughs Corporation. Mr. Gulett received his B.S. in electrical engineering from the University of Dayton. Robert C. McClelland served as Paradigm's Vice President of Finance, Chief Financial Officer from June 1993 to February 1997, and as Secretary from April 1994 to February 1997. Prior to joining Paradigm, Mr. McClelland served as Vice President of Finance at Beaver -60- Computer Corporation, a manufacturer of notebook computers, from February 1991 through January 1993. From January 1982 through January 1991, Mr. McClelland was a Vice President and Controller of Precision Monolithics, Inc., a manufacturer of bipolar semiconductors. Mr. McClelland received his B.S. in finance from the University of Vermont. Douglas Schirle has served as Paradigm's Vice President of Finance and Chief Financial Officer since February 1997. Mr. Schirle joined Paradigm in December 1993 as the Corporate Controller. Prior to joining Paradigm, Mr. Schirle was a product line controller and general accounting manager at Cypress Semiconductor from January 1987 to September 1993. From June 1979 to December 1986, Mr. Schirle worked in the audit division of Arthur Andersen & Co. in San Jose, California. Mr. Schirle received his B.S. in business administration from San Jose State University and is a CPA in the State of California. Dennis McDonald has served as Paradigm's Vice President, Human Resources since May 1995. Mr. McDonald was Vice President of Human Resources for Meta-Software from September 1994 to May 1995, and a Principal at Pragmatic Human Resources Solutions from May 1990 to August 1994. Mr. McDonald has also worked for VLSI Technology and Fairchild Semiconductor. Mr. McDonald received a B.B.A. from St. John's University. Philip Siu has served as Paradigm's Vice President, Engineering since April 1995. Prior to joining Paradigm, Mr. Siu was the President of Saning Electronic, a start-up analog and memory design company, since 1993. Mr. Siu was Vice President of Engineering at ESS Technology, a semiconductor company, from 1991 to 1993 and was President of Micro Integration, a semiconductor company, from 1987 to 1991. He has previously worked for VLSI Technology, Synertek and American Microsystems. Mr. Siu received his B.S. in electrical engineering from the University of Manitoba, Canada and an M.S. in electrical engineering from San Jose State University. James H. Boswell who has served as Paradigm's Vice President, Sales and Marketing since December 1996, joined the Company in November 1995 as Director of Marketing. Prior to joining Paradigm, Mr. Boswell was the Sales Manager of Sharp from 1994 to 1995. Mr. Boswell was in the marketing and sales department of Hitachi from 1989 to 1994. Mr. Boswell received his B.S. from University of New Mexico and his M.B.A. from the University of Arizona. Richard Morley has served as Paradigm's Vice President, Operations since February 1997. Prior to joining Paradigm Mr. Morley worked in other IC based Operations-notably Kopin Corporation as General Manager of Display Manufacturing from 1994 to 1996 and was Director of Operations for Zilog's Nampa Mod II and Mod III CMOS wafer fabrication facilities from 1988 to 1994. Mr. Morley has also worked for other IC manufacturing companies such as General Instrument, NCR, Sprague Solid State, California Devices and VLSI Technology. Mr. Morley received his B.S. in chemistry from Manhattan College. -61- ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table provides certain summary information concerning compensation paid to the Company's Chief Executive Officer, and each of the other four most highly compensated executive officers, who were serving as executive officers on December 31, 1996 (the "Named Executive Officers") and whose aggregate salary and bonus exceeded $100,000, for the fiscal years ended December 31, 1994, 1995 and 1996. Summary Compensation Table
Long-Term Compensation Annual Compensation(1) Payouts ----------------------------------------------------- ------------- Securities Other Annual Underlying Name and Principal Position Year Salary($) Bonus($)(2) Compensation($) Options(#) --------------------------- ---- --------- ----------- --------------- ---------- Michael Gulett 1996 $249,185 $ 85,174 -- 25,000 President and Chief 1995 $219,692 $150,310 -- 15,000 Executive Officer 1994 $171,923 $ 55,000 -- 180,000 1996 $128,076 $ 17,155 -- 13,000 Robert C. McClelland 1995 $121,792 $ 30,484 -- 10,000 Chief Financial Officer 1994 $112,599 $ 10,000 -- 33,750 Dennis McDonald (3) Vice President, Human 1996 $134,302 $ 19,174 -- 17,000 Resources 1995 $ 70,400 $ 175 -- 25,000 Philip Siu (3) Vice President, 1996 $139,195 $ 25,174 -- 22,000 Engineering 1995 $ 92,308 $ 25,155 -- 62,500 James Boswell (3) Vice President, Sales and 1996 $119,638 $ 9,174 $ 1,385(3) 26,250 Marketing 1995 $ 6,250 -- -- 15,000 - - -------------- (1) The Company changed its fiscal year-end from March 31 to December 31 in June 1994. For purposes of the Summary Compensation Table, the 1994 fiscal year figures presented reflect annual compensation for the four quarters ended December 31, 1994. (2) Represents cash bonuses, profit sharing and commissions paid during the year. (3) Mr. Siu, Mr. McDonald and Mr. Boswell were hired by the Company in April, May and November 1995, respectively.
-62- The following table sets forth certain information regarding options granted during the fiscal year ended December 31, 1996 to the Company's Named Executive Officers.
Option Grants in Last Fiscal Year Potential Realizable Percent Value at Assumed of Total Annual Rates of Number of Options Stock Price Securities Granted to Exercise Appreciation for Underlying Employees or Base Option Term (3) Options in Fiscal Price Expiration --------------------- Granted(1) Year(2) ($/Share) Date 5% 10% --------- --------- --------- ---------- ------- -------- Michael Gulett 25,000 2.15% $ 4.50 07/24/06 $70,751 $179,296 Robert C. McClelland 5,000 0.43% $13.50 01/01/06 $42,494 $107,715 8,000 0.69% $ 4.50 07/24/06 $22,640 $ 57,375 Philip Siu(4) 10,000 0.86% $13.50 01/01/06 $84,989 $215,430 12,000 1.03% $ 4.50 07/24/06 $33,960 $ 86,062 Dennis McDonald 5,000 0.43% $13.50 01/01/06 $42,494 $107,715 12,000 1.03% $ 4.50 07/24/06 $33,960 $ 86,062 James Boswell 15,000 1.29% $ 4.50 12/29/05 $39,450 $ 98,365 11,250 0.97% $ 2.50 11/21/06 $17,688 $ 44,824 - - ---------- (1) These options vest on the anniversary date of the grant at 25% per year. (2) Based on options to purchase an aggregate of 1,161,812 shares of Common Stock granted during fiscal 1996. (3) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date and are not presented to forecast possible future appreciation, if any, in the price of the Common Stock. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the options or the sale of the underlying shares. The actual gains, if any, on the stock option exercises will depend on the future performance of the Common Stock, the optionee's continued employment through applicable resting periods and the date on which the options are exercised.
-63- The following table shows stock options exercised by the Named Executive Officers as of December 31, 1996. In addition, this table includes the number of shares of Common Stock represented by outstanding stock options held by each of the Named Executive Officers as of December 31, 1996. The closing price of the Company's Common Stock at fiscal year-end was $2.38. Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Securities Value of Unexercised Shares Underlying Unexercised In-the-Money Options Acquired Options at FY-End(#) at FY-End ($)(1) on Value ------------------------------ ------------------------------ Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- Michael Gulett 15,000 $146,313 166,837 381,163 $334,515 $ 7,860 Robert C. McClelland 20,058 $230,690 10,366 26,326 $ 17,619 $14,863 Philip Siu -- $ 0 27,292 57,208 $ 0 $ 0 Dennis McDonald -- $ 0 9,896 32,104 $ 0 $ 0 James Boswell -- $ 0 3,750 22,500 $ 0 $ 0 - - -------------- (1) Value is calculated by (i) subtracting the exercise price per share from the year-end closing price of $2.38 per share; and (ii) multiplying the number of shares subject to the option.
Compensation of Directors The Company's non-employee directors ("Outside Directors") receive a fee of $3,000 per quarter. All Outside Directors are also reimbursed for expenses incurred in connection with attending Board and committee meetings. The Company's 1994 Stock Option Plan (the "Option Plan") provides for the grant of options to Outside Directors pursuant to a nondiscretionary, automatic grant mechanism, whereby each Outside Director is granted an option at fair market value to purchase 3,125 shares of Common Stock on the date of each Annual Meeting of Stockholders, provided such director is re-elected. These options vest over four years at the rate of 25% per year so long as the optionee remains an Outside Director of the Company. Each new Outside Director who joins the Board is automatically granted an option at fair market value to purchase 12,500 shares of Common Stock upon the date on which such person first becomes an Outside Director. These options vest over four years at the rate of 25% per year. Employment Agreements The Company entered into an employment agreement with Michael Gulett on August 26, 1996 (the "Agreement"), which provides for a base salary of $255,000 and the right to participate in the Company's executive compensation program. The Company may terminate Mr. Gulett's employment at any time with or without cause upon 90 days' advance written notice; provided, however, that if he is terminated without cause (other than as a result of disability or change of control of the Company), he will receive salary continuation for six months. In the event Mr. Gulett's employment is terminated during the term of the Agreement -64- and within the first six-month period after the occurrence of a change of control of the Company, as defined in the Agreement, Mr. Gulett will be entitled to receive one and a half times his annual rate of base salary as in effect on the date of the employment termination, plus one and a half times the last annual bonus awarded by the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of February 20, 1997 by: (i) each person known to the Company to beneficially own more than five percent of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the named executive officers, and (iv) all directors and executive officers of the Company as a group. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such person subject to community property laws where applicable. -65- Shares Beneficially Name of Beneficial Owner Owned Percent ------------------------ ----- ------- Vintage Products, Inc.(1) Arlozorv Street Telaviv, Israel .................................... 1,600,000 18.1% ACMA Limited(2) 17 Jurong Port Road Singapore 2261 ..................................... 1,500,000 20.2% Atmel Corporation(3) 2125 O'Nel Drive San Jose, CA 95131 ................................. 1,028,050 13.9% Michael Gulett(4) .................................. 183,125 2.5% Philip Siu(5) ...................................... 33,750 * James L. Kochman(6) ................................ 21,875 * Robert C. McClelland(7) ............................ 14,572 * Dennis McDonald(8) ................................. 12,708 * Richard Morley ..................................... 11,000 * James Boswell(9) ................................... 3,750 * George J. Collins(10) .............................. 3,125 * S. Atiq Raza(11) ................................... 3,125 * All directors and executive officers as a group (10 persons)(12) ................................... 291,331 3.9% - - ---------- * Less than one percent (1%). (1) Represents shares issuable upon conversion of the Company's 5% Series A Convertible Redeemable Preferred Stock. See "Business--Recent Developments--Sale of Preferred Stock." (2) Includes 175,000 shares issuable upon exercise of outstanding warrants. (3) Includes 200,000 shares issuable upon exercise of outstanding warrants. (4) Includes 171,875 shares subject to stock options that are exercisable or will become exercisable within 60 days of February 20, 1997. (5) Represents shares subject to stock options that are exercisable or will become exercisable within 60 days of February 20, 1997. (6) Represents shares subject to stock options that are exercisable or will become exercisable within 60 days of February 20, 1997. (7) Represents shares subject to stock options that are exercisable or will become exercisable within 60 days of February 20, 1997. (8) Represents shares subject to stock options that are exercisable or will become exercisable within 60 days of February 20, 1997. (9) Represents shares subject to stock options that are exercisable or will become exercisable within 60 days of February 20, 1997. (10) Represents shares subject to stock options that are exercisable or will become exercisable within 60 days of February 20, 1997. -66- (11) Represents shares subject to stock options that are exercisable or will become exercisable within 60 days of February 20, 1997. (12) Includes 270,081 shares subject to stock options that are exercisable or will become exercisable within 60 days of February 20, 1997. Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules of the Securities and Exchange Commission (the "Commission") thereunder require the Company's directors and executive officers to file reports of their ownership and changes in ownership of Common Stock with the Commission. Personnel of the Company generally prepare these reports on the basis of information obtained from each director and officer. Based on such information, the Company believes that all reports required by Section 16(a) of the Exchange Act to be filed by its directors and executive officers during the last fiscal year were filed on time, except that a Form 4 for Richard Velhouse was inadvertently filed late for his November 1996 transactions. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Atmel Relationship On April 28, 1995, pursuant to certain agreements with certain of the Company's stockholders, Atmel Corporation ("Atmel") acquired 425,000 shares of Common Stock from the Company, 300,000 shares of Common Stock from certain stockholders of the Company, and 128,050 shares of Common Stock from the Company's equipment lessors, all of which shares were purchased at a price of $8.00 per share. Atmel also acquired from ACMA Limited ("ACMA") certain warrants to purchase 175,000 shares of Common Stock of the Company at an exercise price of $1.00 per share, for a purchase price of $7.00 per share subject to the warrants. In connection with these transactions, the Company entered into an agreement with Atmel (the "Stock Purchase Agreement") pursuant to which Atmel agreed to certain transfer restrictions for a period of three years. Atmel also agreed to certain standstill provisions, including an agreement not to increase its beneficial ownership above 19.9% of the voting power of the Company on a fully diluted basis for a period of five years from the date of the Stock Purchase Agreement. The foregoing restrictions terminate on the date on which a person or entity acquires more than 50% of the voting power of the Company. In addition, Atmel agreed that, for a period of ten years from the date of the Stock Purchase Agreement, it will vote its shares of Common Stock of the Company in proportion to the votes cast by the other stockholders of the Company, except with respect to certain material events. The voting and standstill restrictions terminate at such time as Atmel beneficially owns less than 5% of the Common Stock of the Company. In connection with its acquisition of capital stock of the Company, Atmel became a party to the Registration Rights Agreement which provides Atmel with certain rights to register its shares of Common Stock of the Company. On April 28, 1995, Atmel also entered into a Licensing and Manufacturing Agreement with the Company. -67- Bentley, Hall, Von Gehr International James Kochman, a director of the Company, is a partner of Bentley, Hall, Von Gehr International ("Von Gehr"), an investment banking firm which performed investment banking services for the Company during the 12 months ended December 31, 1996. Such services related to, among other things, the Company's acquisition of NewLogic and the sale of the Company's wafer fabrication facility to Orbit Semiconductor. Compensation to Von Gehr during 1996 exceeded 5% of the Von Gehr's consolidated gross revenues for its most recent fiscal year. Von Gehr may also perform investment banking services for the Company from time to time in the future. -68- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements. The financial statements listed below appear on the page indicated: Page Number ----------- Report of Independent Accountants....................................... 36 Balance Sheets, December 31, 1996 and December 31, 1995................. 37 Statements of Operations for the years ended December 31, 1996 and December 31, 1995, the Period from June 21, 1994 to December 31, 1994, and the Period from April 1, 1994 to June 20, 1994.................................................. 38 Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996 and December 31, 1995, the Period from June 21, 1994 to December 31, 1994, and the Period from April 1, 1994 to June 20, 1994 ................................ 39 Statements of Cash Flows for the years ended December 31, 1996 and December 31, 1995, the Period from June 21, 1994 to December 31, 1994, and the Period from April 1, 1994 to June 20, 1994 ................................................. 40 Notes to Financial Statements........................................... 41 (b) Reports on Form 8-K. A Current Report on Form 8-K was filed with the Securities and Exchange Commission on December 2, 1996. The report announced the sale of the Registrant's semiconductor wafer fabrication manufacturing operation, including equipment and work in process, and the assignment of the Registrant's rights and obligations under the lease of its wafer fabrication facility. A Current Report on Form 8-K was filed with the Securities and Exchange Commission on February 6, 1997. The report announced the private placement of a total of 200 shares of the Registrant's 5% Series A Convertible Redeemable Preferred Stock to Vintage Products, Inc. at a price of $10,000 per share, for a total proceeds (net of payments to third parties) of approximately $1,880,000. -69- (c) Exhibits The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this annual report. (d) Financial Statement Schedules Financial statement schedules are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto included as part of the Company's 1996 Annual Report on Form 10-K. -70- INDEX TO EXHIBITS Exhibit Number Exhibit ------ 1.3 Agreement and Plan of Merger between the Registrant and Paradigm Technology Delaware Corporation, a Delaware corporation.(1) 1.4 Agreement and Plan of Merger dated as of June 5, 1996 between the Registrant and NewLogic Corp. 2.1 Third Amended Joint Plan of Reorganization effective June 21, 1994.(1) 2.2 Stock Purchase Agreement, dated as of January 21, 1997, by and between Paradigm Technology, Inc. and Vintage Products, Inc.(7) 2.3 Securities Purchase Agreement dated as of April 22, 1996 between the Registrant, NewLogic Corp. and certain securityholders of NewLogic Corp. 2.4 First Amendment to Securities Purchase Agreement dated as of April 22, 1996 between the Registrant, NewLogic Corp. and certain securityholders of NewLogic Corp. 2.5 Investor Securities Purchase Agreement dated as of May 29, 1996 between the Registrant and certain Investors listed on Schedule A attached thereto. 3.1 Amended and Restated Certificate of Incorporation.(1) 3.2 Bylaws of the Registrant, as amended.(1) 4.1 Certificate of Designation of the 5% Series A Convertible Redeemable Preferred Stock as filed with the Secretary of State of the State of Delaware.(7) 9.1 Voting Trust Agreement dated as of May 24, 1996 between Hans Olsen and the persons listed on Schedule A attached thereto. 10.1 Amended and Restated 1994 Stock Option Plan of the Registrant (the "Plan").(5) 10.2 Form of Incentive Stock Option Agreement under the Plan.(1) 10.3 Form of Nonstatutory Stock Option Agreement under the Plan.(1) 10.4 1995 Employee Stock Purchase Plan of the Registrant.(1) -71- Exhibit Number Exhibit ------ 10.5 Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated December 7, 1988.(1) 10.6 Second Amendment to Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated June 18, 1990.(1) 10.7 First Amendment to Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated May 4, 1989.(1) 10.8 Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated January 17, 1992.(1)(2) 10.9 Side Letter to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated January 17, 1992.(1) 10.10 Amendment No. 1 to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated October 23, 1992.(1)(2) 10.11 Amendment No. 2 to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated October 30, 1992.(1) 10.12 Amendment No. 3 to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated February 16, 1995.(1)(2) 10.13 Restated Technology Development Agreement for 4Mb SRAM Process and Design between NKK Corporation and the Registrant dated May 26, 1992.(1)(2) 10.14 Amendment No. 1 to Restated Technology Development Agreement for 4Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 23, 1992.(1)(2) 10.15 Amendment No. 2 to Restated Technology Development Agreement for 4Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 30, 1992.(1) -72- Exhibit Number Exhibit ------ 10.16 Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated May 26, 1992.(1)(2) 10.17 Amendment No. 1 to Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 23, 1992.(1)(2) 10.18 Amendment No. 2 to Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 30, 1992.(1) 10.19 Amendment No. 3 to Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated August 16, 1994.(1)(2) 10.20 Agreement on 1M SRAM Sales Right and OEM Supply and Modification of Existing Agreements between NKK Corporation and the Registrant dated April 18, 1995.(1)(2) 10.21 Marketing and Resale Agreement between the Registrant and National Semiconductor Corporation dated October 13, 1994.(1)(2) 10.22 License and Manufacturing Agreement between the Registrant and Atmel Corporation dated April 28, 1995.(1)(2) 10.23 Patent License Agreement between the Registrant and American Telephone and Telegraph Company dated December 13, 1990.(1) 10.24 Amended and Restated Registration Rights Agreement between the Registrant and certain stockholders of the Registrant dated April 28, 1995.(1) 10.25 Amended Warrant for 50,000 shares of Common Stock of the Registrant issued to ACMA Limited on June 23, 1994.(1) 10.26 Warrant for 100,000 shares of Common Stock transferred by ACMA Limited to Chiang Lam on December 9, 1994.(1) 10.27 Warrant for 50,000 shares of Common Stock issued by the Registrant to ACMA Limited on January 25, 1995 between the Registrant and Atmel Corporation.(1) 10.28 Warrant for 350,000 shares of Common Stock of the Registrant transferred by ACMA Limited to Atmel Corporation on May 1, 1995.(1) -73- Exhibit Number Exhibit ------ 10.29 Loan and Security Agreement between the Registrant and Greyrock Business Credit dated February 28, 1995.(1) 10.30 Amendment to Loan Documents between the Registrant and Greyrock Business Credit dated April 7, 1995.(1) 10.31 Amendment to Loan Documents between the Registrant and Greyrock Business Credit dated May 1, 1995.(1) 10.32 Form of Indemnification Agreement.(1) 10.33 General Release and Covenant Not to Sue dated May 24, 1995 between Anthony C. Langley and the Registrant.(1) 10.34 Stock Purchase Agreement dated as of April 28, 1995 between the Registrant and Atmel Corporation.(1) 10.35 Letter of Credit dated March 2, 1995 issued by Royal Bank of Canada Singapore on behalf of ACMA Limited in favor of Greyrock Business Credit.(1) 10.36 Observation Rights Agreement dated June 16, 1995 between ACMA Limited and the Registrant.(1) 10.37 Third Amendment to Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated December 21, 1995.(3) 10.38 Loan and Security Agreement dated February 9, 1996 between Bank of the West and the Registrant.(3) 10.39 Loan and Security Agreement dated February 14, 1996 between the Registrant and the CIT Group/Equipment Financing, Inc.(4) 10.40 Agreement of Purchase and Sale of Assets dated as of November 7, 1996 between the Registrant and Orbit Semiconductor, Inc. Exhibits to this Agreement omitted from this report will be furnished to the Securities and Exchange Commission upon request.(6) 10.41 Wafer Manufacturing Agreement dated as of November 7, 1996 between the Registrant and Orbit Semiconductor, Inc.(6) 10.42 Promissory Note dated November 15, 1996 in the aggregate principal amount of $4,800,000 issued by Orbit Semiconductor, Inc. to the Registrant.(6) -74- Exhibit Number Exhibit ------ 10.43 Promissory Note dated November 15, 1996 in the aggregate principal amount of $1,000,000 issued by Orbit Semiconductor, Inc. to the Registrant.(6) 10.44 Office Building Lease Agreement dated December 26, 1996 between the Registrant, John Arrillaga, Trustee, UTA dated 7/20/77 and Richard T. Perry, Trustee, UTA dated 7/20/77. 10.45 Loan and Security Agreement dated October 25, 1996 between the Registrant and Greyrock Business Credit. 10.46 Employee letter agreement dated May 23, 1996 between the Registrant and Hans Olsen. 10.47 Employee letter agreement dated May 24, 1996 between the Registrant and Bruce Campbel. 10.48 Employee letter agreement dated May 23, 1996 between the Registrant and Gregory Roberts. 10.49 Executive Compensation Agreement dated August 26, 1996 between the Registrant and Michael Gulett. 11.1 Computation of Net Income (Loss) Per Share. 23.1 Consent of Price Waterhouse LLP, Independent Accountants. 27.1 Financial Data Schedule - - -------------------- (1) Incorporated by reference to Registration Statement on Form S-1 (Reg. No. 33-92390). (2) Confidential treatment granted as to certain portions. (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (6) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 1996. (7) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 6, 1997. -75- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 11, 1997 PARADIGM TECHNOLOGY, INC. By /s/ Michael Gulett ---------------------------------------- Michael Gulett President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature and Title Date ------------------- ---- By /s/ Michael Gulett March 11, 1997 -------------------------------------------------- Michael Gulett President, Chief Executive Officer and Director (Principal Executive Officer) By /s/ Douglas Schirle March 11, 1997 -------------------------------------------------- Douglas Schirle Vice President of Finance and Chief Financial Officer (Principal Financial Officer) By /s/ George Collins March 11, 1997 -------------------------------------------------- George Collins Director By /s/ James Kochman March 11, 1997 -------------------------------------------------- James Kochman Director -76- INDEX TO EXHIBITS Exhibit Number Exhibit ------ ------- 1.3 Agreement and Plan of Merger between the Registrant and Paradigm Technology Delaware Corporation, a Delaware corporation.(1) 1.4 Agreement and Plan of Merger dated as of June 5, 1996 between the Registrant and NewLogic Corp. 2.1 Third Amended Joint Plan of Reorganization effective June 21, 1994.(1) 2.2 Stock Purchase Agreement, dated as of January 21, 1997, by and between Paradigm Technology, Inc. and Vintage Products, Inc.(7) 2.3 Securities Purchase Agreement dated as of April 22, 1996 between the Registrant, NewLogic Corp. and certain securityholders of NewLogic Corp. 2.4 First Amendment to Securities Purchase Agreement dated as of April 22, 1996 between the Registrant, NewLogic Corp. and certain securityholders of NewLogic Corp. 2.5 Investor Securities Purchase Agreement dated as of May 29, 1996 between the Registrant and certain Investors listed on Schedule A attached thereto. 3.1 Amended and Restated Certificate of Incorporation.(1) 3.2 Bylaws of the Registrant, as amended.(1) 4.1 Certificate of Designation of the 5% Series A Convertible Redeemable Preferred Stock as filed with the Secretary of State of the State of Delaware.(7) 9.1 Voting Trust Agreement dated as of May 24, 1996 between Hans Olsen and the persons listed on Schedule A attached thereto. 10.1 Amended and Restated 1994 Stock Option Plan of the Registrant (the "Plan").(5) 10.2 Form of Incentive Stock Option Agreement under the Plan.(1) 10.3 Form of Nonstatutory Stock Option Agreement under the Plan.(1) 10.4 1995 Employee Stock Purchase Plan of the Registrant.(1) 10.5 Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated December 7, 1988.(1) Exhibit Number Exhibit ------ ------- 10.6 Second Amendment to Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated June 18, 1990.(1) 10.7 First Amendment to Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated May 4, 1989.(1) 10.8 Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated January 17, 1992.(1)(2) 10.9 Side Letter to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated January 17, 1992.(1) 10.10 Amendment No. 1 to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated October 23, 1992.(1)(2) 10.11 Amendment No. 2 to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated October 30, 1992.(1) 10.12 Amendment No. 3 to Technology Development Agreement for SRAM/ASM Process Technology and Design between NKK Corporation and the Registrant dated February 16, 1995.(1)(2) 10.13 Restated Technology Development Agreement for 4Mb SRAM Process and Design between NKK Corporation and the Registrant dated May 26, 1992.(1)(2) 10.14 Amendment No. 1 to Restated Technology Development Agreement for 4Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 23, 1992.(1)(2) 10.15 Amendment No. 2 to Restated Technology Development Agreement for 4Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 30, 1992.(1) 10.16 Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated May 26, 1992.(1)(2) 10.17 Amendment No. 1 to Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 23, 1992.(1)(2) Exhibit Number Exhibit ------ ------- 10.18 Amendment No. 2 to Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated October 30, 1992.(1) 10.19 Amendment No. 3 to Restated Technology Transfer and License Agreement 256K/1Mb SRAM Process and Design between NKK Corporation and the Registrant dated August 16, 1994.(1)(2) 10.20 Agreement on 1M SRAM Sales Right and OEM Supply and Modification of Existing Agreements between NKK Corporation and the Registrant dated April 18, 1995.(1)(2) 10.21 Marketing and Resale Agreement between the Registrant and National Semiconductor Corporation dated October 13, 1994.(1)(2) 10.22 License and Manufacturing Agreement between the Registrant and Atmel Corporation dated April 28, 1995.(1)(2) 10.23 Patent License Agreement between the Registrant and American Telephone and Telegraph Company dated December 13, 1990.(1) 10.24 Amended and Restated Registration Rights Agreement between the Registrant and certain stockholders of the Registrant dated April 28, 1995.(1) 10.25 Amended Warrant for 50,000 shares of Common Stock of the Registrant issued to ACMA Limited on June 23, 1994.(1) 10.26 Warrant for 100,000 shares of Common Stock transferred by ACMA Limited to Chiang Lam on December 9, 1994.(1) 10.27 Warrant for 50,000 shares of Common Stock issued by the Registrant to ACMA Limited on January 25, 1995 between the Registrant and Atmel Corporation.(1) 10.28 Warrant for 350,000 shares of Common Stock of the Registrant transferred by ACMA Limited to Atmel Corporation on May 1, 1995.(1) 10.29 Loan and Security Agreement between the Registrant and Greyrock Business Credit dated February 28, 1995.(1) 10.30 Amendment to Loan Documents between the Registrant and Greyrock Business Credit dated April 7, 1995.(1) 10.31 Amendment to Loan Documents between the Registrant and Greyrock Business Credit dated May 1, 1995.(1) 10.32 Form of Indemnification Agreement.(1) Exhibit Number Exhibit ------ ------- 10.33 General Release and Covenant Not to Sue dated May 24, 1995 between Anthony C. Langley and the Registrant.(1) 10.34 Stock Purchase Agreement dated as of April 28, 1995 between the Registrant and Atmel Corporation.(1) 10.35 Letter of Credit dated March 2, 1995 issued by Royal Bank of Canada Singapore on behalf of ACMA Limited in favor of Greyrock Business Credit.(1) 10.36 Observation Rights Agreement dated June 16, 1995 between ACMA Limited and the Registrant.(1) 10.37 Third Amendment to Office Building Lease between Sobrato Development Companies #871, a California limited partnership and the Registrant dated December 21, 1995.(3) 10.38 Loan and Security Agreement dated February 9, 1996 between Bank of the West and the Registrant.(3) 10.39 Loan and Security Agreement dated February 14, 1996 between the Registrant and the CIT Group/Equipment Financing, Inc.(4) 10.40 Agreement of Purchase and Sale of Assets dated as of November 7, 1996 between the Registrant and Orbit Semiconductor, Inc. Exhibits to this Agreement omitted from this report will be furnished to the Securities and Exchange Commission upon request.(6) 10.41 Wafer Manufacturing Agreement dated as of November 7, 1996 between the Registrant and Orbit Semiconductor, Inc.(6) 10.42 Promissory Note dated November 15, 1996 in the aggregate principal amount of $4,800,000 issued by Orbit Semiconductor, Inc. to the Registrant.(6) 10.43 Promissory Note dated November 15, 1996 in the aggregate principal amount of $1,000,000 issued by Orbit Semiconductor, Inc. to the Registrant.(6) 10.44 Office Building Lease Agreement dated December 26, 1996 between the Registrant, John Arrillaga, Trustee, UTA dated 7/20/77 and Richard T. Perry, Trustee, UTA dated 7/20/77. 10.45 Loan and Security Agreement dated October 25, 1996 between the Registrant and Greyrock Business Credit. 10.46 Employee letter agreement dated May 23, 1996 between the Registrant and Hans Olsen. Exhibit Number Exhibit ------ ------- 10.47 Employee letter agreement dated May 24, 1996 between the Registrant and Bruce Campbell. 10.48 Employee letter agreement dated May 23, 1996 between the Registrant and Gregory Roberts. 10.49 Executive Compensation Agreement dated August 26, 1996 between the Registrant and Michael Gulett. 11.1 Computation of Net Income (Loss) Per Share. 23.1 Consent of Price Waterhouse LLP, Independent Accountants. 27.1 Financial Data Schedule - - -------------------- (1) Incorporated by reference to Registration Statement on Form S-1 (Reg. No. 33-92390). (2) Confidential treatment granted as to certain portions. (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (6) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 1996. (7) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 6, 1997. * Previously filed. EX-1.4 2 AGREEMENT OF MERGER AGREEMENT OF MERGER THIS AGREEMENT OF MERGER, made and entered into as of June 5, 1996, by and between PARADIGM TECHNOLOGY, INC., a Delaware corporation ("Paradigm"), and NEWLOGIC CORP., a Delaware corporation ("NewLogic"), W I T N E S S E T H: WHEREAS, Paradigm and NewLogic (collectively the "Constituent Corporations") have entered into a Securities Purchase Agreement (the "Purchase Agreement") dated as of April 22, 1996, as amended; and WHEREAS, the Board of Directors of the Constituent Corporations deem it advisable and in the best interests of the Constituent Corporations and in the best interests of the stockholders of the Constituent Corporations that NewLogic be merged with and into Paradigm (the "Merger") in accordance with Section 251 of the Delaware General Corporation Law: NOW, THEREFORE, the Constituent Corporations hereby agree as follows: ARTICLE I 1.1 Paradigm. Paradigm was incorporated under the laws of the State of Delaware on April 4, 1995. Paradigm is authorized to issue 5,000,000 shares of Preferred Stock, $.01 par value per share ("Paradigm Preferred Stock"), and 25,000,000 shares of Common Stock, $.01 par value per share ("Paradigm Common Stock"). As of May 29, 1996, an aggregate of 6,820,641 shares of Paradigm Common Stock were issued and outstanding, and no shares of Paradigm Preferred Stock were issued or outstanding. 1.2 NewLogic. NewLogic was incorporated under the laws of the State of Delaware on July 1, 1993. NewLogic is authorized to issue 10,765,000 shares of Common Stock, $0.01 par value ("NewLogic Common Stock"), and 4,235,000 shares of Preferred Stock, $0.01 par value ("NewLogic Preferred Stock"), of which 60,000 authorized shares are designated Series A Preferred Stock, 3,750,000 authorized shares are designated Series B-1 Preferred Stock and 425,000 authorized shares are designated Series B-2 Preferred Stock. As of May 29, 1996, an aggregate of 3,226,160 shares of NewLogic Common Stock were issued and outstanding, no shares of NewLogic Series A Preferred Stock were issued and outstanding, an aggregate of 1,825,000 shares of NewLogic Series B-1 Preferred Stock were issued and outstanding and no shares of NewLogic Series B-2 Preferred Stock were issued and outstanding. -1- ARTICLE II - The Merger 2.1 Effectiveness of Merger. The Merger shall become effective at such time ("Effective Time of the Merger") as this Agreement of Merger or a Certificate of Merger is duly filed in accordance with the laws of Delaware. At the Effective Time of the Merger, NewLogic shall be merged into Paradigm and the separate corporate existence of NewLogic shall thereupon cease. Paradigm shall be the surviving corporation in the Merger (the "Surviving Corporation") and the separate corporate existence of Paradigm with all its purposes, objects, rights, privileges, powers and franchises, shall continue unaffected and unimpaired by the Merger. Paradigm stockholder approval of the Merger is not required pursuant to Section 251(f) of the code because Paradigm shares representing less than 20% of outstanding Paradigm stock will be issued in the Merger. All requisite NewLogic stockholder approval of the Merger has been obtained. 2.2 Effect of Merger. The Surviving Corporation shall possess all assets and property of every description, and every interest therein, wherever located, and the rights, privileges, immunities, powers, franchises, and authority, of a public as well as of a private nature, of the Constituent Corporations, and all obligations belonging to or due to each of the Constituent Corporations, all of which shall be vested in the Surviving Corporation without further act or deed, and title to any real estate or any interest therein vested in the Constituent Corporations shall not revert or in any way be impaired by reason of the Merger. The Surviving Corporation shall be liable for all obligations of the Constituent Corporations, including liability, if any, to dissenting stockholders, and any claim existing, or action or proceeding pending, by or against the Constituent Corporations, may be prosecuted to judgment, with right of appeal, as if the Merger had not taken place. All the rights of creditors of the Constituent Corporations shall be preserved unimpaired, and all liens upon the property of the Constituent Corporations shall be preserved unimpaired, on only the property affected by such liens immediately prior to the Effective Time of the Merger. 2.3 Further Assurances. If, at any time after the Effective Time of the Merger, the Surviving Corporation shall consider or be advised that any conveyance, assignment, transfer, deed or other instrument or act is necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of NewLogic acquired or to be acquired by the Surviving Corporation as a result of, or in connection with the Merger or to otherwise carry out this Merger Agreement, the officers and directors of the Surviving Corporation shall and will be authorized to execute, acknowledge and deliver, in the name and on behalf of -2- the Constituent Corporations or otherwise, all such instruments and to do such acts. ARTICLE III Certificate of Incorporation, By-Laws and Directors of the Surviving Corporation 3.1 Certificate of Incorporation. The Certificate of Incorporation of Paradigm in effect at the Effective Time of the Merger shall be the Certificate of Incorporation of the Surviving Corporation. 3.2 By-laws. The By-laws of Paradigm in effect at the Effective Time of the Merger shall be the by-laws of the Surviving Corporation. 3.3 Directors. The directors of Paradigm holding office at the Effective Time of the Merger shall be the directors of the Surviving Corporation (each of whom shall continue in office until the next annual meeting of stockholders of the Surviving Corporation and until his or her respective successor has been elected). ARTICLE IV Manner and Basis of Converting Shares of the Constituent Corporations 4.1 Conversion of Shares. At the Effective Time of the Merger: (a) all shares of NewLogic Common Stock which are held in its treasury immediately prior to the Effective Time of the Merger shall be canceled; (b) each share of Paradigm Common Stock and Paradigm Preferred Stock which is outstanding immediately prior to the Effective Time of the Merger shall continue to be outstanding immediately after the Effective Time of the Merger; (c) each share of NewLogic Common Stock which is outstanding immediately prior to the Effective Time of the Merger, other than 253,667 shares of Common Stock which shall be converted pursuant to subsection (e) below, shall be converted at the Effective Time of the Merger into .07518797 (or 1/13.3) shares of Common Stock, of the Surviving Corporation; (d) Each share of NewLogic Series B-1 Preferred Stock which is outstanding immediately prior to the Effective Time of the Merger, other than the 825,000 shares of NewLogic Series B-1 Preferred Stock held by Nichimen Corporation which shall be converted pursuant to subsection (f) below, shall be converted at the Effective Time of the Merger into .09090909 (or 1/11) shares of Common Stock, of the Surviving Corporation; and -3- (e) Each share of NewLogic Common Stock set forth below which is outstanding immediately prior to the Effective Time of the Merger shall be converted at the Effective Time of the Merger into the right to receive $0.650376: Number of Shares Issued To ---------------- ------------- 96,267 Hans Olsen 129,400 Nicholas Wade 2,000 James Demaris 2,000 Rebecca Williams 24,000 Peter MacCormack (f) Each share of NewLogic Series B-1 Preferred Stock held by Nichimen Corporation which is outstanding immediately prior to the Effective Time of the Merger, shall be converted at the Effective Time of the Merger into the right to receive $0.80. 4.2 Share Certificates. As soon as practicable after the Effective Time of the Merger and after surrender to the Exchange Agent designated by the Surviving Corporation (the "Exchange Agent") of any certificate which prior to the Effective Time of the Merger shall have represented any shares of NewLogic Common Stock or NewLogic Preferred Stock, the Surviving Corporation shall cause to be distributed to the persons identified in the Purchase Agreement certificates registered in the name of such persons representing the number of full shares of Common Stock of the Surviving Corporation into which any shares previously represented by the surrendered certificate shall have been converted at the Effective Time of the Merger. As soon as practicable after the Effective Time of the Merger and after surrender to the Exchange Agent of any certificate which prior to the Effective Time of the Merger shall have represented the Shares described in Sections 4.1(e) and (f) above, the Surviving Corporation shall cause to be distributed to the holders thereof cash in the amount set forth in Section 4.1(e) and (f) above and in accordance with that certain Investors Purchase Agreement by and between Paradigm and such stockholders. Until surrender as contemplated by the preceding two sentences, each certificate which immediately prior to the Effective Time of the Merger shall have represented any shares of NewLogic Common Stock or NewLogic Preferred Stock shall be deemed from and after the Effective Time of the Merger to represent only the right to receive upon such surrender the certificates or cash contemplated by the preceding two sentences. 4.3 Fractional Share Interests. No certificates or scrip representing fractional shares of Common Stock of the Surviving Corporation shall be issued upon the surrender for exchange of certificates for NewLogic Common Stock or NewLogic Preferred Stock pursuant to this Article IV and no dividend or stock split by the Surviving Corporation shall relate to any fractional -4- share, and such fractional share interests shall not entitle the owner thereof to vote or to any rights of a stockholder. In lieu of any such fractional shares, each holder of a fractional interest shall be entitled to receive cash in an amount equal to his or her fractional share interest. ARTICLE V Termination and Amendment 5.1 Termination. Notwithstanding the approval of this Agreement of Merger by the stockholders of NewLogic and Paradigm, this Agreement of Merger shall terminate forthwith in the event that the Purchase Agreement shall be terminated as therein provided. In the event of the termination of this Agreement of Merger as provided above, this Agreement of Merger shall forthwith become void and there shall be no liability on the part of either NewLogic or Paradigm or their respective officers or directors, except as expressly provided for in the Purchase Agreement. 5.2 Amendment. This Merger Agreement may be amended by the parties hereto, by action taken by their respective Boards of Directors, at any time before or after approval hereof by the stockholders of either NewLogic or Paradigm, but, after any such approval, no amendment shall be made which changes the ratio at which NewLogic Common Stock or NewLogic Preferred Stock is to be converted as provided in Section 4.1 of this Merger Agreement or which in any way adversely affects the holders of NewLogic Common Stock or NewLogic Preferred Stock without the further approval of such stockholders. This Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. This Merger Agreement may be executed in two or more counterparts which together shall constitute a single agreement. IN WITNESS WHEREOF, Paradigm and NewLogic have caused this Agreement of Merger to be signed by their respective officers thereunto duly authorized as of the date first written above. PARADIGM TECHNOLOGY, INC. By___________________________________ President ATTEST: ________________________________ Secretary -5- NEWLOGIC CORP. By___________________________________ President ATTEST: _________________________________ Secretary -6- EX-2.3 3 SECURITIES PURCHASE AGREEMENT EXHIBIT SECURITIES PURCHASE AGREEMENT by and among Paradigm Technology, Inc., NewLogic Corp., and Certain Securityholders of NewLogic Corp. dated as of April 22, 1996
TABLE OF CONTENTS Page ---- ARTICLE I PURCHASE, SALE AND SURRENDER OF SECURITIES...........................................1 1.1 Purchase, Sale and Surrender of Securities...........................................1 1.2 The Agreement of Merger..............................................................1 1.3 Purchase Price.......................................................................2 1.4 Other NewLogic Securities............................................................3 ARTICLE II POST-CLOSING CONSIDERATION...........................................................3 2.1 Post-Closing Consideration...........................................................3 2.2 Determination of Amount..............................................................3 ARTICLE III REPRESENTATIONS AND WARRANTIES OF NEWLOGIC...........................................4 3.1 Organization, Standing and Power.....................................................5 3.2 Capital Structure....................................................................5 3.3 Subsidiaries.........................................................................7 3.4 Authority............................................................................7 3.5 Financial Statements.................................................................8 3.6 Payables; Receivables................................................................8 3.7 Compliance with Laws.................................................................9 3.8 No Defaults..........................................................................9 3.9 Litigation......................................................................... 10 3.10 Conduct in the Ordinary Course..................................................... 10 3.11 Absence of Undisclosed Liabilities................................................. 12 3.12 Documents and Information Supplied................................................. 12 3.13 Certain Agreements................................................................. 12 3.14 Plans.............................................................................. 12 3.15 Major Contracts.................................................................... 13 3.16 Taxes.............................................................................. 15 3.17 Intellectual Property.............................................................. 16 3.18 Service Provider Agreements........................................................ 19 3.19 Restrictions on Business Activities................................................ 19 3.20 Title to Properties; Absence of Liens and Encumbrances; Condition of Equipment............................................... 19 3.21 Environmental Matters.............................................................. 19 3.22 Insurance.......................................................................... 20 3.23 Labor Matters...................................................................... 20 3.24 Personnel.......................................................................... 20 3.25 Third-Party Consents............................................................... 21 3.26 Related Party Transactions......................................................... 21 3.27 Brokers or Finders; Professional Fees.............................................. 21 3.28 Permit Application................................................................. 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SECURITYHOLDERS.................................. 22 4.1 Authority.......................................................................... 22 4.2 Title to Securities................................................................ 23 4.3 Third-Party Consents............................................................... 23 4.4 Brokers or Finders; Professional Fees.............................................. 23 -i- Page ---- ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARADIGM......................................... 23 5.1 Organization; Standing and Power................................................... 23 5.2 Authority.......................................................................... 24 5.3 Paradigm Financial Statements...................................................... 25 5.4 Litigation......................................................................... 25 5.5 Reports............................................................................ 25 5.6 Compliance with Laws............................................................... 25 5.7 Material Contracts................................................................. 26 5.8 Taxes.............................................................................. 26 5.9 Restrictions on Business Activities................................................ 26 5.10 Governmental Authorizations and Licenses........................................... 26 5.11 Environmental Matters.............................................................. 27 5.12 Questionable Payments.............................................................. 27 5.13 Brokers or Finders; Professional Fees.............................................. 27 5.14 Permit Application................................................................. 28 5.15 Section 368(a) Reorganization...................................................... 28 ARTICLE VI COVENANTS OF NEWLOGIC.............................................................. 28 6.1 Maintenance of Business............................................................ 28 6.2 Conduct of Business................................................................ 28 6.3 Necessary Consents................................................................. 29 6.4 Access to Information.............................................................. 30 6.5 Further Assurances................................................................. 30 6.6 Exclusivity; Acquisition Proposals................................................. 30 6.7 Breach of Representations, Warranties, Agreements and Covenants........................................................... 31 6.8 Legal Conditions to the Sale or Surrender of the Securities.................................................................. 31 6.9 Post-Closing Covenants............................................................. 32 6.10 Public Announcements............................................................... 33 ARTICLE VII COVENANTS OF PARADIGM.............................................................. 33 7.1 Necessary Consents................................................................. 33 7.2 Access to Information.............................................................. 33 7.3 Further Assurances................................................................. 34 7.4 Public Announcements............................................................... 34 7.5 Breach of Representations, Warranties, Agreements and Covenants........................................................... 34 7.6 Legal Conditions to the Sale of the Securities......................................................................... 34 7.7 3(a)(10) Fairness Hearing.......................................................... 35 7.8 Listing of Shares.................................................................. 35 ARTICLE VIII COVENANTS OF SECURITYHOLDERS....................................................... 35 8.1 Necessary Consents................................................................. 35 8.2 Further Assurances................................................................. 35 8.3 No Transfer........................................................................ 36 8.4 Breach of Representations Warranties, Agreements and Covenants........................................................... 36 8.5 Limited Resales.................................................................... 36 -ii- Page ---- ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF PARADIGM........................................................................... 36 9.1 Certificates for Securities........................................................ 36 9.2 Representations and Warranties True................................................ 37 9.3 Covenants Performed................................................................ 37 9.4 Certificates....................................................................... 37 9.5 Opinion of Counsel for NewLogic.................................................... 37 9.6 No Violations; No Actions.......................................................... 37 9.7 No Material Adverse Effect......................................................... 37 9.8 Proceedings and Documents.......................................................... 37 9.9 Schedules.......................................................................... 37 9.10 Required Consents.................................................................. 38 9.11 Accountants' Opinion............................................................... 38 9.12 Employment, Noncompetition and Proprietary Information Agreements............................................................. 38 9.13 Tax Forms.......................................................................... 38 9.14 Signature Pages.................................................................... 38 9.15 Other Purchase Agreements.......................................................... 39 9.16 Securities Laws.................................................................... 39 ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF NEWLOGIC AND OF THE SECURITYHOLDERS................................................ 39 10.1 Representations and Warranties True................................................ 39 10.2 Covenants Performed................................................................ 39 10.3 No Violations; No Actions.......................................................... 39 10.4 Proceedings and Documents.......................................................... 40 10.5 Required Consents.................................................................. 40 10.6 Certificate........................................................................ 40 10.7 Opinion of Counsel for Paradigm.................................................... 40 10.8 Tax Opinion........................................................................ 40 10.9 3(a)(10) Fairness Hearing.......................................................... 40 10.10 Accountants' Opinion............................................................... 40 ARTICLE XI CLOSING............................................................................ 41 11.1 Time and Place..................................................................... 41 11.2 Deliveries of NewLogic or the Securityholders.................................................................... 41 (a) Certificates and Instruments............................................ 41 (b) Corporate Documents..................................................... 41 (c) Certificates of Good Standing and Qualification........................................................... 41 (d) Resolutions............................................................. 41 (e) Books and Records....................................................... 41 (f) Consents................................................................ 41 (g) Opinion of Counsel...................................................... 41 (h) NewLogic Certificate.................................................... 42 (i) FIRPTA.................................................................. 42 (j) Other Documents......................................................... 42 (k) Option Exercise Price................................................... 42 11.3 Deliveries of Paradigm............................................................. 42 (a) Payment of the Consideration............................................ 42 -iii- (b) Resolutions............................................................. 42 (c) Consents................................................................ 42 (d) Opinion of Counsel...................................................... 42 (e) Paradigm Certificate.................................................... 42 (f) 3(a)(10) Permit......................................................... 43 (g) Other Documents......................................................... 43 ARTICLE XII COVENANT OF SETTLEMENT AND GENERAL RELEASE......................................... 43 12.1 Settlement and General Release of the Paradigm Released Parties.......................................................... 43 12.2 Settlement and General Release of the Securityholders Released Parties................................................... 45 ARTICLE XIII INDEMNIFICATION.................................................................... 46 13.1 Survival of Representations, Warranties, Covenants and Agreements........................................................... 46 13.2 Indemnification.................................................................... 47 13.3 Procedure for Indemnification with Respect to Third-Party Claims.............................................................. 49 13.4 Procedure For Indemnification with Respect to Non-Third Party Claims.......................................................... 50 ARTICLE XIV TERMINATION........................................................................ 51 14.1 Termination........................................................................ 51 14.2 Breakup Fee........................................................................ 53 14.3 Bridge Loan........................................................................ 53 ARTICLE XV MISCELLANEOUS PROVISIONS........................................................... 53 15.1 Notice............................................................................. 53 15.2 Entire Agreement................................................................... 54 15.3 Binding Effect; Assignment......................................................... 54 15.4 Expenses of Transaction............................................................ 54 15.5 Waiver; Consent.................................................................... 54 15.6 Third-Party Beneficiaries.......................................................... 55 15.7 Counterparts....................................................................... 55 15.8 Severability....................................................................... 55 15.9 Governing Law...................................................................... 55 15.10 Other Remedies..................................................................... 55 15.11 Mutual Drafting.................................................................... 55 15.12 Tax Matters........................................................................ 55
Schedules A Schedule of Securityholders 1.3(a) Payments to Securityholders 1.4 Other NewLogic Securityholders 2.1 Post Closing Consideration Table 2.2 NewLogic Products 3.2 NewLogic Stock Ledger 11.2(k) Option Exercise Payments -iv- Exhibits 1.2 Agreement of Merger 1.3(b) Escrow Agreement 9.5 Form of BP&H Opinion 9.12(a) Form of Employment Letter Agreement 9.12(b) Form of Non-Competition Agreement 9.12(c) Form of Proprietary Information Agreement 10.7 Form of PM&S Opinion -v- SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of this 22nd day of April, 1996, by and among PARADIGM TECHNOLOGY, INC., a Delaware corporation ("Paradigm"), NEWLOGIC CORP., a Delaware corporation ("NewLogic"), and the securityholders of NewLogic listed on Schedule A to this Agreement who have executed and delivered a signature page to this Agreement (collectively, the "Securityholders"), W I T N E S S E T H: WHEREAS, Paradigm desires to acquire NewLogic in a transaction intended to qualify as a tax-free reorganization pursuant to section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), pursuant to which NewLogic will merge with and into Paradigm, and Paradigm will receive all of the capital stock of NewLogic, as the surviving entity of the Merger; and WHEREAS, in furtherance thereof, Paradigm will pay to each Securityholder shares of Common Stock of Paradigm for their securities or for the surrender of their securities and, as an inducement to certain Securityholders to enter into this Agreement, certain of these Securityholders shall be entitled to receive additional consideration after the Closing: NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereto agree as follows: ARTICLE I PURCHASE, SALE AND SURRENDER OF SECURITIES 1.1 Purchase, Sale and Surrender of Securities. Upon the terms and subject to the conditions of this Agreement, the Securityholders shall sell to Paradigm and Paradigm shall purchase from the Securityholders all of the shares of capital stock of NewLogic held by the Securityholders, and the Securityholders shall surrender all unexercised options and other rights to purchase such shares held by the Securityholders (collectively, the "Securities") at the Closing (as defined in Section 11.1 hereof). 1.2 The Agreement of Merger. At the Closing, NewLogic shall be merged with and into Paradigm by a statutory merger (the "Merger") in accordance with the Delaware General Corporation Law ("Corporation Law") on the terms and subject to the conditions set forth herein and pursuant to an agreement of merger in the form attached hereto as Exhibit 1.2 (the "Agreement of Merger"). The Agreement of Merger will be executed and delivered by NewLogic and Paradigm prior to the Closing and will be filed with the Secretary of State of the State of Delaware at or simultaneous with the Closing in accordance with section 251 -1- of the Corporation Law. The Merger shall be effective (the "Effective Time of Merger") as of the time of the filing of the Agreement of Merger with the Delaware Secretary of State on the Closing Date, at which time NewLogic shall cease to exist, and Paradigm shall be the surviving entity. At the Effective Time of Merger, the Securities shall by virtue of the Merger and without any action on the part of the Securityholders, be converted into the number of shares of common stock of Paradigm as set forth in the Agreement of Merger. 1.3 Purchase Price. As consideration for the Securities, Paradigm shall pay to the Securityholders an aggregate of 314,395 shares of the Common Stock of Paradigm (collectively, the "Stock Consideration") and an aggregate of $165,068.05 in cash (the "Cash Consideration"), together with the post-closing consideration in accordance with Article (collectively, the "Purchase Price"), as follows: (a) 176,307 shares of Common Stock of Paradigm, shall be distributed at the Closing to the Securityholders set forth on Schedule 1.3(a) and in the amounts set forth next to each Securityholder's name on such schedule; (b) 138,088 shares of Common Stock of Paradigm (the "Escrowed Shares"), shall be delivered irrevocably to a financial institution or other independent party to be mutually agreed upon by Paradigm and NewLogic prior to the Closing, as escrow agent (the "Escrow Agent"), pursuant to an escrow agreement substantially in the form attached as Exhibit 1.3(b) hereto (the "Escrow Agreement"). The Escrowed Shares shall be issued in the record name of Hans Olsen, as trustee (the "Securityholders Trustee") of the voting trust created pursuant to an agreement by and among each of the Securityholders and the Trustee for the purpose of administering the rights of the Securityholders with respect to the Escrowed Shares (the "Voting Trust Agreement"). The Escrowed Shares will be held by the Escrow Agent for purposes of securing the indemnification obligations of the Securityholders as set forth in Article of this Agreement and in the Escrow Agreement. In accordance with the Escrow Agreement, 41,426 shares of Common Stock of Paradigm (together with any dividends or distributions paid thereon), net of any offsets made in satisfaction of such indemnification obligations ("Offsets"), shall be released by the Escrow Agent to the Securityholders Trustee on the first anniversary of the Closing, and thirty-five percent (35%) of the Stock Consideration, or 96,662 shares of Common Stock of Paradigm (together with any dividends or distributions paid thereon), net of any Offsets, shall be released by the Escrow Agent to the Securityholders Trustee on the second anniversary of the Closing. (c) The Cash Consideration shall be paid to the Securityholders set forth on Schedule 1.3(a), or to NewLogic on behalf of such Securityholders, and in the amounts set forth next to -2- each such Securityholder's name on such schedule, by check or wire transfer. 1.4 Other NewLogic Securities. Schedule 1.4 attached hereto sets forth the name and number of NewLogic shares of capital stock and options or other rights to acquire such capital stock held by each person other than the Securityholders. On or before the Closing Date, Paradigm shall purchase and acquire from each securityholder named on Schedule 1.4 all of the NewLogic securities held by such Securityholders, for consideration consisting entirely of cash, pursuant to one or more purchase agreements separate from this Agreement. ARTICLE II POST-CLOSING CONSIDERATION 2.1 Post-Closing Consideration. Subsequent to the Closing, in accordance with Section 2.2 below, all of the Securityholders set forth in the attached Schedule 2.1 shall be entitled to receive additional cash consideration as set forth in Section 2.2 of this Agreement (the "Gross Margin Payments"). 2.2 Determination of Amount. (a) Each such Securityholder set forth in Schedule 2.1 then employed by Paradigm (or otherwise providing services to Paradigm substantially equivalent to those provided immediately prior to the termination of such employment) at the time of the distribution shall be entitled to cash consideration, if any, equal to the product of (i) twelve and one-half percent (12.5%) of the NewLogic Product Gross Margin generated from and after the Closing until December 31, 1997, times (ii) the percentage set forth next to such Securityholder's name on such Schedule 2.1 (the "Percentage Interest"). (b) Each such Securityholder set forth in Schedule 2.1 then employed by Paradigm (or otherwise providing services to Paradigm substantially equivalent to those provided immediately prior to the termination of such employment) at the time of the distribution shall be entitled to cash consideration, if any, equal to the product of (i) five percent (5%) of the NewLogic Product Gross Margin generated from and after January 1, 1998 until June 30, 1998, times (ii) such Securityholder's Percentage Interest. (c) In the event that a Securityholder set forth on Schedule 2.1 for any reason is not employed by Paradigm (or otherwise providing services to Paradigm substantially equivalent to those provided immediately prior to the termination of such employment) at the time of any Gross Margin Payments, such Securityholder's Gross Margin Payment shall be allocated and distributed among the remaining eligible Securityholders pro rata based on their Percentage Interest in such amount (after -3- reallocating pro rata among them the Percentage Interest of the departed Securityholder). (d) "NewLogic Product Gross Margin" shall be defined as the gross margin generated from the sale of NewLogic (or any legal successor in interest to NewLogic) Products (defined below) as determined by Paradigm applying the criteria used by Paradigm with respect to the sale of Paradigm products. The NewLogic products subject to this Section 2.2 (the "Products") shall be as set forth in the attached Schedule 2.2 Paradigm shall act in good faith in determining the NewLogic Product Gross Margin on any sales of Products and in developing and marketing the sale of the Products during the periods described in Sections 2.2(a) and 2.2(b) above. Subject to Subsection 2.2(f) below, Gross Margin Payments due under this Section 2.2 shall be paid to eligible Securityholders, when earned, in quarterly payments on each of April 15, July 15, October 15 and January 15. (e) The Securityholders holding a majority in interest of the Stock Consideration or their duly authorized agents shall have the right, (i) during normal business hours and following reasonable prior written notice to Paradigm, to conduct audits with respect to the applicable books and records in the possession or under the control of Paradigm reasonably relating to the Products for the purpose of verifying Paradigm's determination of the NewLogic Product Gross Margin, and (ii) to modify the allocation of the Percentage Interests set forth on Schedule 2.1 among eligible Securityholders or third parties, upon prior written notice to Paradigm. (f) The parties hereto acknowledge that NewLogic has on the date hereof an uncollected, unearned milestone payment receivable in the amount of $600,000 relating to its research and development contract with Winbond Electronics Corp. dated January 1, 1996 (the "R&D Milestone Payment"). Notwithstanding the provisions of this Section 2.2, from and after the Closing date, no Gross Margin Payments shall be distributed to eligible Securityholders except to the extent such Gross Margin Payments in the aggregate exceed the then-current balance of the R&D Milestone Payment. In the event, following the full offset of Gross Margin Payments against the R&D Milestone Payment as set forth above, any portion of the R&D Milestone Payment is collected by Paradigm, such amount shall be promptly distributed to the eligible Securityholders pursuant to their Percentage Interests. ARTICLE III REPRESENTATIONS AND WARRANTIES OF NEWLOGIC Except as specifically set forth in the NewLogic disclosure schedule certified by the President and Chief Executive Officer of NewLogic and delivered by NewLogic to Paradigm prior to the -4- execution of this Agreement (the "NewLogic Disclosure Schedule"), NewLogic represents and warrants to Paradigm that the representations and warranties set forth in this Article are true and correct as of the date hereof. All disclosures set forth in such NewLogic Disclosure Schedule shall be deemed representations and warranties of NewLogic. As used in this Agreement, (a) "Business Condition" with respect to NewLogic shall refer to NewLogic's financial condition, business, prospects, results of operations and assets as presently conducted or as proposed to be conducted; (b) a disclosure or result will be deemed "material and adverse" if it gives or could give rise to a substantial diminution in the economic value of NewLogic as presently conducted or as proposed to be conducted; and (c) "to the knowledge of NewLogic" and like phrases shall, unless otherwise qualified, refer to the knowledge of NewLogic's executive officers and directors following reasonable inquiry. 3.1 Organization, Standing and Power. NewLogic is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as now being conducted. NewLogic is qualified to do business as a foreign corporation in the states of Washington and California, and is not required to qualify as a foreign corporation in any other jurisdiction except where the failure to so qualify would not have a material adverse effect on the Business Condition of NewLogic. NewLogic has delivered or made available to Paradigm complete and correct copies of its (a) Certificate of Incorporation and Bylaws, (b) minutes of all of directors' and stockholders' meetings, which are complete and accurate as of the date hereof, (c) stock certificate books and all other records of NewLogic, which collectively correctly set forth the record ownership of all outstanding shares of capital stock and all rights to purchase capital stock of NewLogic and (d) form of stock certificates, option agreements and rights to purchase shares of capital stock of NewLogic. 3.2 Capital Structure. (a) The authorized capital stock of NewLogic consists of 10,765,000 shares of Common Stock, $0.01 par value per share, and 4,235,000 shares of Preferred Stock, $0.01 par value per share, of which 60,000 authorized shares are designated Series A Preferred Stock, 3,750,000 authorized shares are designated Series B-1 Preferred Stock and 425,000 authorized shares are designated Series B-2 Preferred Stock. As of the date of this Agreement, there were issued and outstanding: 2,375,380 shares of NewLogic common stock ("NewLogic Common Stock"); no shares of NewLogic Series A Preferred Stock; 1,825,000 shares of NewLogic Series B-1 Preferred Stock convertible into shares of Common Stock at the rate of one (1) share of NewLogic Common Stock for each share of NewLogic Series B-1 Preferred Stock; and no shares -5- of NewLogic Series B-2 Preferred Stock. As of the date of this Agreement, there were an aggregate of (i) 4,235,000 shares of NewLogic Common Stock reserved for issuance upon conversion of the NewLogic Preferred Stock, and (ii) 826,780 shares of Common Stock reserved for issuance upon the exercise of outstanding NewLogic options to acquire NewLogic Common Stock (the "NewLogic Options"). There are currently outstanding options to purchase 826,780 shares of NewLogic Common Stock and 973,220 shares of NewLogic Common Stock available for grant under options. There are no outstanding shares of NewLogic capital stock or any other right to receive or purchase equity securities of NewLogic (collectively, "NewLogic capital stock"), other than shares of NewLogic Common Stock and NewLogic Series B-1 Preferred Stock and the NewLogic Options. (b) All outstanding shares of NewLogic capital stock are, and any shares of NewLogic capital stock issued upon exercise of any NewLogic Option (subject to receipt of the exercise price as provided therein) will be, validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, NewLogic's Certificate of Incorporation or Bylaws or any agreement to which NewLogic is a party or by which NewLogic may be bound. All outstanding NewLogic securities have been issued in compliance with applicable federal and, to the Company's knowledge, based on written information provided by the Securityholders, state securities laws. Other than as described herein, there are no options, warrants, calls, conversion rights, commitments or agreements of any character to which NewLogic is a party or by which NewLogic may be bound that do or may legally obligate NewLogic to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of NewLogic capital stock or that do or may legally obligate NewLogic to grant, extend or enter into any such option, warrant, call, conversion right, commitment or agreement. (c) Schedule 3.2 contains a complete and accurate list of, and the number of shares owned of record by, the holders of outstanding NewLogic Common Stock, NewLogic Series B-1 Preferred Stock and NewLogic Options. Schedule 3.2 is complete and accurate on the date hereof, and an updated Schedule 3.2 to be attached hereto will be complete and accurate as of the Closing Date. (d) All NewLogic Options have been issued in accordance with NewLogic's stock equity plans and, to the Company's knowledge, based on written information provided by the Securityholders, all state securities laws. The NewLogic stock equity plans and all amendments thereto have been approved by all requisite NewLogic securityholder action. NewLogic does not have in effect any stock appreciation rights plan and no stock appreciation rights are currently outstanding. (e) Except as set forth in NewLogic's Certificate of Incorporation and except for any restrictions imposed by appli- -6- cable state and federal securities laws, there is no right of first refusal, co-sale right, right of participation, right of first offer, option or other restriction on transfer applicable to any shares of NewLogic Common Stock. (f) NewLogic is not a party or subject to any agreement or understanding, and, to the best of NewLogic's knowledge, there is no agreement or understanding between or among any persons that affects or relates to the voting or giving of written consent with respect to any outstanding security of NewLogic. 3.3 Subsidiaries. NewLogic does not own or control, directly or indirectly, any corporation, partnership, business, trust or other entity. 3.4 Authority. (a) NewLogic has all requisite corporate power and authority to enter into this Agreement, to execute, deliver and perform its obligations hereunder, and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement, the performance by NewLogic of its obligations hereunder and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary corporate action on the part of NewLogic, including approval by its Board of Directors. No NewLogic shareholder vote is required in connection with the transactions set forth in this Agreement. This Agreement is a legal, valid and binding obligation of NewLogic enforceable against NewLogic in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors' rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. (b) Subject to satisfaction of the conditions set forth in this Agreement, to NewLogic's knowledge, the execution, delivery and performance of this Agreement does not and the performance and consummation of the transactions contemplated hereby will not, conflict with or result in any material violation of any material statute, law, rule, regulation, judgment, order, decree, or ordinance applicable to NewLogic or its properties or assets, or conflict with or result in any conflict with, breach or violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation, forfeiture or acceleration of any material obligation or the loss of a material benefit under, or result in the creation of a lien or encumbrance on any of the properties or assets of NewLogic pursuant to (i) any provision of the Certificate of Incorporation or Bylaws of NewLogic or (ii) any agreement, contract, note, mortgage, indenture, lease, instrument, permit, concession, franchise or license to which NewLogic is a party or by which NewLogic or any of its properties or assets may be bound or affected except such violations that would not -7- have a material and adverse effect on the Business Condition of NewLogic. (c) No consent, approval, order or authorization of, or registration, declaration of, or qualification or filing with, any court, administrative agency, commission, regulatory authority or other governmental or administrative body or instrumentality, whether domestic or foreign (a "Governmental Entity"), is required by or with respect to NewLogic in connection with the execution, delivery and performance of this Agreement by NewLogic or the consummation by NewLogic of the transactions contemplated hereby, except for such consents, approvals, orders, authorizations, registrations, declarations, qualifications or filings (i) as may be required under state securities or Blue Sky laws in connection with the transactions set forth herein and (ii) the failure of which to obtain would not have a material and adverse effect on the Business Condition of NewLogic. 3.5 Financial Statements. NewLogic has furnished to Paradigm a complete and accurate copy of its audited balance sheet as of June 30, 1995 and its audited statements of operations, changes in stockholders' equity (deficit) and cash flow for the period ended June 30, 1995 (collectively, the "NewLogic Audited Financial Statements"). The NewLogic Audited Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied and fairly present the financial position of NewLogic as and at the dates thereof and NewLogic's results of operations and cash flows for the periods then ended. NewLogic has furnished to Paradigm a complete and accurate copy of its unaudited balance sheet as of March 31, 1996 and its unaudited statement of operations and cash flow for the nine (9) months ended March 31, 1996 (collectively, the "NewLogic Unaudited Financial Statements," collectively with the NewLogic Audited Financial Statements, the "NewLogic Financial Statements"). The NewLogic Unaudited Financial Statements have been prepared in accordance with GAAP consistently applied, subject to normal year-end adjustments and except for the absence of footnotes, and fairly present the financial position of NewLogic as and at the date thereof and NewLogic's results of operations and cash flows for the period then ended. 3.6 Payables; Receivables. (a) The NewLogic Disclosure Schedule sets forth a listing of accounts payable and accounts receivable of NewLogic in the aggregate and by creditor as of March 31, 1996. (b) NewLogic's revenue recognition policies with respect to the NewLogic Financial Statements have been made in accordance with GAAP. NewLogic maintains a standard system of accounting in accordance with GAAP. All of NewLogic's general ledgers, books and records are located at NewLogic's principal -8- place of business. NewLogic does not have any of its records, systems, controls, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) that (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of NewLogic. NewLogic's financial reserves are adequate to cover claims already incurred. 3.7 Compliance with Laws. To NewLogic's knowledge, NewLogic is in compliance and has conducted its business and operations so as to comply with all laws, ordinances, rules and regulations, judgments, decrees or orders of any Governmental Entity, except to the extent that failure to comply would not have a material and adverse effect on NewLogic's Business Condition. To NewLogic's knowledge, there are no judgments or orders, injunctions, decrees, stipulations or awards (whether rendered by a court or administrative agency or by arbitration) against NewLogic or against any of its properties or businesses, and, to NewLogic's knowledge, none are pending or threatened, which individually or in the aggregate would have a material and adverse effect on the Business Condition of NewLogic. NewLogic has not during the past eighteen (18) months received any governmental notice from any Governmental Entity for any violation of United States laws or regulations. NewLogic has all permits, licenses, orders, authorizations, registrations, concessions, certificates, approvals and other instruments of any Governmental Entity (the "Government Licenses") (each of which is in full force and effect) necessary for the conduct of its business which other than those the lack of which would individually or in the aggregate have a material and adverse effect on the Business Condition of NewLogic. NewLogic is in compliance with the terms, conditions, limitations, restrictions, standards, prohibitions, requirements and obligations of such Government Licenses except where the failure to so comply would not have a material and adverse effect on the Business Condition of NewLogic. NewLogic has made all filings and registrations and the like necessary or required by law to conduct its business except where its failure to do so would not have a material and adverse effect on NewLogic's Business Condition. To NewLogic's knowledge, there is not now pending, nor is there threatened, any action, suit, investigation or proceeding against NewLogic before any Governmental Entity with respect to the Government Licenses, nor is there any issued or outstanding notice, order or complaint with respect to the violation by NewLogic of the terms of any Government License or any rule or regulation applicable thereto other than those that would not have a material adverse effect on the Business Condition of NewLogic. 3.8 No Defaults. NewLogic is not, and it has not received notice that it is or would be with the passage of time (x) in violation of any provision of its Certificate of Incorporation or Bylaws or (y) to NewLogic's knowledge, in default or viola- -9- tion of (a) any term, condition or provision of any judgment, decree, order, injunction or stipulation applicable to NewLogic, or (b) any term or condition of any agreement, note, mortgage, indenture, law, statute, rule, regulation, contract, lease, instrument, permit, concession, franchise or license to which NewLogic is a party or by which NewLogic or its properties or assets may be bound, except for defaults or violations that would not have a material and adverse effect on the Business Condition of NewLogic. 3.9 Litigation. To NewLogic's knowledge, there is no action, suit, proceeding, claim, arbitration or investigation pending or threatened against NewLogic or any of its officers or directors which, if determined adversely to NewLogic or such officers or directors, would have an adverse effect on NewLogic's Business Condition. There is no action, suit, proceeding or investigation by NewLogic currently pending or which it intends to initiate. NewLogic has delivered or made available to Paradigm correct and complete copies of all correspondence prepared by its counsel for NewLogic's independent public accountants in connection with the last completed audit of NewLogic's financial statements and any such correspondence since the date of the last such audit. 3.10 Conduct in the Ordinary Course. Since March 31, 1996, NewLogic has conducted its business in the ordinary course and there has not occurred: (a) Any material and adverse change in the Business Condition of NewLogic from that reflected in the Financial Statements other than changes in the ordinary course of business; (b) Any amendments or changes in the Certificate of Incorporation or Bylaws of NewLogic; (c) Any material damage, destruction or loss, whether covered by insurance or not, affecting the Business Condition of NewLogic; (d) Any issuance, redemption, repurchase or other acquisition of shares of capital stock of NewLogic (other than issuances pursuant to exercise of NewLogic Options, repurchases of NewLogic Common Stock at cost in the ordinary course under the terms of preexisting agreements), or any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to NewLogic capital stock; (e) Other than compensation increases not exceeding five percent (5%) in any individual case and annual bonuses not exceeding fifteen percent (15%) in any individual case, any increase in or modification of the compensation or benefits payable or to become payable by NewLogic to any of its service -10- providers or changes pursuant to employment agreements currently in effect; (f) Any increase in or modification of any bonus, pension, insurance or other employee benefit plan, payment or arrangement (including, without limitation, the granting of stock options, restricted stock awards or stock appreciation rights) made to, for or with any of its service providers; (g) Any (i) sale of the property or assets of NewLogic individually in excess of $10,000 or in the aggregate in excess of $25,000, other than inventory sales in the ordinary course of business consistent with past practice or (ii) mortgage, pledge, transfer of a security interest in, or lien created by it, or other encumbrance with respect to any of its material properties or assets, except liens arising under existing lease financing arrangements, liens arising in the ordinary course of NewLogic's business and liens for taxes not yet due or payable, in each case or in the aggregate, which are not material to the Company; (h) Any (i) incurrence, assumption or guarantee by NewLogic of any debt for borrowed money other than trade indebtedness incurred in the ordinary course of business consistent with past practice; (ii) waiver or compromise by it of a valuable right or of a debt owed to it except that which is not material to its Business Condition, (iii) satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by it, except that which is not material to its Business Condition; (iv) issuance or sale of any securities convertible into or exchangeable for debt securities of NewLogic; or (v) issuance or sale of options or other rights to acquire from NewLogic, directly or indirectly, debt securities of NewLogic or any securities convertible into or exchangeable for any such debt securities; (i) Any making of any loan, advance or capital contribution to, or investment in, any person other than advances made in the ordinary course of business of NewLogic; (j) Any entry into, amendment of, relinquishment, termination or nonrenewal by NewLogic of any contract, lease, commitment or other right or obligation other than in the ordinary course of business consistent with past practice; (k) Any transfer or grant of a right under the NewLogic Intellectual Property Rights (as defined in Section 3.17) other than those transferred or granted in the ordinary course of business; (l) Any labor dispute, other than routine individual grievances, or any activity or proceeding by a labor union or representative thereof to organize any employees of NewLogic; -11- (m) Any resignation or termination of employment of any of its key employees; and NewLogic, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such employee; or (n) Any agreement or arrangement made by NewLogic to take any action which, if taken prior to the date hereof, would have made any representation or warranty set forth in this Section 3.10 untrue or incorrect in any material respect as of the date when made. 3.11 Absence of Undisclosed Liabilities. Except as disclosed or reflected in the NewLogic March 31, 1996 balance sheet and except for liabilities and obligations arising after March 31, 1996 in the ordinary course of business which are not material, NewLogic has no liabilities or obligations (whether absolute, accrued or contingent, and whether or not determined or determinable) of a character which, under GAAP, should be accrued, shown, disclosed, reserved or indicated in an audited balance sheet of NewLogic (including the footnotes thereto). 3.12 Documents and Information Supplied. To NewLogic's knowledge, the copies of all instruments, agreements, other documents and information delivered by NewLogic and its professional advisors to Paradigm or its counsel and accountants are and will be true, accurate and complete in all material respects as of the date of delivery thereof. 3.13 Certain Agreements. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (a) result in any material payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any service provider of NewLogic under any Plan (as defined in Section 3.14 below) or otherwise, (b) materially increase any benefits otherwise payable under any Plan, or (c) result in the acceleration of the time of payment or vesting of any material benefits. 3.14 Plans. All plans, programs, policies, commitments or other arrangements (whether or not set forth in a written document) maintained by or on behalf of NewLogic that provide deferred or incentive compensation, stock options or other stock purchase rights, severance or termination pay, medical, dental, life, disability or accident benefits (whether or not insured), profit sharing or retirement benefits to, or for the benefit of, any active, former or retired service provider of NewLogic or their spouses or dependents and all collective bargaining agreements covering such service providers are listed in the NewLogic Disclosure Schedule (collectively, the "Plans"). NewLogic has furnished or made available to Paradigm copies of the Plans and related Plan documents. All applicable governmental filings and reports required with respect to such Plans have been correctly prepared and timely filed with the appropriate agencies. No -12- Plan is covered by Title IV of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or section 412 of the Code. Each Plan has been maintained and administered in all respects in compliance with its terms and with the requirements prescribed by all statutes, orders, rules and regulations, which are applicable to such Plan, except to the extent noncompliance would not have a material adverse effect on the operation of such Plan. To the knowledge of NewLogic, no suit, administrative proceeding, action or other litigation has been brought, or is threatened, against or with respect to any such Plan. The consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee or other service provider of NewLogic to severance benefits or any other payment, except as expressly provided in this Agreement, or (ii) other than with respect to NewLogic Options, accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or service provider. 3.15 Major Contracts. Except as set forth in the NewLogic Disclosure Schedule, NewLogic is not a party to or subject to: (a) Any union contract or any employment or consulting contract or arrangement, written or oral, with any director, officer or affiliate, other than indemnification agreements, stock option or stock purchase agreements or proprietary information agreements; (b) Any OEM agreement, distribution agreement, volume purchase agreement or other similar agreement, or joint venture contract or arrangement or any other agreement which has involved or is expected to involve a sharing of profits with other persons or provides for payments of more than $25,000 per annum; (c) Any lease for personal property involving payments of more than $10,000 per annum, or any lease for real property; (d) Except for trade indebtedness incurred in the ordinary course of business, any instrument evidencing or related in any way to indebtedness incurred in the acquisition of companies or other entities or indebtedness for borrowed money by way of direct loan, sale of debt securities, purchase money obligation, conditional sale, guarantee, leasehold obligations or otherwise; (e) Any license agreement, either as licensor or licensee other than license agreements entered into in the ordinary course of business; (f) Any contract containing covenants purporting to materially limit the freedom of NewLogic to compete in any line of business in any geographic area; -13- (g) Any agreement of indemnification, except indemnification provided in the ordinary course of business or for officers and directors pursuant to state law; (h) Any agreement, contract or commitment relating to capital expenditures in excess of $25,000; (i) Any agreement, contract or commitment relating to the disposition or acquisition by NewLogic of any assets in excess of $25,000 or any NewLogic Intellectual Property Rights (as defined herein); (j) Any agreement providing for minimum payment or resale obligations, ongoing support or research and development obligations, or warranty obligations on the part of NewLogic, except arrangements entered into in the ordinary course of business or arrangements involving payments of less than $25,000 per annum; (k) Any agreement for the provision of products or services to any Governmental Entity, except customer agreements entered into in the ordinary course of business or arrangements involving payments of less than $25,000 per annum; (l) Any agreement requiring a commitment of NewLogic resources or personnel to market, distribute or license third-party products or technology, whether on a best-efforts basis or otherwise or arrangements involving payments of less than $25,000 per annum; or (m) Any other agreement, contract, letter of intent, memorandum of understanding or commitment which is material to NewLogic. Each material agreement, contract, mortgage, indenture, plan, lease, instrument, permit, concession, franchise, arrangement, license and commitment to which NewLogic is a party or by which it is bound (i) is valid and binding on NewLogic in all material respects, (ii) to the knowledge of NewLogic is in full force and effect, (iii) has not been materially breached by NewLogic or, to the best knowledge of NewLogic, any other party thereto, and (iv) contains no material liquidated damages, penalty or similar provision. NewLogic has not been notified that any party to any such contract, agreement or instrument intends to cancel, withdraw, modify or amend in any material respect such contract, agreement or instrument. NewLogic has performed all obligations required to be performed by it on or prior to the date hereof under each contract, obligation, commitment, agreement, undertaking, arrangement or lease referred to in this Agreement or any exhibit hereto, and is not actually aware of any facts from which it should reasonably conclude that it will not be able to perform all obligations required to be performed by it subsequent to the date hereof under each such agreement, other than failures to perform that would not have a material and adverse effect on the Business Condition of NewLogic. -14- 3.16 Taxes. All Tax returns, statements, reports and forms (including without limitation estimated Tax returns and reports and information returns and reports) required to be filed with any Tax authority with respect to any Taxable period ending on or before the Closing, by or on behalf of NewLogic (collectively, the "NewLogic Returns"), have been or will be completed and filed when due (including any extensions of such due date), and all amounts shown due thereon on or before the Closing have been or will be paid on or before such date. The NewLogic Unaudited Financial Statements (a) fully accrue all actual and contingent liabilities for Taxes with respect to all periods through March 31, 1996, and (b) properly accrue in accordance with GAAP all liabilities for Taxes payable after March 31, 1996 with respect to all transactions and events occurring on or prior to such date. All information set forth in the notes to the NewLogic Financial Statements relating to Tax matters is true, complete and accurate in all material respects. To NewLogic's knowledge, no material Tax liability since March 31, 1996 has been incurred other than in the ordinary course of business and adequate provision has been made for all Taxes since that date in accordance with GAAP. NewLogic has withheld and paid to the applicable financial institution or Tax authority all amounts required to be withheld. NewLogic has not granted any extension or waiver of the limitation period applicable to any NewLogic Returns. To NewLogic's knowledge, there is no claim, audit, action, suit, proceeding, or investigation now pending or threatened against or with respect to NewLogic in respect of any Tax or assessment. No notice of deficiency or similar document of any Tax authority has been received by NewLogic, and there are no liabilities for Taxes (including liabilities for interest, additions to Tax and penalties thereon and related expenses) with respect to the issues that have been raised (and are currently pending) by any Tax authority that would, if determined adversely to NewLogic, adversely affect the liability of NewLogic for Taxes. NewLogic is in full compliance with all the terms and conditions of any Tax exemptions or other Tax-sharing agreement or order of a foreign government and the consummation of the transactions set forth herein will not have any adverse effect on the continued validity and effectiveness of any such Tax exemption or other Tax-sharing agreement or order. Neither NewLogic nor any person on behalf of NewLogic has entered into or will enter into any agreement or consent pursuant to section 341(f) of the Code. NewLogic is not party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes. NewLogic is not currently and never has been subject to the reporting requirements of section 6038A of the Code. There is no agreement, contract or arrangement to which NewLogic is a party that could, individually or collectively, result in the payment of any amount that would not be deductible by reason of sections 280G (as determined without regard to section 280G(b)(4), 162 (other than 162(a)) or 404 of the Code. NewLogic is not a party to or bound by any Tax indemnity, Tax sharing or Tax allocation agreement which includes a -15- party other than NewLogic nor does NewLogic owe any amount under any such Agreement. NewLogic has previously provided or made available to Paradigm true and correct copies of all NewLogic Returns. Except as may be required as a result of the consummation of the transactions set forth herein, NewLogic has not been and will not be required to include any material adjustment in Taxable income for any Tax period (or portion thereof). For purposes of this Agreement, the following terms have the following meanings: "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any and all taxes including, without limitation, (i) any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, value added, net worth, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall profit tax, custom, duty or other tax governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Entity (a "Tax authority") responsible for the imposition of any such tax (domestic or foreign), (ii) any liability for the payment of any amounts of the type described in (i) as a result of being a member of an affiliated, consolidated, combined or unitary group for any Taxable period or as the result of being a transferee or successor thereof and (c) any liability for the payment of any amounts of the type described in (i) or (ii) as a result of any express or implied obligation to indemnify any other person. 3.17 Intellectual Property. (a) To NewLogic's knowledge, without inquiry, NewLogic owns or is licensed or is otherwise entitled to exercise, without restriction, all rights to all patents, trademarks, trade names, service marks, copyrights, mask works, trade secrets and other intellectual property rights, and any applications or registrations therefor, and all inventions, mask work layouts, net lists, schematics, technical drawings, technology, know-how, processes, formulas, algorithms, computer software programs, documentation, and all other tangible and intangible information or material in any form, used or currently proposed to be used in the business of NewLogic as currently conducted or as proposed to be conducted, without any conflict with or infringement of the rights of others. (b) The Intellectual Property Disclosure Schedule lists: (i) all copyrights, patents, patent applications, trademarks, service marks and trade names owned by or exclusively licensed to NewLogic ("NewLogic Intellectual Property Rights"); (ii) the jurisdiction(s) in which an application for patent or application for registration of each such NewLogic Intellectual Property Right has been made, including the respective application numbers and dates; (iii) the jurisdiction(s) in which each such NewLogic Intellectual Property Right has been patented or registered, including the respective patent or registration numbers -16- and dates; (iv) all licenses, sublicenses and other agreements to which NewLogic is a party and pursuant to which any other party is authorized to use, exercise, or receive any benefit from any NewLogic Intellectual Property Right; and (v) all parties to whom NewLogic has delivered copies of NewLogic's source code, whether pursuant to an escrow arrangement or otherwise, or parties who have the right to receive such source code. NewLogic has delivered or made available to Paradigm copies of all licenses, sublicenses, and other agreements identified pursuant to clause (iv) above. (c) To NewLogic's knowledge, without inquiry, NewLogic is the owner or exclusive licensee of, with all right, title and interest in and to (free and clear of any liens, encumbrances or security interests), the NewLogic Intellectual Property Rights and has the rights to use, sell, license, assign, transfer, convey or dispose thereof or the products, processes and materials covered thereby. NewLogic has taken all commercially reasonable steps, including without limitation the filing and prosecution of patent, copyright, and trademark applications to perfect and protect its interest in the NewLogic Intellectual Property Rights in all countries in which NewLogic does business; and NewLogic has the exclusive right to file, prosecute, and maintain such applications and the patents and registrations that issue therefrom. (d) To NewLogic's knowledge, all patents and registered trademarks, service marks and trade names and registered copyrights held by NewLogic are valid and enforceable. To NewLogic's knowledge, there has not been and there is not now any unauthorized use, infringement or misappropriation of any of the NewLogic Intellectual Property Rights by any third party, including, without limitation, any service provider of NewLogic. (e) NewLogic has not brought any actions or lawsuits alleging (i) infringement of any NewLogic Intellectual Property Rights or (ii) breach of any license, sublicense or other agreement authorizing another party to use the NewLogic Intellectual Property Rights. No person has asserted or, to NewLogic's knowledge, threatened to assert any claims with respect to the NewLogic Intellectual Property Rights (i) contesting the right of NewLogic to use, exercise, sell, license, transfer or dispose of any NewLogic Intellectual Property Rights or any products, processes or materials covered thereby or (ii) challenging the ownership, validity or enforceability of any of the NewLogic Intellectual Property Rights. No NewLogic Intellectual Property Right is subject to any outstanding order, judgment, decree, stipulation or agreement related to or restricting in any manner the licensing, assignment, transfer or conveyance thereof by NewLogic. (f) The Intellectual Property Disclosure Schedule separately lists: (i) all copyrights, patents, patent applications, trademarks, service marks, trade names, and other company, -17- product or service identifiers licensed to NewLogic ("In- licensed Intellectual Property Rights"); (ii) all licenses, sublicenses and other agreements to which NewLogic is a party and pursuant to which NewLogic is authorized to use, exercise, or receive any benefit from any In-Licensed Intellectual Property Right. NewLogic has delivered or made available to Paradigm copies of all licenses, sublicenses, and other agreements identified pursuant to clause (ii) above. NewLogic is in compliance with all material terms and conditions of all such licenses, sublicenses, and other agreements. NewLogic has no knowledge of any assertion, claim or threatened claim that NewLogic has breached any terms or conditions of such licenses, sublicenses, or other agreements. To the knowledge of NewLogic, no In-Licensed Intellectual Property Right is subject to any outstanding order, judgment, decree, stipulation or agreement related to or restricting in any manner the use or licensing thereof by NewLogic. (g) NewLogic is not, nor will be as a result of the execution and delivery of this Agreement or the performance of NewLogic's obligations hereunder, in violation of, or lose or in any way impair any material rights pursuant to any license, sublicense or agreement described in the Intellectual Property Disclosure Schedule. (h) NewLogic knows of no claims to the effect that the manufacture, marketing, license, sale or use of any product or service as now used or offered or proposed for use or sale by NewLogic infringes any copyright, patent, trade secret, or other intellectual property right of any third party or violates any license or agreement with any third party. NewLogic has not entered into any agreement to indemnify any other person against any charge of infringement of any third party intellectual property right, NewLogic Intellectual Property Right or In-Licensed Intellectual Property Right. (i) NewLogic has taken all commercially reasonable steps to protect and preserve the confidentiality of all inventions, algorithms, formulas, schematics, technical drawings, ideas, know-how, processes not otherwise protected by patents or patent applications, source code, program listings, and trade secrets ("Confidential Information"), including without limitation the marking of such Confidential Information with appropriate "Proprietary" or "Confidential" legends, the establishment of policies for the handling, disclosure, and use of Confidential Information, and the acquisition of valid written nondisclosure agreements from any party receiving Confidential Information. All Confidential Information is presently and as of the Closing will be located at NewLogic's address as set forth in this Agreement. No person other than NewLogic has used, divulged or appropriated Confidential Information except for the benefit of NewLogic. No person has used, divulged or appropriated Confidential Information to the detriment of NewLogic other than pursuant to the terms of written agreements between NewLogic and -18- such other persons. NewLogic has delivered or made available to Paradigm copies of all nondisclosure agreements or other agreements relating to the handling, disclosure, and use of Confidential Information. 3.18 Service Provider Agreements. To NewLogic's knowledge, no service provider of NewLogic currently is in violation of any material term of any employment agreement (whether written or verbal), patent or trademark disclosure agreement or any other contract or agreement relating to the relationship of any such service provider with NewLogic. Each employee or consultant-inventor has executed a written agreement validly assigning his or her rights to NewLogic on all inventions, pending patent applications, all patents issued, and all other intellectual property rights developed by such service provider while working for NewLogic. NewLogic does not believe that it is or will be necessary for NewLogic to utilize any inventions of any of its service providers (or people it currently intends to hire) made prior to their employment by or relationship with NewLogic. 3.19 Restrictions on Business Activities. To NewLogic's knowledge, there is no agreement, judgment, injunction, order or decree binding upon NewLogic or which has or could reasonably be expected to have the effect of prohibiting or significantly impairing any material business practice of NewLogic, any material acquisition of property by NewLogic, or the continuation in all material respects of the business of NewLogic as currently conducted or as currently proposed to be conducted. 3.20 Title to Properties; Absence of Liens and Encumbrances; Condition of Equipment. (a) NewLogic does not own any real property. (b) All of the existing NewLogic real property leases have been previously delivered or made available to Paradigm. The NewLogic Disclosure Schedule sets forth a complete and accurate list of all real property leased by NewLogic. (c) NewLogic has valid leasehold interests in all of its material tangible properties and assets, real, personal and mixed, used in its business, free and clear of any liens (other than liens for taxes that are not yet delinquent), charges, pledges, security interests or other encumbrances, except as reflected in the NewLogic Financial Statements and except for such imperfections of title and encumbrances, if any, which are not substantial in character, amount or extent, and which do not and are not reasonably likely to materially detract from the value, or interfere with the present use, of the property subject thereto or affected thereby. 3.21 Environmental Matters. To NewLogic's knowledge, NewLogic is in substantial compliance with all applicable -19- federal, state or local laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or waste, except to the extent noncompliance with such laws has not had and would not reasonably be expected to have a material and adverse effect on the Business Condition of NewLogic. 3.22 Insurance. The NewLogic Disclosure Schedule lists all material insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of NewLogic, and the amounts of coverage under each such policy and bond of NewLogic. NewLogic has not been refused any requested coverage and no material claim made by NewLogic has been denied by the underwriters of such policies or bonds. All premiums payable under all such policies and bonds have been paid, and NewLogic is otherwise in full compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage) except where the failure to be in compliance would not have a material and adverse effect on the Business Condition of NewLogic. NewLogic does not know of any threatened termination of, the invalidation of any coverage of or material premium increase with respect to, any of such material policies. 3.23 Labor Matters. To NewLogic's knowledge, NewLogic is in compliance in all material respects with all currently applicable laws and regulations respecting employment, discrimination in employment, terms and conditions of employment and wages and hours and occupational safety and health and employment practices, and NewLogic is not engaged in any unfair labor practice. NewLogic has not received any notice from any Governmental Entity and, to NewLogic's knowledge, there has not been asserted before any Governmental Entity, any claim, action or proceeding to which NewLogic is a party and, to NewLogic's knowledge, there is neither pending nor threatened any investigation or hearing concerning NewLogic arising out of or based upon any such laws, regulations or practices. 3.24 Personnel. (a) NewLogic has supplementally provided to Paradigm a list identifying all current directors, officers, employees, independent contractors and consultants of NewLogic, setting forth the job title of, and salary (including bonuses and commissions) payable to each such person. The employment of each of NewLogic's employees is "at will" employment. NewLogic does not have any contractual obligation (i) to provide any particular form or period of notice prior to termination, or (ii) to pay any of such employees any severance benefits in connection with their termination of employment or service. In addition, no severance pay will become due to any NewLogic employees under any NewLogic agreement, plan or program as a result of the transactions set forth in this Agreement. NewLogic has not entered into any consulting agreements with any -20- service provider who owes services to or are owed compensation by NewLogic for services provided in excess of $10,000. (b) NewLogic has no outstanding obligation (whether contractual, statutory, at law or in equity) to pay to its former employee Peter MacCormick any compensation, severance or other benefits or other payments, or to issue Mr. MacCormick any shares of capital stock of or other equity interest in NewLogic, and NewLogic has incurred no other liability to Mr. MacCormick, other than an obligation to sell to Mr. MacCormick, upon the timely and valid exercise of his purchase right, up to 24,000 shares of NewLogic Common Stock, which the parties acknowledge and agree possess a maximum aggregate monetary value of $15,609. Mr. MacCormick on the date hereof has no right, title or interest in or to (i) any of NewLogic's products, patents, trademarks, trade names, service marks, copyrights, mask works, trade secrets or other intellectual property rights, or any applications or registrations therefor, or (ii) any inventions, mask work layouts, schematics, technical drawings, technology, processes, formulas, algorithms, computer software programs, documentation or other tangible or intangible information or material in any form, used or proposed to be used in the business of NewLogic as currently conducted or as proposed to be conducted, that were created or developed by Mr. MacCormick, in whole or in part, during the period he was employed by or provided services to NewLogic. The parties agree that any liability of Paradigm to Mr. MacCormick arising from the breach of this Section 3.24(b) shall be a 13.2(a) Indemnifiable Claim (defined in Section 13.2(a) below). 3.25 Third-Party Consents. To NewLogic's knowledge, no consent or approval is needed from any third party in order to effect the sale or surrender of the Securities or any of the other transactions contemplated hereby. 3.26 Related Party Transactions. No employee, officer or director of NewLogic or member of his or her immediate family is indebted to NewLogic, nor is NewLogic indebted (or committed to make loans or extend or guarantee credit) to any of them. To NewLogic's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which NewLogic is affiliated or with which NewLogic has a business relationship, or any firm or corporation that competes with NewLogic, except that the employees, officers or directors of NewLogic and members of their immediate families may own stock in publicly traded companies that may compete with NewLogic. No member of the immediate family of any officer or director of NewLogic is directly interested in any material contract with NewLogic. 3.27 Brokers or Finders; Professional Fees. No agent, broker, investment banker or other firm or person is, or will be, pursuant to any agreement made or entered into by NewLogic, entitled to any broker's or finder's fee or any other commission -21- or similar fee in connection with any of the transactions contemplated by this Agreement. 3.28 Permit Application. The information supplied by NewLogic on its behalf and on behalf of the Securityholders for inclusion in the application for issuance of a permit pursuant to section 25121 of the California Corporations Code pursuant to which the Stock Consideration will be qualified shall not at the time the fairness hearing is held pursuant to section 25142 of the California Corporations Code and the time the qualification of such securities is effective under section 25122 of the California Corporations Code contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SECURITYHOLDERS Each Securityholder represents and warrants to Paradigm that the representations and warranties set forth in this Article are true and correct as of the date hereof. The representations and warranties of each Securityholder are made by and on behalf of that Securityholder alone, and are not made by or on behalf of any other Securityholder. 4.1 Authority. (a) Such Securityholder has all requisite power and authority to enter into this Agreement, to execute, deliver and perform its obligations hereunder, including the surrender of any NewLogic Options to be surrendered by such Securityholder, and to consummate the transactions contemplated hereby. This Agreement is a legal, valid and binding obligation of such Securityholder, enforceable against such Securityholder in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors' rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. (b) Subject to satisfaction of the conditions set forth in this Agreement, to such Securityholder's knowledge, the execution and delivery of this Agreement does not and the performance and consummation of the transactions contemplated hereby will not, conflict with or result in any material violation of any material statute, law, rule, regulation, judgment, order, decree, or ordinance applicable to such Securityholder or any material agreement affecting such Securityholder or the Securities held by such Securityholder. -22- (c) No consent, approval, order or authorization of, or registration, declaration of, or qualification or filing with, any Governmental Entity is required by or with respect to such Securityholder in connection with the execution, delivery and performance of this Agreement by such Securityholder or the consummation by such Securityholder of the transactions contemplated hereby, except for such consents, approvals, orders, authorizations, registrations, declarations, qualifications or filings as may be required under state securities or Blue Sky laws in connection with the transactions set forth herein. 4.2 Title to Securities. Good and marketable and unencumbered title to all of the Securities held by such Securityholder shall pass to Paradigm upon consummation of the transactions set forth in this Agreement. 4.3 Third-Party Consents. Except as contemplated by Section 4.1(c), no consent or approval is needed from any third party in order to effect the sale or surrender of the Securities held by such Securityholder. 4.4 Brokers or Finders; Professional Fees. No agent, broker, investment banker, or other firm or person is, or will be, pursuant to any agreement made or entered into by a Securityholder, entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARADIGM Except as described in the Paradigm disclosure schedule certified by the President of Paradigm and delivered by Paradigm to NewLogic prior to the execution of this Agreement (the "Paradigm Disclosure Schedule"), Paradigm represents and warrants to NewLogic that the representations and warranties set forth below are true and correct as of the date hereof. As used in this Agreement, (a) "Business Condition" with respect to Paradigm shall mean the financial condition, business, prospects, results of operations and assets of Paradigm and all of its subsidiaries taken as a whole as presently conducted or as proposed to be conducted; (b) a disclosure or result will be deemed "material and adverse" only if, individually or when aggregated with other disclosures or results, it gives or could give rise to a substantial diminution in the economic value of Paradigm and (c) "to the knowledge of Paradigm" and like phrases shall, unless otherwise qualified, refer to the knowledge of Paradigm's executive officers and directors upon reasonable inquiry. 5.1 Organization; Standing and Power. Paradigm is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has -23- all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as now being conducted. Paradigm is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on Paradigm's Business Condition. 5.2 Authority. (a) Paradigm has all requisite corporate power and authority to enter into this Agreement, to execute, deliver and perform its obligations hereunder, and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement, the performance by Paradigm of its obligations hereunder and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Paradigm, including approval by its Board of Directors. No vote of Paradigm shareholders is required in connection with the transactions set forth in this Agreement. This Agreement is a legal, valid and binding obligation of Paradigm enforceable against Paradigm in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. (b) Subject to satisfaction of the conditions set forth in this Agreement, to Paradigm's knowledge the execution and delivery of this Agreement does not and the performance and consummation of the transactions contemplated hereby will not, conflict with or result in any material violation of any material statute, law, rule, regulation, judgment, order, decree, or ordinance applicable to Paradigm or conflict with or result in any conflict with, breach or violation or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation, forfeiture or acceleration of any material obligation or the loss of a material benefit under, or result in the creation of a lien or encumbrance on any of the properties or assets of Paradigm pursuant to (i) any provision of its Certificate of Incorporation or Bylaws, or (ii) any agreement, contract, note, mortgage, indenture, lease, instrument, permit, concession, franchise or license to which Paradigm is a party or by which Paradigm or any of its properties or assets may be bound or affected, except such violations that would not have a material and adverse effect on the Business Condition of Paradigm. (c) No consent, approval, order or authorization of, or registration, declaration, qualification, or filing of or with, any Governmental Entity is required by or with respect to Paradigm in connection with the execution and delivery of this Agreement or the consummation by Paradigm of the transactions contemplated hereby, except for (i) the filing of documents -24- with, and the obtaining of orders from, any state securities or "blue sky" authorities and the making of such reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as are required in connection with the transactions contemplated by this Agreement and (ii) the failure of which to obtain would not have a material and adverse effect on the Business Condition of Paradigm. 5.3 Paradigm Financial Statements. The financial statements of Paradigm included in the annual, quarterly or other reports filed by Paradigm with the Securities and Exchange Commission (the "SEC") (the "Paradigm Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles consistently applied (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present the consolidated financial position of Paradigm and its consolidated subsidiaries at the dates thereof and the consolidated results of their operations and changes in financial position for the periods then ended (subject, in the case of unaudited statements, to normal, recurring audit adjustments). 5.4 Litigation. To the knowledge of Paradigm, there is no action, suit, proceeding, arbitration, investigation or claim pending or threatened against Paradigm which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated hereby. 5.5 Reports. Paradigm has previously made available to NewLogic complete and accurate copies, as amended or supplemented, of (a) its Annual Report on Form 10-K filed with the SEC for the year ended December 31, 1995 (the "1995 10-K"), and (b) all other reports and filings made with the SEC since the filing of the 1995 10-K (such reports and other filings, together with any amendments or supplements thereto, are collectively referred to herein as the "Paradigm Reports"). As of their respective dates, the Paradigm Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.6 Compliance with Laws. To Paradigm's knowledge, Paradigm is in compliance and has conducted its business so as to comply with all laws, ordinances, rules and regulations, judgments, decrees or orders of any Governmental Entity, except to the extent that any failure to comply, individually or in the aggregate, would not have a material adverse effect on the Business Condition of Paradigm. To Paradigm's knowledge, there are no judgments or orders, injunctions, decrees, stipulations or awards (whether rendered by a court or administrative agency -25- or by arbitration) against Paradigm or any of its properties or businesses, and, to the knowledge of Paradigm, none are pending or threatened, which individually or in the aggregate would have a material and adverse effect on the Business Condition of Paradigm. 5.7 Material Contracts. Except to the extent not material to the Business Condition of Paradigm, each agreement, contract, mortgage, indenture, plan, lease, instrument, permit, concession, franchise, arrangement, license and commitment to which Paradigm or any of its subsidiaries is a party or by which, to its knowledge, it is bound (a) is valid and binding on Paradigm in all material respects, (b) to the knowledge of paradigm, is in full force and effect, and (c) has not been breached by Paradigm or to the knowledge of Paradigm, any other party thereto. To the knowledge of Paradigm, no party to any such contract, agreement or instrument intends to cancel, withdraw, modify or amend such contract, agreement or arrangement, except to the extent such action would not have a material and adverse effect on the Business Condition of Paradigm. 5.8 Taxes. (a) All Tax returns, statements, reports and forms (including estimated Tax returns and reports and information returns and reports) required to be filed with any Tax authority with respect to any Taxable period ending on or before the consummation of the transactions set forth herein, by or on behalf of Paradigm (collectively, the "Paradigm Returns"), have been or will be filed when due (including any extensions of such due date), and all amounts shown to be due thereon on or before the Closing have been or will be paid on or before such date, except to the extent such failure to file or pay has not had and would not have a material and adverse effect on the Business Condition of Paradigm. (b) The consolidated financial statements of Paradigm contained in Paradigm's Annual Report to Stockholders for the year ended December 31, 1995 fully accrue all actual and contingent liabilities for Taxes with respect to all periods through the date thereof in accordance with GAAP. 5.9 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon Paradigm which has or would have the effect of prohibiting or significantly impairing any material business practice of Paradigm, any material acquisition of property by Paradigm, or the continuation in all material respects of the business of Paradigm as currently conducted or as currently proposed to be conducted. 5.10 Governmental Authorizations and Licenses. Paradigm is the holder of all licenses, authorizations, permits, concessions, certificates and other franchises of any Governmental -26- Entity required to operate its business (collectively, the "Paradigm Government Licenses") which Paradigm Government Licenses are in full force and effect, and is in material compliance with the terms, conditions, limitations, restrictions, standards, prohibitions, requirements and obligations of such Paradigm Government Licenses except to the extent failure to hold and maintain such Paradigm Government Licenses or to so comply would not have a material and adverse effect on the Business Condition of Paradigm. To the knowledge of Paradigm, there is not now pending, nor is there threatened, any action, suit, investigation or proceeding against Paradigm before any Governmental Entity with respect to the Paradigm Government Licenses, nor is there any issued or outstanding notice, order or complaint with respect to the violation by Paradigm of the terms of any Paradigm Government License or any rule or regulation applicable thereto, except to the extent that any such action would not have a material and adverse effect on the Business Condition of Paradigm. 5.11 Environmental Matters. Paradigm is, to its knowledge, in substantial compliance with all applicable federal, state or local laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or waste, except to the extent noncompliance with such laws has not had and would not reasonably be expected to have a material and adverse effect on the Business Condition of Paradigm. 5.12 Questionable Payments. Neither Paradigm nor, to its knowledge, any director, officer or other employee, agent or representative of Paradigm has (a) made any payments or provided services or other favors in the United States of America or in any foreign country in order to obtain preferential treatment or consideration by any Governmental Entity with respect to any aspect of the business of Paradigm; or (b) made any political contributions which, to the best knowledge of Paradigm, would not be lawful under the laws of the United States or the foreign country in which such payments were made. Neither Paradigm nor, to its knowledge, any director, officer or other employee, agent or representative of Paradigm or any customer or supplier of any of them has been the subject of any inquiry or investigation by any Governmental Entity in connection with payments or benefits or other favors to or for the benefit of any governmental or armed services official, agent, representative or employee with respect to any aspect of the business of Paradigm or with respect to any political contribution. 5.13 Brokers or Finders; Professional Fees. Other than as reflected in that certain letter agreement between Paradigm and Bentley Hall & Company, no agent, broker, investment banker or other firm or person is, or will be, pursuant to any agreement made or entered into by Paradigm, entitled to any broker's or finder's fee or any other commission or similar fee in -27- connection with any of the transactions contemplated by this Agreement. 5.14 Permit Application. The information supplied by Paradigm for inclusion in the application for issuance of a permit pursuant to section 25121 of the California Corporations Code pursuant to which the Stock Consideration will be qualified shall not at the time the fairness hearing is held pursuant to section 25142 of the California Corporations Code and the time the qualification of such securities is effective under section 25122 of the California Corporations Code contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.15 Section 368(a) Reorganization. Subject in each case to the assumptions, conditions and representations set forth and relied on in the Tax Opinion delivered pursuant to Section 10.8 below, the transactions contemplated hereby will constitute, with respect to the Stock Consideration, a reorganization within the meaning of section 368(a) of the Code. ARTICLE VI COVENANTS OF NEWLOGIC 6.1 Maintenance of Business. During the period from the date hereof to the Closing, NewLogic shall carry on and use all commercially reasonable efforts to preserve in all material respects its business, operations and facilities, the goodwill of the business, operations and facilities and relationships with its employees and all significant customers, suppliers, agents, licensees and others with respect to the business, operations and facilities in substantially the same manner as NewLogic did prior to the date hereof. If NewLogic becomes aware of a deterioration in a relationship with any such employee or significant customer, supplier, licensee or agent with respect to the business, operations and facilities, NewLogic will promptly bring such information to the attention of Paradigm and will use all commercially reasonable efforts to restore such relationship. 6.2 Conduct of Business. From the date hereof until the Closing, except as expressly permitted hereby, NewLogic shall not without Paradigm's prior written consent: (a) incur any indebtedness for money borrowed or guarantee any indebtedness or obligation of any other party except in the ordinary course; (b) set aside or pay any dividend or distribution of assets to, or repurchase any of its stock from any of its shareholders; -28- (c) issue or grant any securities or securities convertible into common stock or grant or issue any options, warrants or rights to subscribe for its common stock or securities convertible into its common stock; (d) enter into, amend or terminate any employment or consulting agreement or any similar agreement or arrangement; (e) increase or modify the compensation payable or to become payable to any of its officers, directors, employees or agents, or adopt or amend any employee benefit plan or arrangement; (f) acquire or dispose of by sale, lease, license or other means, any properties or assets used in its business except in the ordinary course of business; (g) waive or commit to waive any rights of substantial value; (h) permit any material change in the manner in which its books and records are maintained; (i) create or suffer to be imposed any material lien, mortgage, security interest or other charge on or against its properties or assets; (j) enter into, amend or terminate any lease of real or personal property otherwise than in the ordinary course of business; (k) amend its Certificate of Incorporation or Bylaws; (l) engage in any activities or transactions outside the ordinary course of its business; (m) make any material amendments or changes in any instruments or agreements delivered by it or its representatives to Paradigm or its counsel; (n) grant any severance or termination pay to any director, officer, employee or consultant, except mandatory payments made pursuant to standard written agreements outstanding on the date hereof (with any such agreement or arrangement to be disclosed in the NewLogic Schedule); or (o) transfer to any person or entity any rights to the NewLogic Intellectual Property Rights. 6.3 Necessary Consents. Prior to the Closing, at the request and direction of Paradigm, NewLogic will use its commercially reasonable efforts to obtain such written consents and take such other actions as may be reasonably necessary or appropriate to allow the continuation of its businesses in all -29- material respects by Paradigm after the Closing as conducted on the date hereof. 6.4 Access to Information. NewLogic shall give to Paradigm and its accountants, legal counsel and other representatives full and complete access, during normal business hours throughout the period from the date hereof to the Closing, to all of the properties, books, contracts, commitments and records relating to the business, assets and liabilities of NewLogic, and will furnish Paradigm, its accountants, legal counsel and other representatives during such period all such information concerning its affairs as Paradigm may reasonably request. 6.5 Further Assurances. NewLogic will use all commercially reasonable efforts to perform and fulfill all obligations to be performed and fulfilled under this Agreement, and to cause all the conditions precedent to the consummation of the transactions to be timely satisfied, to the end that the transactions contemplated by this Agreement shall be effected substantially in accordance with its terms. Notwithstanding the foregoing, NewLogic will use its best efforts to ensure that all Securityholders will enter into this Agreement promptly following the issuance of the fairness determination described in Section 5.14 above. NewLogic shall cooperate with Paradigm in such actions and in securing requisite approvals and shall deliver such further documents as Paradigm may reasonably request as necessary to evidence such transactions. 6.6 Exclusivity; Acquisition Proposals. Until the earliest to occur of May 15, 1996, valid termination of this Agreement, or the Closing: (a) NewLogic shall not knowingly, and shall not knowingly cause or permit, directly or indirectly, through any officer, director, agent or representative (including, without limitation, investment bankers, attorneys, accountants and consultants), or otherwise: (i) solicit, initiate or further the submission of proposals or offers from, or enter into any agreement with, any firm, corporation, partnership, association, group (as defined in section 13(d)(3) of the Exchange Act) or other person or entity, individually or collectively (including, without limitation, any managers or employees of NewLogic or any affiliates), other than Paradigm (a "Third Party"), relating to any acquisition or purchase of all or any significant portion of the assets of, or any equity interest in, NewLogic or any merger, consolidation or business combination with NewLogic; (ii) other than in the ordinary course of business, participate in any discussions or negotiations regarding, or furnish to any Third Party any -30- confidential information with respect to NewLogic or Paradigm in connection with any acquisition or purchase of all or any significant portion of the assets of, or any equity interest in, NewLogic or any merger, consolidation or business combination with NewLogic; or (iii) cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any Third Party to undertake or seek to undertake any acquisition or purchase of all or any significant portion of the assets of, or any equity interest in, NewLogic or any merger, consolidation or business combination with NewLogic. (b) In the event that, prior to termination of this Agreement or the Closing, NewLogic receives any offer or indication of interest from any Third Party relating to any acquisition or purchase of all or any portion of the assets of, or any equity interest in, NewLogic or any merger, consolidation or business combination with NewLogic, NewLogic shall promptly notify Paradigm in writing, and shall in any such notice, set forth in reasonable detail the identity of the Third Party, the terms and conditions of any proposal and any other information requested of NewLogic by the Third Party or in connection therewith. (c) NewLogic shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any Third Party conducted prior to the date of this Agreement with respect to any of the foregoing. (d) In the event the Fairness Hearing (defined in Section 7.7 below) has not occurred by May 15, 1996, the exclusive dealing covenants set forth in this Section 6.6 shall automatically be extended for ten (10) day periods until the earlier to occur of the Closing or the valid termination of this Agreement. 6.7 Breach of Representations, Warranties, Agreements and Covenants. NewLogic shall not knowingly take, or knowingly fail to take, any action which from the date hereof through the Closing would cause or constitute a material breach of any of its representations, warranties, agreements and covenants set forth in this Agreement. Promptly after becoming aware of the actual, pending or threatened occurrence of any event which would cause or constitute such a material breach or inaccuracy, NewLogic shall give notice thereof to Paradigm and shall use all commercially reasonable efforts to prevent or promptly remedy such breach or inaccuracy. 6.8 Legal Conditions to the Sale or Surrender of the Securities. NewLogic shall take, and shall cause to be taken, all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on NewLogic with respect -31- to the consummation of the transactions set forth herein and will promptly cooperate with and furnish information to Paradigm in connection with any such requirements imposed upon Paradigm in connection with the consummation of the transactions set forth herein. NewLogic shall take, and shall cause to be taken, all reasonable actions to obtain (and to cooperate with Paradigm in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity required to be obtained or made by NewLogic (or by Paradigm) in connection with the consummation of the transactions set forth herein or the taking of any action contemplated thereby or by this Agreement, to lift or rescind any injunction or restraining order or other order materially and adversely affecting the ability of the parties to consummate the transactions contemplated hereby as NewLogic deems advisable in good faith, and to effect all necessary registrations and filings and submissions of information as NewLogic deems advisable in good faith required by any Governmental Entity, and to fulfill all conditions to this Agreement. 6.9 Post-Closing Covenants. (a) Commencing from and after the Closing, and for a period of two (2) years following the Closing, no Securityholder shall voluntarily resign his or her employment with or Service Provision for Paradigm (or any legal successor-in-interest to Paradigm), or act or fail to act in such a manner as to give rise to such Securityholder's termination for "Cause" (as defined below) by Paradigm (or any such successor-in-interest). The parties agree that a Securityholder's resignation of employment from, or termination of employment for Cause by, Paradigm, on or before the second anniversary of the Closing Date, shall constitute a Breach (as defined in Section 13.2) of this Section 6.9(a). Nothing in this Section 6.9(a) shall in any way prohibit Paradigm from terminating the employment of one or more Securityholders for any reason, with or without Cause. For purposes of this Section 6.9(a), "Cause" shall mean (i) any act of personal dishonesty taken by the Securityholder in connection with his/her responsibilities as an employee of Paradigm and intended to result in his/her substantial personal enrichment, (ii) such Securityholder's conviction of a felony which Paradigm reasonably determines had or will have a material detrimental effect on Paradigm's reputation or business, (iii) a grossly negligent or willful act by such Securityholder which constitutes gross misconduct and which is injurious to Paradigm, or (iv) continued violations by such Securityholder of his/her obligations which are demonstrably willful or grossly negligent on his/her part after there has been delivered to such Securityholder a written demand for performance from Paradigm which describes the basis for Paradigm's belief that he/she has not substantially performed his/her duties. In addition, for purposes of this Section 6.9(a), in the event Paradigm, without Cause and without the affected Securityholder's consent, (A) substantially reduces the amount of such Securityholder's base compensation, other than any such reduction which is part -32- of, and generally consistent with, a general reduction of salaries of employees holding similar positions, (B) materially adversely affects his/her working conditions at Paradigm in a manner that disproportionately adversely affects such Securityholder, as compared to other Paradigm employees generally, or (C) unilaterally and substantially changes his/her title and duties, such Securityholder's resignation of employment will be treated as a termination of employment by Paradigm without Cause; provided, however, that with respect to acts described in subsections (B) and (C) above, such Securityholder's resignation will not be treated as a constructive termination unless Paradigm fails to restore his/her prior working conditions, title or duties in all material respects within thirty (30) days after notice to the President of Paradigm setting forth in reasonable detail the respects in which he/she believes the act constitutes constructive termination. (b) The parties acknowledge that the Business Condition of NewLogic would be materially adversely affected by the failure to replace its chip architect, the position held until recently by Nicholas Wade. Prior to the expiration of sixty (60) days from the date hereof, the Securityholders, or any of them, shall identify, recruit and cause to be hired by Paradigm, pursuant to employment terms reasonably acceptable to Paradigm, an individual with credentials, expertise and experience reasonably similar in scope and subject matter to NewLogic's prior chip architect. Paradigm's decision whether to employ any such individual shall be made by Paradigm in its sole discretion. The parties agree that the failure to complete such recruitment and hiring within the time frame specified above shall constitute a Breach (as defined in Section 13.2) of this Section 6.9(b). 6.10 Public Announcements. NewLogic will consult in advance with Paradigm concerning the timing and content of any announcement, press release or public statement concerning the transactions set forth in this Agreement and will not make any such announcement, release or statement without Paradigm's prior written consent. ARTICLE VII COVENANTS OF PARADIGM 7.1 Necessary Consents. Prior to the Closing, Paradigm will obtain such consents and take such other actions as may be necessary or appropriate to allow the consummation of the transactions contemplated hereby. 7.2 Access to Information. Paradigm shall give NewLogic and its accountants, legal counsel and other representatives full access, during normal business hours throughout the period prior to the Closing, to all of the properties, books, contracts, commitments and records relating to the business, assets -33- and liabilities of Paradigm, and will furnish NewLogic, its accountants, legal counsel and other representatives during such period all such information concerning its affairs as NewLogic may reasonably request; provided, that any furnishing of such information pursuant hereto or any investigation by NewLogic shall not affect NewLogic's right to rely on the representations, warranties, agreements and covenants made by Paradigm in this Agreement. 7.3 Further Assurances. Paradigm will use all commercially reasonable efforts to perform and fulfill all obligations on its part to be performed and fulfilled under this Agreement, and to cause all the conditions precedent to the consummation of the transactions to be timely satisfied, to the end that the transactions contemplated by this Agreement shall be effected substantially in accordance with its terms. Paradigm shall cooperate with NewLogic in such actions and in securing requisite approvals and shall deliver such further documents as NewLogic may reasonably request as necessary to evidence such transactions. 7.4 Public Announcements. Paradigm will consult in advance with NewLogic concerning the timing and content of any announcement, press release or public statement concerning the transactions set forth in this Agreement and will not make any such announcement, release or statement without NewLogic's consent; provided, however, that Paradigm may make any public statement concerning the transactions set forth in this Agreement without NewLogic's consent, if, in the reasonable opinion of counsel for Paradigm, such statement or announcement is required or advisable to comply with applicable law, statute, rule or regulation. 7.5 Breach of Representations, Warranties, Agreements and Covenants. Paradigm shall not knowingly take, or knowingly fail to take, any action which from the date hereof through the Closing would cause or constitute a material breach of any of its representations, warranties, agreements and covenants set forth in this Agreement. In the event of, and promptly after becoming aware of, the actual, pending or threatened occurrence of any event which would cause or constitute such a material breach or inaccuracy, Paradigm shall give notice thereof to NewLogic and shall use its commercially reasonable efforts to prevent or promptly remedy such breach or inaccuracy. 7.6 Legal Conditions to the Sale of the Securities. Paradigm shall take, and shall cause to be taken, all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on Paradigm with respect to the consummation of the transactions set forth herein and will promptly cooperate with and furnish information to NewLogic in connection with any such requirements imposed upon NewLogic in connection with the consummation of the transactions set forth herein. Paradigm shall take, and shall cause to be taken, all reasonable -34- actions to obtain (and to cooperate with NewLogic in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity required to be obtained or made by Paradigm (or by NewLogic) in connection with the consummation of the transactions set forth herein or the taking of any action contemplated thereby or by this Agreement, to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby as Paradigm deems advisable in good faith, and to effect all necessary registrations and filings and submissions of information as Paradigm deems advisable in good faith required by any Governmental Entity, and to fulfill all conditions to this Agreement. 7.7 3(a)(10) Fairness Hearing. As promptly as practicable and in no event later than May 15, 1996, Paradigm, with the cooperation of NewLogic and the Securityholders, shall prepare and file a permit application under section 25121 of the California Corporate Securities Law of 1968, as amended (the "Corporations Code") with the California Department of Corporations with respect to the transactions contemplated by this Agreement and Paradigm shall request a fairness hearing pursuant to section 25142 of the Corporations Code ("Fairness Hearing"). Paradigm shall pay all costs and expenses associated with the Fairness Hearing. Paradigm shall provide notice of the Fairness Hearing to the Securityholders in accordance with the requirements of the Corporations Code. 7.8 Listing of Shares. As soon as practicable following the Closing, Paradigm shall take any action reasonably required to be taken to cause the Stock Consideration to be issued in this transaction to be approved for listing on the Nasdaq National Market. ARTICLE VIII COVENANTS OF SECURITYHOLDERS 8.1 Necessary Consents. Prior to the Closing each Securityholder will obtain such written consents and take such other actions as may be necessary or appropriate to allow the consummation of the transactions contemplated hereby. 8.2 Further Assurances. Each Securityholder will use all commercially reasonable efforts to perform and fulfill all obligations to be performed and fulfilled under this Agreement, and to cause all conditions precedent to the consummation of the transactions to be timely satisfied, to the end that the transactions contemplated by this Agreement shall be effected substantially in accordance with its terms. Each Selling Securityholder shall execute and deliver to Paradigm on or before the Closing each agreement and certificate applicable to such Securityholder set forth in Sections 9.1, 9.12, 9.13 and below. Each Securityholder shall cooperate with NewLogic and Paradigm -35- in such actions and in securing requisite approvals and shall deliver such further documents as NewLogic and Paradigm may reasonably request in writing as necessary to evidence such transactions. 8.3 No Transfer. As long as this Agreement is in effect, each Securityholder agrees not to sell, offer for sale, assign, transfer or otherwise encumber any of the Securities to any third party other than Paradigm. Each Securityholder also waives any rights of first offer or refusal or similar rights that it has with respect to the transfer of any NewLogic security by any NewLogic securityholder to Paradigm. 8.4 Breach of Representations Warranties, Agreements and Covenants. Each Securityholder shall not knowingly take, or knowingly fail to take, any action which from the date hereof through the Closing would cause or constitute a material breach of any of its representations, warranties, agreements and covenants set forth in this Agreement or a material breach of NewLogic's covenants set forth in Section 6.9. Promptly after becoming aware of the actual, pending or threatened occurrence of any event which would cause or constitute such a material breach or inaccuracy, such Securityholder shall give notice thereof to NewLogic and to Paradigm and shall use all commercially reasonable efforts to prevent or promptly remedy such material breach or inaccuracy. The parties agree that a Securityholder's resignation of employment from, or termination of employment for Cause by, Paradigm, on or before the second anniversary of the Closing Date, shall constitute a Breach (as defined in Section 13.2) of this Section 8.4 and Section 6.9. 8.5 Limited Resales. Unless and until the Stock Consideration is effectively registered under the 1933 Act or a valid exemption from such registration is available (other than that provided under section 3(a)(10) of the 1933 Act), each of the Securityholders agrees, for so long as Rule 144 under the 1933 Act shall apply to such Securityholder, to sell the Stock Consideration in accordance with the terms and conditions of paragraphs (e)(1), (g) and (h) of Rule 144 under the 1933 Act. ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF PARADIGM The obligations of Paradigm to consummate the transactions contemplated by this Agreement are subject to the satisfaction, at or before the Closing, of all the following conditions, unless waived in writing by Paradigm: 9.1 Certificates for Securities. Paradigm shall have received from the Securityholders all written certificates and other documents evidencing the Securities. -36- 9.2 Representations and Warranties True. All representations and warranties of NewLogic and of the Securityholders in this Agreement, the NewLogic Disclosure Schedule and the schedules and exhibits hereto, and in any written statement or certificate that shall be delivered to Paradigm under this Agreement, shall be true and correct in all material respects on and as of the Closing Date as if made on the date thereof. 9.3 Covenants Performed. NewLogic and the Securityholders shall have performed, satisfied, and complied with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by NewLogic and the Securityholders, as applicable, on or before the Closing Date. 9.4 Certificates. Paradigm shall have received a certificate from NewLogic, dated the Closing Date, certifying, in such detail as Paradigm and its counsel may reasonably request, that the conditions specified in this Article have been satisfied. 9.5 Opinion of Counsel for NewLogic. Paradigm shall have received a final opinion from Brobeck, Phleger & Harrison LLP, counsel for NewLogic, dated the Closing Date and in substantially the form attached hereto as Exhibit 9.5 (the "BP&H Opinion"). 9.6 No Violations; No Actions. Consummation of the transactions contemplated by this Agreement shall not violate any order, decree or judgment of any court or Governmental Entity having competent jurisdiction and no action or proceeding shall have been instituted or threatened by any person, entity or Governmental Entity which, in any such case, in the sole reasonable judgment of Paradigm, has a reasonable probability of resulting in (a) the obtaining of material damages from Paradigm; or (b) an order, judgment or decree restraining, prohibiting or rendering unlawful the consummation of the transactions contemplated by this Agreement. 9.7 No Material Adverse Effect. During the period from March 31, 1996 to the Closing, there shall not have been any material and adverse effect on the Business Condition of NewLogic. 9.8 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions, including without limitation the Escrow Agreement and Securityholders' investment representation certificates, shall be in form and substance reasonably satisfactory to Paradigm and its counsel, and Paradigm shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 9.9 Schedules. If necessary or appropriate, NewLogic shall have updated or amended all schedules and other disclosure -37- required by this Agreement and Paradigm shall be satisfied with its due diligence investigation and review of such updates, amendments and/or additional disclosure. 9.10 Required Consents. All consents, filings, registrations, legend removal permits, approvals and waivers from third parties and governmental authorities necessary for the consummation of the transactions as contemplated hereby shall have been obtained or timely filed, as applicable. 9.11 Accountants' Opinion. Paradigm shall have received an opinion of its independent accountants, in form reasonably acceptable to Paradigm, confirming certain accounting treatment and Purchase Price allocation matters material to the transactions contemplated under this Agreement. 9.12 Employment, Noncompetition and Proprietary Information Agreements. (a) Each person listed on Schedule 2.1 attached hereto shall have accepted in writing an employment letter agreement from Paradigm in substantially the form attached hereto as Exhibit 9.12(a) (the "Employment Letter Agreement"), with such other changes as the officers of NewLogic and Paradigm deem to be appropriate. (b) Each of Messrs. Campbell, Olsen and Roberts shall have entered into a three (3) year Non-Competition Agreement with Paradigm in substantially the form attached hereto as Exhibit (the 9.12(b) "Non-Competition Agreements"), with such other changes as the officers of NewLogic and Paradigm deem to be appropriate. (c) Each person listed on Schedule 2.1 shall have executed and delivered to Paradigm a proprietary information and inventions agreement in substantially the form attached hereto as Exhibit 9.12(c) (the "Proprietary Information Agreements"), which shall not exclude any inventions that would have been assigned to NewLogic had such Proprietary Information Agreement been executed and delivered to NewLogic on the date such Securityholder's employment with NewLogic commenced. 9.13 Tax Forms. Each of the Securityholders shall have provided to Paradigm an executed Form W-8 or Form W-9 properly reporting the transactions set forth in this Agreement. 9.14 Signature Pages. Each of Messrs. Campbell, Olsen and Roberts and at least six (6) of the seven (7) other persons listed on Schedule 2.1 hereto shall have entered into this Agreement by executing and delivering to Paradigm (a) a Signature Page to this Agreement in the form attached hereto and (b) each agreement or certificate applicable to such Securityholder or other person as set forth in Section 9.12 above. -38- 9.15 Other Purchase Agreements. Nichimen and each other securityholder of NewLogic not executing this Agreement shall have executed and delivered to Paradigm a securities purchase agreement (the "Investor Securities Purchase Agreement") in form and substance satisfactory to Paradigm. 9.16 Securities Laws. Paradigm shall have received any and all permits, authorizations, approvals and orders under federal and state securities laws for the issuance of the Stock Consideration including, without limitation, approval of the California Commissioner of Corporations pursuant to section 25142 of the California Corporate Securities Law without the imposition of any conditions adverse to Paradigm or the Securityholders or which would require Paradigm to amend its Articles of Incorporation, Bylaws or any contract. ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF NEWLOGIC AND OF THE SECURITYHOLDERS The obligations of NewLogic and of the Securityholders to consummate the transactions contemplated by this Agreement are subject to the satisfaction, at or before the Closing, of all the following conditions, unless waived in writing by NewLogic and by the Securityholders: 10.1 Representations and Warranties True. All representations and warranties by Paradigm in this Agreement and the schedules and exhibits hereto, and in any written statement or certificate that shall be delivered to NewLogic or to the Securityholders by Paradigm under this Agreement shall be true and correct in all material respects on and as of the Closing as though such representations and warranties were made on and as of that date. 10.2 Covenants Performed. Paradigm shall have performed, satisfied, and complied with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by Paradigm on or before the Closing. 10.3 No Violations; No Actions. Consummation of the transactions contemplated by this Agreement shall not violate any order, decree or judgment of any court or governmental body having competent jurisdiction and no action or proceeding shall have been instituted or threatened by any person, entity or governmental agency which, in any such case, in the sole reasonable judgment of NewLogic or the Securityholders, has a reasonable probability of resulting in (a) the obtaining of material damages from NewLogic or from the Securityholders, or (b) an order, judgment or decree restraining, prohibiting or rendering unlawful the consummation of the transactions contemplated by this Agreement. -39- 10.4 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions, including without limitation the Escrow Agreement, shall be in form and substance reasonably satisfactory to NewLogic, the Securityholders and its or their counsel, and NewLogic and the Securityholders shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 10.5 Required Consents. All consents, filings, registrations, legend removal permits, approvals and waivers from third parties and governmental authorities necessary to the transactions as contemplated hereby shall have been obtained or timely filed, as applicable. 10.6 Certificate. The Securityholders and NewLogic shall have received a certificate from Paradigm, dated the Closing Date, certifying in such detail as NewLogic, the Securityholders and its or their counsel may reasonably request that the conditions specified in this Article that have to be satisfied by Paradigm have been satisfied. 10.7 Opinion of Counsel for Paradigm. NewLogic and the Securityholders shall have received an opinion from Pillsbury Madison & Sutro LLP, counsel for Paradigm, dated the Closing Date, in substantially the form attached hereto as Exhibit 10.7 (the "PM&S Opinion"). 10.8 Tax Opinion. NewLogic and the Securityholders shall have received a written opinion from Pillsbury Madison & Sutro LLP, counsel to Paradigm, dated the Closing Date, to the effect that the transactions contemplated hereby will constitute a reorganization within the meaning of section 368(a) of the Code, which opinion shall be in a form reasonably acceptable to NewLogic and its counsel (the "Tax Opinion"). In rendering the Tax Opinion, such counsel shall be entitled to rely upon reasonable assumptions and conditions and to require and rely upon reasonable representations relating thereto made by NewLogic and the Securityholders. 10.9 3(a)(10) Fairness Hearing. The Fairness Hearing shall have been held and a permit for the issuance of the Stock Consideration by the Commissioner of Corporations of the State of California shall have been issued. 10.10 Accountants' Opinion. Paradigm shall have received an opinion of its independent accountants, in form reasonably acceptable to Paradigm, confirming certain accounting treatment and Purchase Price allocation matters material to the transactions contemplated under this Agreement. -40- ARTICLE XI CLOSING 11.1 Time and Place. The purchase, sale and surrender of the Securities hereunder (the "Closing") shall occur at the Menlo Park, California offices of Pillsbury Madison & Sutro LLP at such time and date to which the parties may agree in writing (the "Closing Date" or the "Closing"). 11.2 Deliveries of NewLogic or the Securityholders. At the Closing, NewLogic or the Securityholders will execute and deliver or cause to be executed and delivered to Paradigm: (a) Certificates and Instruments. Certificates representing the Securities endorsed over to Paradigm or accompanied by duly executed stock powers or similar instruments of transfer or, in the case of Securities to be surrendered, instruments effecting such surrender; (b) Corporate Documents. The Certificate of Incorporation of NewLogic, certified by the Secretary of State of Delaware as of a recent date and the Bylaws of NewLogic, certified by the Secretary of NewLogic, as in effect at the Closing; (c) Certificates of Good Standing and Qualification. Certificate of Good Standing, dated as of a recent date, with respect to NewLogic issued by the Secretary of State of Delaware, and Certificate of Qualification as a Foreign Corporation, dated as of a recent date, with respect to NewLogic issued by the Secretary of State of Washington; (d) Resolutions. A copy of the resolutions of the Board of Directors of NewLogic, certified by the Secretary of NewLogic as having been duly and validly adopted and being in full force and effect, authorizing execution and delivery of this Agreement and performance of the transactions contemplated hereby by NewLogic; (e) Books and Records. All of the minute books, stock ledgers and similar corporate records of NewLogic; (f) Consents. Evidence that all consents, filings, legend removal permits, registrations, approvals, or authorizations of or notifications to any third parties (including governmental agencies), if any, required to issue and exchange the securities for the consideration set forth herein and to consummate the transactions contemplated hereby have been obtained or made, as applicable, by NewLogic; (g) Opinion of Counsel. The BP&H Opinion; -41- (h) NewLogic Certificate. A certificate from NewLogic, dated the Closing Date, containing the information required pursuant to Section 9.4; (i) FIRPTA. A Foreign Investment and Real Property Tax Act of 1980 Notification Letter executed by NewLogic; and (j) Other Documents. The Escrow Agreement, the Agreement of Merger, the Employment Letter Agreements, the Non-Competition Agreements, the Proprietary Information Agreements and such other documents and instruments as Paradigm or its counsel reasonably shall deem necessary to consummate the transactions contemplated hereby. (k) Option Exercise Price. Payment in full to NewLogic (or Paradigm on behalf of NewLogic) of the aggregate option exercise price set forth next to each Securityholder optionee identified on Schedule 11.2(k) attached hereto. All documents delivered to Paradigm shall be in form and substance satisfactory to Paradigm. 11.3 Deliveries of Paradigm. At the Closing, Paradigm will execute and deliver or cause to be executed and delivered to NewLogic, the Securityholders and/or the Escrow Agent, as appropriate, simultaneously with delivery of the items referred to in Section 11.2 above: (a) Payment of the Consideration. The Cash Consideration and certificates representing the Stock Consideration set forth in Article and Schedule 1.3(a); (b) Resolutions. A copy of the resolutions of the Board of Directors of Paradigm, certified by the Secretary thereof as having been duly and validly adopted and being in full force and effect, authorizing execution and delivery of this Agreement and performance of the transactions contemplated hereby by Paradigm; (c) Consents. Evidence that all consents, filings, registrations, approvals, or authorizations of or notifications to any third parties (including governmental agencies), if any, required to purchase the Securities and to consummate the transactions contemplated hereby have been obtained or made, as applicable, by Paradigm; (d) Opinion of Counsel. The PM&S Opinion and the Tax Opinion; (e) Paradigm Certificate. A certificate from Paradigm dated the Closing Date, containing the information required pursuant to Section 10.6; and -42- (f) 3(a)(10) Permit. The permit issued pursuant to section 25121 of the California Corporations Code qualifying the issuance of the Stock Consideration. (g) Other Documents. The Escrow Agreement, the Agreement of Merger, the Employment Letter Agreements, and such other documents and instruments as NewLogic, the Securityholders or its or their counsel reasonably shall deem necessary to consummate the transactions contemplated hereby. All documents delivered to NewLogic and/or to the Securityholders shall be in form and substance satisfactory to NewLogic and/or to the Securityholders, as appropriate. ARTICLE XII COVENANT OF SETTLEMENT AND GENERAL RELEASE 12.1 Settlement and General Release of the Paradigm Released Parties. (a) From and after the Closing, for the consideration set forth herein and for other due and valid consideration, the receipt and sufficiency of which is hereby acknowledged and received, each of the Securityholders, for and on behalf of themselves and on behalf of their respective affiliates, successors, assigns, agents and representatives waive and finally release and forever discharge Paradigm and NewLogic and each of Paradigm's and NewLogic's respective officers, directors, stockholders, affiliates, agents, subsidiaries, including officers and directors of subsidiaries, representatives, employees, successors and assigns (collectively, the "Paradigm Released Parties") from any and all claims, causes of action, suits, debts, demands, costs, expenses, attorneys' fees, contracts, agreements, payments, compensation, liabilities or obligations, contingent or fixed, liquidated or unliquidated, matured or unmatured, of every name and nature, known or unknown, arising or which may have existed from the beginning of the world against any such person, excluding therefrom only the obligations specifically set forth in subparagraph 12.2(c) hereof (hereinafter collectively referred to as the "NewLogic/Securityholders' Released Claims"). (b) Without limiting the generality of the foregoing, it is specifically agreed that the NewLogic/Securityholders' Released Claims include all claims arising out of, or related to, the approval of this Agreement by the Securityholders, all of the transactions contemplated herein or in any other document or agreement referred to herein and acceptance of the consideration for the purchase or surrender of the Securities set forth herein. The Securityholders hereby acknowledge and agree that from and after the Closing, they shall cease to have any further right, title or interest in and to any of the Securities purchased or surrendered pursuant to this Agreement and they shall -43- accordingly cease to have any equity interest in NewLogic as a result of the transactions set forth in this Agreement. (c) The NewLogic/Securityholders' Released Claims shall not include the following: (i) the Stock Consideration; (ii) the potential payments set forth under Article of this Agreement, if actually earned, and Paradigm's obligations to act in good faith set forth in Section 2.2(d) above; (iii) the obligations of Paradigm under the Employment Letter Agreements to the extent expressly set forth therein; (iv) the right of any Securityholder of NewLogic to indemnification or contribution from NewLogic pursuant to (A) NewLogic's Certificate of Incorporation or Bylaws in effect on the Closing Date,(B) for acts occurring prior to Closing, any written indemnification agreement between NewLogic and the Securityholder in effect at the Closing, or (C) any indemnification statute, at common law or in equity; (v) the rights of the Securityholders to indemnification under the terms of Article of this Agreement and to specifically enforce Paradigm's material obligations under this Agreement; and (vi) the rights of the Securityholders against Pillsbury Madison & Sutro LLP with respect to the Tax Opinion. (d) Each of the Securityholders for and on behalf of themselves and on behalf of their respective affiliates, successors, assigns, agents and representatives covenants not to sue or otherwise institute or cause to be instituted or in any way participate in any legal, administrative or other proceeding or action against any of the Paradigm Released Parties with respect to any matter of any kind arising out of the NewLogic/Securityholders' Released Claims except as required by court order or statute. (e) The Securityholders acknowledge that this waiver and release extends to all claims of every nature and kind, known or unknown, suspected or unsuspected, past, present or future, arising from the NewLogic/Securityholders' Released Claims, and any and all rights granted to such Securityholders under section 1542 of the California Civil Code or any analogous state law or federal law or regulation are hereby expressly waived. Said section 1542 of the Civil Code of the State of California reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." (f) This Section 12.1 shall constitute a complete defense to any claim released herein and shall survive indefinitely, without restriction, qualification or limitation, notwithstanding anything in this Agreement to the contrary. -44- 12.2 Settlement and General Release of the Securityholders Released Parties. (a) From and after the Closing, for the consideration set forth herein and for other due and valid consideration, the receipt and sufficiency of which is hereby acknowledged and received, Paradigm and NewLogic, each severally for and on behalf of itself and on behalf of its respective affiliates, subsidiaries, successors, assigns, officers, directors, shareholders, agents and representatives waives and finally releases and forever discharges each of the Securityholders and their successors and permitted assigns (collectively, the "Securityholders Released Parties") from any and all claims, causes of action, suits, debts, demands, costs, expenses, attorneys' fees, contracts, agreements, payments, compensation, liabilities or obligations, contingent or fixed, liquidated or unliquidated, matured or unmatured, of every name and nature, known or unknown, arising or which may have existed from the beginning of the world against any such person, excluding therefrom only the obligations specifically set forth in subparagraph 12.2(c) hereof (hereinafter collectively referred to as the "Paradigm/NewLogic Released Claims"). (b) Without limiting the generality of the foregoing, it is specifically agreed that the Paradigm/NewLogic Released Claims include all claims arising out of, or related to, this Agreement, all of the transactions contemplated herein or in any other document or agreement referred to herein, and any Securityholder's prior employment with, service to, or service as an officer or director of NewLogic (except as excluded in subparagraph 12.2(c) below). (c) The Paradigm/NewLogic Released Claims shall not include (i) the rights of Paradigm to indemnification under the terms of Article of this Agreement and to specifically enforce NewLogic's and each Securityholder's material obligations under this Agreement; (ii) each Securityholders' obligations under his or her confidentiality and assignment of inventions and similar agreements and any indemnification agreements entered into with or inuring to the benefit of NewLogic or Paradigm; (iii) the obligations of each Securityholder under his or her Employment Agreement or Offer Letter and Noncompete Agreement to the extent expressly set forth in, and in accordance with, such agreements and (iv) the rights of Paradigm against Brobeck, Phleger & Harrison LLP with respect to the BP&H Opinion. (d) Paradigm and NewLogic each severally for and on behalf of itself and on behalf of its respective officers, directors, shareholders and each of their respective affiliates, agents, representatives, successors and assigns covenants not to sue or otherwise institute or cause to be instituted or in any way participate in any legal, administrative or other proceeding or action against any of the Securityholder Released Parties with -45- respect to any matter of any kind arising out of the Paradigm/NewLogic Released Claims. (e) Paradigm and NewLogic acknowledge that this waiver and release extends to all claims of every nature and kind, known or unknown, suspected or unsuspected, past, present or future, arising from the Paradigm/NewLogic Released Claims, and any and all rights granted to Paradigm and NewLogic under section 1542 of the California Civil Code or any analogous state law or federal law or regulation are hereby expressly waived. Said section 1542 of the Civil Code of the State of California reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." (f) This Section 12.2 shall constitute a complete defense to any claim released herein and shall survive indefinitely, without restriction, qualification or limitation, notwithstanding anything in this Agreement to the contrary. ARTICLE XIII INDEMNIFICATION 13.1 Survival of Representations, Warranties, Covenants and Agreements. (a) All representations, warranties, covenants and agreements of Paradigm, NewLogic and the Securityholders in this Agreement shall survive the execution, delivery, and performance of this Agreement in accordance with this paragraph. All representations and warranties of each party set forth in this Agreement shall be deemed to have been made again by such party at and as of the Closing Date. The representations, warranties, covenants and agreements of NewLogic, the Securityholders and Paradigm set forth in this Agreement (other than Article XII, Section 5.15 and each Securityholders' continuing obligation under his or her confidentiality, employment, non-competition, and assignment of inventions-agreements entered into with NewLogic and/or Paradigm, which shall survive indefinitely) shall terminate on the second anniversary of the Closing Date. (b) As used in this Article, any reference to a representation, warranty, agreement or covenant contained in any Article of this Agreement shall include the exhibit and the portion of the NewLogic or Paradigm Schedule relating to such Article. -46- 13.2 Indemnification. (a) Subject to the terms and limitations of this Article XIII, each of the Securityholders hereby agrees, severally and not jointly, to indemnify, defend and hold harmless each of the Paradigm Released Parties (other than any Paradigm Released Party which is a Securityholder) from and against any and all losses, liabilities, damages, demands, claims, suits, actions, judgments or causes of action, assessments, costs and expenses, including, without limitation, interest, penalties, attorneys' fees, any and all expenses incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation or otherwise (collectively, "Damages") asserted against, resulting from, imposed upon or incurred or suffered by any Paradigm Released Party (other than any Paradigm Released Party which is a Securityholder), directly or indirectly, as a result of or arising from any inaccuracy in or breach or nonfulfillment of or noncompliance with (hereafter, a "Breach") any of the representations, warranties, covenants or agreements made by NewLogic or by such Securityholder in this Agreement or any facts or circumstances constituting such a Breach (all of which shall be referred to as the "13.2(a) Identifiable Claims"). The Securityholders' indemnification obligations hereunder with respect to the representations, warranties, covenants and agreements made by NewLogic shall survive the Closing in accordance with the terms of this Section 13.2 notwithstanding the Merger of NewLogic with and into Paradigm. (b) Subject to the terms and limitations of this Article XIII, Paradigm hereby agrees to indemnify, defend and hold harmless each of the Securityholder Released Parties from and against any and all Damages asserted against, resulting from, imposed upon or incurred or suffered by any Securityholder Released Party, directly or indirectly, as a result of or arising from any Breach of any of the representations, warranties, covenants or agreements made by Paradigm in this Agreement or any facts or circumstances constituting such a Breach (all of which shall be referred to as "13.2(b) Identifiable Claims" and together with 13.2(a) Identifiable Claims, collectively, the "Identifiable Claims"). (c) With respect to the payment of Damages by the Securityholders under this Agreement, the sole remedy of the Paradigm Released Parties, other than with respect to fraud or willful misrepresentation (for which the sole remedy is set forth in Section 13.2(e)), shall be the right to offset as payment for such Damages a portion of the Escrowed Shares then held in the Escrow Account, in each case in accordance with the terms and provisions of, and subject to the limitations provided in, the Escrow Agreement. For purposes of any such Offsets, the dollar value of the Escrowed Shares shall be $8.65 per share (subject in each case to adjustment relating to stock splits, consolida- -47- tions or recapitalizations). Any allocation of Damages (or Offsets relating to such Damages) among the Securityholders, and the allocation among the Securityholders of the Escrowed Shares, net of any such Offsets, following their release from escrow, shall be the responsibility of the Securityholders Trustee and the Securityholders. Indemnifiable Claims that may result in Damages and Offsets shall be determined by the parties in accordance with Sections 13.3 and 13.4 below; provided, however, that the parties hereby agree and stipulate that any Breach of the covenants contained in Section 6.9 shall result solely in a payment to the Paradigm Indemnified Parties equal to the designated number of Escrowed Shares set forth on Schedule I attached to the Escrow Agreement; and provided, further, that no Damages shall be paid to the Paradigm Released Parties in connection with the Breach of any representations, warranties, covenants and agreements (excluding those set forth in Section 6.9) contained herein unless, until and except to the extent the aggregate amount of Indemnifiable Claims resulting in Damages exceeds $75,000. (d) Paradigm's maximum liability to each such Securityholder for Damages caused by a breach of its representations, warranties, covenants and agreements set forth herein (absent fraud or willful misrepresentation, for which the limitation on Damages is set forth in Section 13.2(e) below) shall be limited to the maximum amount of Damages for which such Securityholder could be liable to Paradigm (in the event such Securityholder were to owe Damages to Paradigm) at the time such Damages are payable by Paradigm. (e) The sole remedies that may be available to a party in the event of fraud or willful misrepresentation relating to any of the representations, warranties, agreements or covenants made by any other party(ies) in this Agreement shall be as set forth in this Section 13.2(e). With respect to any fraud or willful misrepresentation claim brought by any party seeking indemnification against any other party, the party seeking indemnification will bear the burden of proof of demonstrating that the other party had actual knowledge of the alleged falsehood and intentionally misled such party with respect to same. Knowledge of a fact or omission on which a fraud or willful misrepresentation claim is based may not be imputed or attributed to a party seeking indemnification on the basis of his or her position as an officer or director of Paradigm or NewLogic, as applicable, on access to information arising from such position (unless it can be demonstrated that in fact such access was used by such party seeking indemnification to obtain such information) or on any lack of investigation by such party seeking indemnification. Each Securityholder's maximum obligation for any Damages relating to any fraud or willful misrepresentation claim arising under this paragraph shall be limited to the aggregate Stock Consideration and other proceeds received or to be received by such Securityholder pursuant to Article of this Agreement, but including only any consideration actually earned pursuant to -48- Article at the time of the calculation of Damages. Paradigm's maximum liability for any Damages relating to any fraud or willful misrepresentation claim arising under this paragraph shall be limited to the total consideration paid, or to be paid, pursuant to Article of this Agreement, but including only any consideration actually paid pursuant to Article at the time of the calculation of Damages. (f) Notwithstanding the expiration date of the representations, warranties, covenants and agreements set forth herein, if a party shall notify the other with respect to the submission of a claim during the time period of survivability of the representations, warranties, covenants and agreements, such party's liability for Damages shall continue in full force and effect until settled to the other party's satisfaction with respect to those claims timely made. 13.3 Procedure for Indemnification with Respect to Third-Party Claims. (a) If any Paradigm or Securityholder Released Party determines to seek indemnification under this Article with respect to Identifiable Claims (the party seeking such indemnification hereinafter referred to as the "Indemnified Party" and the party against whom such indemnification is sought is hereinafter referred to as the "Indemnifying Party") resulting from the assertion of liability by third parties, the Indemnified Party shall give written notice to the Indemnifying Party within thirty (30) days of the Indemnified Party becoming aware of any such Identifiable Claim or of facts upon which any such Identifiable Claim will be based; the notice shall set forth such material information with respect thereto as is then reasonably available to the Indemnified Party; provided, however, that such written notice shall be effective only if delivered to the Indemnifying Party before the termination, pursuant to Sections 13.1 and 13.2 hereof, of the representations, warranties, covenants and agreements upon which such Identifiable Claim(s) are based. All Indemnifiable Claims made by Paradigm shall also be communicated to the Escrow Agent as provided in the Escrow Agreement. In case any such liability is asserted against the Indemnified Party, and the Indemnified Party notifies the Indemnifying Party thereof, the Indemnifying Party will be entitled, if it so elects by written notice delivered to the Indemnified Party within twenty (20) days after receiving the Indemnified Party's notice, to assume the defense thereof with counsel satisfactory to the Indemnified Party. Notwithstanding the foregoing, (i) the Indemnified Party shall also have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless the Indemnified Party shall reasonably determine that there is a conflict of interest between the Indemnified Party and the Indemnifying Party with respect to such Identifiable Claim, in which case the fees and expenses of such counsel will be borne by the Indemnifying Party, (ii) the -49- Indemnified Party shall not have any obligation to give any notice of any assertion of liability by a third party unless such assertion is in writing and (iii) the rights of the Indemnified Party to be indemnified hereunder in respect of Identifiable Claims resulting from the assertion of liability by third parties shall not be adversely affected by its failure to give notice pursuant to the foregoing unless, and, if so, only to the extent that, the Indemnifying Party is materially prejudiced thereby. With respect to any assertion of liability by a third party that results in an Identifiable Claim, the parties hereto shall make available to each other all relevant information in their possession material to any such assertion. (b) In the event that the Indemnifying Party, within twenty (20) days after receipt of the aforesaid notice of an Identifiable Claim, fails to assume the defense of the Indemnified Party against such Identifiable Claim, the Indemnified Party shall have the right to undertake the defense, compromise, or settlement of such action on behalf of and for the account and risk of the Indemnifying Party. (c) Notwithstanding anything in this Section to the contrary, if there is a reasonable probability that an Identifiable Claim may materially and adversely affect the Indemnified Party, the Indemnified Party shall have the right to participate, at its own cost and expense, in such defense, compromise, or settlement and the Indemnifying Party shall not, without the Indemnified Party's written consent (which consent shall not be unreasonably withheld), settle or compromise any Identifiable Claim or consent to entry of any judgment in respect thereof unless such settlement, compromise, or consent includes as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a release from all liability in respect of such Identifiable Claim. 13.4 Procedure For Indemnification with Respect to Non-Third Party Claims. In the event that the Indemnified Party asserts the existence of a claim giving rise to Damages (but excluding claims resulting from the assertion of liability by third parties), it shall give written notice to the Indemnifying Party. Such written notice shall state that it is being given pursuant to this Section 13.4, specify with particularity the nature and amount of the claim asserted, accompanied by any written materials supporting such claim, and indicate the date on which such assertion shall be deemed accepted and the amount of the claim deemed a valid claim (such date to be established in accordance with the next sentence); provided, however, that such written notice shall be effective only if delivered to the Indemnifying Party before the termination, pursuant to Sections 13.1 and 13.2 hereof, of the representations, warranties, covenants and agreements upon which such Identifiable Claim(s) are based. If the Indemnifying Party, within thirty (30) days after the mailing of notice by the Indemnified Party, shall not give written notice to the Indemnified Party announcing its -50- intent to contest such assertion of the Indemnified Party, such assertion shall be deemed accepted and the amount of claim shall be deemed a valid claim. In the event, however, that the Indemnifying Party contests the assertion of a claim by giving such written notice to the Indemnified Party within said period, then the parties shall act in good faith to reach agreement regarding such claim. If the parties to this Agreement, acting in good faith, cannot reach agreement with respect to such claim within fifteen (15) days after such notice, then the parties may pursue other legal or equitable remedies in accordance with Section hereof. ARTICLE XIV TERMINATION 14.1 Termination. (a) This Agreement may be terminated at any time prior to the Closing: (i) by mutual agreement of the Boards of Directors of Paradigm and NewLogic; (ii) by Paradigm, if there has been a breach by NewLogic or by any of the Securityholders of any representation, warranty, covenant or agreement set forth in this Agreement resulting in a material and adverse change in the Business Condition of NewLogic and which NewLogic fails to cure within five (5) business days after notice thereof is given by Paradigm (except that no cure period shall be provided for a breach by NewLogic or the Securityholders which by its nature cannot be cured); (iii) by NewLogic, if there has been a breach by Paradigm of any representation, warranty, covenant or agreement set forth in this Agreement on the part of Paradigm resulting in a material and adverse change in the Business Condition of Paradigm and which Paradigm fails to cure within five (5) business days after notice thereof is given by NewLogic (except that no cure period shall be provided for a breach by Paradigm which by its nature cannot be cured); (iv) by Paradigm, if the Closing condition contained in Section 9.14 has not been met within three (3) business days following the issuance by the California Department of Corporations of a fairness determination and permit under section 25121 of the California Corporations Code with respect to the Stock Consideration; -51- (v) by Paradigm or NewLogic, if the Closing shall not have been consummated on or before June 30, 1996; (vi) by Paradigm or NewLogic, if any permanent injunction or other order of a court or other competent authority preventing the Closing shall have become final and nonappealable or, in either party's reasonable good faith judgment, shall render unlikely within a reasonable period of time the consummation of the transactions set forth herein on the terms contemplated hereby; or (vii) by Paradigm or NewLogic, if any Governmental Entity shall have issued a temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the transactions set forth herein or any litigation shall be pending, the ultimate resolution of which is likely to (A) result in the issuance of such an order or injunction, or the imposition against NewLogic or Paradigm of substantial damages if the transactions set forth herein are consummated, (B) prohibit Paradigm's or NewLogic's ownership or operation of all or a material portion of the business rights of NewLogic or Paradigm and its subsidiaries taken as a whole, or to compel Paradigm or NewLogic to dispose of or hold separate all or a material portion of the business or assets of NewLogic or Paradigm and its subsidiaries taken as a whole, as a result of the consummation of the transactions set forth herein, (C) materially limit or restrict Paradigm's proposed conduct or operation of the business of NewLogic, or (D) render Paradigm or NewLogic unable to consummate the transactions set forth herein. In the event any such order or injunction shall have been issued, each party agrees to use its best efforts to have any such order or injunction lifted. (viii) By Paradigm, if Paradigm determines in its reasonably judgment that it will be unable to obtain the accountants opinion described in Section 9.11 and 10.10 above. (b) Where action is taken to terminate this Agreement pursuant to this Section 5.2, it shall be sufficient authorization for such action to be authorized by the Board of Directors of the party taking such action. (c) In the event of termination of this Agreement as provided in this Section 5.2, this Agreement shall forthwith become null and void. -52- (d) In the event of termination of this Agreement pursuant to any of the events or conditions set forth in Section 14.1(a), no party shall be liable for any costs, charges, expenses or fees of any other party. In addition, in no event will any party to this Agreement be liable for special, consequential or indirect damages relating to or arising out of this Agreement, except for such damages arising out of actual fraud or intentional misrepresentation. 14.2 Breakup Fee. If Paradigm terminates this Agreement pursuant to Section 14.1(a)(iv) and, in the circumstances of such termination, all of the Closing conditions contained in Article would have otherwise been met, NewLogic shall pay to Paradigm within fifteen (15) business days after such termination in cash the sum of $250,000, plus Paradigm's documented reasonable out-of-pocket expenses incurred through the date of termination in connection with this Agreement and the transactions contemplated thereby (as evidenced by written notice accompanied by such documentation and delivered to NewLogic by Paradigm within ten (10) business days of such termination). 14.3 Bridge Loan. If Paradigm terminates this Agreement pursuant to Section 14.1(a)(viii) and, in the circumstances of such termination, all of the other Closing conditions contained in Article would have otherwise been met, Paradigm shall agree to provide NewLogic with bridge loan financing, for a term of up to four (4) months, of up to $400,000 in original principal amount, with interest at the rate of prime plus one percent (1%) per annum, and pursuant to such other commercially reasonable terms and conditions as shall be mutually agreed upon in good faith between Paradigm and NewLogic. ARTICLE XV MISCELLANEOUS PROVISIONS 15.1 Notice. All notices and other communications required or permitted under this Agreement shall be in writing and shall be delivered to the parties at the address set forth below their respective signature blocks, or at such other address that they designate by notice to all other parties in accordance with this Section 15.1. Any party delivering notice to Paradigm shall also deliver a copy to: Pillsbury Madison & Sutro LLP, 2700 Sand Hill Road, Menlo Park, California 94025, Attn: Jorge A. del Calvo, Esq. Any party delivering notice to NewLogic or the Securityholders shall also deliver a copy to: Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, CA 94303, Attn: Warren T. Lazarow, Esq. All notices and communications shall be deemed to have been received: (a) in the case of personal delivery, on the date of such delivery; (b) in the case of telex or facsimile transmission, on the date on which the sender receives confirmation by telex or facsimile transmission that such notice was received by the addressee, provided that a copy of such -53- transmission is additionally sent by mail as set forth in (d) below; (c) in the case of overnight air courier, on the second business day following the day sent, with receipt confirmed by the courier; and (d) in the case of mailing by first class certified or registered mail, postage prepaid, return receipt requested, on the fifth business day following such mailing. 15.2 Entire Agreement. This Agreement, the exhibits and schedules hereto, and the documents referred to herein embody the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, oral or written, relative to said subject matter. 15.3 Binding Effect; Assignment. This Agreement and the various rights and obligations arising hereunder shall inure to the benefit of and be binding upon NewLogic and the Securityholders and their respective successors and permitted assigns and upon Paradigm and its successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be transferred or assigned (by operation of law or otherwise) by any of the parties hereto without the prior written consent of the other party; provided, however, that Paradigm may, without such written consent, assign its rights in connection with a merger of Paradigm with or into another entity, a sale of all or substantially all of Paradigm's assets or a reorganization involving Paradigm or a merger or sale of assets of NewLogic to Paradigm or to one of Paradigm's affiliates. 15.4 Expenses of Transaction. NewLogic and the Securityholders shall pay in full all fees and expenses incurred by NewLogic and the Securityholders, respectively, in connection with this Agreement and the transactions contemplated hereby; provided, however, that all legal fees and expenses incurred by NewLogic in excess of twenty five thousand dollars ($25,000) shall be paid by the Securityholders. Paradigm shall pay all fees and expenses incurred by Paradigm in connection with this Agreement and the transactions contemplated hereby. NewLogic and the Securityholders shall pay all applicable sales, use, excise, transfer, documentary and any other similar taxes arising out of the purchase and sale of the Securities. 15.5 Waiver; Consent. This Agreement may not be changed, amended, terminated, augmented, rescinded or discharged (other than by performance), in whole or in part, except by a writing executed by the parties hereto; and no waiver of any of the provisions or conditions of this Agreement or any of the rights of a party hereto shall be effective or binding unless such waiver shall be in writing and signed by the party claimed to have given or consented thereto. Except to the extent that a party hereto may have otherwise agreed in writing, no waiver by that party of any condition of this Agreement or breach by the other party of any of its obligations or representations -54- hereunder or thereunder shall be deemed to be a waiver of any other condition or subsequent or prior breach of the same or any other obligation or representation by the other party, nor shall any forbearance by the first party to seek a remedy for any noncompliance or breach by the other party be deemed to be a waiver by the first party of its rights and remedies with respect to such noncompliance or breach. 15.6 Third-Party Beneficiaries. Except as otherwise expressly provided for in this Agreement, nothing herein, expressed or implied, is intended or shall be construed to confer upon or give to any person, firm, corporation or legal entity, other than the parties hereto, any rights, remedies or other benefits under or by reason of this Agreement. 15.7 Counterparts. This Agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 15.8 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 15.9 Governing Law. This Agreement shall in all respects be construed in accordance with and governed by the laws of the State of California, as applied to contracts entered into and to be performed solely within California solely between residents of California. 15.10 Other Remedies. Any and all rights and remedies herein expressly conferred upon a party pursuant to this Agreement or in any agreement referred to herein will be deemed cumulative with and not exclusive of any other right or remedy conferred hereby or thereby; and the exercise of any one right or remedy will not preclude the exercise of any other right or remedy under any such Agreement. 15.11 Mutual Drafting. This Agreement is the joint product of Paradigm, NewLogic and the Securityholders, and shall not be construed for or against any party hereto. 15.12 Tax Matters. Each of the parties to this Agreement acknowledges and agrees that any amounts payable under -55- Article II of this Agreement shall be subject to all applicable withholding requirements. IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be executed as of the day and year first above written. PARADIGM TECHNOLOGY, INC. By_______________________________________ Title____________________________________ Address 71 Vista Montana San Jose, CA 95134 NEWLOGIC CORP. By_______________________________________ Title____________________________________ Address 11805 N.E. 99th Street Suite 1320 Vancouver, WA 98682 -56- SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT BY AND AMONG PARADIGM TECHNOLOGY, INC., NEWLOGIC CORP. AND THE SECURITYHOLDERS OF NEWLOGIC CORP. The undersigned hereby executes and delivers the Securities Purchase Agreement (the "Agreement") to which this Signature Page is attached effective as of the date of the Agreement, which Agreement and Signature Page, together with all counterparts of said Agreement and Signature Pages of the other parties named in said Agreement, shall constitute one and the same document in accordance with the terms of said Agreement. ------------------------------------------- Name of Securityholder ------------------------------------------- Signature Address ------------------------------------ ------------------------------------ ------------------------------------ SCHEDULE A ---------- NEWLOGIC SECURITYHOLDERS ------------------------
Common Common Issuable Issuable Upon Upon Exercise Exercise of of Outstanding Vested Unvested Series B-1 Common Options Options Preferred Total ----------- ------- -------- ---------- --------- Hans Olsen 1,070,000 259,380 0 0 1,329,380 Bruce Campbell 474,880 0 0 950,000 1,424,880 Simone Campbell 0 0 0 50,000 50,000 James Campbell, 504,500 0 0 0 504,500 T'ee Greg Roberts 282,000 28,000 30,000 0 340,000 Dennis Halicki 8,000 15,000 45,000 0 68,000 Jamie LeVasseur 8,000 30,000 30,000 0 68,000 Richard Shields 8,000 30,000 30,000 0 68,000 Gene Sorg 0 0 36,000 0 36,000 Phil Andrews 0 0 48,000 0 48,000 Dinesh Rao 0 0 132,000 0 132,000 --------- 4,068,760
In the event any securityholder of NewLogic set forth above fails to enter into this Agreement and complete its obligations provided in Section 8.2 of the Agreement, (i) such securityholder's unvested options and other rights to purchase Common Stock of NewLogic shall not accelerate, (ii) all such rights of such securityholder to acquire such shares shall terminate at the Closing, (iii) the Securities to be sold to Paradigm hereunder shall be decreased by the number of shares set forth next to such securityholder's name in the column captioned "Common Issuable Upon Exercise of Unvested Options," and (iv) the Stock Consideration (and Cash Consideration, if any) payable by Paradigm for such Securities shall be commensurately reduced. SCHEDULE 1.3(a) --------------- PAYMENTS TO SECURITYHOLDERS ---------------------------
Paradigm Shares Issued Paradigm NewLogic and Shares Issued Certificate Shares Transferred and Held in Cash at Name Numbers Represented at Close Escrow Close - - ------------------------------------ ----------- ------------ ----------- ----------- ------------ Bruce and Simone Campbell B1-2, B1-3 1,000,000 B-1 76,411 14,498 $ 0.79 Bruce Campbell 21 128,000 9,624 0 $ 0.52 27 346,880 0 26,080 $ 1.76 James S. Campbell TTEE 17 192,000 14,436 0 $ 5.97 23 312,500 4,530 18,966 $ 2.08 Hans Olsen 22 320,000 16,822 0 $ 62,601.35 28 750,000 25,916 30,474 $ 8.45 TBD 259,380 0 19,502 $ 2.21 Gregory Roberts 20 4,000 300 0 $ 6.50 28 278,000 12,481 8,421 $ 2.21 TBD 58,000 0 4,360 $ 7.80 Nicholas Wade 29 16,000 0 0 $ 10,406.02 TBD 113,400 0 0 $ 73,752.63 Dennis Halicki 30 8,000 601 0 $ 4.36 TBD 60,000 1,955 2,556 $ 2.41 Jamie LeVasseur 19 4,000 300 0 $ 8.45 25 4,000 300 0 $ 8.45 TBD 60,000 1,955 2,556 $ 2.41 Richard Shields 20 4,000 300 0 $ 8.45 24 4,000 300 0 $ 8.45 TBD 60,000 1,955 2,556 $ 2.41 Gene Sorg TBD 36,000 1,353 1,353 $ 6.63 Phil Andrews TBD 48,000 1,805 1,804 $ 0.20 Dinesh Rao TBD 132,000 4,962 4,962 $ 7.02 Peter MacCormick TBD 24,000 0 0 $ 15,609.02 James Demaris 2,000 0 0 $ 1,300.75 Rebecca Williams 2,000 0 0 $ 1,300.75 --------- ------- ------- ------------ TOTAL 4,226,160 176,306 138,088 $165,068.05
SCHEDULE 1.4 ------------ OTHER NEWLOGIC SECURITYHOLDERS ------------------------------ Name Shares Held ---- ----------- Nichimen Corporation 825,000 Series B-1 James Demaris 2,000 Common Rebecca Williams 2,000 Common Peter MacCormick 24,000 Common Nicholas Wade 129,400 Common SCHEDULE 2.1 ------------ POST CLOSING CONSIDERATION TABLE -------------------------------- Name Initial Percentage Interest ---- --------------------------- Hans Olsen 18.5% Bruce Campbell 18.5% Gregory Roberts 12% Dennis Halicki 12% Jamie LeVasseur 8% Rick Shields 8% Gene Sorg 4% Phil Andrews 4% Dinesh Rao 4% Dale Koch 4% Reserved 7% ---- TOTAL 100% SCHEDULE 2.2 ------------ THE NEWLOGIC PRODUCTS --------------------- ISC-5 Integrated Pentium "North Bridge" System Controller with Integrated L2 Cache (NewLogic 5610) and derivatives thereof ISC-6 Integrated Pentium Pro "North Bridge" ICR-5 High Integration Cache Solution for Pentium PC's ICR-6 High Integration Cache Solution for Pentium Pro PC's Other Any other product substantially developed by NewLogic Securityholders other than Paradigm's normal SRAM products and proposed SRAM products SCHEDULE 11.2(k) ---------------- OPTION EXERCISE PRICE --------------------- Per Share Aggregate Exercise Total Exercise Name Price Shares Price ---- -------- ---------- ---------- Hans Olsen $0.088 x 259,380 = $22,825.44 Gregory Roberts 0.08 x 58,000 = 4,640.00 Nicholas Wade 0.08 x 113,400 = 9,072.00 Dennis Halicki 0.08 x 60,000 = 4,800.00 Jamie LeVasseur 0.08 x 60,000 = 4,800.00 Richard Shields 0.08 x 60,000 = 4,800.00 Gene Sorg 0.08 x 36,000 = 2,880.00 Phil Andrews 0.08 x 48,000 = 3,840.00 Dinesh Rao 0.08 x 132,000 = 10,560.00 Peter MacCormick 0.08 x 24,000 = 1,920.00 ---------- TOTAL $70,137.44 EX-2.4 4 FIRST AMENDMENT FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT by and among Paradigm Technology, Inc., NewLogic Corp., and Certain Securityholders of NewLogic Corp. dated as of April 22, 1996 THIS FIRST AMENDMENT (this "Amendment") to that certain Securities Purchase Agreement by and among Paradigm Technology, Inc., a Delaware corporation ("Paradigm"), NewLogic Corp., a Delaware corporation ("NewLogic"), and the securityholders of NewLogic listed on Schedule A thereto (the "Purchase Agreement") is entered into as of the 9th day of May, 1996. Capitalized terms used herein shall have the respective meanings ascribed to them in the Purchase Agreement. WHEREAS, each securityholder of NewLogic is entitled to privacy in his or her financial dealings vis-a-vis each other securityholder of NewLogic; NOW, THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Upon distribution of the Securities Purchase Agreement to each Securityholder, each schedule attached to the Securities Purchase Agreement shall be redacted such that only information relating to the NewLogic securities held by such Securityholder and the Paradigm securities or cash payment to be exchanged therefor is provided. 2. Notwithstanding anything to the contrary in this Amendment, nothing in this Amendment shall prevent the provision of information regarding: (1) the exchange ratios between NewLogic securities and Paradigm securities; (2) the exchange ratio between NewLogic securities and cash; and (3) the percentage of each other Securityholder's NewLogic securities which will be exchanged for Paradigm securities and the percentage of each other Securityholder's NewLogic securities which will be exchanged for cash in the Notice of Fairness Hearing to be provided to each Securityholder. 3. This Amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Each Securityholder's execution and delivery of a signature page to the Purchase Agreement shall signify such Securityholder's ratification and approval of this Amendment, which shall be appended to the Purchase Agreement and incorporated therein by -1- this reference at such time as the Purchase Agreement is distributed to the Securityholders for execution. 4. In all other respects, the Purchase Agreement is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as of the day and year first above written. PARADIGM TECHNOLOGY, INC. NEWLOGIC CORP. By: By: ------------------------------- ---------------------------------- Its: Its: ------------------------------ --------------------------------- -2- EX-2.5 5 INVESTOR SECURITIES PURCHASE AGREEMENT INVESTOR SECURITIES PURCHASE AGREEMENT by and among PARADIGM TECHNOLOGY, INC. and certain Investors in NEWLOGIC CORP. dated as of May __, 1996 TABLE OF CONTENTS -----------------
Page ---- ARTICLE I PURCHASE AND SALE OF SECURITIES......................................................1 1.1 Purchase and Sale of Securities......................................................1 1.2 Purchase Price.......................................................................1 ARTICLE II REPRESENTATIONS AND WARRANTIES OF INVESTOR...........................................2 2.1 Authority............................................................................2 2.2 Title to Securities..................................................................2 2.3 Consents.............................................................................2 ARTICLE III COVENANTS OF INVESTOR................................................................2 3.1 Necessary Consents...................................................................2 3.2 No Transfer..........................................................................2 ARTICLE IV CONDITIONS PRECEDENT TO OBLIGATIONS OF PARADIGM.............................................................................3 4.1 Certificates for Securities..........................................................3 4.2 Tax Forms............................................................................3 4.3 Securities Purchase Agreement........................................................3 ARTICLE V CONDITION PRECEDENT TO OBLIGATIONS OF THE INVESTOR.............................................................................3 5.1 Securities Purchase Agreement........................................................3 ARTICLE VI CLOSING..............................................................................3 6.1 Time and Place.......................................................................3 6.2 Deliveries of Investor...............................................................3 6.3 Deliveries of Paradigm...............................................................4 ARTICLE VII COVENANTS OF SETTLEMENT AND GENERAL RELEASES.............................................................................4 7.1 Settlement and General Release by Investor of Paradigm..........................................................................4 7.2 Settlement and General Release by Paradigm of Investor..........................................................................5 ARTICLE VIII INDEMNIFICATION......................................................................6 8.1 Indeminification.....................................................................6 ARTICLE IX MISCELLANEOUS PROVISIONS.............................................................7 9.1 Notice...............................................................................7 9.2 Entire Agreement.....................................................................7 9.3 Binding Effect; Assignment...........................................................7 9.4 Expenses of Transaction..............................................................7 9.5 Waiver; Consent......................................................................8 9.6 Counterparts.........................................................................8 9.7 Severability.........................................................................8 9.8 Governing Law........................................................................8 -i-
Schedules - - --------- Schedule A List of Investor together with equity ownership and addresses of Investor Schedule 1.2 Cash Payment Schedule to Investor -ii- INVESTOR SECURITIES PURCHASE AGREEMENT THIS INVESTOR SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of May __, 1996, by and among PARADIGM TECHNOLOGY, INC., a Delaware corporation ("Paradigm") and certain investors of NEWLOGIC CORP., a Delaware corporation ("NewLogic") listed on Schedule A to this Agreement (collectively, the "Investor"), W I T N E S S E T H: WHEREAS, Paradigm desires to acquire all of the rights of equity ownership of NewLogic through the purchase by Paradigm of all of the issued and outstanding shares of capital stock together with payment for the surrender of all outstanding options and other rights to purchase such shares of capital stock of NewLogic, including all of the rights of equity ownership of NewLogic held by Investor; and WHEREAS, Paradigm will enter into a securities purchase agreement (the "Securities Purchase Agreement") with all other securityholders of NewLogic (the "Securityholders") whereby pursuant to this Agreement and the Securities Purchase Agreement, Paradigm will pay to the Investor and the Securityholders consideration for their NewLogic securities and/or the surrender of all rights to purchase any NewLogic securities, and will purchase all outstanding NewLogic securities; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows: ARTICLE I PURCHASE AND SALE OF SECURITIES 1.1 Purchase and Sale of Securities. On the terms and conditions of this Agreement, the Investor shall sell to Paradigm and Paradigm shall purchase from the Investor all of the shares of capital stock of NewLogic held by the Investor (collectively, the "Securities") at the Closing (as defined). 1.2 Purchase Price. At the Closing, Paradigm shall pay to the Investor by check the aggregate of the amounts set forth next to each Investor's name on Schedule 1.2. (collectively, the "Cash Consideration"). -1- ARTICLE II REPRESENTATIONS AND WARRANTIES OF INVESTOR Each Investor represents and warrants to Paradigm that the representations and warranties set forth in this Article are true and correct as of the date hereof and shall be true and correct on the date of the Closing. The representations and warranties of each Investor set forth in this Article are made by and on behalf of that Investor alone, and are not made by or on behalf of any other Investor. 2.1 Authority. Such Investor has all requisite power and authority to enter into this Agreement, to execute, deliver and perform its obligations hereunder, and to consummate the transactions contemplated hereby. This Agreement is a legal, valid and binding obligation of such Investor, enforceable against such Investor in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors' rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. 2.2 Title to Securities. Good and marketable and unencumbered title to all of the Securities held by such Investor shall pass to Paradigm upon consummation of the transactions set forth in this Agreement. Such Investor does not own any other shares of capital stock or rights to acquire shares of capital stock of NewLogic, with the exception of any rights to acquire shares of capital stock of NewLogic that will be waived at the time of Closing. 2.3 Consents. No consent or approval is needed from any third party or governmental or regulatory agency in order to effect the sale of the Securities held by such Investor. ARTICLE III COVENANTS OF INVESTOR 3.1 Necessary Consents. Prior to the Closing, each Investor will obtain such written consents and take such other actions as may be necessary or appropriate to allow the consummation of the transactions contemplated by this Agreement. 3.2 No Transfer. Each Investor agrees not to sell, offer for sale, assign, transfer or otherwise encumber any of the Securities to any third party except as contemplated by this Agreement. Each Investor also waives any rights of first offer or refusal or similar rights, including any rights to acquire capital stock of NewLogic, that it has with respect to the transfer of any NewLogic security. Such waiver will only be effective from and after the time of Closing. -2- ARTICLE IV CONDITIONS PRECEDENT TO OBLIGATIONS OF PARADIGM The obligations of Paradigm to consummate the transactions contemplated by this Agreement are subject to the satisfaction, at or before the Closing, of all the following conditions, unless waived in writing by Paradigm: 4.1 Certificates for Securities. Paradigm shall have received all written certificates and other documents evidencing the Securities. 4.2 Tax Forms. The Investor shall have provided to Paradigm an executed Form W-8 or Form W-9 properly reporting the transactions set forth in this Agreement. 4.3 Securities Purchase Agreement. Concurrently herewith, Paradigm, NewLogic and the Securityholders shall have entered into the Securities Purchase Agreement and all closing conditions pursuant to such agreement shall have been met or waived by the parties thereto. ARTICLE V CONDITION PRECEDENT TO OBLIGATIONS OF THE INVESTOR The obligations of the Investor to consummate the transactions contemplated by this Agreement are subject to the satisfaction, at or before the Closing, of the following condition, unless waived in writing by the Investor: 5.1 Securities Purchase Agreement. Concurrently herewith, Paradigm, NewLogic and the Securityholders shall have entered into the Securities Purchase Agreement and all closing conditions pursuant to such agreement shall have been met or waived by the parties thereto. ARTICLE VI CLOSING 6.1 Time and Place. The purchase and sale of the Securities (the "Closing") shall occur at 4:00 p.m. PST on May 23, 1996 at the Menlo Park, California offices of Pillsbury Madison & Sutro LLP or at such other time and date to which the parties may agree in writing (the "Closing Date" or the "Closing"). 6.2 Deliveries of Investor. At the Closing, the Investor will execute and deliver or cause to be executed and delivered to Paradigm (a) certificates representing the Securities endorsed over to Paradigm or accompanied by duly executed stock powers or similar instruments of transfer, and (b) such other -3- documents and instruments as Paradigm or its counsel reasonably shall deem necessary to consummate the transactions contemplated hereby. 6.3 Deliveries of Paradigm. At the Closing, Paradigm will execute and deliver or cause to be executed and delivered to the Investor, simultaneously with delivery of the items referred to in Section above, the consideration set forth in Article . In addition, all documents delivered to the Investor shall be in form and substance satisfactory to the Investor. ARTICLE VII COVENANTS OF SETTLEMENT AND GENERAL RELEASES The covenants contained in this Article shall be effective from and after the time of Closing. 7.1 Settlement and General Release by Investor of Paradigm. (a) For the consideration set forth herein and for other due and valid consideration, the receipt and sufficiency of which is hereby acknowledged and received, each of the Investors, for and on behalf of themselves and on behalf of their respective affiliates, successors, assigns, agents and representatives waive and finally release and forever discharge Paradigm and each of Paradigm's officers, directors, stockholders, affiliates, agents, subsidiaries, including NewLogic, including officers and directors of subsidiaries, representatives, employees, successors and assigns (collectively, the "Paradigm Released Parties") from any and all claims, causes of action, suits, debts, demands, costs, expenses, attorneys' fees, contracts, agreements, payments, compensation, liabilities or obligations, contingent or fixed, liquidated or unliquidated, matured or unmatured, of every name and nature, known or unknown, arising or which may have existed from the beginning of the world against any such person, excluding therefrom only the obligations specifically set forth in subparagraph hereof (hereinafter collectively referred to as the "Investor's Released Claims"). (b) Without limiting the generality of the foregoing, it is specifically agreed that the Investor's Released Claims include all claims arising out of, or related to, the approval of this Agreement by the Investor, all of the transactions contemplated herein or in any other document or agreement referred to herein and acceptance of the consideration for the purchase of the Securities set forth herein. The Investor hereby acknowledge and agree that from and after the Closing, they shall cease to have any further right, title or interest in and to any of the Securities purchased by Paradigm and they shall accordingly cease to have any equity interest in NewLogic -4- (nor shall they acquire any equity interest in Paradigm) as a result of the transactions set forth in this Agreement. (c) Each of the Investors for and on behalf of themselves and on behalf of their respective affiliates, successors, assigns, agents and representatives covenants not to sue or otherwise institute or cause to be instituted or in any way participate in any legal, administrative or other proceeding or action against any of the Paradigm Released Parties with respect to any matter of any kind arising out of the Investor's Released Claims. (d) The Investor acknowledge that this waiver and release extends to all claims of every nature and kind, known or unknown, suspected or unsuspected, past, present or future, arising from the Investor's Released Claims, and any and all rights granted to such Investor under section 1542 of the California Civil Code or any analogous state law or federal law or regulation are hereby expressly waived. Said section 1542 of the Civil Code of the State of California reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." (e) This Section shall constitute a complete defense to any claim released herein and shall survive indefinitely, without restriction, qualification or limitation, notwithstanding anything in this Agreement to the contrary. (f) The Investor's Released Claims shall not include the right of any Investor to indemnity or contribution from NewLogic pursuant to NewLogic's Articles of Incorporation or Bylaws in effect at the time of Closing, or pursuant to any indemnification statute or common law. 7.2 Settlement and General Release by Paradigm of Investor. (a) Except as set forth below, for the consideration set forth herein and for other due and valid consideration, the receipt and sufficiency of which is hereby acknowledged and received, Paradigm, for and on behalf of itself, NewLogic, and on behalf of each of their successors, assigns, agents and representatives waives and finally releases and forever discharges each of the Investors and each of the Investor's officers, directors, stockholders, affiliates, agents, subsidiaries, including officers and directors of subsidiaries, representatives, employees, successors and assigns (collectively, the "Investor Released Parties") from any and all claims, causes of action, suits, debts, demands, costs, expenses, attorneys' fees, contracts, agreements, payments, compensation, liabilities or -5- obligations, contingent or fixed, liquidated or unliquidated, matured or unmatured, of every name and nature, known or unknown, arising or which may have existed from the beginning of the world against any such person, excluding therefrom only the obligations specifically set forth in subparagraph 72(b), (hereinafter collectively referred to as "Paradigm's Released Claims"). (b) Paradigm's Released Claims shall not include (i) any claims or damages resulting to Paradigm, for breach of any representations or warranties made by the Investor in Section of this Agreement, or (ii) the rights to indemnification under the terms of Article of this Agreement. (c) Paradigm for and on behalf of itself and the Paradigm Released Parties covenants not to sue or otherwise institute or cause to be instituted or in any way participate in any legal, administrative or other proceeding or action against any of the Investor's Released Parties with respect to any matter of any kind arising out of Paradigm's Released Claims. (d) Paradigm acknowledges that this waiver and release extends to all claims of every nature and kind, known or unknown, suspected or unsuspected, past, present or future, arising from Paradigm's Released Claims, and any and all rights granted to Paradigm under section 1542 of the California Civil Code or any analogous state law or federal law or regulation are hereby expressly waived. Said section 1542 of the Civil Code of the State of California reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." (e) This Section shall constitute a complete defense to any claim released herein and shall survive indefinitely, without restriction, qualification or limitation, notwithstanding anything in this Agreement to the contrary. ARTICLE VIII INDEMNIFICATION 8.1 Indemnification. Subject to the terms and limitations of this Article , the Investor hereby agrees to indemnify, defend and hold harmless each of the Paradigm Released Parties (as defined in Section 12.1 of the Securities Purchase Agreement) from and against any and all losses, liabilities, damages, demands, claims, suits, actions, judgments or causes of action, -6- assessments, costs and expenses, including, without limitation, interest, penalties, attorneys' fees, any and all expenses incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation or otherwise (collectively, "Damages") asserted against, resulting from, imposed upon or incurred or suffered by any Paradigm Released Party (other than any Paradigm Released Party which is an Investor), directly or indirectly, as a result of or arising from any inaccuracy in or breach or nonfulfillment of or noncompliance with any of the representations and warranties made by Investor herein (all of which shall be referred to as the "Indemnifiable Claims"). ARTICLE IX MISCELLANEOUS PROVISIONS 9.1 Notice. All notices and other communications required under this Agreement shall be in writing and shall be delivered to the parties at the address set forth below, if an Investor, to the address set forth on Exhibit A hereto, and, if to Paradigm, to 71 Vista Montana, San Jose, CA 95134, Attention: Michael Gulett, or at such other address that they designate by notice to all other parties in accordance with this Section . Any party delivering notice to Paradigm, shall also deliver a copy to: Pillsbury Madison & Sutro LLP, 2700 Sand Hill Road, Menlo Park, California 94025, Attn: Jorge A. del Calvo, Esq. 9.2 Entire Agreement. This Agreement and the documents referred to herein embody the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, oral or written, relative to said subject matter. 9.3 Binding Effect; Assignment. This Agreement and the various rights and obligations arising hereunder shall inure to the benefit of and be binding upon the Investor' Released Parties and upon the Paradigm Released Parties. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be transferred or assigned (by operation of law or otherwise) by any of the parties hereto without the prior written consent of the other party; provided, however, that Paradigm may, without such written consent, assign its rights in connection with a merger of Paradigm with or into another entity, a sale of all or substantially all of Paradigm's assets or a reorganization or merger involving Paradigm. 9.4 Expenses of Transaction. The Investor shall pay in full all fees and expenses incurred by the Investor in connection with this Agreement and the transactions contemplated hereby. Paradigm shall pay all fees and expenses incurred by -7- Paradigm in connection with this Agreement and the transactions contemplated hereby. The Investor shall pay all applicable sales, use, excise, transfer, documentary and any other similar taxes arising out of the purchase and sale of the Securities. 9.5 Waiver; Consent. This Agreement may not be changed, amended, terminated, augmented, rescinded or discharged (other than by performance), in whole or in part, except by a writing executed by the parties hereto; and no waiver of any of the provisions or conditions of this Agreement or any of the rights of a party hereto shall be effective or binding unless such waiver shall be in writing and signed by the party claimed to have given or consented thereto. Except to the extent that a party hereto may have otherwise agreed in writing, no waiver by that party of any condition of this Agreement or breach by the other party of any of its obligations or representations hereunder shall be deemed to be a waiver of any other condition or subsequent or prior breach of the same or any other obligation or representation by the other party, nor shall any forbearance by the first party to seek a remedy for any noncompliance or breach by the other party be deemed to be a waiver by the first party of its rights and remedies with respect to such noncompliance or breach. 9.6 Counterparts. This Agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 9.7 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 9.8 Governing Law. This Agreement shall in all respects be construed in accordance with and governed by the laws of the State of California, as applied to contracts entered into and to be performed solely within California solely between residents of California. -8- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. PARADIGM TECHNOLOGY, INC. By________________________________________ Title_____________________________________ INVESTOR By________________________________________ Title_____________________________________ -9- SCHEDULE A LIST OF INVESTORS Name and Address Equity Ownership - - ---------------- ---------------- Nichimen Corporation 825,000 shares Mita NM Building Series B-1 1-23, Shiba 4-Chome Preferred Stock Minato-ku, Tokyo 108 Japan Attn: Mr. K. Yanai James Demaris 2,000 shares Common Stock Rebecca Williams 2,000 shares Common Stock Nicholas Wade 129,400 shares Common Stock Peter MacCormack 24,000 shares Common Stock SCHEDULE 1.2 CASH PAYMENT SCHEDULE Name Payment -------------------------------------------------------- Nichimen Corporation US$660,000.00 James Demaris US$1,300.75 Rebecca Williams US$1,300.75 Nicholas Wade US$84,158.65 Peter MacCormack US$15,609.02 EX-9.1 6 VOTING TRUST AGREEMENT VOTING TRUST AGREEMENT THIS AGREEMENT is made as of the 24th day of May, 1996, by and among Hans Olsen (the "Representative") and the persons listed on Schedule A attached hereto (the "Escrowed Securityholders"). Capitalized terms used herein shall have the respective meanings ascribed to them in that certain Securities Purchase Agreement by and among Paradigm Technology, Inc., NewLogic Corp. and certain Securityholders of NewLogic Corp., dated April 22, 1996 (the "Purchase Agreement"). WHEREAS, in order to satisfy the terms and conditions of that certain Escrow Agreement by and among the Representative, Paradigm Technology, Inc. and First Trust of California (the "Escrow Agent"), a Voting Trust Agreement by and among the Representative and the Securityholders is required, the parties hereto have indicated their willingness to enter into this Agreement upon the terms and conditions set forth below; WHEREAS, the parties hereto enter into this Agreement for the additional purpose of confirming the arrangements for voting the Escrowed Shares and for distribution of the Escrow Funds upon each Release Date; IT IS HEREBY AGREED AS FOLLOWS: 1. Agreement to Vote. During the term of this Agreement, to the extent they are entitled to vote on a particular matter, the Escrowed Securityholders agree to vote all of the Escrowed Shares of Paradigm's voting securities issued into escrow, whether beneficially or otherwise (the "Escrowed Shares") pursuant to the desire of the holders of a majority in interest of the Escrowed Shares. Hans Olsen, as Representative, shall have full authority to so vote the Escrowed Shares and by signing below, each Escrowed Securityholder gives the Representative full authority to act in his capacity pursuant to the terms of this Agreement. 2. Allocation of the Escrowed Shares. a. The Escrowed Shares shall initially be beneficially owned as set forth on Schedule B hereof. b. If, during the term of this Agreement, a Claim is made pursuant to Paragraph 2 of the Escrow Agreement, other than a Claim based upon the Breach of the covenant contained in Section 6.9 of the Purchase Agreement, each Escrowed Securityholder's beneficially owned portion of the Escrowed Shares shall be reduced pro rata by percentage beneficial ownership of the Escrowed Shares, such that the aggregate number of Escrowed Shares is reduced by the -1- aggregate amount set forth on Annex I to the Escrow Agreement opposite such Breach. c. If, during the term of this Agreement, a Claim is made pursuant to Paragraph 2 of the Escrow Agreement based upon the Breach of the covenant contained in Section 6.9(a) of the Purchase Agreement, the breaching Escrowed Securityholder's beneficially owned portion of the Escrowed Shares shall be reduced by the amount set forth on Annex I to the Escrow Agreement opposite such Escrowed Securityholder's name (without affecting any other Escrowed Securityholder's beneficial ownership interest); provided, however, that in the case of a Breach of the covenant contained in Section 6.9(a) of the Purchase Agreement by Bruce Campbell, then those Escrowed Shares beneficially owned by Bruce and Simone Campbell shall be reduced in number until Bruce and Simone Campbell beneficially own no Escrowed Shares, and if further reduction is necessary to indemnify Paradigm against such Breach, then the number of Escrowed Shares beneficially owned by James S. Campbell, Trustee, shall be reduced until the aggregate number of shares removed from the Escrowed Shares is equal to the number of shares set forth opposite Bruce Campbell's name on Annex I to the Escrow Agreement (without affecting any Escrowed Securityholder's beneficial ownership, other than Bruce Campbell, Simone Campbell or James S. Campbell). d. If, during the term of this Agreement, a Claim is made pursuant to Paragraph 2 of the Escrow Agreement based upon the Breach of the covenant contained in Section 6.9(b) of the Purchase Agreement, the number of Escrowed Shares beneficially owned by Hans Olsen shall be reduced by 12,000 and the number of Escrowed Shares beneficially owned by Bruce and Simone Campbell shall be reduced by 12,000. e. If, during the period from the Closing to the First Release Date (as defined in the Escrow Agreement), no Claim is made pursuant to Paragraph 2 of the Escrow Agreement, then the number of shares set forth in the column entitled "Number of Shares to be Released upon First Release Date" opposite each Escrowed Securityholder's name on Schedule B hereto shall be released to such Escrowed Securityholder. If, however, a Claim is made pursuant to Paragraph 2 of the Escrow Agreement, then the reductions required by the above paragraphs shall be taken into account prior to the release of any Escrowed Shares to any Escrowed Securityholder. f. If, during the period from the Closing to the Termination Date (as defined in the Escrow Agreement), no Claim is made pursuant to Paragraph 2 of the Escrow Agreement, then the number of shares set forth in the column entitled "Number of Shares to be Released upon Termination Date" opposite each Escrowed Securityholder's -2- name on Schedule B hereto shall be released to such Escrowed Securityholder. If, however, a Claim is made pursuant to Paragraph 2 of the Escrow Agreement, then the reductions required by the above paragraphs shall be taken into account prior to the release of any Escrowed Shares to any Escrowed Securityholder. 3. Successors in Interest of the Escrowed Securityholders. The provisions of this Agreement shall be binding upon the successors in interest of the Escrowed Securityholders as to all of the Escrowed Shares. No Escrowed Securityholder shall transfer the beneficial ownership of any Escrowed Shares unless and until the person to whom such security is to be transferred shall have executed a written agreement, satisfactory in form and substance to the remaining Escrowed Securityholders and the Representative, pursuant to which such person becomes a party to this Agreement and agrees to be bound by all the provisions hereof as if such person was an original Escrowed Securityholder hereunder. Should any Escrowed Securityholder die or be disabled during the effectiveness of this Agreement, then the personal representative of such Escrowed Securityholder's estate or the person or persons to whom those shares beneficially owned by such Escrowed Securityholder are transferred pursuant to such Escrowed Securityholder's will or in accordance with the laws of descent and distribution shall be bound by the terms of this Agreement, whether or not such person shall have executed a counterpart to this Agreement. 4. Termination. This Agreement shall terminate upon the Termination Date (defined as May ____, 1998 in the Escrow Agreement). 5. Amendments and Waivers. Any term hereof may be amended and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the holders holding a majority in interest of the Escrowed Shares and the Representative. Any amendment or waiver so effected shall be binding upon each of the Escrowed Securityholders or their successors or assigns, regardless of whether any such Escrowed Securityholder actually signed this Agreement. 6. Stock Splits, Stock Dividends, etc. In the event of any stock split, stock dividend, recapitalization, reorganization, or the like, any securities issued with respect to the Escrowed Securityholders' Escrowed Shares shall become Escrowed Shares for purposes of this Agreement. 7. Indemnification. Through the Escrow or otherwise, in consideration of the Representative's acceptance of this appointment, the other parties hereto, jointly and severally, agree to indemnify and hold the Representative harmless as to -3- any liability incurred by him to any person, firm or corporation by reason of his having accepted such appointment or in carrying out the terms hereof and to reimburse the Representative for all of his reasonable costs and expenses, including, among other things, counsel fees and expenses, incurred by reason of any matter as to which an indemnity is paid; provided, however, that no indemnity need be paid in case of the Representative's gross negligence, willful misconduct or breach of this Agreement. 8. Other Documents. The Escrowed Securityholders and the Representative hereby agree to take whatever additional action and execute whatever additional documents the Representative or the Escrow Agent may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on the Escrowed Shares pursuant to the provisions of this Agreement. In particular, the Representative shall execute three Assignments Separate From Certificate, as attached hereto as Exhibit Z, have such Assignments Medallion Guaranteed and deliver such Assignments to the Escrow Agent as soon as practicable. 9. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10. Governing Law. This Agreement shall be governed by and construed under the laws of the State of California, without regard to the conflict of laws provisions thereof. 11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. Successors and Assigns. Except as otherwise expressly provided in this Agreement, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. REPRESENTATIVE ESCROWED SECURITYHOLDER Hans Olsen Phil Andrews - - ---------------------------------- ------------------------------------- -4- EX-10.44 7 LEASE AGREEMENT LEASE AGREEMENT BLDG: MILPITAS 10 OWNER: 500 PROP: 210 UNIT: 1 TENANT: 21004 THIS LEASE, made this 26th day of December, 1996 between JOHN ARRILLAGA, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA FAMILY TRUST) as amended, and RICHARD T. PEERY, Trustee or his Successor Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter called Landlord, and PARADIGM TECHNOLOGY, INC., a Delaware corporation, hereinafter called Tenant. W I T N E S S E T H: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") outlined in red on Exhibit "A," attached hereto and incorporated herein by this reference thereto more particularly described as follows: A portion of that certain 38,318+/- square foot, one-story building located at 694 Tasman Drive, Milpitas, California 95035, consisting of approximately 19,855+/- square feet of space. Said Premises is more particularly shown within the area outlined in Red on Exhibit A. The entire parcel, of which the Premises is a part, is shown within the area outlined in Green on Exhibit A attached hereto. The Premises is leased on an "as-is" basis, in its present condition, and in the configuration as shown in Red on Exhibit B to be attached hereto. As used herein the Complex shall mean and include all of the land outlined in Green and described in Exhibit "A," attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. Use. Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office, light manufactur- ing, research and development, and storage and other uses necessary for Tenant to conduct Tenant's business, provided that -1- such use shall be in accordance with all applicable governmental laws and ordinances, and for no other purpose. Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents. Tenant shall not do or permit to be done anything in, on or about the Premises or the Complex which will in any way obstruct or interfere with the rights of other tenants or occupants of the Complex or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises or the Complex. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorneys' fees, or liability arising out of failure of Tenant to comply with any applicable law. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. -2- 2. Term.* A. The term of this Lease shall be for a period of five (5) years unless sooner terminated as hereinafter provided, and, subject to Paragraphs 2(b) and 3, shall commence on the 1st day of February, 1997 and end on the 31st day of January, 2002. B. Subject only to Paragraph 51, possession of the Premises shall be deemed tendered and the term of this Lease shall commence on February 1, 1997, or (d) As otherwise agreed in writing. 3. Possession. If Landlord, for any reason whatsoever, cannot deliver possession of said premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2(b), above. The above is, however, subject to the provision that the period of delay, of delivery of the premises shall not exceed 90 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease. 4. Rent. A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of TWO MILLION TWO HUNDRED FIFTY ONE THOUSAND FIVE HUNDRED FIFTY SEVEN AND NO/100 ($2,251,557.00) Dollars in lawful money of the United States of America, payable as follows: SEE PARAGRAPH 43 FOR BASIC RENT SCHEDULE. - - -------- * It is agreed in the event said Lease commences on a date other than the first day of the month the term of the Lease will be extended to account for the number of days in the partial month. The Basic Rent during the resulting partial month will be pro-rated (for the number of days in the partial month) at the Basic Rent scheduled for the projected commencement date as shown in Paragraph 43. -3- B. Time for Payment. In the event that the term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rental as set forth in the Paragraph 4 when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days. Said late charge shall equal ten (10%) percent of each rental payment so in default. D. Additional Rent. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent the following: (a) Tenant's proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and (b) Tenant's proportionate share of all insurance premiums relating to the Complex, as set forth in Paragraph 15, and (c) Tenant's proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and (d) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including attorneys' fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent Landlord shall have all -4- the rights and remedies with respect thereto as Landlord has for non- payment of rent. The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent (i) within five days for taxes and insurance and within thirty (30) days for all other Additional Rent items after presentation of invoice from Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at the option of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure for such Additional Rent items, which estimated amount shall be reconciled within 120 days of the end of each calendar year or more frequently if Landlord so elects to do so at Landlord's sole and absolute discretion, as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended by Landlord in excess of said amount, or Landlord refunding to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this Lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. E. Fixed Management Fee. Beginning with the Commencement Date of the Term of this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and Additional Rent, a fixed monthly management fee ("Management Fee") equal to 3% of the Basic Rent due for each month during the Lease Term. F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at Peery/Arrillaga, File 1504, Box 60000, San Francisco, CA 94160 or to such other person or to such other place as Landlord may from time to time designate in writing. G. Security Deposit. Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of SEVENTY NINE THOUSAND FOUR HUNDRED TWENTY AND NO/100 ($79,420.00) Dollars. Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept -5- and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. 5. Rules and Regulations and Common Area. Subject to the terms and conditions of this Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as "Common Area." This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. -6- Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. 6. Parking. Tenant shall have the right to use with other tenants or occupants of the Complex 100 parking spaces in the common parking areas of the Complex. Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 100 spaces allocated to Tenant hereunder, Landlord shall have the right, at Landlord's sole discretion, to specifically designate the location of Tenant's parking spaces within the common parking areas of the Complex in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking space specifically designated by Landlord for Tenant's use. Said parking spaces, if specifically designated by Landlord to Tenant, may be relocated by Landlord at any time, and from time to time. Landlord reserves the right, at Landlord's sole discretion, to rescind any specific designation of parking spaces, thereby returning Tenant's parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant's parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park, or permit the parking of Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Tenant agrees to assume responsibility for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, as an additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant's employees parked in violation of these provisions, or to attach violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. 7. Expenses of Operation, Management, and Maintenance of the Common Areas of the Complex and Building in Which the Premises Are Located. As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of all expenses -7- of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit, and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance of landscaped areas, lakes, parking lots, sidewalks, driveways; maintenance, repair and replacement of all fixtures and electrical, mechanical, and plumbing systems; structural elements and exterior surfaces of the buildings; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. "Additional Rent" as used herein shall include Landlord's debt repayments; interest on charges; expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries. As Additional Rent and in accordance with paragraph 4 D of this Lease, Tenant shall pay its proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of operation (including common utilities), management, maintenance, and repair of the building (including common areas such as lobbies, restrooms, janitor's closets, hallways, elevators, mechanical and telephone rooms, stairwells, entrances, spaces above the ceilings and janitorization of said common areas) in which the Premises are located. The maintenance items herein referred to include, but are not limited to, all windows, all window frames, plate glass, glazing, truck doors, main plumbing systems of the building (such as water and drain lines, sinks, toilets, faucets, drains, showers and water fountains), main electrical systems (such as panels and conduits), heating and air conditioning systems (such as compressors, fans, air handlers, ducts, boilers, heaters), store fronts, roofs, downspouts, building common area interiors (such as wall coverings, window coverings, floor coverings and partitioning), ceilings, building exterior doors, skylights (if any), automatic fire extinguishing systems, and elevators; license, permit, and inspection fees; security; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of -8- fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. Tenant hereby waives all rights under, and benefits of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. 8. Acceptance and Surrender of Premises. By entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire, normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the air conditioning and heating equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant's responsibility during the term of this Lease) together with all alterations, additions, and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the expense of Tenant) except that Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of the Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of -9- Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. 9. Alterations and Additions. Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except movable furniture and traded fixtures, shall at once become a part of the Premises and belong to Landlord. Landlord reserves the right to approve all contractors and mechanics proposed by Tenant to make such alterations and additions. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, air conditioning, floor to ceiling partitioning, drapery, carpeting, and floor installations make by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees that it will not proceed to make such alteration or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. 10. Tenant Maintenance. Tenant shall, at its sole cost and expense, keep and maintain the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, and in good sanitary condition. Tenant's maintenance and repair responsibilities herein referred to include, but are not limited to, janitorization, plumbing systems within the non-common areas of the Premises (such as water and drain lines, sinks), electrical systems within the, non-common areas of the Premises (such as outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and air conditioning controls within the non-common areas of the Premises (such as mixing boxes, thermostats, time clocks, supply and return grills), all interior improvements within the premises including but not limited to: wall coverings, window -10- coverings, acoustical ceilings, vinyl tile, carpeting, partitioning, doors (both interior and exterior, including closing mechanisms, latches, locks), and all other interior improvements of any nature whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant' sole expense upon Lease termination. 11. Utilities of the Building in Which the Premises Are Located. As Additional Rent and in accordance with paragraph 4 D of this Lease, Tenant shall pay its proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of all utility charges such as water, gas, electricity, telephone, telex and other electronic communications service, sewer service, waste-pick-up and any other utilities, materials or services furnished directly to the building in which the Premises are located, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure or utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Provided that Tenant is not in default in the performance or observance of any of the terms, covenants or conditions of this Lease to be performed or observed by it, Landlord shall furnish to the Premises between the hours of 8:00 a.m. and 6:00 p.m., Mondays through Fridays (holidays excepted) and subject to the rules and regulations of the Complex hereinbefore referred to, reasonable quantities of water, gas and electricity suitable for the intended use of the Premises and heat and air conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises for such purposes. Tenant agrees that at all times it will cooperate fully with Landlord and abide by all regulations and requirements that Landlord may prescribe for the proper functioning and protection of the building heating, ventilating and air conditioning systems. Whenever heat generating machines, equipment, or any other devices (including exhaust fans) are used in the Premises by Tenant which affect the temperature or otherwise maintained by the air conditioning system, Landlord shall have the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Tenant will not, -11- without the written consent of Landlord, use any apparatus or device in the Premises (including, without limitation), electronics data processing machines or machines using current in excess of 110 Volts which will in any way increase the amount of electricity, gas, water or air conditioning usually furnished or supplied to premises being used as general office space, or connect with electric current (except through existing electrical outlets in the Premises), or with gas or water pipes any apparatus or device for the purposes of using electric current, gas, or water. If Tenant shall require water, gas, or electric current in excess of that usually furnished or supplied to premises being used as general office space, Tenant shall first obtain the written consent of Landlord, which consent shall not be unreasonably withheld and Landlord may cause an electric current, gas, or water meter to be installed in the Premises in order to measure the amount of electric current, gas or water consumed for any such excess use. The cost of any such meter and of the installation, maintenance and repair thereof, all charges for such excess water, gas and electric current consumed (as shown by such meters and at the rates then charged by the furnishing public utility); and any additional expense incurred by Landlord in keeping account of electric current, gas, or water so consumed shall be paid by Tenant, and Tenant agrees to pay Landlord therefor promptly upon demand by Landlord. 12. Taxes. A. As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real Property Taxes, which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term "Real Property Taxes," as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership of the Complex) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein; any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including attorneys' -12- fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord's business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term "Real Property Taxes." Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. B. Taxes on Tenant's Property. (a) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (b) If the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex are assessed, then the real property taxes and assessments levied against Landlord or the -13- Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 12Ba, above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used. 13. Liability Insurance. Tenant at Tenant's expense, agrees to keep in force during the term of this Lease a policy of commercial general insurance with combined single limit coverage of not less than Two Million Dollars ($2,000,000) for injuries to or death of persons occurring in, on or about the Premises or the Complex, and property damage. The policy or policies affecting such insurance, certificates of insurance of which shall be furnished to Landlord, shall name Landlord as additional insureds, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days' prior writing notice to Landlord. If, during the term of this Lease, in the considered opinion of Landlord's Lender, insurance advisor, or counsel, the amount of insurance described in this Paragraph 13 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor, or counsel shall deem adequate. 14. Tenant's Personal Property Insurance and Workman's Compensation Insurance. Tenant shall maintain a policy or policies of fire and property damage insurance in "all risk" form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures, and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured. Tenant shall also maintain a policy or policies of workman's compensation insurance and any other employee benefit insurance sufficient to comply with all laws. 15. Property Insurance. Landlord shall purchase and keep in force and as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's proportionate share (calculated on a square footage or other -14- equitable basis as calculated by Landlord) of the deductibles on insurance claims and the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risks" insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent. If such insurance cost is increased due to Tenant's use of the Premises or the Complex, Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy of either releasing party prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. 16. Indemnification. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises of the Complex but excluding, however, the willful misconduct or negligence of Landlord, its agents, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property to the extent arising from the willful misconduct or the negligence of Landlord, its agents, servants, employees, invitees or contractors, Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorneys' fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever. 17. Compliance. Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such -15- failure shall be deemed a breach of the provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. This paragraph shall not be interpreted as requiring Tenant to make structural changes or improvements, except to the extent such changes or improvements are required as a result Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises. 18. Liens. Tenant shall keep the Premises and the Complex free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 19. Assignment and Subletting. Tenant shall not assign, transfer, or hypothecate the leasehold estate under this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld. As a condition for granting this consent to any assignment, transfer, or subletting, Landlord may require that Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%) of all rents or additional consideration received by Tenant from its assignees, transferees, or subtenants in excess of the rent payable by Tenant to Landlord hereunder. Tenant shall, by thirty (30) days written notice, advise Landlord of its intent to assign or transfer Tenant's interest in the Lease or sublet the Premises or any portion thereof for any part of the term hereof. Within thirty (30) days after receipt of said written notice, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant's notice on the date specified in Tenant's notice by giving written notice of such election to terminate. If no such notice to terminate is given to Tenant within said thirty (30) day period, Tenant may proceed to locate -16- an acceptable sublease, assignee, or other transferee for presentment to Landlord for Landlord's approval, all in accordance with the terms, covenants, and conditions of this paragraph 19. If Tenant intends to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as defined and reserved hereinabove shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord. As a condition to its consent, Landlord may require Tenant to pay all expenses in connection with the assignment, and Landlord may require Tenant's assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. See Paragraph 49. 20. Subordination and Mortgages. In the event Landlord's title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all rent and observe and perform all of the provisions set forth in this Lease. 21. Entry by Landlord. Landlord reserves, and shall at all reasonable times after at least 24 hours notice (except in -17- emergencies) have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to submit the Premises to prospective purchasers, mortgagers or tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes, any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. 22. Bankruptcy and Default. The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. -18- Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustment thereto. Tenant shall have a period of thirty (30) days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that if the nature of Tenant's failure is such that more than thirty (30) days is reasonably required to cure the same, Tenant shall not be in default so long as Tenant commences performance within such thirty (30) day period and thereafter prosecutes the same to completion. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity: (a) The rights and remedies provided for by California Civil Code Section 1951.2, including but not limited to, recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate broker, and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided from the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. -19- (b) The rights and remedies provided by California Civil Code Section which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession; acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law, (d) To the extent permitted by law, the right and power, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account to Tenant, and to sell such property and apply such proceeds therefrom pursuant to applicable California law. Landlord may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the term of this Lease) and at such rent and such other terms as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than rent due hereunder, the cost of such subletting, including, but not limited to, reasonable attorneys' fees, and any real estate commissions actually paid, and the cost of such alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof) exceeds the amount to be paid as rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment of indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third to payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under option (ii) during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. For all purposes set forth in this subparagraph d, no taking possession of the Premises by Landlord, shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach. -20- (e) The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to subparagraph d. above. 23. Abandonment. Tenant shall not vacate or abandon the Premises at any time during the term of this Lease (except that Tenant may vacate so long as it pays rent, provides an on-site security guard during normal business hours from Monday through Friday, and otherwise performs its obligations hereunder), and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by the process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 24. Destruction. In the event the Premises are destroyed in whole or in part from any cause, except for routine maintenance and repairs and incidental damage and destruction caused from vandalism and accidents for which Tenant is responsible for under Paragraph 10, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction; or (b) Terminate this Lease (providing that the Premises is damaged to the extent of 33 1/3% of the replacement cost). If Landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent while such repair is being made in the proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Premises. If Landlord initially estimates that the rebuilding or restoration will exceed 180 days or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord), then Tenant shall have the right to terminate this Leases by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior improvements constructed by -21- Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not cancelled according to the provisions above. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than 33 1/3% of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be injured or not. 25. Eminent Domain. If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the premises or any portion thereof, or (ii) any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or if any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then, in any of such events Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur of the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. -22- In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 26. Sale or Conveyance by Landlord. In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. 27. Attornment to Lender or Third Party. In the event the interest of Landlord in the land and buildings in which the leased Premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale. Tenant hereby agrees to attorn to the purchaser at any such foreclosure sale and to recognize such purchaser as the Landlord under this Lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the Lease, this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired term hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 28. Holding Over. Any holding over by Tenant after expiration or other termination of the term of this Lease with -23- the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this Lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 29. Certification of Estoppel. Tenant shall at any time upon not less than ten (10) days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord; that there are no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance. 30. Construction Changes. It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 31. Right of Landlord to Perform. All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to pay an sum of money, or other rent, required to be paid by it hereunder or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for five (5) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obligated -24- to, make any such payment or perform any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment or performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 32. Attorneys' Fees. (a) In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. (b) Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee. 33. Waiver. The waiver by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 34. Notices. All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises. All notices demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage -25- prepaid, addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054. Each notice, request, demand, advice or designation referred to in this paragraph shall be deemed received on the date of the personal service/or mailing thereof in the manner herein provided, as the case may be. 35. Examination of Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. 36. Default by Landlord. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 37. Corporate Authority. If Tenant is a corporation, (or a partnership) each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the bylaws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 38. Limitation Liability. In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord, (i) the sole and exclusive remedy shall be against Landlord's interest in the Premises leased herein; (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership); -26- (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (v) no judgment will be taken against any partner of Landlord; (vi) any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; (vii) no writ of execution will ever be levied against the assets of any partner of Landlord; (viii) these covenants and agreements are enforceable both by Landlord and also by an partner of Landlord. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 39. Miscellaneous and General Provisions. (a) Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address of the business conducted by Tenant in the Premises. (b) This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. (c) The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of the this Lease shall inure to the benefit of and bind such heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. -27- If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. (d) Time is of the essence of this Lease and of each and all of its provisions. (e) At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant's Premises are a part. (f) This instrument along with any exhibits and attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. (g) Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. (h) Tenant further agrees to execute any amendments required by a lender to enable Landlord to obtain financing, so long as Tenant's rights hereunder are not substantially affected. (i) Paragraphs 43 through 51 added hereto and are included as a part of this lease. (j) Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. (k) Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect his Lease, entitle Tenant to any reduction or rent hereunder or result in any liability of Landlord to Tenant. 40. Brokers. Tenant warrants that it had dealings with only the following real estate brokers or agents in connection with the negotiation of this Lease: none and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. -28- 41. Signs. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year last written below. LANDLORD TENANT ARRILLAGA FAMILY TRUST PARADIGM TECHNOLOGY, INC., a Delaware corporation By__________________________ By____________________________ John Arrillaga, Trustee Date________________________ Title_________________________ Type or Print Name____________ RICHARD T. PEERY SEPARATE PROPERTY TRUST Date__________________________ By___________________________ Richard T. Peery, Trustee Date_________________________ -29- Paragraphs 43 through 51 to Lease Agreement Dated December 26, 1996, By and Between the Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as Landlord, and Paradigm Technology, Inc., a Delaware corporation, as Tenant for 19,855+/- Square Feet of Space Located at 694 Tasman Drive, Milpitas, California. 43. Basic Rent. In accordance with Paragraph 4A herein, the total aggregate sum of TWO MILLION TWO HUNDRED FIFTY ONE THOUSAND FIVE HUNDRED FIFTY SEVEN AND NO/100 DOLLARS ($2,251,557.00), shall be payable as follows: On February 1, 1997, the sum of THIRTY FOUR THOUSAND SEVEN HUNDRED FORTY SIX AND 25/100 DOLLARS ($34,746.25) shall be due, and a like sum due on the first day of each month thereafter, through and including January 1, 1998. On February 1, 1998, the sum of THIRTY SIX THOUSAND SEVEN HUNDRED THIRTY ONE AND 75/100 DOLLARS ($36,731.75) shall be due, and a like sum due on the first day of each month thereafter, through and including January 1, 1999. On February 1, 1999, the sum of THIRTY SEVEN THOUSAND SEVEN HUNDRED TWENTY FOUR AND 50/100 DOLLARS ($37,724.50) shall be due, and a like sum due on the first day of each month thereafter, through and including January 1, 2000. On February 1, 2000, the sum of THIRTY EIGHT THOUSAND SEVEN HUNDRED SEVENTEEN AND 25/100 DOLLARS ($38,717.25) shall be due, and a like sum due on the first day of each month thereafter, through and including January 1, 2001. On February 1, 2001, the sum of THIRTY NINE THOUSAND SEVEN HUNDRED TEN AND NO/100 DOLLARS ($39,710.00) shall be due, and a like sum due on the first day of each month thereafter, through and including January 1, 2002; or until the entire aggregate sum of TWO MILLION TWO HUNDRED FIFTY ONE THOUSAND FIVE HUNDRED FIFTY SEVEN AND NO/100 DOLLARS ($2,251,557.00) has been paid. 44. "As-Is" Basis. It is hereby agreed that the Premises leased hereunder is leased strictly on an "as-is" basis and in its present condition, and in the configuration as shown on Exhibit B attached hereto, and by reference made a part hereof. It is specifically agreed between the parties that Landlord shall not be required to make, nor be responsible for any cost, in connection with any repair, restoration, and/or improvement to the Premises in order for this Lease to commence, or thereafter, throughout the Term of this Lease. Notwithstanding anything to the contrary within this Lease, Landlord makes no warranty or representation of any kind or nature whatsoever as to the condition or repair of the Premises, nor as to the use or occupancy which may be made thereof. -30- 45. Consent. Whenever the consent of one party to the other is required hereunder, such consent shall not be unreasonably withheld. 46. Choice of Law; Severability. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provisions of this Lease shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. 47. Authority to Execute. The parties executing this Lease Agreement hereby warrant and represent that they are properly authorized to execute this Lease Agreement and bind the parties on behalf of whom they execute this Lease Agreement and to all of the terms, covenants and conditions of this Lease Agreement as they relate to the respective parties hereto. 48. Assessment Credits. The demised property herein is subject to a special assessment levied by the City of Milpitas in Improvement District No. 9. As a part of said special assessment proceedings, additional bonds were sold and assessments levied to provide for construction contingencies and reserve funds. Interest will be earned on such funds created for contingencies and on reserve funds which will be credited for the benefit of said assessment district. To the extent surpluses are created in said district through unused contingency funds, interest earnings on reserve funds, such surpluses shall be deemed the property of Landlord. Notwithstanding that such surpluses may be credited on assessments otherwise due against the demised premises, Tenant shall pay to Landlord, as additional rent if, and at the time of any such credit of surpluses, an amount equal to all such surpluses so credited. 49. Assignment and Subletting (Continued). Any and all sublease agreement(s) between Tenant and any and all subtenant(s) (which agreements must be consented to by Landlord, pursuant to the requirements of this Lease) shall contain the following language: "If Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease termination date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and -31- (2) Subtenant hereby waives any and all rights it may have under law or at equity against Landlord to challenge such an early termination of the Sublease, and unconditionally releases and relieves Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor. The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials: __________ Initials: __________ Subtenant Tenant 50. Hazardous Materials. Landlord and Tenant agree as follows with respect to the existence or use of "Hazardous Materials" (as defined herein) on, in, under or about the Premises and real property located beneath said Premises and the common areas of the Complex (hereinafter collectively referred to as the "Property"): A. As used herein, the term "Hazardous Materials" shall mean any material, waste, chemical, mixture or byproduct which is or hereafter is defined, listed or designated under Environmental Laws (defined below) as a pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or material, or any other unwholesome, hazardous, toxic, biohazardous, or radioactive material, waste, chemical, mixture or byproduct, or which is listed, regulated or restricted by any Environmental Law (including, without limitation, petroleum hydrocarbons or any distillates or derivative or fractions thereof, polychlorinated byphenyls, or asbestos). As used herein, the term "Environmental Laws" shall mean any applicable Federal, State of California or local governmental law (including common law), statute, regulation, rule, ordinance, permit, license, order, requirement, agreement, or approval, or -32- any determination, judgment, directive, or order of any executive or judicial authority at any level of Federal, State of California or local government (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, ecology, natural resources, or public health and safety. B. Tenant shall obtain Landlord's written consent, which may be withheld in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous Material Activities (defined below); provided, however, that Landlord's consent shall not be required for normal use in compliance with applicable Environmental Laws of customary household and office supplies (Tenant shall first provide Landlord with a list of said materials use), such as mild cleaners, lubricants and copier toner. As used herein, the term "Tenant's Hazardous Materials Activities" shall mean any and all use, handling, generation, storage, disposal, treatment, transportation, discharge, or emission of any Hazardous Materials on, in, beneath, to, from, at or about the Property, in connection with Tenant's use of the Property, or by Tenant or by any of Tenant's agents, employees, contractors, vendors, invitees, visitors or its future subtenants or assignees. Tenant agrees that any and all Tenant's Hazardous Materials Activities shall be conducted in strict, full compliance with applicable Environmental Laws at Tenant's expense, and shall not result in any contamination of the Property or the environment. Tenant agrees to provide Landlord with prompt written notice of any spill or release of Hazardous Materials at the Property during the term of the Lease of which Tenant becomes aware, and further agrees to provide Landlord with prompt written notice of any violation of Environmental Laws in connection with Tenant's Hazardous Materials Activities of which Tenant becomes aware. If Tenant's Hazardous Materials Activities involve Hazardous Materials other than normal use of customary household and office supplies, Tenant also agrees at Tenant's expense: (i) to install such Hazardous Materials monitoring, storage and containment devices as Landlord reasonably deems necessary (Landlord shall have no obligation to evaluate the need for any such installation or to require any such installation); (ii) provide Landlord with a written inventory of such Hazardous Materials, including an update of same each year upon the anniversary date of the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each Anniversary Date, to retain a qualified environmental consultant, acceptable to Landlord, to evaluate whether Tenant is in compliance with all applicable Environmental Laws with respect to Tenant's Hazardous Materials Activities. Tenant, at its expense, shall submit to Landlord a report from such environmental consultant which discusses the environmental consultant's findings within two (2) months of each Anniversary Date. Tenant, at its expense, shall promptly undertake and complete any and all steps necessary, and in full compliance with applicable Environmental Laws, to fully correct any and all problems or deficiencies identified by the -33- environmental consultant, and promptly provide Landlord with documentation of all such corrections. C. Prior to termination or expiration of the Lease, Tenant, at its expense, shall (iv) properly remove from the Property all Hazardous Materials which come to be located at the Property in connection with Tenant's Hazardous Materials Activities, and (v) fully comply with and complete all facility closure requirements of applicable Environmental Laws regarding Tenant's Hazardous Materials Activities, including but not limited to (x) properly restoring and repairing the Property to the extent damaged by such closure activities, and (y) obtaining from the local Fire Department or other appropriate governmental authority with jurisdiction a written concurrence that closure has been completed in compliance with applicable Environmental Laws. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any such closure activities. D. If Landlord, in its sole discretion, believes that the Property has become contaminated as a result of Tenant's Hazardous Materials Activities, Landlord in addition to any other rights it may have under this Lease or under Environmental Laws or other laws, may enter upon the Property and conduct inspection, sampling and analysis, including but not limited to obtaining and analyzing samples of soil and groundwater, for the purpose of determining the nature and extent of such contamination. Tenant shall promptly reimburse Landlord for the costs of such an investigation, including but not limited to reasonable attorneys' fees Landlord incurs with respect to such investigation, that discloses Hazardous Materials contamination for which Tenant is liable under this Lease. Except as may be required of Tenant by applicable Environmental Laws, Tenant shall not perform any sampling, testing, or drilling to identify the presence of any Hazardous Materials at the Property, without landlord's prior written consent which may be withheld in Landlord's discretion. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any sampling, testing, or drilling performed pursuant to the preceding sentence. E. Tenant shall indemnify, defend (with legal counsel acceptable to Landlord, whose consent shall not unreasonably be withheld) and hold harmless Landlord, its employees, assigns, successors, successors-in-interest, agents and representatives from and against any and all claims (including but not limited to third party claims from a private party or a government authority), liabilities, obligations, losses, causes of action, demands, governmental proceedings or directives, fines, penalties, expenses, costs (including but not limited to reasonable attorneys', consultants' and other experts' fees and costs), and damages, which arise from or relate to: (vi) Tenant's Hazardous Materials Activities; (vii) releases or -34- discharges of Hazardous Materials at the Property, which occur during the Term of this Lease, (viii) any Hazardous Materials contamination caused by Tenant prior to the Commencement Date of the Lease; or (ix) the breach of any obligation of Tenant under this Paragraph 50 (collectively, "Tenant's Environmental Indemnification"). Tenant's Environmental Indemnification shall include but is not limited to the obligation to promptly and fully reimburse Landlord for losses in or reductions to rental income, and diminution in fair market value of the Property. Tenant's Environmental Indemnification shall further include but is not limited to the obligation to diligently and properly implement to completion, at Tenant's expense, any and all environmental investigation, removal, remediation, monitoring, reporting, closure activities or other environmental response action (collectively, "Response Actions"). Tenant shall promptly provide Landlord with copies of any claims, notice, work plans, data and reports prepared, received or submitted in connection with any Response Actions. It is agreed that the Tenant's responsibilities related to Hazardous Materials will survive the expiration or termination of this Lease and that Landlord may obtain specific performance of Tenant's responsibilities under this Paragraph 50. 51. Lease Contingent Upon Landlord Obtaining Termination Agreement with Current Tenant. This Lease is subject to and conditional upon Landlord obtaining from Crosspoint Solutions, Inc., a California corporation ("Crosspoint"), the current tenant occupying the Premises leased hereunder, a Termination Agreement satisfactory to Landlord on or before February 1, 1997. In the event Landlord is unable to obtain said satisfactory Termination Agreement on or before February 1, 1997, this Lease Agreement shall, at Landlord's option (a) terminate, or (b) the Commencement Date hereof shall be modified to reflect the date Landlord so obtains said satisfactory Termination Agreement and receives possession of the Premises hereunder free and clear of Crosspoint's occupancy and Landlord is able to deliver the Premises to Tenant; provided, however, that said period of delay caused by Crosspoint shall not extend beyond April 1, 1997. In the event this Lease does not commence by April 1, 1997 (subject only to the delays covered in Paragraph 3) this Lease shall be automatically rescinded. -35- EX-10.45 8 LOAN AND SECURITY AGREEMENT Loan and Security Agreement Borrower: Paradigm Technology, Inc. Address: 71 Vista Montana San Jose, California 95134 Date: October 25, 1996 This Loan and Security Agreement is entered into on the above date between GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation ("GBC"), whose address is 10880 Wilshire Boulevard, Suite 950, Los Angeles, California 90024 and the borrower named above ("Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") being signed concurrently is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.) 1. LOANS. 1.1 Loans. GBC will make loans to Borrower (the "Loans") up to the amounts (the "Credit Limit") shown on the Schedule, provided no Default or Event of Default has occurred and is continuing. If at any time or for any reason the total of all outstanding Loans and all other Obligations exceeds the Credit Limit, Borrower shall immediately pay the amount of the excess to GBC, without notice or demand. 1.2 Interest. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement or in another written agreement signed by GBC and Borrower. Interest shall be payable monthly * , on the last day of the month. ** Interest may, in GBC's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. * in arrears ** In lieu of direct payment from Borrower, 1.3 Fees. Borrower shall pay GBC the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to GBC and are not refundable. 2. SECURITY INTEREST. 2.1 Security Interest. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to GBC a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located (collectively, the "Collateral"): All Inventory, , Receivables, and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts, all money, all collateral in which GBC is granted a security interest pursuant to any other present or future agreement, all property now or at any time in the future in GBC's possession, and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products of the foregoing, and all books and records related to any of the foregoing. * * Notwithstanding the foregoing, the Collateral shall exclude all fixed assets and/or inventory of Borrower produced or used at its semiconductor wafer fabrication facility located in San Jose, California (the "Wafer Fabrication Assets"). 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to induce GBC to enter into this Agreement and to make Loans, Borrower represents and warrants to GBC as follows, and Borrower covenants that the following representations will continue to be true * , and that Borrower will at all times comply* with all of the following covenants: * in all material respects 3.1 Corporate Existence and Authority. Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a material adverse effect on Borrower. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), (iii) do not violate Borrower's articles or certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. -1- 3.2 Name; Trade Names and Styles. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give GBC 30 days' prior written notice before changing its name or doing business under any other name. Borrower has complied * , and will in the future comply*, with all laws relating to the conduct of business under a fictitious business name. * in all material respects 3.3 Place of Business; Location of Collateral. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give GBC at least 30 days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule. 3.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. GBC now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend GBC and the Collateral against all claims of others. So long as any Loan is outstanding which is a term loan, none of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by GBC, use its best efforts to cause such third party to execute and deliver to GBC, in form acceptable to GBC, such waivers and subordinations as GBC shall specify, so as to ensure that GBC's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. 3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good working condition, ordinary wear and tear excepted, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise GBC in writing of any material loss or damage to the Collateral. 3.6 Books and Records. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with generally accepted accounting principles. 3.7 Financial Condition, Statements and Reports. All financial statements now or in the future delivered to GBC have been, and will be, prepared in conformity with generally accepted accounting principles * and now and in the future will completely and accurately reflect the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to GBC and the date hereof, there has been no material adverse change in the financial condition or business of Borrower **. Borrower is now and will continue to be solvent. * (except as may be otherwise set forth in the notes thereto) ** that has not been disclosed to GBC in writing 3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed, and will timely file, all tax returns and reports required by applicable law, and Borrower has timely paid, and will timely pay, all applicable taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies GBC in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 3.9 Compliance with Law. Borrower has complied, and will comply, in all material respects, with all provisions of all applicable laws and regulations, including, but not -2- limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and all environmental matters. 3.10 Litigation. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in any material adverse change in the financial condition or business of Borrower, or in any material impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. Borrower will promptly inform GBC in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of $50,000 or more, or involving $100,000 or more in the aggregate. 3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful business purposes. 4. RECEIVABLES. 4.1 Representations Relating to Receivables. Borrower represents and warrants to GBC as follows: Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, (i) represent an undisputed, bona fide, existing, unconditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services, in the ordinary course of Borrower's business, and (ii) meet the Minimum Eligibility Requirements set forth in Section 8 below. 4.2 Representations Relating to Documents and Legal Compliance. Borrower represents and warrants to GBC as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all * respects what they purport to be, and all signatories and endorsers have the capacity to contract. All sales and other transactions underlying or giving rise to each Receivable shall comply with all applicable laws and governmental rules and regulations. All signatures and endorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms **. * material ** , except as such terms may be limited by bankruptcy, insolvency, or other similar laws affecting creditors' rights generally 4.3 Schedules and Documents relating to Receivables. Borrower shall deliver to GBC transaction reports and loan requests, schedules and assignments of all Receivables, and schedules of collections, all on GBC's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit GBC's security interest and other rights in all of Borrower's Receivables, nor shall GBC's failure to advance or lend against a specific Receivable affect or limit GBC's security interest and other rights therein. Together with each such schedule and assignment, or later if requested by GBC, Borrower shall furnish GBC with copies (or, at GBC's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to GBC an aged accounts receivable trial balance in such form and at such intervals as GBC shall request. In addition, Borrower shall deliver to GBC the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, immediately upon receipt thereof and in the same form as received, with all necessary endorsements. 4.4 Collection of Receivables. Borrower shall have the right to collect all Receivables, unless and until a Default or an Event of Default has occurred. Borrower shall hold all payments on, and proceeds of, Receivables in trust for GBC, and Borrower shall deliver all such payments and proceeds to GBC, within one business day after receipt of the same, in their original form, duly endorsed, to be applied to the Obligations in such order as GBC shall determine. 4.5 Disputes. Borrower shall notify GBC promptly of all * disputes or claims relating to Receivables on the regular reports to GBC. Borrower shall not forgive, or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to GBC on the regular reports provided to GBC; (ii) no Default or Event of Default has occurred and is continuing; and (iii) taking into account all such settlements and forgiveness, the total outstanding Loans and other Obligations will not exceed the Credit Limit. * material 4.6 Returns. Provided no Event of Default has occurred and is continuing, if any Account Debtor * returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount (sending a copy to GBC). In the event any attempted return occurs after the -3- occurrence of any Event of Default, Borrower shall (i) hold the returned Inventory in trust for GBC, (ii) segregate all returned Inventory from all of Borrower's other property, (iii) conspicuously label the returned Inventory as GBC's property, and (iv) immediately notify GBC of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on GBC's request deliver such returned Inventory to GBC. * (other than a distributor engaged by Borrower in the ordinary course of business) 4.7 Verification. GBC may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or GBC or such other name as GBC may choose, and GBC or its designee may, at any time, notify Account Debtors that it has a security interest in the Receivables. 4.8 No Liability. GBC shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall GBC be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve GBC from liability for its own gross negligence or willful misconduct. 5. ADDITIONAL DUTIES OF THE BORROWER. 5.1 Insurance. Borrower shall, at all times, insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to GBC * , in such form and amounts as GBC may reasonably require, and Borrower shall provide evidence of such insurance to GBC, so that GBC is satisfied that such insurance is, at all times, in full force and effect. All such insurance policies shall name GBC as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to GBC. Upon receipt of the proceeds of any such insurance, GBC shall apply such proceeds in reduction of the Obligations as GBC shall determine in its sole discretion, GBC may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, GBC may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to GBC copies of all reports made to insurance companies. * (it being agreed that Borrower's current insurers are currently acceptable) 5.2 Reports. Borrower, at its expense, shall provide GBC with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as GBC shall from time to time reasonably specify. 5.3 Access to Collateral, Books and Records. At reasonable times, and on one business day's notice, GBC, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. GBC shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but GBC shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower's expense and the charge therefor shall be $600 per person per day (or such higher amount as shall represent GBC's then current standard charge for the same), plus reasonable out-of-pockets expenses. Borrower shall not be charged more than $3,000 per audit (plus reasonable out-of-pockets expenses), nor shall audits be done more frequently than four times per calendar year, provided that the foregoing limits shall not apply after the occurrence of a Default or Event of Default, nor shall they restrict GBC's right to conduct audits at its own expense (whether or not a Default or Event of Default has occurred). Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first obtaining GBC's written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give GBC the same rights with respect to access to books and records and related rights as GBC has under this Agreement. 5.4 Remittance of Proceeds. All proceeds arising from the sale or other disposition of any Collateral shall be delivered, in kind, by Borrower to GBC in the original form in which received by Borrower not later than the following business day after receipt by Borrower, to be applied to the Obligations in such order as GBC shall determine; Borrower shall not commingle proceeds of Collateral with any of Borrower's other funds or property, and shall hold such proceeds separate and apart from such other funds and property and -4- in an express trust for GBC. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 5.5 Negative Covenants. Except as may be permitted in the Schedule, Borrower shall not, without GBC's prior written consent, do any of the following: (i) merge or consolidate with another corporation or entity; (ii) acquire any assets, except in the ordinary course of business; (iii) enter into any other transaction outside the ordinary course of business * ; (iv) sell or transfer any Collateral, except that, provided no Default or Event of Default has occurred and is continuing, Borrower may (a) sell finished Inventory in the ordinary course of Borrower's business, ; (v) store any Inventory or other Collateral with any warehouseman or other third party**; (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis***; (vii) make any loans of any money or other assets **** ; (viii) incur any debts, outside the ordinary course of business, which would have a material, adverse effect on Borrower or on the prospect of repayment of the Obligations*****; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity ****** ; (x) Intentionally deleted; (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock; (xii) make any change in Borrower's capital structure which would have a material adverse effect on Borrower or on the prospect of repayment of the Obligations; or (xiii) dissolve or elect to dissolve; or (xiv) agree to do any of the foregoing. * , other than the sale of the Wafer Fabrication Assets, provided that the foregoing shall not prohibit Borrower from making any underwritten public offering of its capital stock and interests therein ** , other than subcontractors of whom Borrower has given GBC prior written notice, including the following subcontractors: 71 Vista Montana; IQL; Liberty Laboratories, Inc.; Viko Test Labs; IQN Implant Services; IC Implant Center, Inc.; Best IC Laboratories, Inc.; ISIS Surface Mounting; Amkor/Anam SC Compound KH-22; Hyundai SAN 136-1, AMI-RI; ASE Electronics (M) SDN. BHD.; ASE, Inc.; and Siliconware Precision *** , except to a distributor engaged by Borrower in the ordinary course of business **** in any material amount, other than any seller financing provided to any purchaser of the Wafer Fabrication Assets ***** (the foregoing shall not preclude any loan to Borrower secured solely by a lien on Borrower's equipment) ****** , except as an endorser of checks or drafts in the ordinary course of business 5.6 Litigation Cooperation. Should any third-party suit or proceeding be instituted by or against GBC with respect to any Collateral or in any manner relating to Borrower, Borrower shall, without expense to GBC, make available Borrower and its officers, employees and agents, and Borrower's books and records, without charge, to the extent that GBC may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 5.7 Further Assurances. Borrower agrees, at its expense, on request by GBC, to execute all documents and take all actions, as GBC may deem reasonably necessary or useful in order to perfect and maintain GBC's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 5.8 Indemnity. Borrower hereby agrees to indemnify GBC and hold GBC harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including attorneys' fees), of every nature, character and description, which GBC may sustain or incur based upon or arising out of any of the Obligations, any actual or alleged failure to collect and pay over any withholding or other tax relating to Borrower or its employees, any relationship or agreement between GBC and Borrower, any actual or alleged failure of GBC to comply with any writ of attachment or other legal process relating to Borrower or any of its property, or any other matter, cause or thing whatsoever occurred, done, omitted or suffered to be done by GBC relating to Borrower or the Obligations (except any such amounts sustained or incurred as the result of the gross negligence or willful misconduct of GBC or any of its directors, officers, employees, agents, attorneys, or any other person affiliated with or representing GBC). Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect. 6. TERM. 6.1 Maturity Date. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the "Maturity Date"); provided that the Maturity Date shall automatically be extended, and this Agreement shall automatically and continuously renew, for successive additional terms of one year each, unless one party gives written notice to the other, not less than sixty days prior to the next Maturity Date, that such party elects to terminate this Agreement effective on the next Maturity Date. 6.2 Early Termination. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three business days after written notice of termination is given to GBC; or (ii) by GBC at any time -5- after the occurrence of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by GBC under this Section 6.2, Borrower shall pay to GBC a termination fee (the "Termination Fee") in the amount shown on the Schedule. The termination fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the highest rate applicable to any of the Obligations. 6.3 Payment of Obligations. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding letters of credit issued based upon an application, guarantee, indemnity or similar agreement on the part of GBC, then on such date Borrower shall provide to GBC cash collateral in an amount equal to the face amount of all such letters of credit plus all interest, fees and costs due or (in GBC's estimation) likely to become due in connection therewith, to secure all of the Obligations relating to said letters of credit, pursuant to GBC's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of GBC's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that GBC may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of GBC, nor shall any such termination relieve Borrower of any Obligation to GBC, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, GBC shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be reasonably required to terminate GBC's security interests. 7. EVENTS OF DEFAULT AND REMEDIES. 7.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give GBC immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to GBC by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) Intentionally Deleted; or (d) Borrower shall fail to perform any non-monetary Obligation which by its nature cannot be cured; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within 5 business days after the date performance is due; or (f) Any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within 10 days after the occurrence of the same; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches any material contract or obligation * , which has or may reasonably be expected to have a material adverse effect on Borrower's business or financial condition; or (i) Dissolution, termination of existence, insolvency or business failure of Borrower or any Guarantor; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within 45 days after the date commenced; or (k) default under, revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing; or (l) default under, revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations defaults under, terminates or in any way limits or terminates its subordination agreement; or (n) there shall be a change in the record or beneficial ownership of an aggregate of more than 20% of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of Borrower in effect on the date hereof, without the prior written consent of GBC ** ; or (o) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a material adverse change in Borrower's business or financial condition. GBC may cease making any Loans hereunder during any of the above -6- cure periods, and thereafter if an Event of Default has occurred. * (after giving effect to any applicable cure period) ** , except for a change which results from an underwritten public offering of Borrower's capital stock or any interests therein 7.2 Remedies. Upon the occurrence of any Event of Default, and at any time thereafter, GBC, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes GBC without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as GBC deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should GBC seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that GBC retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to GBC at places designated by GBC which are reasonably convenient to GBC and Borrower, and to remove the Collateral to such locations as GBC may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, GBC shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time GBC obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. GBC shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as GBC deems reasonable, or on GBC's premises, or elsewhere and the Collateral need not be located at the place of disposition. GBC may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes GBC to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in GBC's sole discretion, to grant extensions of time to pay, compromise claims and settle Receivables, General Intangibles and the like for less than face value; and (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by GBC with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 7.3 Standards for Determining Commercial Reasonableness. Borrower and GBC agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by GBC, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash or by cashier's check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, GBC may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. GBC shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 7.4 Power of Attorney. Upon the occurrence of any Event of Default, without limiting GBC's other rights and remedies, Borrower grants to GBC an irrevocable power of attorney coupled with an interest, authorizing and permitting GBC (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but GBC agrees to exercise the -7- following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that GBC may, in its sole discretion, deem advisable in order to perfect and maintain GBC's security interest in the Collateral, or in order to exercise a right of Borrower or GBC, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of GBC's Collateral or in which GBC has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into GBC's possession; (e) Endorse all checks and other forms of remittances received by GBC; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give GBC the same rights of access and other rights with respect thereto as GBC has under this Agreement; and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and reasonable attorneys' fees incurred by GBC with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall GBC's rights under the foregoing power of attorney or any of GBC's other rights under this Agreement be deemed to indicate that GBC is in control of the business, management or properties of Borrower. 7.5 Application of Proceeds. All proceeds realized as the result of any sale or other disposition of the Collateral shall be applied by GBC first to the reasonable costs, expenses, liabilities, obligations and * attorneys' fees incurred by GBC in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as GBC shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to GBC for any deficiency. If, GBC, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, GBC shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by GBC of the cash therefor. * reasonable 7.6 Remedies Cumulative. In addition to the rights and remedies set forth in this Agreement, GBC shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between GBC and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by GBC of one or more of its rights or remedies shall not be deemed an election, nor bar GBC from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of GBC to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 8. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Account Debtor" means the obligor on a Receivable. "Affiliate" means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Business Day" means a day on which GBC is open for business. "Code" means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. "Collateral" has the meaning set forth in Section 2.1 above. "Default" means any event which with notice or passage of time or both, would constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9105 of the Code. "Eligible Receivables" means Receivables arising in the ordinary course of Borrower's business from the sale of -8- goods or rendition of services, which GBC, in its sole judgment, shall deem eligible for borrowing, based on such considerations as GBC may from time to time deem appropriate. Without limiting the fact that the determination of which Receivables are eligible for borrowing is a matter of GBC's discretion, the following (the "Minimum Eligibility Requirements") are the minimum requirements for a Receivable to be an Eligible Receivable: (i) the Receivable must not be outstanding for more than 90 days from its invoice date, (ii) the Receivable must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor, (iii) the Receivable must not be subject to any contingencies (including Receivables arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be conditional), (iv) the Receivable must not be owing from an Account Debtor with whom the Borrower has any dispute (whether or not relating to the particular Receivable), (v) the Receivable must not be owing from an Affiliate of Borrower, (vi) the Receivable must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not acceptable to GBC, or which, fails or goes out of a material portion of its business, (vii) the Receivable must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to GBC's satisfaction, with the United States Assignment of Claims Act), (viii) the Receivable must not be owing from an Account Debtor located outside the United States or Canada (unless pre-approved by GBC in its discretion in writing, or backed by a letter of credit satisfactory to GBC, or FCIA insured satisfactory to GBC), (ix) the Receivable must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise. In addition, if more than 25% of the Receivables owing from an Account Debtor are outstanding more than 90 days from their invoice date (without regard to unapplied credits) or are otherwise not Eligible Receivables, then all Receivables owing from that Account Debtor will be deemed ineligible for borrowing. GBC may, from time to time, in its discretion, revise the Minimum Eligibility Requirements, upon * written notice to the Borrower. * prior "Event of Default" means any of the events set forth in Section 7.1 of this Agreement. "General Intangibles" means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against GBC, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Guarantor" means any Person who has guaranteed any of the Obligations. "Inventory" means all of Borrower's now owned and hereafter acquired goods, merchandise or other personal property *, wherever located, to be furnished under any contract of service or held for sale or lease (including all raw materials, work in process, finished goods and goods in transit), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. * other than Wafer Fabrication Assets "LIBOR Rate" means (i) the one-month London Interbank Offered Rate for deposits in U.S. dollars, as shown each day in The Wall Street Journal (Eastern Edition) under the caption "Money Rates - London Interbank Offered Rates (LIBOR)"; or (ii) if the Wall Street Journal does not publish such rate, the offered one-month rate for deposits in U.S. dollars which appears on the Reuters Screen LIBO Page as of 10:00 a.m., New York time, each day, provided that if at least two rates appear on the Reuters Screen LIBO Page on any day, the "LIBOR Rate" for such day shall be the arithmetic mean of such rates; or (iii) if the Wall Street Journal does not publish such rate on a particular day and no such rate appears on the Reuters Screen LIBO Page on -9- such day, the rate per annum at which deposits in U.S. dollars are offered to the principal London office of The Chase Manhattan Bank, N.A. in the London interbank market at approximately 11:00 A.M., London time, on such day in an amount approximately equal to the outstanding principal amount of the Loans, for a period of one month, in each of the foregoing cases as determined in good faith by GBC, which determination shall be conclusive absent manifest error. "Obligations" means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to GBC, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by GBC in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, * attorney's fees, expert witness fees, audit fees, letter of credit fees, loan fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and GBC. * reasonable "Permitted Liens" means the following: (i) liens for taxes not yet payable; (ii) additional security interests and liens which are subordinate to the security interest in favor of GBC and are consented to in writing by GBC (which consent shall not be unreasonably withheld); (iii) security interests being terminated substantially concurrently with this Agreement; (iv) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (v) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. GBC will have the right to require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on GBC's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of GBC, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Receivables" means all of Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 9. GENERAL PROVISIONS. 9.1 Interest Computation. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by GBC (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by GBC on account of the Obligations three Business Days after receipt by GBC of immediately available funds. GBC shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to GBC in its discretion, and GBC may charge Borrower's Loan account for the amount of any item of payment which is returned to GBC unpaid. 9.2 Application of Payments. All payments with respect to the Obligations may be applied, and in GBC's sole discretion reversed and re-applied, to the Obligations, in such order and manner as GBC shall determine in its sole discretion. 9.3 Charges to Account. GBC may, in its discretion, require that Borrower pay monetary Obligations in cash to GBC, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. 9.4 Monthly Accountings. GBC shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors -10- discovered by GBC), unless Borrower notifies GBC in writing to the contrary within sixty days after each account is rendered, describing the nature of any alleged errors or admissions. 9.5 Notices. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt requested, addressed to GBC or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one business day following delivery to the private delivery service, or two business days following the deposit thereof in the United States mail, with postage prepaid. 9.6 Severability. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 9.7 Integration. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and GBC and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith. 9.8 Waivers. The failure of GBC at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and GBC shall not waive or diminish any right of GBC later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to GBC shall be deemed to have been waived by any act or knowledge of GBC or its agents or employees, but only by a specific written waiver signed by an authorized officer of GBC and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by GBC on which Borrower is or may in any way be liable, and notice of any action taken by GBC, unless expressly required by this Agreement. 9.9 Amendment. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of GBC. 9.10 Time of Essence. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 9.11 Attorneys Fees and Costs. Borrower shall reimburse GBC for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by GBC, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs GBC incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce GBC's security interest in, the Collateral; and otherwise represent GBC in any litigation relating to Borrower. If either GBC or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which GBC may be entitled pursuant to this Paragraph shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 9.12 Benefit of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and GBC; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of GBC, and any prohibited assignment shall be void. No consent by GBC to any assignment shall release Borrower from its liability for the Obligations. 9.13 Joint and Several Liability. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 9.14 -11- 9.15 Paragraph Headings; Construction. Paragraph headings are only used in this Agreement for convenience. Borrower and GBC acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against GBC or Borrower under any rule of construction or otherwise. 9.16 Governing Law; Jurisdiction; Venue. This Agreement and all acts and transactions hereunder and all rights and obligations of GBC and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to GBC to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at GBC's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 9.17 Mutual Waiver of Jury Trial. BORROWER AND GBC EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN GBC AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF GBC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GBC OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. Borrower: PARADIGM TECHNOLOGY, INC. By --------------------------------------------- President or Vice President By --------------------------------------------- Secretary of Ass't Secretary GBC: GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation By --------------------------------------------- Title ------------------------------------------ -12- Schedule to Loan and Security Agreement Borrower: Paradigm Technology, Inc. Address: 71 Vista Montana San Jose, California 95134 Date: October 25, 1996 This Schedule is an integral part of the Loan and Security Agreement (the "Loan Agreement") between Greyrock Business Credit, a Division of NationsCredit Commercial Corporation ("GBC") and the above-borrower ("Borrower") of even date. ================================================================================ 1. CREDIT LIMIT (Section 1.1): An amount not to exceed the lesser of: (i) $6,000,000 at any one time outstanding; or (ii) the sum of: (a) 80% of the amount of Borrower's Eligible Receivables * owing from original equipment manufacturers; plus (b) 70% of the amount of Borrower's Eligible Receivables * owing from distributors. * (as defined in Section 8 of the Loan Agreement) ================================================================================ 2. INTEREST. Interest Rate (Section 1.2): The interest rate in effect throughout each calendar month during the term of this Agreement shall be the highest "LIBOR Rate" in effect during such month, plus 5.25% per annum, provided that the interest rate in effect in each month shall not be less than 9.00% per annum, and provided that the interest charged for each month shall be a minimum of $12,500, regardless of the amount of the Obligations outstanding. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "LIBOR Rate" has the meaning set forth in Section 8 of the Loan Agreement. ================================================================================ 3. FEES (Section 1.3/Section 6.2): Loan Fee: $45,000, payable concurrently herewith. Termination Fee: $12,500 per month for each month (or portion thereof). NSF Check Charge: $15.00 per item. Wire Transfers: $15.00 per transfer. ================================================================================ -1- 4. MATURITY DATE (Section 6.1) October 31, 1997, subject to automatic renewal as provided in Section 6.1 of the Loan Agreement, and early termination as provided in Section 6.2 of the Loan Agreement. ================================================================================ 5. REPORTING. (Section 5.2): Borrower shall provide GBC with the following: 1. Annual financial statements, as soon as available, and in any event within 90 days following the end of Borrower's fiscal year, certified by independent certified public accountants acceptable to GBC. 2. Monthly unaudited financial statements, as soon as available, and in any event within 45 days after the end of each month. 3. Monthly Receivable agings, aged by invoice date, within 10 days after the end of each month. 4. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers within 10 days after the end of each month. ================================================================================ 6. BORROWER INFORMATION: Prior Names of Borrower (Section 3.2): None Prior Trade Names of Borrower (Section 3.2): GL Micro Devices Existing Trade Names of Borrower (Section 3.2): None Other Locations and Addresses (Section 3.3): 11805 N.E. 99th Street, Vancouver, Washington 98682 6 Ventura, Suite 100, Irvine, California 92718 555 Republic Drive, Suite 200, Plano, Texas 75074 1600 Boston-Providence Highway, Walpole, Massachusetts 02081 6525 The Corners Parkway, Suite 400, Norcross, Georgia 30092 Material Adverse Litigation (Section 3.10): 1. Joseph Bulwa, Michael Mohamadifar, et al. v. Paradigm Technology, Inc., et al., Superior Court, Santa Clara County, Case No. CV759991; 2. Olson Technical Sales Corporation v. Paradigm Technology, Inc., Superior Court, Santa Clara County, Case No. CV748898. -2- Borrower: GBC: Paradigm Technology, Inc. Greyrock Business Credit, a Division of NationsCredit Commercial Corporation By ------------------------------------------- President or Vice President By ----------------------------- Title -------------------------- By ------------------------------------------- Secretary or Ass't Secretary -3- EX-10.46 9 LETTER May 23, 1996 Hans Olsen NewLogic 11805 NE 99th Street, Suite 1320 Vancouver, WA 98682 Dear Hans: I am very pleased to offer you the position of Vice President of the Systems Group, reporting to me. The annual salary for this position is $150,000 payable (in increments) every two weeks. As an employee of the Company, you will be entitled to receive such other benefits customarily afforded employees of the Company. You will be granted a stock option to purchase 50,000 shares of stock at an exercise price which will be the closing price of our stock the day the acquisition of NewLogic by Paradigm is completed. Your stock will begin to vest two years after the acquisition is completed and will vest 25% per year for four years. You should be aware that your employment with the Company is freely entered into and is for no specified period of time. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause. For purposes of Federal Immigration Law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three business days of your date of hire. In the event of any dispute or claim related to or arising out of our employment relationship, you and the Company agree that all such disputes shall be fully and finally resolved by binding arbitration conducted by the American Arbitration Association in San Jose, California. However, we agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or proprietary information. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me. Your start date will be the day the acquisition of NewLogic by Paradigm is completed. This letter, along with any agreements relating to proprietary rights between you and the Company, and the agreements associated with the acquisition of NewLogic by Paradigm set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by written agreement, signed by you and the Company. We look forward to working with you at Paradigm Technology. Welcome aboard! Sincerely, Michael Gulett President and CEO The undersigned hereby accepts the position at Paradigm and agrees to the terms of employment as set forth above. - - ----------------------------------- Hans Olsen - - ----------------------------------- Date EX-10.47 10 LETTER May __, 1996 Bruce Campbell NewLogic 11805 NE 99th Street, Suite 1320 Vancouver, WA 98682 Dear Bruce: I am very pleased to offer you the position of Vice President of Strategic Planning, reporting to me. The annual salary for this position is $150,000 payable (in increments) every two weeks. As an employee of the Company, you will be entitled to receive such other benefits customarily afforded employees of the Company. You will be granted a stock option to purchase 40,000 shares of stock at an exercise price which will be the closing price of our stock the day the acquisition of NewLogic by Paradigm is completed. Your stock will begin to vest two years after the acquisition is completed and will vest 25% per year for four years. You should be aware that your employment with the Company is freely entered into and is for no specified period of time. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause. For purposes of Federal Immigration Law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three business days of your date of hire. In the event of any dispute or claim related to or arising out of our employment relationship, you and the Company agree that all such disputes shall be fully and finally resolved by binding arbitration conducted by the American Arbitration Association in San Jose, California. However, we agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or proprietary information. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me. Your start date will be the day the acquisition of NewLogic by Paradigm is completed. This letter, along with any agreements relating to proprietary rights between you and the Company, and the agreements associated with the acquisition of NewLogic by Paradigm set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by written agreement, signed by you and the Company. We look forward to working with you at Paradigm Technology. Welcome aboard! Sincerely, Michael Gulett President and CEO The undersigned hereby accepts the position at Paradigm and agrees to the terms of employment as set forth above. - - ------------------------------ Bruce Campbell - - ------------------------------ Date EX-10.48 11 LETTER May 23, 1996 Gregory Roberts NewLogic 11805 NE 99th Street, Suite 1320 Vancouver, WA 98682 Dear Gregory: I am very pleased to offer you the position of Memory Design Manager, reporting to Hans Olsen. The annual salary for this position is $108,000 payable (in increments) every two weeks. As an employee of the Company, you will be entitled to receive such other benefits customarily afforded employees of the Company. You will be granted a stock option to purchase 12,000 shares of stock at an exercise price which will be the closing price of our stock the day the acquisition of NewLogic by Paradigm is completed. Your stock will begin to vest two years after the acquisition is completed and will vest 25% per year for four years. You should be aware that your employment with the Company is freely entered into and is for no specified period of time. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause. For purposes of Federal Immigration Law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three business days of your date of hire. In the event of any dispute or claim related to or arising out of our employment relationship, you and the Company agree that all such disputes shall be fully and finally resolved by binding arbitration conducted by the American Arbitration Association in San Jose, California. However, we agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or proprietary information. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me. Your start date will be the day the acquisition of NewLogic by Paradigm is completed. This letter, along with any agreements relating to proprietary rights between you and the Company, and the agreements associated with the acquisition of NewLogic by Paradigm set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by written agreement, signed by you and the Company. We look forward to working with you at Paradigm Technology. Welcome aboard! Sincerely, Michael Gulett President and CEO The undersigned hereby accepts the position at Paradigm and agrees to the terms of employment as set forth above. - - ----------------------------------- Gregory Roberts - - ----------------------------------- Date EX-10.49 12 EXECUTIVE COMPENSATION AGREEMENT EXECUTIVE COMPENSATION AGREEMENT THIS AGREEMENT is entered into as of August __, 1996, by and between MICHAEL GULETT (the "Employee") and PARADIGM TECHNOLOGY, INC., a Delaware corporation (the "Company"). 1. Term of Employment. (a) Basic Rule. The Company agrees to continue the Employee's employment, and the Employee agrees to remain in employment with the Company, from the date hereof until the date when the Employee's employment terminates pursuant to Subsection (b), (c) or (d) below. (b) Early Termination. Subject to Sections 6 and 7, the Company may terminate the Employee's employment by giving the Employee 90 days' advance notice in writing. The Employee may terminate his employment by giving the Company 30 days' advance notice in writing. The Employee's employment shall terminate automatically in the event of his death. Any waiver of notice shall be valid only if it is made in writing and expressly refers to the applicable notice requirement of this Section 1. (c) Cause. The Company may at any time terminate the Employee's employment for Cause by giving the Employee notice in writing. For all purposes under this Agreement, "Cause" shall mean: (i) A willful act by the Employee which constitutes misconduct or fraud and which is injurious to the Company; or (ii) Conviction of, or a plea of "guilty" or "no contest" to, a felony. No act, or failure to act, by the Employee shall be considered "willful" unless committed without good faith and without a reasonable belief that the act or omission was in the Company's best interest. (d) Disability. The Company may terminate the Employee's active employment due to Disability by giving the Employee 30 days' advance notice in writing. For all purposes under this Agreement, "Disability" shall mean that the Employee, at the time notice is given, has become eligible to receive immediate long-term disability benefits under the Company's long-term disability insurance plan or, if there is no such plan, under the federal Social Security program. In the event that the Employee resumes the performance of substantially all of his duties hereunder before the termination of his active employment under this Subsection (d) becomes effective, the notice of termination shall automatically be deemed to have been revoked. -1- (e) Rights Upon Termination. Except as expressly provided in Sections 6 and 7, upon the termination of the Employee's employment pursuant to this Section 1, the Employee shall only be entitled to the compensation, benefits and reimbursements described in Sections 3, 4 and 5 for the period preceding the effective date of the termination. The payments under this Agreement shall fully discharge all responsibilities of the Company to the Employee upon the termination of his employment. (f) Termination of Agreement. This Agreement shall terminate when all obligations of the parties hereunder have been satisfied. 2. Duties and Scope of Employment. (a) Position. The Company agrees to employ the Employee as its Chief Executive Officer for the term of his employment under this Agreement. The Employee shall report to the Company's Board of Directors. (b) Obligations. During the term of his employment under this Agreement, the Employee shall devote his full business efforts and time to the Company and its subsidiaries. The Employee shall not render services to any other for-profit corporation or entity without the prior written consent of the Company's Board of Directors (the "Board"). This Subsection (b) shall not preclude the Employee from engaging in appropriate professional, educational, civic, charitable or religious activities or from devoting a reasonable amount of time to private investments that do not interfere or conflict with his responsibilities to the Company. 3. Base Compensation. During the term of his employment under this Agreement, the Company agrees to pay the Employee as compensation for his services a base salary at the annual rate of $255,000 or at such higher rate as the Company may determine from time to time. Such salary shall be payable in accordance with the Company's standard payroll procedures. Once the Company has increased such salary, it thereafter shall not be reduced. (The annual compensation specified in this Section 3, together with any increases in such compensation that the Company may grant from time to time, is referred to in this Agreement as "Base Compensation.") 4. Employee Benefits. During the term of his employment under this Agreement, the Employee shall be eligible for the employee benefit plans and executive compensation programs maintained by the Company for other senior executives, subject in each case to the generally applicable terms and conditions of the plan or program in -2- question and to the determinations of any person or committee administering such plan or program. 5. Business Expenses. During the term of his employment under this Agreement, the Employee shall be authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with his duties hereunder. The Company shall reimburse the Employee for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. 6. Change in Control. (a) Definition. For all purposes under this Agreement, "Change in Control" shall mean the occurrence of any of the following events after the date of this Agreement: (i) the consummation of the acquisition of fifty-one percent (51%) or more of the outstanding stock of the Company by one person or by two or more persons acting as a partnership, limited partnership, syndicate or other group pursuant to a tender offer validly made under any federal or state law (other than a tender offer by the Company); (ii) the consummation of a merger, consolidation or other reorganization of the Company (other than a reincorporation of the Company), if after giving effect to such merger, consolidation or other reorganization of the Company, the stockholders of the Company immediately prior to such merger, consolidation or other reorganization do not represent a majority in interest of the holders of voting securities (on a fully diluted basis) with the ordinary voting power to elect directors of the surviving or resulting entity after such merger, consolidation or other reorganization; (iii) the sale of all or substantially all of the assets of the Company to a third party who is not an affiliate (including a Parent or Subsidiary) of the Company; (iv) the dissolution of the Company pursuant to action validly taken by the stockholders of the Company in accordance with applicable state law. (b) Good Reason. For all purposes under this Agreement, "Good Reason" shall mean that the Employee: (i) Has incurred a material reduction in his authority or responsibility; -3- (ii) Has incurred one or more reductions in his Base Compensation in the cumulative amount of five percent or more; or (iii) Has been notified that his principal place of work will be relocated by a distance of 35 miles or more. (c) Severance Payment. The Employee shall be entitled to receive a severance payment from the Company (the "Severance Payment") if, during the term of this Agreement and within the first 6-month period after the occurrence of a Change in Control, either: (i) The Employee voluntarily resigns his employment for Good Reason; or (ii) The Company terminates the Employee's employment for any reason other than Cause or Disability. The Severance Payment shall be made in a lump sum not more than five business days following the date of the employment termination and shall be in an amount determined under Subsection (d) below. The Severance Payment shall be in lieu of any further payments to the Employee under Section 3 and any further accrual of benefits under Section 4 with respect to periods subsequent to the date of the employment termination. (d) Amount. The amount of the Severance Payment shall be equal to the sum of the following: (i) One and a half times the Employee's annual rate of Base Compensation, as in effect on the date of the employment termination; plus (ii) One and a half times the last annual bonus awarded to the Employee by the Company prior to the date of the employment termination (regardless of when paid). If the Company has determined that no bonus shall be awarded to the Employee for a fiscal year, such bonus shall be included in the calculation as zero. (e) Incentive Programs. If, during the term of this Agreement, a Change in Control occurs with respect to the Company that is not a merger that is being accounted for as a pooling of interests, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all stock option, stock appreciation rights, restricted stock, phantom stock or similar plans or agreements of the Company, regardless of any provisions in such plans or agreements that do not provide for full vesting. (To the extent that such plans or agreements provide for full vesting on an earlier date than this Agreement, such plans or agreements shall prevail.) -4- (f) Insurance Coverage. During the 18-month period commencing upon a termination of employment described in Subsection (c) above, the Employee (and, where applicable, his dependents) shall be entitled to continue participation in the group insurance plans maintained by the Company, including life, disability and health insurance programs, as if he were still an employee of the Company. Where applicable, the Employee's salary for purposes of such plans shall be deemed to be equal to his Base Compensation. To the extent that the Company finds it impossible to cover the Employee under its group insurance policies during such 18-month period, the Company shall provide the Employee with individual policies which offer at least the same level of coverage and which impose not more than the same costs on him. The foregoing notwithstanding, in the event that the Employee becomes eligible for comparable group insurance coverage in connection with new employment, the coverage provided by the Company under this Subsection (f) shall terminate immediately. Any group health continuation coverage that the Company is required to offer under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA") shall commence when coverage under this Subsection (f) terminates. (g) No Mitigation. The Employee shall not be required to mitigate the amount of any payment contemplated by this Section 6 (whether by seeking new employment or in any other manner). Except as expressly provided in Subsection (f) above, no such payment shall be reduced by earnings that the Employee may receive from any other source. 7. Involuntary Termination Without Cause. (a) Continuation Period. In the event that, during the term of this Agreement, the Company terminates the Employee's employment for any reason other than Cause or Disability and Section 6 does not apply, then the Employee shall be entitled to receive all of the payments and benefit coverage described in this Section 7. Such payments and benefit coverage shall continue for the period (the "Continuation Period") commencing on the date when the employment termination is effective and ending on the earlier of: (i) The date six months after such date; or (ii) The date of the Employee's death. (b) Compensation. During the Continuation Period, the Company shall pay the Employee compensation at an annual rate equal to his Base Compensation at the rate in effect on the date of the employment termination. Such amount shall be paid at periodic intervals in accordance with the Company's standard payroll procedures. (c) Insurance Coverage. During the Continuation Period, the Employee (and, where applicable, his dependents) shall be -5- entitled to continue participation in the group insurance plans maintained by the Company, including life, disability and health insurance programs, as if he were still an employee of the Company. Where applicable, the Employee's salary for purposes of such plans shall be deemed to be equal to his Base Compensation. To the extent that the Company finds it impossible to cover the Employee under its group insurance policies during the Continuation Period, the Company shall provide the Employee with individual policies which offer at least the same level of coverage and which impose not more than the same costs on him. The foregoing notwithstanding, in the event that the Employee becomes eligible for comparable group insurance coverage in connection with new employment, the coverage provided by the Company under this Subsection (c) shall terminate immediately. Any group health continuation coverage that the Company is required to offer under COBRA shall commence when coverage under this Subsection (c) terminates. (d) Incentive Programs. The Continuation Period shall be counted as employment with the Company for purposes of vesting under all stock option, stock appreciation rights, restricted stock, phantom stock or similar plans maintained by the Company (any contrary provisions of such plans notwithstanding). The preceding sentence shall not be construed to require the Company to grant any new awards to the Employee during the Continuation Period. The Continuation Period shall also be counted as employment with the Company for purposes of determining the expiration date of any stock option granted by the Company and held by the Employee when his employment terminates. Any other provision of this Agreement notwithstanding, the Continuation Period for purposes of this Subsection (d) shall not exceed three months in the event that the Company terminates the Employee's employment for performance-related reasons, as determined by the Board. (There is no Continuation Period for any purpose in the event that the termination is for Cause.) (e) No Mitigation. The Employee shall not be required to mitigate the amount of any payment contemplated by this Section 7 (whether by seeking new employment or in any other manner). Except as expressly provided in Subsection (c) above, no such payment shall be reduced by earnings that the Employee may receive from any other source. 8. Limitation on Payments. (a) Application. This Section 8 shall apply to the Employee only if, after the application of this Section 8, the present value of his aggregate payments or property transfers from the Company will be greater than the present value of his payments or property transfers from the Company would have been if: (i) This Section 8 did not apply; and -6- (ii) Such present value had been reduced by the amount of the excise tax described in section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"). In all other cases, this Section 8 shall not apply to the Employee. All determinations under this Subsection (a) shall be made by the independent auditors retained by the Company most recently prior to the Change in Control (the "Auditors"). (b) Basic Rule. Any provision of this Agreement other than Subsection (a) above notwithstanding, the Company shall not be required to make any payment or property transfer to, or for the benefit of, the Employee (under this Agreement or otherwise) that would be nondeductible by the Company by reason of section 280G of the Code or that would subject the Employee to the excise tax described in section 4999 of the Code. All calculations required by this Section 8 shall be performed by the Auditors, based on information supplied by the Company and the Employee, and shall be binding on the Company and the Employee. All fees and expenses of the Auditors shall be paid by the Company. (c) Reductions. If the amount of the aggregate payments or property transfers to the Employee must be reduced under this Section 8, then the Employee shall direct in which order the payments or transfers are to be reduced, but no change in the timing of any payment or transfer shall be made without the Company's consent. As a result of uncertainty in the application of sections 280G and 4999 of the Code at the time of an initial determination by the Auditors hereunder, it is possible that a payment will have been made by the Company that should not have been made (an "Overpayment") or that an additional payment that will not have been made by the Company could have been made (an "Underpayment"). In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Employee that the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Employee that he shall repay to the Company, together with interest at the applicable federal rate specified in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Employee to the Company if and to the extent that such payment would not reduce the amount that is nondeductible under section 280G of the Code or is subject to an excise tax under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to, or for the benefit of, the Employee, together with interest at the applicable federal rate specified in section 7872(f)(2) of the Code. -7- 9. Successors. (a) Company's Successors. The Company shall require any successor (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets, by an agreement in substance and form satisfactory to the Employee, to assume this Agreement and to agree expressly to perform this Agreement in the same manner and to the same extent as the Company would be required to perform it in the absence of a succession. The Company's failure to obtain such agreement prior to the effectiveness of a succession shall be a breach of this Agreement and shall entitle the Employee to all of the compensation and benefits to which he would have been entitled hereunder if the Company had involuntarily terminated his employment without Cause immediately after such succession becomes effective. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this Subsection (a) or which becomes bound by this Agreement by operation of law. (b) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representa- tives, executors, administrators, successors, heirs, distributees, devisees and legatees. 10. Miscellaneous Provisions. (a) Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement -8- have been made or entered into by either party with respect to the subject matter hereof. This Agreement supersedes any employment agreement or understanding, whether oral or written, made before the date of this Agreement between Employee and the Company. (d) No Setoff; Withholding Taxes. There shall be no right of setoff or counterclaim, with respect to any claim, debt or obligation, against payments to the Employee under this Agreement. All payments made under this Agreement shall be subject to reduction to reflect taxes required to be withheld by law. (e) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) Arbitration. Except as otherwise provided in Section 9, any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in San Francisco in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Discovery shall be permitted to the same extent as in a proceeding under the Federal Rules of Civil Procedure, including (without limitation) such discovery as is specifically authorized by section 1283.05 of the California Code of Civil Procedure, without need of prior leave of the arbitrator under section 1283.05(e) of such Code. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. All fees and expenses of the arbitrator and such Association shall be paid as determined by the arbitrator. (h) No Assignment. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limita- -9- tion) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this Subsection (h) shall be void. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. ______________________________ PARADIGM TECHNOLOGY, INC. By ___________________________ Title ________________________ -10- EX-11.1 13 NET INCOME (LOSS) PER SHARE EXHIBIT 11.1 PARADIGM TECHNOLOGY, INC. COMPUTATION OF NET INCOME (LOSS) PER SHARE(1) (in thousands, except per share amounts) Year Ended Year Ended December 31, December 31, 1995 1996 ------------ ------------ Net income (loss) ................................. $ 5,263 $(36,425) ======== ======== Weighted average shares outstanding: Common Stock ................................... 3,784 7,060 Convertible Preferred Stock .................... 1,600 -- Common Stock issuable upon exercise of options and warrants(2) ..................... 930 -- -------- -------- Weighted average common shares and equivalents ................................. 6,314 7,060 ======== ======== Net income (loss) per share ....................... $ 0.83 $ (5.16) ======== ======== - - ------------------- (1) This Exhibit should be read with Note 2 of Notes to the financial statements. (2) Stock options and warrants granted subsequent to May 1994 have been included in the calculation of common and common equivalents shares as if they were outstanding for all periods prior to the Company's initial public offering of 2,300,000 shares of common stock when closed on July 5, 1995. EX-23.1 14 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-4412) of Paradigm Technology, Inc. of our report dated January 23, 1997, except as to the second paragraph of Note 14, which is as of February 21, 1997, appearing on page 36 of this Annual Report on Form 10-K. Price Waterhouse LLP San Jose, California March 10, 1997 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 587 0 7,279 1,569 2,472 10,914 9,507 (2,869) 17,742 11,306 374 72 0 0 36,226 17,742 23,202 23,202 36,364 24,213 (946) 0 1,121 (37,550) (1,125) (37,550) 0 0 0 (36,425) (5.16) (5.16)
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