-----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, OSCTtrtWdm3FA1xLbnNmJgj8XoJ2yVrtugf2lpAgt52oEzRFNMLlbiG208gMiEd2 xy7b/kyVnCdizUzIgu8wKQ== 0000950008-96-000340.txt : 19961115 0000950008-96-000340.hdr.sgml : 19961115 ACCESSION NUMBER: 0000950008-96-000340 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARADIGM TECHNOLOGY INC /DE/ CENTRAL INDEX KEY: 0000945699 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770140882 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26124 FILM NUMBER: 96660328 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1996, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------- ----------- Commission file number 0-26124 ------- PARADIGM TECHNOLOGY, INC. ---------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 77-0140882 ---------------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 71 VISTA MONTANA, SAN JOSE, CALIFORNIA 95134 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (408) 954-0500 ---------------------------------------------------------------------- Registrant's telephone number, including area code ---------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No ------- ------- Indicate by check mark whether the registrant (1) has filed all 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. Yes X No ------- ------- The number of shares of the Registrant's Common Stock, $.01 par value, outstanding as of September 30, 1996 was 7,188,538. TABLE OF CONTENTS Page Part I. Financial Information Item 1. Financial Statements Condensed Statements of Operations 3 Condensed Balance Sheets 4 Condensed Statements of Cash Flows 5 Notes to Condensed Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations 11-13 Liquidity and Capital Resources 13-15 Other Factors That May Affect Future Operating Results 15-20 Part II. Other Information Item 1. Legal Proceedings 21 Item 3. Defaults Upon Senior Securities 21 Item 6. Exhibits and Reports on Form 8-K 22 Signature 22 Exhibit 10.1 1994 Stock Option Plan Exhibit 11.1 Computation of Net Income (Loss) Per Share Exhibit 27 Financial Data Schedule Page 2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements PARADIGM TECHNOLOGY, INC. CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data) (unaudited)
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1996 1995 1996 1995 ---- ---- ---- ---- Sales, net $ 5,191 $ 14,003 $ 20,120 $ 36,917 Cost of goods sold 8,501 8,328 29,770 22,156 --------- -------- -------- -------- Gross profit (loss) (3,310) 5,675 (9,650) 14,761 --------- -------- -------- -------- Operating expenses: Research and development 1,657 1,263 4,596 3,367 Selling, general, and administrative 2,523 2,049 6,781 5,934 Write-off of in-process technology acquired -- -- 3,841 -- --------- -------- -------- -------- Total operating expenses 4,180 3,312 15,218 9,301 --------- -------- -------- -------- Operating income (loss) (7,490) 2,363 (24,868) 5,460 Interest expense 305 326 910 1,106 Other income, net (515) (295) (918) (330) --------- -------- -------- -------- Income (loss) before provision for income taxes (7,280) 2,332 (24,860) 4,684 Provision (benefit) for income -- 792 (1,125) 1,219 taxes --------- -------- -------- -------- Net income (loss) $ (7,280) $ 1,540 $ (23,735) $ 3,465 ========= ======== ========= ======== Net income (loss) per share $ (1.01) $ 0.21 $ (3.33) $ 0.58 ========= ======== ========= ======== Weighted average shares outstanding 7,184 7,242 7,133 5,984 ========= ======== ========= ======== See accompanying notes to condensed financial statements.
Page 3 PARADIGM TECHNOLOGY, INC. CONDENSED BALANCE SHEETS (In thousands) (unaudited)
Sept. 30, Dec. 31, 1996 1995 ---- ---- ASSETS: Current Assets: Cash and cash equivalents $ 871 $ 4,015 Short-term investments -- 17,198 Accounts receivable, net 3,836 10,424 Inventory 4,185 5,702 Other current assets 3,128 1,883 -------- -------- Total current assets 12,020 39,222 -------- -------- Property and equipment, net 26,567 17,331 Other assets 281 179 -------- -------- $38,868 $56,732 ======= ======= LIABILITIES AND STOCKHOLDERS'EQUITY: Current Liabilities: Line of credit $ 2,100 $ -- Current portion of long-term debt 9,887 3,287 Accounts payable and accrued liabilities 7,300 9,311 ------- ------- Total current liabilities 19,287 12,598 ------- ------- Long-term debt, net of current portion 129 4,349 Deferred rent 423 436 ------- ------- Total liabilities 19,839 17,383 ------- ------- Stockholders' Equity: Common stock 36,293 32,878 Retained earnings (deficit) (17,264) 6,471 ------- ------- Total stockholders' equity 19,029 39,349 ------- ------- $38,868 $56,732 ======= ======= See accompanying notes to condensed financial statements.
Page 4 PARADIGM TECHNOLOGY, INC. CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Nine Months Ended ----------------- Sept. 30, 1996 Sept. 30, 1995 -------------- -------------- Cash flows from operating activities: Net income (loss) $ (23,735) $ 3,465 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 4,395 3,885 Write-off of in-process technology acquired 3,841 -- Gain of sale of fixed assets (532) -- Changes in operating assets and liabilities: Accounts receivable 6,588 (1,627) Inventory 1,517 1,108 Other assets (916) (647) Accounts payable and accrued liabilities (2,670) 3,979 Prepetition liabilities paid (34) (977) ----------- ---------- Net cash provided by (used in) operating activities before reorganization items paid (11,546) 9,186 Reorganization items paid -- (189) ----------- ---------- Net cash provided by (used in) operating activities (11,546) 8,997 ----------- ---------- Cash flows used in investing activities: Purchases of capital equipment (13,310) (9,984) Sale of fixed assets 549 -- Purchases of short-term investments (2,672) (16,704) Sale of short-term investments 19,870 -- Acquisition of New Logic net of cash acquired (723) -- ----------- ---------- Net cash provided by (used in) investing activities 3,714 (26,688) ----------- ---------- Cash flows from financing activities : Line of credit increase (decrease) 2,100 (4,623) Payments on capital leases -- (7,747) Issuance of notes payable 11,339 9,300 Principal payments on notes payable (9,494) (1,089) Issuance of common stock 743 31,736 ----------- ---------- Net cash provided by financing activities 4,688 27,577 ----------- ---------- Net increase (decrease) in cash and cash equivalents (3,144) 9,886 Cash and cash equivalents: Beginning of period 4,015 135 ----------- ---------- End of period $ 871 $ 10,021 =========== ========== Supplemental cash flow information: Interest paid $ 797 $ 1,115 =========== ========== Income taxes paid $ 1,067 $ -- ========== ========== See accompanying notes to condensed financial statements.
Page 5 PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) NOTE 1: Basis of Presentation The financial statements have been prepared by Paradigm Technology, Inc. ("Paradigm" or the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited interim condensed financial statements included herein have been prepared on the same basis as the December 31, 1995 audited financial statements, contained in the Company's Annual Report to Stockholders, and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth therein. Results for the three and nine month periods ended September 30, 1996, are not necessarily indicative of the results to be expected for the entire year. The preparation of the interim condensed financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the report period. Actual results could differ from estimates. Share information for all periods has been retroactively adjusted to reflect a 1-for-2 reverse stock split approved in May 1995 and effected in conjunction with the Company's reincorporation in Delaware effective June 22, 1995. 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 the first nine months 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 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 the first nine months of 1996 which was not within the control of the Company. The Company could continue to experience a downward trend in pricing which could adversely affect the Company's operating results. Page 6 PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) This report on Form 10-Q for the quarter ended September 30, 1996 should be read in conjunction with the audited financial statements as of December 31, 1995, and the notes thereto included in the Company's Annual Report to Stockholders for the year ended December 31, 1995. NOTE 2: Net Income (Loss) Per Share Net loss per share for the three months ended September 30, 1996 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 shares of common stock and common stock equivalents outstanding. Common stock equivalent shares consist of convertible preferred stock (using the if-converted method), 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 Company's initial public offering are included in the computations for periods presented through the initial public offering, whether they are anti-dilutive or not. The Company completed its initial public offering of 2,300,000 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 result in a greater amount of average shares in 1996 compared to 1995. NOTE 3: New Logic Corporation Acquisition In June 1996, the Company acquired, through a stock purchase and merger transaction, New Logic Corporation ("New Logic"), a company which develops and manufactures logic designs with large memory arrays. In exchange for its purchase of the New Logic capital stock, the Company issued 314,394 shares of the Company's common stock, with a market value of approximately $2.7 million, and approximately $825,000 in cash. The fair value of New Logic Corporation's tangible net assets at the date of acquisition was a deficit of $373,000. Approximately $3.8 million of the purchase price over the fair market value of the net tangible assets was allocated to in-process technology which because of the uncertainty as to realization, the Company wrote off in the quarter ended June 30, 1996. Approximately $250,000 was allocated to other intangibles and will be amortized over a two year period. Page 7 PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) NOTE 4: Balance Sheet Detail
September 30, December 31, 1996 1995 ---- ---- Inventory (in thousands): Raw materials $ 411 $ 633 Work in process 2,923 4,307 Finished goods 851 762 ------- ------- $ 4,185 $ 5,702 +====== +====== Property and equipment (in thousands): Machinery and equipment $32,141 $21,315 Leasehold improvements 5,757 3,622 Furniture and fixtures 639 264 ------- ------- 38,537 25,201 Less accumulated depreciation (11,970) (7,870) ------- ------- $26,567 $17,331 ======= =======
NOTE 5: 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. The court has scheduled a hearing on the demurrer for December 3, 1996. No other motions have been filed with the court by plaintiffs or defendants, and no discovery has yet been conducted. Page 8 PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) NOTE 6: Subsequent Event On November 8, 1996, the Company entered into a definitive Asset Purchase Agreement to sell its wafer fabrication facility to an unnamed company (the "Buyer") for an approximate aggregate compensation of $20,000,000, consisting of approximately $6,665,000 in cash, $7,535,000 in debt assumption and $5,800,000 in promissory notes (the "Fab Divestiture"). The Asset Purchase Agreement will terminate if the Fab Divestiture has not closed on or before November 30, 1996. In addition to the above described consideration, the Asset Purchase Agreement provides for, among other things, the Buyer to enter into a Wafer Manufacturing Agreement with the Company whereby the Buyer will supply a quantity of wafers to the Company over a specified period of time. Consummation of the Asset Purchase Agreement is subject to a number of conditions, including approval of the board of directors of each party, and no assurance can be given that the Fab Divestiture will occur. If the Fab Divestiture is consummated, Paradigm will have additional working capital and greatly reduced fixed manufacturing expenses. NOTE 7: Income Taxes The Company's effective tax rate was 34.0% for the quarter ended June 30, 1995. The company's overall tax rate benefited from the use of net operating loss carryforwards. No provision was recorded for the first quarter of 1995 because the company incurred a net operating loss for tax purposes. During the three and nine month periods ended September 30, 1996 the Company recorded a loss for tax purposes. The Company recorded a tax benefit of $(1.1) million for the nine month period ended September 30, 1996 as a result of not providing a valuation allowance against the net operating loss generated due to the existence of carryback potential against previously paid taxes. At September 30, 1996, the Company had net operating loss carryforwards of approximately $4.6 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 8: Line of Credit and Debt Agreements The Company has a line of credit with Bank of the West with a borrowing limit of $10.0 million, secured by the Company's accounts receivable (the "Bank of the West Loan"). As of September 30, 1996, a total of $2.1 million was outstanding under the Bank of the West Loan. At September 30, 1996 the Company was not in compliance with covenants requiring a minimum quick ratio of 1.75 to one, a ratio of total liabilities to tangible net worth of less than 1.00 to 1.00, minimum tangible net worth requirements and quarterly profitability requirements. In November 1996 the Company replaced the Bank of the West line of credit with a line of credit with Greyrock Business Credit with a borrowing limit of $6,000,000. Borrowings under this new line of credit with Greyrock Business Credit are limited to up to 80% of eligible receivables and interest is at the greater of LIBOR plus 5.25% or 9%. The Company has a line of credit for equipment purchases from the CIT Group. The aggregate principal amount of all loans under this commitment may not exceed $15.0 million and the commitment expires on December 30, 1996. As of September 30, 1996, the Company's Page 9 PARADIGM TECHNOLOGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) outstanding indebtedness under this line of credit was approximately $9.6 million. All borrowings under this commitment are secured by the equipment purchased. At September 30, 1996, the Company was not in compliance with covenants requiring a minimum level of tangible net worth and a requirement for net income, as adjusted per the agreement, to exceed the current portion of debt by a ratio of 1.50 to one for the four most recent quarters. At September 30, 1996 the Company has not received a waiver of these covenants from the CIT Group and has therefore classified all CIT Group debt as a current liability. Page 10 PART I. Financial Information ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations When used in this Form 10-Q, the words "estimate," "project," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially, including factors relating to the impact of competitive products and pricing, the timely development and market acceptance of new products and upgrades to existing products, availability and cost of products from Paradigm's suppliers and market conditions in the PC industry. For discussion of certain such risk factors, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Factors That May Affect Future Operating Results." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release updates or revisions to these statements. Results of Operations Sales The Company's net sales for the three and nine month periods ended September 30, 1996 decreased 63% and 45%, respectively, from the corresponding periods in fiscal year 1995. The Company has continued to experience a significant downward trend in pricing that began in late 1995 in addition to lower volumes of units shipped when compared to 1995. The reduced selling prices of the Company's products and reduced unit shipments are both principally a result of the significant excess supply of SRAM devices relative to demand that the SRAM market has been experiencing since late 1995. The SRAM business is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity, and accelerated erosion of average selling prices. During the latter part of 1995 and first nine months of 1996, the market for SRAM devices experienced an excess supply relative to demand which resulted in a significant downward trend in prices. The selling prices that the Company is able to command for its products are highly dependent on industry-wide production capacity and demand. In this regard, the Company did experience rapid erosion in product pricing during the first nine months of 1996 which was not within the control of the Company. The Company could continue to experience a downward trend in pricing which could adversely affect the Company's operating results. Gross Profit Gross profit has decreased from $5.7 million and $14.8 million for the three and nine month periods ended September 30, 1995, respectively, to losses of $3.3 million and $9.7 million for the comparable periods in fiscal 1996. The decrease in gross profit resulted principally from industry-wide pricing pressures experienced by the Company in the March, June and September 1996 Page 11 quarters caused by an oversupply in the worldwide SRAM marketplace. These pricing pressures directly impacted profits as average selling prices of the Company's products declined during the three quarters ended September 30, 1996 when compared to the three quarters ended September 30, 1995. In addition, in the quarter ended June 30, 1996 the Company provided $5.8 million to write down the value of inventory on hand 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 Corporation ("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. Current market prices are lower than the prices payable to Atmel. The Company's conversion of its internal fabrication facility from five-inch to six-inch wafer manufacturing was completed during 1996 and has caused temporary declines in output and reductions in yield. Research and Development Research and development expenses increased to $1.7 million and $4.6 million in the three and nine month periods ended September 30, 1996 from $1.3 million and $3.4 million in the corresponding periods in fiscal 1995. As a percentage of revenues these expenses have increased to 32% and 23%, respectively, in the three and nine month periods ended September 30, 1996 from 9% in each of the comparable periods in 1995. Increased expenses result primarily from increased headcount required to support the Company's co-development activities with Atmel, new product introductions and other development activities. The Company expects research and development expenses in absolute dollars to increase through at least the end of 1996. In addition, research and development expenses increased in the three and nine month periods ended September 30, 1996 as a result of the Company's acquisition of New Logic Corporation in June 1996. Research and development expenses, as a percentage of revenue, have also increased as a result of the decline in revenue in the 1996 periods compared to the 1995 periods. Selling, General and Administrative Selling, general and administrative expenses were $2.5 million and $6.8 million in the three and nine month periods ended September 30, 1996, respectively, compared to $2.0 million and $5.9 million in the comparable periods in 1995. These expenses are expected to increase in the future in absolute dollars, as the Company increases its sales and marketing staff. Page 12 Interest Expense Interest expense of $.3 million and $.9 million for the three and nine month periods ended September 30, 1996 compares to $.3 million and $1.1 million in the corresponding periods in fiscal 1995. This decrease in interest expense for the nine month period in 1996 reflects repayment of certain outstanding debt by the Company from the proceeds of its initial public offering which was subsequently replaced during the March and June 1996 quarters by new debt at lower interest rates. See "Liquidity and Capital Resources." Other Income, Net For the three and nine month periods ended September 30, 1996, other income, net, reflects interest income earned on the investment of the net proceeds to the Company from its initial public offering. In addition, the September 1996 quarter includes a gain on the sale of fixed assets of $.5 million. Taxes The Company's effective tax rate was 34.0% for the quarter ended June 30, 1995. The Company's overall tax rate benefited from the use of net operating loss carryforwards. No provision was recorded for the first quarter of 1995 because the Company incurred a net operating loss for tax purposes. During the three and nine month periods ended September 30, 1996 the Company recorded a loss for tax purposes. The Company recorded a tax benefit of $(1.1) million for the nine month period ended September 30, 1996 as a result of not providing a valuation allowance against the net operating loss generated due to the existence of carryback potential against previously paid taxes. At September 30, 1996, the Company had net operating loss carryforwards of approximately $4.6 million available to offset future regular and alternative minimum taxable income. The Company's net operating loss carryforwards expire through 2011, if not utilized. Liquidity and Capital Resources The Company's operating, investing and financing activities used $3.1 million of cash in the nine months ended September 30, 1996 compared to generating $9.9 million of cash in the comparable period in 1995. Operating activities used $11.5 million in cash in 1996 versus the generation of $9.0 million of cash in 1995. This change of $20.5 million is primarily due to the loss of $23.7 million in the 1996 period compared to net income of $3.5 million in the 1995 period. The 1996 loss is partially offset by the write-off of in-process technology of $3.8 million associated with the Company's purchase of New Logic Corporation in June 1996. In addition, the decrease in accounts receivable in the 1996 period provided $8.2 million more cash than in 1995. The 1996 reduction in accounts receivable reflects the decrease of $8.8 million in net sales for the quarter ended September 30, 1996 compared to the third quarter of 1995. Accounts payable and accrued liabilities used $6.6 million more cash in 1996 than in 1995 due primarily to the cost of equipment purchased in the Company's conversion from five to six inch wafers. Page 13 Investing activities provided $3.7 million in 1996 compared to the use of $26.7 million in 1995. Capital equipment purchases increased from $10.0 million in the 1995 period to $13.3 million in the 1996 period as the Company continued its conversion from 5-inch wafers to 6-inch wafers in the Company's wafer fabrication facilities. In addition, the 1996 period included the sale of $17.2 million in short-term investments compared to the purchase of $16.7 million in short-term investments in the 1995 period. Financing activities provided $4.7 million in the 1996 period compared to $27.6 million in the 1995 period. Borrowing under the Company's line of credit provided $2.1 million in the 1996 period compared to a use of $4.6 million in the 1995 period. The issuance of notes payable resulted in an increase of $2.0 million of cash provided in 1996 compared to 1995 as the issuance of notes payable increased to $11.3 in the 1996 period from $9.3 million in the 1995 period. The increase in notes payable in the 1996 period resulted from borrowings by the Company under its line of credit for equipment purchases with the CIT Group to acquire capital equipment required for the Company's 5-inch to 6-inch wafer conversion and test floor expansion. The 1996 and 1995 periods reflected capital lease or note payable payments of approximately $9.5 million and $8.8 million, respectively, as the Company retired debt by replacing it with new borrowings at lower interest rates. In February, 1996 the Company replaced an existing line of credit with Greyrock Business Credit with a new line of credit from Bank of the West with a borrowing limit of $10.0 million. Borrowings are limited to 80% of eligible receivables and interest is at prime. The line of credit is secured by the Company's accounts receivable and will continue until all obligations to Bank of the West have been satisfied. On February 27, 1996 the Company borrowed $5.6 million under the line of credit to pay off the outstanding balance of the Greyrock term notes. At September 30, 1996 the Company was not in compliance with covenants requiring a minimum quick ratio of 1.75 to 1.0, a ratio of total liabilities to tangible net worth of less than 1.00 to 1.00, minimum tangible net worth requirements and quarterly profitability requirements. In November 1996 the Company replaced the Bank of the West line of credit with a line of credit with Greyrock Business Credit with a borrowing limit of $6,000,000. Borrowings under this new line of credit with Greyrock Business Credit are limited to up to 80% of eligible receivables and interest is at the greater of LIBOR plus 5.25% or 9%. In addition, in February 1996, the Company obtained a line of credit for equipment purchases from the CIT Group. The aggregate principal amount of all loans under this commitment may not exceed $15.0 million and the commitment expires on December 30, 1996. Borrowings under this line of credit bear interest at the U.S. Treasury rate for two year maturities plus 2.96% and are limited to 80% of the cost of eligible equipment. As of September 30, 1996, the Company's outstanding indebtedness under this line of credit was approximately $9.6 million. All borrowings under this commitment are secured by the equipment purchased. At September 30, 1996, the Company was not in compliance with covenants requiring a minimum level of tangible net worth and a requirement for net income, as adjusted per the agreement, to exceed the current portion of debt by a ratio of 1.50 to 1.0 for the four most recent quarters. At September 30, 1996 the Company has not received a waiver of these covenants from the CIT Group and has therefore classified all CIT Group debt as a current liability. As of November 13, 1996, cash flow from operations and other existing sources of liquidity are not expected to be sufficient to meet the Company's projected working capital and other cash Page 14 requirements through the end of 1996. The Company is currently seeking additional liquidity through the sale of its wafer fabrication facility in San Jose, California. No assurance can be given that such sale (which is subject to a number of conditions) will be consummated. See "Subsequent Events." If such sale is not consummated, the Company will be forced to pursue other sources of liquidity, including asset sales, equity financings, debt financings, bank financing, or other sources of liquidity. If the Company is unsuccessful in pursuing short-term liquidity, it will have to consider other options, including significant cost reductions, discontinuance of certain operations, debt restructuring, or protection from creditors pursuant to applicable laws. No assurances can be given that the Company will be successful in pursuing such sources of liquidity. Subsequent Events On November 8, 1996, the Company entered into a definitive Asset Purchase Agreement to sell its wafer fabrication facility to an unnamed company (the "Buyer") for an approximate aggregate compensation of $20,000,000, consisting of approximately $6,665,000 in cash, $7,535,000 in debt assumption and $5,800,000 in promissory notes (the "Fab Divestiture"). The Asset Purchase Agreement will terminate if the Fab Divestiture has not closed on or before November 30, 1996. In addition to the above described consideration, the Asset Purchase Agreement provides for, among other things, the Buyer to enter into a Wafer Manufacturing Agreement with the Company whereby the Buyer will supply a quantity of wafers to the Company over a specified period of time. Consummation of the Asset Purchase Agreement is subject to a number of conditions, including approval of the board of directors of each party, and no assurance can be given that the Fab Divestiture will occur. If the Fab Divestiture is consummated, Paradigm will have additional working capital and greatly reduced fixed manufacturing expenses. Other Factors That May Affect Future Operating Results 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 offset expected price erosion through manufacturing cost savings, yield improvements and developing and introducing on a timely basis new products and enhanced versions of its existing products which incorporate advanced features and command higher prices. If the Company is unable to design, develop and introduce competitive products or to develop new or modified designs and processes on a timely basis, the Company's operating results will be materially adversely affected. The Company's recent operations have consumed substantial amounts of cash. As of November 13, 1996, cash flow from operations and other existing sources of liquidity are not expected to be sufficient to meet the Company's projected working capital and other cash requirements through the end of 1996. Moreover, the Company is not currently in compliance with the covenants of its principal loan agreements. See Item 3, "Defaults Upon Senior Securities". The Company is currently seeking additional liquidity through the sale of its wafer fabrication facility in San Jose, California. No assurance can be given that such sale (which is subject to a number of conditions) will be consummated. See "Subsequent Events". If such sale is not consummated, the Company will be forced to pursue other sources of liquidity, including asset sales, equity financings, debt Page 15 financings, bank financing, or other sources of liquidity. If the Company is unsuccessful in pursuing short-term liquidity, it will have to consider other options, including significant cost reductions, discontinuance of certain operations, debt restructurings, or protection from creditors pursuant to applicable laws. No assurances can be given that the Company will be successful in pursuing such sources of liquidity. The manufacture and assembly of integrated circuits, particularly Paradigm's high speed, high density SRAMs, involve highly complex processes. The number of functional commercial quality devices produced from each processed silicon wafer depends upon a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the silicon, chemicals, and other materials used, and the performance of equipment and personnel. Paradigm has in the past experienced reductions in yields with its 256K, 1M and 4M products as a result of various factors. Susceptibility to yield problems generally increases as the density of the SRAM product increases. The Company's San Jose facility is its sole internal wafer fabrication facility and as a result is also vulnerable to future interruptions caused by natural disasters such as earthquakes, power and other utilities outages (which have occurred previously), fires and other interruptions. There can be no assurance that the Company, or any third-party foundry used by the Company, will not experience manufacturing problems including low yields of its products and business interruptions, in the future, and such problems could have a material adverse effect on the Company. To maintain competitive manufacturing yields and product performance, the Company must obtain from its vendors, in a timely manner, sufficient quantities of acceptable materials at budgeted prices. From time to time, vendors have extended lead times or limited supply to the Company because of capacity constraints. A limited number of vendors supply certain critical raw materials used in the Company's wafer fabrication facility, and the Company has occasionally rejected materials from those vendors that did not meet its specifications, resulting in temporary declines in output or yield. Only a few vendors supply certain ceramic semiconductor packages used to assemble some of the Company's products, and those vendors require long lead times to fill orders. The Company relies on two outside vendors to provide ion implant services that the Company requires as part of its manufacturing process. These service providers are the only two significant ion implant service providers available locally to the Company. Any interruption in the availability or quality of services from these providers would materially adversely affect the Company. In addition, the subcontracting of ion implant services involves the removal of wafers from the Company's manufacturing facility during the manufacturing process for transport to the facilities of the ion implant service providers. The process of transfer of the wafer from one facility to another involves the risks of breakage of wafers and contamination from impurities. The Company would be adversely affected if it were unable to obtain sufficient quantities of raw materials and other supplies or services in a timely manner, if those materials, supplies or services were not of acceptable quality, or if there were significant increases in the costs of raw materials. 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 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 Page 16 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 and introduce 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. The Company's future success will be heavily dependent upon its ability to attract and retain qualified technical, managerial, marketing and financial personnel. The Company experienced a high degree of turnover in personnel, including at the senior and middle management levels, during and subsequent to the Reorganization. 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. 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, 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, 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 shipping requirements 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. During the first nine months of 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 Company could continue to experience a downward trend in pricing which could adversely affect the Company's operating results. The Company's ability to maintain or increase revenues in light of the current downward trend in product prices will be highly dependent upon its ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling prices will also adversely affect the Company's gross margins unless the Company is able to reduce its costs per unit to offset such declines. There can be no assurance that the Company will be able to increase unit sales volumes, introduce and sell new products, or reduce its costs per unit. The semiconductor industry is highly cyclical and has been subject to significant economic downturns at various times, characterized by diminished product demand, production overcapacity and accelerated erosion of average selling prices. During the first nine months 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 Company could continue to experience a downward trend in pricing which could adversely affect the Company's operating margins. The selling prices Page 17 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 controls 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. The Company intends to continue to pursue patent, trade secret, and mask work protection for its semiconductor process technologies and designs. To that end, the Company has obtained certain patents and patent licenses and intends to continue to seek patents on its inventions and manufacturing processes, as appropriate. The process of seeking patent protection can be long and expensive, and there is no assurance that patents will be issued from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to the Company. In particular, there can be no assurance that any patents held by the Company will not be challenged, invalidated, or circumvented, or that the rights granted thereunder will provide competitive advantage to the Company. The Company also relies on trade secret protection for its technology, in part through confidentiality agreements with its employees, consultants and third parties. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known to or independently developed by others. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured, or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor industry. In the future, litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. The Company has from time to time received, and may in the future receive, communications alleging possible infringement of patents or other intellectual property rights of others. Any such litigation could result in substantial cost to and diversion of effort by the Company, which could have a material adverse effect on the Company. Further, adverse determinations in such litigation could result in the Company's loss of proprietary rights, subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties, or prevent the Company from manufacturing or selling its products, any of which could have a material adverse effect on the Company. The Company has received a letter from Integrated Device Technology, Inc. ("IDT") asserting that Paradigm's products that incorporate a "burst mode" synchronous exchange into a single integrated SRAM chip infringe IDT's patent number 5,126,975 which was issued on June 30, 1992. The Company's products using this feature represented approximately 22% of the Company's sales for the year ended December 31, 1995 and 15% for the nine months ended September 30 1996. If IDT initiates litigation against Paradigm based on such patent, it will likely seek substantial damages Page 18 and injunctive relief to prevent the Company from continuing to ship those of its products which IDT asserts infringe such patent. Under the patent laws, in certain circumstances, damage awards may be tripled. The Company intends to vigorously defend any such claim that may be prosecuted by IDT and, based on facts presently known, believes that it is not liable under the IDT patent. The Company expects that such patent claim will be vigorously prosecuted by IDT. No assurance can be given that the Company will be successful in the defense of any such claims. 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 claims, the Company's business and operating results would be materially adversely affected. 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. The court has scheduled a hearing on the demurrer for December 3, 1996. 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 unsuccessful in such defense, it may incur substantial legal fees and other expenses related to this claim. If unsuccessful in the defense of any such claims, the Company's business and operating results would be materially adversely affected. The Company is subject to a variety of federal, state, and local governmental laws and regulations related to air and water quality and to the use, storage, discharge, and disposal of toxic, volatile, or otherwise hazardous chemicals used in its manufacturing process. Such laws and regulations have required or, from time to time, could require the Company to acquire costly equipment or to incur other significant expenses to comply with such laws and regulations. The Company evaluates its compliance with environmental laws and regulations on an ongoing basis and endeavors to maintain such compliance, including correcting actual or potential noncompliance as soon as practicable after discovery of such noncompliance. Nevertheless, failure by the Company to comply with present or future environmental laws and regulations could result in fines being imposed on the Company, suspension of production, or a cessation of operations. In addition, any failure by the Company to control the use of, or adequately restrict the discharge of, hazardous substances could subject it to future liabilities. 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. In addition, the stock market has in the past experienced extreme price and Page 19 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. 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. In addition, incorporated by reference herein, are the following risk factors set forth in Part I, Factors That May Affect Future Results, in the Company's Form 10-K for the year ended December 31, 1995: "Current and Impending Capacity Constraints and Risks of Proposed Expansion"; "Product and Customer Concentration"; "International Trade" and "Future Capital Needs." Page 20 Part II. OTHER INFORMATION Item 1. 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. The court has scheduled a hearing on the demurrer for December 3, 1996. No other motions have been filed with the court by plaintiffs or defendants, and no discovery has yet been conducted. Item 3. Defaults Upon Senior Securities. The Company has a line of credit with Bank of the West with a borrowing limit of $10.0 million, secured by the Company's accounts receivable (the "Bank of the West Loan"). As of September 30, a total of $2.1 million was outstanding under the Bank of the West Loan. At September 30, 1996 the Company was not in compliance with covenants requiring a minimum quick ratio of 1.75 to one, a ratio of total liabilities to tangible net worth of less than 1.00 to 1.00, minimum tangible net worth requirements and quarterly profitability requirements. In November 1996 the Company replaced the Bank of the West line of credit with a line of credit with Greyrock Business Credit with a borrowing limit of $6,000,000. Borrowings under this new line of credit with Greyrock Business Credit are limited to up to 80% of eligible receivables and interest is at the greater of LIBOR plus 5.25% or 9%. The Company has a line of credit for equipment purchases from the CIT Group. The aggregate principal amount of all loans under this commitment may not exceed $15.0 million and the commitment expires on December 30, 1996. As of September 30, 1996, the Company's outstanding indebtedness under this line of credit was approximately $9.6 million. All borrowings under this commitment are secured by the equipment purchased. At September 30, 1996, the Company was not in compliance with covenants requiring a minimum level of tangible net worth and a requirement for net income, as adjusted per the agreement, to exceed the current portion of debt by a ratio of 1.50 to one for the four most recent quarters. At September 30, 1996 the Company has not received a waiver of these covenants from the CIT Group and has therefore classified all CIT Group debt as a current liability. Page 21 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 1994 Stock Option Plan 11.1 Computation of net income (loss) per share (see Note 2 of Notes to Condensed Financial Statements) 27 Financial Data Schedule (b) Reports on Form 8-K None Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARADIGM TECHNOLOGY, INC. /s/ Robert C. McClelland Date: November 11, 1996 --------------------------------------- Robert C. McClelland Vice President Finance (Principal Financial and Accounting Officer) Page 22 EX-10.1 2 EXHIBIT 10.1 PARADIGM TECHNOLOGY, INC. 1994 STOCK OPTION PLAN (Amended and Restated Effective as of May 2, 1996) TABLE OF CONTENTS Page ---- SECTION 1. ESTABLISHMENT AND PURPOSE.............................1 SECTION 2. DEFINITIONS...........................................1 (a) Board of Directors....................................1 (b) Change in Control.....................................1 (c) Code..................................................2 (d) Committee.............................................2 (e) Company...............................................2 (f) Employee..............................................2 (g) Exchange Act..........................................2 (h) Exercise Price........................................2 (i) Fair Market Value.....................................2 (j) ISO...................................................2 (k) Nonstatutory Option...................................2 (l) Option................................................3 (m) Optionee..............................................3 (n) Outside Director......................................3 (o) Plan..................................................3 (p) Service...............................................3 (q) Share.................................................3 (r) Stock.................................................3 (s) Stock Option Agreement................................3 (t) Subsidiary............................................3 (u) Total and Permanent Disability........................3 SECTION 3. ADMINISTRATION........................................3 (a) Committee Procedures..................................3 (b) Committee Responsibilities............................3 SECTION 4. ELIGIBILITY...........................................5 (a) General Rule..........................................5 (b) Outside Directors.....................................5 (c) Limitation On Grants..................................6 (d) Ten-Percent Shareholders..............................6 (e) Attribution Rules.....................................6 (f) Outstanding Stock.....................................6 SECTION 5. STOCK SUBJECT TO PLAN.................................6 (a) Basic Limitation......................................6 (b) Additional Shares.....................................7 -i- SECTION 6. TERMS AND CONDITIONS OF OPTIONS........................7 (a) Stock Option Agreement.................................7 (b) Number of Shares.......................................7 (c) Exercise Price.........................................7 (d) Withholding Taxes......................................7 (e) Exercisability and Term................................7 (f) Nontransferability.....................................7 (g) Exercise of Options Upon Termination of Service........8 (h) No Rights as a Stockholder.............................8 (i) Modification, Extension and Renewal of Options.........8 (j) Restrictions on Transfer of Shares.....................8 SECTION 7. PAYMENT FOR SHARES.....................................8 (a) General Rule...........................................8 (b) Surrender of Stock.....................................8 (c) Cashless Exercise......................................8 SECTION 8. ADJUSTMENT OF SHARES...................................9 (a) General................................................9 (b) Reorganizations........................................9 (c) Reservation of Rights..................................9 SECTION 9. LEGAL AND REGULATORY REQUIREMENTS......................9 SECTION 10. NO EMPLOYMENT RIGHTS..................................10 SECTION 11. DURATION AND AMENDMENTS...............................10 (a) Term of the Plan......................................10 (b) Right to Amend or Terminate the Plan..................10 (c) Effect of Amendment or Termination....................10 SECTION 12. EXECUTION.............................................11 -ii- PARADIGM TECHNOLOGY, INC. 1994 STOCK OPTION PLAN (Amended and Restated Effective as of May 2, 1996) SECTION 1. ESTABLISHMENT AND PURPOSE. ------------------------- The Plan was established in 1994 to offer selected employees and consultants an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, by purchasing Shares of the Company's Common Stock. The Plan provides for the grant of Options to purchase Shares. Options granted under the Plan may include Nonstatutory Options as well as ISOs intended to qualify under Code section 422. The Plan is being amended and restated to add an additional 300,000 shares for the grant of options to employees who are not subject to Section 16 of the Exchange Act with respect to transactions in the Company's securities. SECTION 2. DEFINITIONS. ----------- (a) "Board of Directors" shall mean the Board of Directors of the Company, ------------------ as constituted from time to time. (b) "Change in Control" means the occurrence of either of the following ----------------- events: (i) A change in the composition of the Board of Directors, as a result of which fewer than one-half of the incumbent directors are directors who either: (A) Had been directors of the Company 24 months prior to such change; or (B) Were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or (ii) Any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act) by the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); except that any change in the relative beneficial ownership of the Company's securities by any person resulting solely from a reduction in the -1- aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. For purposes of this Subsection (ii), the term "person" shall not include an employee benefit plan maintained by the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (d) "Committee" shall mean the committee designated by the Board of --------- Directors, which is authorized to administer the Plan under Section 3 hereof. The Committee shall have membership composition which enables the Plan to qualify under Rule 16b-3 with regard to the grant of Options or other rights under the Plan to persons who are subject to Section 16 of the Exchange Act. (e) "Company" shall mean Paradigm Technology, Inc., a Delaware corporation. ------- (f) "Employee" shall mean (i) any individual who is a common-law employee -------- of the Company or of a Subsidiary, (ii) a member of the Board of Directors and (iii) an independent contractor or advisor who performs services for the Company or a Subsidiary. Service as a member of the Board of Directors or as an independent contractor or advisor shall be considered employment for all purposes of the Plan except the second sentence of Section 4(a). (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (h) "Exercise Price" shall mean the amount for which one Share may be -------------- purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement. (i) "Fair Market Value" shall mean (i) the closing price of a Share on the ----------------- principal exchange which the Shares are trading, on the first trading day immediately preceding the date on which the Fair Market Value is determined, or (ii) if the Shares are not traded on an exchange but are quoted on the Nasdaq National Market or a successor quotation system, the closing price on the first trading day immediately preceding the date on which the Fair Market Value is determined, or (iii) if the Shares are not traded on an exchange or quoted on the Nasdaq National Market or a successor quotation system, the fair market value of a Share, as determined by the Committee in good faith. Such determination shall be conclusive and binding on all persons. (j) "ISO" shall mean an employee incentive stock option described in Code --- section 422. (k) "Nonstatutory Option" shall mean an employee stock option that is not ------------------- an ISO. (l) "Option" shall mean an ISO or Nonstatutory Option granted under the ------ Plan and entitling the holder to purchase Shares. (m) "Optionee" shall mean an individual who holds an Option. -------- -2- (n) "Outside Director" shall mean a member of the Board of Directors who is ---------------- not a common-law employee of the Company or of a Subsidiary. (o) "Plan" shall mean this Paradigm Technology, Inc. 1994 Stock Plan, as ---- amended from time to time. (p) "Service" shall mean service as an Employee. ------- (q) "Share" shall mean one share of Stock, as adjusted in accordance with ----- Section 8 (if applicable). (r) "Stock" shall mean the Common Stock of the Company. ----- (s) "Stock Option Agreement" shall mean the agreement between the Company ---------------------- and an Optionee which contains the terms, conditions and restrictions pertaining to his Option. (t) "Subsidiary" shall mean any corporation, if the Company and/or one or ---------- more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. (u) "Total and Permanent Disability" shall mean that the Optionee is unable ------------------------------ to work. Total and Permanent Disability shall be determined by the Company in accordance with its Long Term Disability Plan. SECTION 3. ADMINISTRATION. -------------- (a) Committee Procedures. The Board of Directors shall designate one of the -------------------- members of the Committee as chairman. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee. (b) Committee Responsibilities. Subject to the provisions of the Plan, the -------------------------- Committee shall have full authority and discretion to take the following actions: (i) To interpret the Plan and to apply its provisions; (ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan; (iii) To authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan; -3- (iv) To determine when Options are to be granted under the Plan; (v) To select the Optionees; (vi) To determine the number of Shares to be made subject to each Option; (vii) To prescribe the terms and conditions of each Option, including (without limitation) the Exercise Price, the vesting or duration of the Option (including accelerating the vesting of the Option), to determine whether such Option is to be classified as an ISO or as a Nonstatutory Option, and to specify the provisions of the Stock Option Agreement relating to such Option; (viii) To amend any outstanding Stock Option Agreement, subject to applicable legal restrictions and to the consent of the Optionee who entered into such agreement; (ix) To prescribe the consideration for the grant of each Option under the Plan and to determine the sufficiency of such consideration; (x) To determine the disposition of each Option under the Plan in the event of an Optionee's divorce or dissolution of marriage; (xi) To determine whether Options under the Plan will be granted in replacement of other grants under an incentive or other compensation plan of an acquired business; (xii) To correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Stock Option Agreement; and (xiii) To take any other actions deemed necessary or advisable for the administration of the Plan. Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of Options under the Plan to persons subject to Section 16 of the Exchange Act. All decisions, interpretations and other actions of the Committee shall be final and binding on all Optionees and all persons deriving their rights from an Optionee. No member of the Committee shall be liable for any action that he has taken or has failed to take in good faith with respect to the Plan or any Option to acquire Shares under the Plan. -4- SECTION 4. ELIGIBILITY. ----------- (a) General Rule. Only Employees shall be eligible for designation as ------------ Optionees by the Committee. In addition, only individuals who are employed as common-law employees by the Company or a Subsidiary shall be eligible for the grant of ISOs. (b) Outside Directors. Any other provision of the Plan notwithstanding, the ----------------- participation of Outside Directors in the Plan shall be subject to the following restrictions: (i) Outside Directors shall only be eligible for the grant of Nonstatutory Options as described in this Section 4(b). (ii) Upon the conclusion of each regular annual meeting of the Company's shareholders following the initial public offering, each Outside Director who will continue serving as a member of the Board thereafter shall receive a Nonstatutory Option to purchase 3,125 Shares (subject to adjustment under Section 8). All such Nonstatutory Options shall vest and become exercisable at the rate of 25% upon each one-year anniversary of the date the option is granted to the Outside Director. (iii) Each Outside Director who is appointed an Outside Director following the initial public offering shall automatically be granted a Nonstatutory Option to purchase 12,500 Shares (subject to adjustment under Section 8) as a result of their appointment as an Outside Director. Upon the conclusion of each regular annual meeting of the Company's shareholders following the annual meeting at which they were appointed, each Outside Director who will continue serving as a member of the Board thereafter shall receive a Nonstatutory Option to purchase 3,125 Shares (subject to adjustment under Section 8). All such Nonstatutory Options shall vest and become exercisable at the rate of 25% upon each one-year anniversary of the date the option is granted to the Outside Director. (iv) All Nonstatutory Options granted to an Outside Director under this Section 4(b) shall also become exercisable in full in the event of (A) the termination of such Outside Director's service because of death or Total and Permanent Disability or (B) a Change in Control of the Company. (v) Subject to (ii) above, the Exercise Price of all Nonstatutory Options granted to an Outside Director under this Section 4(b) shall be equal to 100% of the Fair Market Value of a Share on the date of grant, payable in one of the forms described in Sections 7(a), (b) and (c). (vi) All Nonstatutory Options granted to an Outside Director under this Section 4(b) shall terminate on the earliest of (A) the 10th anniversary of the date of grant of such Nonstatutory Options, (B) the date 90 days after the termination of such Outside Director's service for any reason other than death, -5- Total and Permanent Disability or voluntary retirement as an Outside Director at or after the age of 60, or (C) the date 12 months after the termination of such Outside Director's service because of death, Total and Permanent Disability or voluntary retirement as an Outside Director at or after the age of 60. (c) Limitation On Grants. No Employee shall be granted Options to purchase -------------------- Shares during any fiscal year covering in excess 200,000 Shares. (d) Ten-Percent Shareholders. An Employee who owns more than 10 percent of ------------------------ the total combined voting power of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for the grant of an ISO unless such grant satisfies the requirements of Code section 422(c)(5). (e) Attribution Rules. For purposes of Subsection (d) above, in determining ----------------- stock ownership, an Employee shall be deemed to own the stock owned, directly or indirectly, by or for his brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its shareholders, partners or beneficiaries. (f) Outstanding Stock. For purposes of Subsection (d) above, "outstanding ----------------- stock" shall include all stock actually issued and outstanding immediately after the grant. "Outstanding stock" shall not include shares authorized for issuance under outstanding options held by the Employee or by any other person. SECTION 5. STOCK SUBJECT TO PLAN. --------------------- (a) Basic Limitation. Shares offered under the Plan shall be authorized but ---------------- unissued Shares or treasury Shares. The aggregate number of Shares which may be issued under the Plan upon exercise of Options shall not exceed 1,300,000 Shares provided, however, the 300,000 shares added by this restatement may not be granted to employees who are subject to Section 16 of the Exchange Act at the time of grant. The Company shall reserve an additional 150,000 Shares exclusively for grants of Options to Outside Directors described in Section 4(b). On each January 1 for the remaining term of the Plan, the aggregate number of Shares which may be issued under the Plan to individuals other than Outside Directors shall be increased by a number of Shares equal to 3.0 percent of the total number of Shares of the Common Stock of the Company outstanding at the end of the most recently concluded calendar year. Any Shares that have been reserved but not issued as Shares or Options during any calendar year shall remain available for grant during any subsequent calendar year. Notwithstanding the foregoing, no more than 2,000,000 Shares shall be available for the grant of ISOs for the remaining term of the Plan. The aggregate number of Shares which may be issued under the Plan shall at all times be subject to adjustment pursuant to Section 8. The number of Shares which are subject to Options outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan. -6- (b) Additional Shares. In the event that any outstanding Option for any ----------------- reason expires or is canceled or otherwise terminated, the Shares allocable to the unexercised portion of such Option shall again be available for the purposes of the Plan. SECTION 6. TERMS AND CONDITIONS OF OPTIONS. ------------------------------- (a) Stock Option Agreement. Each grant of an Option under the Plan shall be ---------------------- evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. (b) Number of Shares. Each Stock Option Agreement shall specify the number ---------------- of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 8. The Stock Option Agreement shall also specify whether the Option is an ISO or a Nonstatutory Option. (c) Exercise Price. Each Stock Option Agreement shall specify the Exercise -------------- Price. The Exercise Price of an ISO shall not be less than 100 percent of the Fair Market Value of a Share on the date of grant, except as otherwise provided in Section 4(d). Subject to the preceding sentence, the Exercise Price under any Option shall be determined by the Committee at its sole discretion. The Exercise Price shall be payable in one of the forms described in Sections 7(a), (b) and (c). (d) Withholding Taxes. As a condition to the exercise of an Option, the ----------------- Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option. (e) Exercisability and Term. Each Stock Option Agreement shall specify the ----------------------- date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option. The term shall not exceed 10 years from the date of grant, except as otherwise provided in Section 4(d). Subject to the preceding three sentences, the Committee at its sole discretion shall determine when all or any installment of an Option is to become exercisable and when an Option is to expire. (f) Nontransferability. During an Optionee's lifetime, his Option(s) shall ------------------ be exercisable only by him and shall not be transferable, unless the Option agreement otherwise provides. In the event of an Optionee's death, his Option(s) shall not be transferable other than by will, beneficiary designation or by the laws of descent and distribution. (g) Exercise of Options Upon Termination of Service. Each Stock Option ----------------------------------------------- Agreement shall set forth the extent to which the Optionee shall have the right to exercise the Option -7- following termination of the Optionee's Service with the Company and its Subsidiaries, and the right to exercise the Option of any executors or administrators of the Optionee's estate or any person who has acquired such Option(s) directly from the Optionee by beneficiary designation, bequest or inheritance. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service. (h) No Rights as a Stockholder. An Optionee, or a transferee of an -------------------------- Optionee, shall have no rights as a stockholder with respect to any Shares covered by his Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section 8. (i) Modification, Extension and Renewal of Options. Within the limitations ---------------------------------------------- of the Plan, the Committee may cancel, modify, extend or renew outstanding Options or may accept the cancellation of outstanding Options (to the extent not previously exercised) in return for the grant of new Options at the same or a different price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair his rights or increase his obligations under such Option. (j) Restrictions on Transfer of Shares. Any Shares issued upon exercise ---------------------------------- of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares. SECTION 7. PAYMENT FOR SHARES. ------------------ (a) General Rule. The entire Exercise Price of Shares issued under the ------------ Plan shall be payable in lawful money of the United States of America at the time when such options are exercised, except as provided in Subsections (b) and (c) below. (b) Surrender of Stock. To the extent that a Stock Option Agreement so ------------------ provides, payment may be made all or in part with Shares which have already been owned by the Optionee or his representative for more than the maximum number of months required by the Committee and which are surrendered to the Company in good form for transfer. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. (c) Cashless Exercise. To the extent that a Stock Option Agreement so ------------------ provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. -8- SECTION 8. ADJUSTMENT OF SHARES. -------------------- (a) General. In the event of a subdivision of the outstanding Stock, a ------- declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the value of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (i) the number of Shares available for future grants under Section 5, (ii) the number of Shares covered by each outstanding Option or (iii) the Exercise Price under each outstanding Option. (b) Reorganizations. In the event that the Company is a party to a merger --------------- or other reorganization, outstanding Options shall be subject to the agreement of merger or reorganization. Such agreement may provide for the assumption of outstanding Options by the surviving corporation or its parent or for their continuation by the Company (if the Company is a surviving corporation); provided, however, that if assumption or continuation of the outstanding Options is not provided by such agreement then the Committee shall have the option of offering the payment of a cash settlement equal to the difference between the amount to be paid for one Share under such agreement and the Exercise Price, in all cases without the Optionees' consent. (c) Reservation of Rights. Except as provided in this Section 8, an --------------------- Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION 9. LEGAL AND REGULATORY REQUIREMENTS. --------------------------------- Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on which the Company's securities may then be listed, and the Company has obtained the approval or favorable ruling from any governmental agency which the Company determines is necessary or advisable. -9- SECTION 10. NO EMPLOYMENT RIGHTS. -------------------- No provision of the Plan, nor any Option granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee. The Company and its Subsidiaries reserve the right to terminate any person's Service at any time and for any reason. SECTION 11. DURATION AND AMENDMENTS. ----------------------- (a) Term of the Plan. The amended and restated Plan, as set forth herein, ---------------- shall become effective as of the date first set forth above, subject to the approval of the Company's stockholders. In the event that the stockholders fail to approve this amended and restated Plan within 12 months of its adoption by the Board of Directors, the Plan as in effect prior to this amendment and restatement shall continue in effect, and any additional Option grants shall be deemed made pursuant to the terms of the Plan as in effect prior to this amendment and restatement. The Plan shall terminate automatically 10 years after its original adoption by the Board of Directors and may be terminated on any earlier date pursuant to Subsection (b) below. (b) Right to Amend or Terminate the Plan. The Board of Directors may amend ------------------------------------ the Plan at any time and from time to time except that the provisions of Section 4(b) relating to the amount, price and timing of the Option grants to Outside Directors shall not be amended more than once in any six-month period after the Plan becomes effective, except as may be required by the Code or ERISA. Rights and obligations under any Option granted before amendment of the Plan shall not be materially altered, or impaired adversely, by such amendment, except with consent of the person to whom the Option was granted. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. (c) Effect of Amendment or Termination. No Shares shall be issued or sold ---------------------------------- under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan. -10- SECTION 12. EXECUTION. --------- To record the adoption of the amended and restated Plan by the Board of Directors effective as of the date first set forth above, the Company has caused its authorized officer to execute the same. PARADIGM TECHNOLOGY, INC. By /S/ Robert C. McClelland ------------------------------------ Its CFO/V.R. Finance 5/2/96 -11- EX-11.1 3 EXHIBIT 11.1 EXHIBIT 11.1 PARADIGM TECHNOLOGY, INC. COMPUTATION OF NET INCOME (LOSS) PER SHARE (1) (in thousands, except net income per share)
Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1996 1995 1996 1995 ---- ---- ---- ---- Net income (loss) ($7,280) $ 1,540 ($23,735) $3,465 ------- -------- -------- ------ Weighted average shares outstanding: Common Stock 7,184 6,485 6,933 2,847 Convertible Preferred Stock -- -- -- 2,133 Common Stock issuable upon exercise of options and warrants (2) -- 757 200 1,004 ------- -------- -------- ------ Weighted average common shares and equivalents 7,184 7,242 7,133 5,984 ======= ======= ======== ====== Net income (loss) per share ($1.01) $ 0.21 ($3.33) $0.58 ======= ======= ======== ====== (1) This Exhibit should be read with Note 2 of Notes to Condensed Financial Statements. (2) Stock options and warrants granted subsequent to May 1994, and prior to the completion of the Company's initial public offering ("IPO") of common stock, 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 IPO of 2,300,000 shares of common stock which closed on July 5, 1995.
EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 871 0 3,836 1,260 4,185 12,020 38,537 11,970 38,868 19,287 10,016 0 0 71 36,222 38,868 5,191 5,191 8,501 8,501 4,180 0 305 (7,280) 0 (7,280) 0 0 0 (7,280) ($1.01) ($1.01)
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