United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998.
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 0-24030
THE PANDA PROJECT, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0323354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
951 Broken Sound Parkway, N.W.
BOCA RATON, FLORIDA 33487
(Address of principal executive offices)
(561) 994-2300
(Registrant's telephone number)
901 Yamato Road
BOCA RATON, FLORIDA 33431
(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 the past 90 days. Yes __x__ No ____.
Applicable Only to Issuers Involved In Bankruptcy
Proceedings During The Preceding Five Years
Indicate by check mark whether the registrant 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. Yes ___ No ___.
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Common Stock, $.01 Par
Value -16,428,468 shares as of September 30, 1998
<PAGE>
THE PANDA PROJECT, INC.
Index
Page
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Condensed Balance Sheets -September 30, 1998 and
December 31, 1997 2
Condensed Statements of Operations -Three and Nine
months ended September 30, 1998 and September 30, 1997 3
Condensed Statements of Cash Flows -Nine months
ended September 30, 1998 and September 30, 1997 4
Notes to Condensed Financial Statements -
September 30, 1998 5-11
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 15
Part II - Other Information
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to Vote of Security Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 17
Exhibit Index 18
<PAGE>
The Panda Project, Inc.
Condensed Balance Sheets
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,283,493 $ 619,683
Accounts receivable-trade (net of allowance
of $10,000 at September 30, 1998 and
$10,006 at December 31, 1997) 178,753 224,851
Inventory 1,522,654 965,199
Other receivables 24,676 105,825
Prepaid expenses and other current assets 2,340,527 378,242
------------ ------------
Total current assets 5,350,103 2,293,800
------------ ------------
Property and equipment, net 2,532,424 2,818,218
Restricted cash 80,000 260,000
Debt issuance costs, net 25 340,513
Other assets 77,679 1,299
------------ ------------
Total assets $ 8,040,231 $ 5,713,830
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 934,135 $ 1,651,540
Notes payable 2,000,000 1,000,000
Accrued expenses and other current
liabilities 685,896 964,586
------------ ------------
Total current liabilities 3,620,031 3 ,616,126
------------ ------------
Stockholders' Equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized: 1,000
shares designated as Series A, no
shares issued at December 31, 1997
and 434 shares issued and outstanding
at September 30, 1998 4,064,606 -
Common Stock, $.01 par value, 50,000,000
shares authorized: 16,428,468 shares
issued and outstanding at September 30,
1998 and 12,215,522 shares issued
and outstanding at December 31, 1997. 164,284 122,155
Additional paid-in capital 74,255,858 64,841,102
Accumulated deficit (74,064,548) (62,865,553)
------------ ------------
Total stockholders' equity 4,420,200 2,097,704
------------ ------------
Total liabilities and stockholders' equity $ 8,040,231 $ 5,713,830
============ ============
The Balance Sheet at December 31, 1997 has been derived from the audited
financial statements of the Company at that date. See Notes to Condensed
Financial Statements.
<PAGE>
<TABLE>
The Panda Project, Inc.
Condensed Statements of Operations (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 193,268 $ 392,485 $ 515,186 $ 826,902
Licensing fees - 250,000 - 250,000
Contract research and
development revenues - 441,470 135,673 1,000,724
Less returns and
allowances (3,239) - (3,239) -
----------- ----------- ----------- -----------
Net revenues $ 190,029 $ 1,083,955 $ 647,620 $ 2,077,626
Costs and expenses:
Cost of sales 169,152 435,138 563,604 950,179
Research and development 803,722 1,050,581 2,832,242 3,138,700
Selling, general and
administrative 2,076,024 2,308,715 6,316,268 6,566,212
Amortization of debt
issuance costs 511,000 - 1,740,514 -
Costs associated with
asset impairments - - - 585,000
----------- ----------- ----------- -----------
Total costs and
expenses 3,559,898 3,794,434 11,452,628 11,240,091
----------- ----------- ----------- -----------
Operating loss (3,369,869) (2,710,479) (10,805,008) (9,162,465)
Interest income/
(expense) 21,299 49,021 (21,298) 125,957
Other income (expense) (3,075) (580) 47,311 55,635
----------- ----------- ----------- -----------
Net loss $(3,351,645) $(2,662,038) $(10,778,995)$(8,980,873)
----------- ----------- ----------- -----------
Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock (597,872) - (1,109,713) -
----------- ----------- ----------- -----------
Net loss applicable to
common stock (3,949,517) (2,662,038) (11,880,708) (8,980,873)
=========== =========== =========== ===========
Basic and diluted loss
per common share $ (0.29) $ (0.22) $ (0.90) $ (0.93)
=========== =========== =========== ===========
Weighted average shares
outstanding 13,850,943 12,076,161 12,779,174 11,535,999
=========== =========== =========== ===========
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
The Panda Project, Inc.
Condensed Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
1998 1997
Net cash used by operating activities $ (9,274,041) $ (7,078,807)
Cash flows from investing activities:
Additions to property and equipment (647,601) (684,840)
------------ ------------
Net cash used by investing activities (647,601) (684,840)
Cash flows from financing activities:
Proceeds from issuance of
convertible preferred stock 6,000,000 -
Proceeds from issuance of debentures - 4,800,000
Proceeds from issuance of common
stock 3,778,465 53,346
Proceeds from issuance of notes
payable 3,000,000 -
Repayment of notes payable (2,000,000) -
Payments of convertible preferred
stock issuance costs (193,013) (25,500)
------------ ------------
Net cash provided by
financing activities 10,585,452 4,827,846
------------ ------------
Net increase (decrease) in cash and
cash equivalents 663,810 (2,935,801)
Cash and cash equivalents at
beginning of period 619,683 5,114,015
------------ ------------
Cash and cash equivalents at end
of period $ 1,283,493 $ 2,178,214
============ ============
See Notes to Condensed Financial Statements.
<PAGE>
The Panda Project, Inc.
Notes to Condensed Financial Statements (Unaudited)
September 30, 1998
1. Basis of Presentation
The accompanying condensed financial statements of The Panda Project, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles on a basis consistent in all material respects with
those applied in the Transition Report on Form 10-K for the nine months
ended December 31, 1997. The interim financial information is unaudited,
but reflects all normal and recurring adjustments which are, in the opinion
of management, necessary to provide a fair statement of results of
operations for the interim periods presented. The interim financial
statements should be read in connection with the financial statements in
the Company's Transition Report on Form 10-K for the nine months ended
December 31, 1997.
Change in Fiscal Year
- ---------------------
During 1997, the Company changed its fiscal year from April 1 through March
31 to January 1 through December 31.
2. Inventory
September 30, 1998 December 31, 1997
----------------------------------------
Raw materials $1,136,129 $879,756
Work in process 295,163 14,024
Finished goods 91,362 71,419
------------- -------------
$1,522,654 $965,199
============= =============
Inventory is valued at net realizable value ( lower of cost or market),
which is net of obsolescence reserves of approximately $585,700 at
September 30, 1998 and $600,000 at December 31, 1997.
3. Prepaid expenses and other current assets
September 30, 1998 December 31, 1997
----------------------------------------
Prepaid expenses $ 185,404 $ 326,470
Prepaid insurance 44,774 50,728
Prepaid consulting fees 1,250 -
Deferred costs 9,099 1,043
Capitalized beneficial
debt conversion feature 2,520,000 -
Accumulated amortization
of capitalized beneficial
debt conversation feature (420,000) -
------------ ------------
$ 2,340,527 $ 378,241
============ ============
3. Notes Payable
During December 1997 and January 1998, the Company received two short-term
loans in the amount of $1,000,000 each from Helix (PEI) Inc. ("Helix"). On
February 27, 1998, the Company fully repaid both of these loans using a
portion of the proceeds from the issuance of preferred stock (see Note 5).
The Company received additional short-term loans from Helix during the
quarter ended June 30, 1998 which aggregated $1,750,000, and an additional
$250,000 was received in July 1998. The loans are secured by the Company's
intellectual property. In connection with the issuance of these notes, the
Company issued warrants to Helix to purchase an aggregate of 850,000
shares of the Company's common stock at exercise prices ranging from $1.63
to $2.125 per share, as adjusted. The warrants have a term of two years
and were recorded as debt issuance costs at an aggregate value of
approximately $1,645,000 which is fully amortized as of September 30,1998.
Total debt issuance costs, including the value of the warrants, charged to
amortization expense during the quarter ended September 30, 1998 amounted
to $511,000.
On August 7, 1998, Helix agreed to extend the maturity date of all
outstanding notes payable to February 15, 1999, from their original due
date of August 1998, in exchange for the issuance of a warrant to purchase
up to 2,000,000 shares of the Company's common stock (in addition to the
850,000 shares covered by the warrants discussed in the previous paragraph)
at an exercise price equal to the fair market value of the Company's common
stock at the date of issuance ($2.125). The warrant has a term of two
years. The value of the warrant will be charged to amortization expense
through the revised maturity date. Helix and its affiliates to the best
of the Company's knowledge currently hold approximately 10% of the
Company's common stock. James T. A. Wooder, a director of the Company, is
a Vice President of Helix's parent, Helix Investments (Canada), Inc.
4. Convertible Preferred Stock
On February 11, 1998, the Company issued 600 shares of its Series A
Convertible Preferred Stock ("Series A Preferred") and Common Stock
Purchase Warrants ("Warrants") to purchase an aggregate of 150,000 shares
of common stock for a total purchase price of $6,000,000. The purchase
price was allocated to the Series A Preferred and Warrants based on their
relative fair value. The Warrants, which have a term of five years and an
exercise price, subject to adjustment for stock splits and similar events,
of $6.10 per share, were valued at $411,000 using the Black-Scholes option
pricing model. Issuance costs of approximately $193,000 were deducted on a
pro rata basis from the gross proceeds assigned to the Series A Preferred
and the Warrants. Holders of Series A Preferred are entitled to a dividend
of 5% per annum of the purchase price for the shares, payable either in
cash or as an accrual to the purchase price utilized in computing the
number of shares of Series A Preferred issuable upon conversion. Dividends
payable for the quarter ended September 30, 1998 in the amount of $177,872
have been accrued and added to the purchase price of the Series A Preferred
in lieu of a cash payment.
Shares of Series A Preferred are convertible into shares of common stock
pursuant to a formula whereby the purchase price of the shares to be
converted plus any such dividends is divided by a conversion price defined
as the lower of (i) $3.50 subject to adjustment in the event of certain
dilutive issuances of securities by the Company or for stock splits or
similar events, or (ii) a percentage of the average closing bid price of
the common stock for the five days immediately preceding conversion equal
to 92%, if conversion occurs in the period beginning 120 days and ending
180 days after issuance of the Series A Preferred, or 90%, if conversion
occurs after 180 days from issuance of the Series A Preferred. From July
1, 1998 through October 23, 1998, 164 shares of Series A Preferred were
converted into an aggregate of 1,999,796 shares of common stock of the
Company.
The Company may require that all unconverted shares of Series A Preferred
be converted at any time if the closing bid price of common stock is equal
to or greater than $12.00 per share for a period of twenty consecutive
trading days. In addition, on February 11, 2003, the Company may, at its
option, require the holders to convert the Series A Preferred shares which
remain outstanding on such date (plus accrued and unpaid dividends) or
redeem such shares of Series A Preferred. In the event certain conditions
are met, the Company has the right to cause the issuance of an additional
400 shares of Series A Preferred for an aggregate purchase price of
$4,000,000. In such event, the Company would be required to issue Warrants
to the purchasers of Series A Preferred to purchase an additional 100,000
shares of common stock.
Under the terms of the transaction, as modified on July 2, 1998, without
the prior written approval of the holders of 66 2/3% of the Series A
Preferred shares, the Company shall not (1) consolidate or merge with
another corporation or other entity or person, whereby the shareholders of
the Company own in the aggregate less than 50% of the ultimate parent or
surviving entity, (2) transfer all or substantially all of the Company's
assets to another corporation or other entity or person, or (3) fix a
record date for the declaration of a distribution or dividend, whether
payable in cash, securities or assets (other than shares of common stock).
In addition, a "Triggering Event" shall be deemed to have occurred under
the following circumstances: (1) the Company does not issue shares of
common stock registered for resale for any reason, including (a) the
Company does not have a sufficient number of shares of common stock
authorized and available, (b) is otherwise prohibited by applicable law or
by the rules or regulations of any stock exchange or interdealer quotation
system from issuing such shares (including as a result of the Series A
Exchange Cap discussed below) or (c) fails to have a sufficient number of
shares of common stock registered for resale under a registration
statement, and if such condition remains unremedied for a period of 30
days, (2) suspension for a period of 30 consecutive days of a registration
statement covering shares issuable upon conversion of Series A Preferred,
(3) failure of the Common Stock to be listed, or suspension of trading in
the Company's Common Stock on the NASDAQ National Market or the NASDAQ
SmallCap Market for a period of five consecutive days, or (4) notice by the
Company to any holder of Series A Preferred of its intention not to comply
with proper requests for conversion of Series A Preferred. After a
Triggering Event, the Company is required to pay the holders $100,000 on
the first day of each month until the Triggering Event is remedied.
In the event the Company is unable to issue shares of its common stock
pursuant to a request for conversion for any reason, including, without
limitation, because the Company (1) does not have sufficient number of
shares of Common Stock authorized and available, (2) is otherwise
prohibited by applicable law or by the rules or regulations of any stock
exchange from issuing such shares, or (3) fails to have a sufficient number
of shares of Common Stock registered for resale under a registration
statement, and if such condition remains unremedied for a period of 30
days, the dividend rate for all shares of Series A Preferred that cannot be
converted into shares of Common Stock pursuant to such limitations will
increase on a formula basis until such securities have been duly converted.
In connection with this transaction, the Company filed a registration
statement on form S-3 (the "form S-3") with the Securities and Exchange
Commission ("SEC") to effect the registration for resale of 2,000,000
shares of Common Stock issuable upon conversion of the Series A Preferred
and 150,000 shares of common stock issuable upon exercise of the Warrants,
plus an additional number of shares of Common Stock, not to exceed the
Exchange Cap, described below, that may be usable upon conversion of the
Series A Preferred as a result of antidilution provisions. The Form S-3 has
been declared effective by the Securities and Exchange Commission. As of
November 10, 1998, 1,999,796 shares of Common Stock issued upon conversion
of Series A Preferred had been sold pursuant to the Form S-3.
The beneficial conversion feature associated with the Series A Preferred
shares has been recognized and allocated to additional paid- in capital.
The amount of the beneficial conversion feature of approximately $510,000
was calculated using the most favorable conversion rate as defined by the
terms of the Series A Preferred stock and is being amortized over a period
of six months. The amount of amortization ($177,872 for the third quarter
of 1998) is reflected, along with accrued dividends, as an increase to net
loss in the Statement of Operations. The accounting for this transaction
has no effect on cash.
Under applicable NASDAQ rules, without shareholder approval, the Company
may issue no more than 2,443,104 shares of Common Stock upon conversion of
Series A Preferred and exercise of the warrants (the "Series A Exchange
Cap"). The terms of the Series A Preferred provide that the Company will
use its best efforts to obtain shareholder approval prior to October 31,
1998 of issuances of shares of Common Stock in excess of the Series A
Exchange Cap. As of November 10 , 1998, a shareholders meeting for the
purpose of obtaining such approval had not been scheduled, and the Company
is attempting to defer such a meeting to a later date or otherwise reach a
settlement with the holders of Series A Preferred. There can be no
assurance that such efforts will be successful or that holders of Series A
Preferred will not make claims against the Company for penalty payments,
damages or rather relief, any of which could have a substantial adverse
effect on the Company.
5. August Private Placement
In August 1998, the Company completed the sale of 2,254,601 shares of its
Common Stock in a private placement to accredited investors with gross
proceeds of $3,675,000 (the "Private Placement"). Expenses of the Private
Placement were approximately $230,000. In addition to the shares of Common
Stock purchased by each investor in the Private Placement, such investor
received a warrant (the "Private Placement Warrants") to purchase an equal
number of shares of Common Stock (the "Private Placement Warrant Shares"),
subject to adjustment for stock splits and similar events, at an exercise
price of $2.55 per share. The Private Placement Warrants have a term of
five years expiring August 13, 2003. Issuance of the Private Placement
Warrant Shares requires the approval of the Company's shareholders.
Under the terms of the Securities Purchase Agreement relating to the
Private Placement, if on either the six-month or the one-year anniversary
of the date of closing of the Private Placement (each "Anniversary Date"),
the average closing bid price of the Common Stock for the twenty-trading
day period ending on the trading day immediately prior to the applicable
Anniversary Date (the "Anniversary Price") is less than the Closing Price
($2.0375), or the prior Anniversary Price in the event the six-month
Anniversary Price is less than the Closing Price, respectively, the Company
is required to issue a number of shares of Common Stock within ten days
after the Anniversary Date equal to the product of ( i ) (x) the difference
between the Closing Price (or if the measurement date is the one-year
Anniversary Date, the six-month Anniversary Price if the six-month
Anniversary Price is less than the Closing Price) and the applicable
Anniversary Price, multiplied by .85, multiplied by (y) the number of
shares of Common Stock purchased by the investors in the Private Placement
and not sold or assigned to non-affiliated third parties, divided by (ii)
(x) the applicable Anniversary Price multiplied by (y) .85. The shares
issuable pursuant to this formula are referred to as the "Fill-Up Shares".
Issuance of the Fill-Up Shares pursuant to these provisions requires the
approval of the Company's shareholders.
In the event ( i ) the Common Stock is delisted or suspended from trading
on NASDAQ, (ii) the Fill-Up Shares or the Private Placement Warrant Shares
are not issuable or are not listed with NASDAQ. Or (iii) the Company fails
to issue Fill-Up Shares as required, then the Company shall pay to the
initial investors $100,000 for each full 30-day period that the condition
continues.
In connection with the execution and delivery of the Securities Purchase
Agreement relating to the Private Placement, the Company agreed to seek
shareholder approval prior to October 31, 1998 of issuance of the Fill-Up
Shares and Private Placement Warrant Shares. In the event approved of such
proposal is not obtained by such date, the Company could be required to pay
investors in the Private Placement $100,000 per month as a penalty.
As of November 10, 1998, a shareholders meeting for the purpose of
obtaining such approval had not been scheduled, and the Company is
attempting to defer such a meeting to a later date or otherwise reach a
settlement with participants in the Private Placement. There can be no
assurance that such efforts will be successful or that participants in the
Private Placement will not make claims against the Company for penalty
payments, damages or other relief, any of which could have a substantial
adverse effect on the Company.
The Company has filed a registration statement with respect to the shares
of Common Stock issuable in the Private Placement. Such registration
statement has not yet been declared effective. In the event the
registration statement is not declared effective by November 14, 1998, the
Company could be liable for penalties of up to $36,000 for each month in
which effectiveness is not granted.
6. Commitments and Contingent Matters
The Company is involved in various lawsuits from time to time of the type
routinely encountered in the ordinary course of business. Management
aggressively defends these lawsuits and believes that the ultimate outcome
of these lawsuits will not have a material adverse impact on the Company's
financial statements. Following are litigation matters that management
considers to be material in nature such that disclosure is appropriate.
On September 8,1998, a judgement in the amount of $1,227,041.09 was entered
in the Circuit Court for the 15th Judicial Circuit, Palm Beach County,
Florida against the Company in favor of Joseph A. Sarubbi, a former
director of the Company. The Company believes that the judgement contains
certain inconsistencies which could result in a significant reduction in
the damages related to stock sale damages and has filed a notice of appeal.
Filing of the appeal requires the Company to provide a surety bond
sufficient to secure the judgement. The Company is working diligently to
obtain this bond but had not done so as of November 10,1998. If the
Company is unable to obtain this bond, or if Company's appeal is
unsuccessful, the judgement would have a severe adverse impact on the
Company's business, financial condition and results of operation. The
Company has filed notices of the judgement with the Company's insurance
carriers.
On October 16, 1998, a complaint was filed against the Company in the
United States District Court for the Southern District of New York by
Promethean Investment Group, L.L.C. The complaint alleges breach of
contract by the Company for failing to proceed with a financing transaction
and seeks damages in an unspecified amount in excess of $270,000 or a
declaration that the Company is required to proceed with the financing
transaction. The Company has not yet filed an answer to the complaint and
the outcome is both immeasurable and undeterminable. There can be no
assurance that the Company will be successful in defending this litigation.
7. Subsequent Events -
On October 21, 1998, the Company was notified by PricewaterhouseCoopers LLP
("PWC") that PWC had terminated its auditor-client relationship with the
Company. The Company has begun a search for new auditors and anticipates
that the search will be completed prior to December 31, 1998.
The Company has entered into a letter of intent with Round Stone Holdings
Ltd., a U.K.-based company ("Round Stone"), providing for the grant to
Round Stone of exclusive manufacturing, marketing and sales rights with
respect to the Company's Rock City and Archistrat Computers (the "Systems
Division") and the sale to Round Stone of all Systems Division inventory.
The letter of intent provides that at closing Round Stone will pay an
amount to be agreed for the Systems Division inventory plus a one-time
license fee of $250,000. Thereafter, at the end of year 2000, 2001, 2002,
and 2003 respectively, Round Stone will pay the Company $500,000, $750,000,
$1,500,000 and $2,000,000. For each of years 2004 and 2005, the letter of
intent provides that Round Stone will pay $2 for each Rock City system sold
and $10 for each Archistrat system sold, up to a maximum of $2,000,000 in
each year. Stanford W. Crane, Jr., President and Chairman of the Board of
Directors of the Company, owns a 30% equity interest in Round Stone.
Closing of the transaction is subject to the execution and delivery of
definitive legal agreements and requisite approvals. There can be no
assurance that the transaction will occur.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview:
The Panda Project, Inc. (the "Company") is a technology company engaged in
the design, development, manufacture, licensing and sale of interconnect
solutions to generate greater throughput from silicon to board to system.
These technologies are embodied in VSPA, a three-dimensional semiconductor
package, and the Compass connector, a board-to-board interconnect solution
(collectively the "Technology Products"). VSPA has received JEDEC
Committee designation and has passed Mil Std. 883. In addition, in
September 1998, the Compass Connector received Bellcore approval. The
Company recently announced a streamlining of operations that has included
significant reduction of operations related to the development of the
Archistrat line of computers and the Rock City line of desktop computers
(collectively the "Systems") and any board development related to the
Systems. The Company also announced that it will focus its efforts on
Technology Products. The Company believes that the streamlining of
operations to focus on the Technology Products will have a direct impact on
overhead costs which will be reduced significantly, as provided in the
following discussion of operating expenses.
The Company has firm purchase commitments for prototype, pre-production and
production orders of its Technology Products from Veridicom, EG&G, SEEQ
Technologies Incorporated, Motorola, Kaiser Aerospace & Electronics,
Honeywell, Tamarack Microelectronics Inc., Lucent Technologies, and Saab
Dynamics. The Company anticipates that these purchase commitments will
result in increased revenues. However, there can be no assurance that such
anticipated revenues will materialize.
Statements in this Report on Form 10-Q, that are not statements of
historical fact, are to be regarded as forward-looking statements which are
based on information available to the Company as of the date hereof and
involve a number of risks and uncertainties. Among the important factors
that could cause actual results to differ materially from those indicated
by such forward-looking statements are delays in product development,
competitive pressures, general economic conditions, risks of intellectual
property and other litigation, and the factors detailed below under
"Certain Factors That May Affect Future Results" or elsewhere herein or set
forth from time to time in the Company's periodic reports and registration
statements filed with the Securities and Exchange Commission.
Results of Operations -Quarter Ended September 30, 1998 and 1997
Net revenues decreased during the quarter ended September 30, 1998 ("Third
Quarter of 1998") to approximately $190,029 as compared to $1,083,955 for
the quarter ended September 30, 1997 ("Third Quarter of 1997"). Product
sales for The Third Quarter of 1997 were $392,485. In The Third Quarter of
1998 revenue was solely recognized from product sales of the remaining Rock
City Inventory and VSPA sales for prototype, pre-production and production
orders. In the Third Quarter of 1997, a significant portion of the
Company's revenue related to one time licensing fees and contract research
and development from the Defense Advanced Research Projects Agency (DARPA)
which was successfully completed in April 1998. The Company does not
anticipate any further revenue recognition from grants during 1998.
Research and development ("R&D") expenses decreased to approximately
$803,722 for the Third Quarter of 1998 as compared to $1,050,581 for the
third Quarter of 1997. R&D for the Third Quarter of 1998 was attributable
to new custom VSPA designs for specific customer applications, the
refinement of the existing VSPA Flex automation machines and new VSPA
dedication insertion machines. The Company believes that although its
level of R&D spending is appropriate to support current operations, it will
need to increase future R&D spending to enhance further development of
VSPA, Compass Connectors, Compass PGA and other derivative technologies as
resources are available. Management is currently evaluating the
appropriate R&D expense relative to the current level of activity in its
Technology Products.
Consistent with management's focus on decreasing fixed costs, selling,
general and administrative ("SG&A") expenses decreased for the Third
Quarter 1998 to $2,076,024 compared to $ 2,308,715 for the Third Quarter
1997. The average number of employees has decreased from 69 at June 30,
1998 to 40 full time employees as of November 1, 1998. The decrease in
full-time employees is directly related to the decrease in Systems
activity. This is not necessarily reflected in the Third Quarter of 1998
as a reduction was implemented during the month of September. Monthly
payroll decreased to approximately $190,000 per month for October 1998 from
$340,000 for August 1998. The departments have been realigned to
accurately reflect current business actively related to the Technology
Products. The departments include Product and Equipment Design,
Application Engineering, Quality Control and Reliability, Production, Sales
& Marketing and Material Management. Management believes that this
department structure can adequately support operations of the initial
commercialization of its Technology Products. Management believes that
additional employees will need to be added with further commercialization
of its Technology Products.
Total debt issuance costs associated with short-term borrowings from Helix,
including the value of the warrants issued in connection with such
borrowings, charged to amortization expense during the quarter and nine
months ended September 30, 1998, amounted to approximately $511,000 and
$1,740,500 respectively. The valuation of the warrants and related
amortization expense represents a non-cash transaction.
During the quarter ended March 31, 1997, the Company determined that, due
to various events and changes in circumstances (including efforts to
streamline operations and to increase the use of strategic alliances to
manufacture and market the Company's products), certain long-lived assets
were impaired. As a result, in the first quarter of 1997, the Company
recorded a charge of approximately $585,000.
For purposes of determining net loss applicable to common stock for the
quarter and nine months ended September 30, 1998, accrued dividends payable
in the amount of approximately $75,000 and $115,000, respectively, and
amortization of the beneficial conversion feature of $597,872 and
$1,109,713 respectively, related to the issuance of the Series A Preferred
Stock have been added to the net loss. Both amounts represent non-cash
transactions. Basic and diluted loss per share has been calculated on the
basis of net loss applicable to common stock.
YEAR 2000 READINESS
Historically, certain computer programs have been written using two digits,
rather than four digits, to define the applicable year. This could lead,
in many cases, to a computer's recognizing a date using "00" as 1900 rather
than the year 2000. This phenomenon could result in major computer system
failures or miscalculations, and is generally referred to as the "Year
2000" problem or issue.
The Company is currently in the process of assessing its exposure to the
Year 2000 problem, and has established a comprehensive response to that
exposure. Generally, the Company has Year 2000 exposure in three areas:
(i) financial and management operating computer systems used to manage the
Company's business, (ii) microprocessors and other electronic devices
included as components of therapy and other equipment used by the Company
("embedded chips") and (iii) computer systems used by third parties, in
particular financial institutions, customers and suppliers of the Company.
The Company expects to substantially complete Year 2000 testing and
remediation of its financial and management operating systems by June 30,
1999.
The Company has begun an inventory and assessment of its exposure to
embedded chips in its facilities or equipment used in those facilities and
capability of vendors of such equipment to successfully remediate Year 2000
problems in equipment with embedded chips.
If the Company is unsuccessful in completing remediation of non-compliant
systems, correcting embedded chips and if customers of vendors cannot
rectify Year 2000 issues, the Company could incur additional costs, which
may be substantial, to develop alternative methods of managing its business
and replacing non-compliant equipment, and may experience delays in
payments by customers or to vendors. The Company has not yet established a
contingency plan in the event of non-compliance by its customers and
vendors.
Liquidity and Capital Resources
During February 1998, the Company completed a private placement of $6.0
million of Series A Preferred stock and received net proceeds of
approximately $5.8 million. The shares of preferred stock are convertible
into common stock at the lower of $3.50 per share (in accordance the
revised terms effective July 2, 1998) or a floating conversion price.
Through September 30, 1998, 164 shares of preferred stock were converted
into an aggregate of 1,918,670 shares of the Company's common stock.
The Company may require that all unconverted shares of Series A Preferred
be converted at any time if the closing bid price of common stock is equal
to or greater than $12.00 per share for a period of twenty consecutive
trading days. In addition, on February 11, 2003, the Company may, at its
option, require the holders to convert the Series A Preferred shares which
remain outstanding on such date (plus accrued and unpaid dividends) or
redeem such shares of Series A Preferred. The terms of the Series A
Preferred, as revised on July 2, 1998, provide that upon the occurrence of
certain Triggering Events, as defined, the Company may be required to pay
the holders $100,000 per month until such time that the Triggering Event
has been remedied. Any requirement that the Company pay such amounts could
have a material adverse impact on the Company in the event the Triggering
Event causing such payment is not remedied on a timely basis.
On August 14, 1998, the Company completed the sale of 2,254,601 shares of
its Common Stock in a private placement to accredited investors with gross
proceeds of $3.625 million. Upon exercise of the warrant, the investors may
elect to receive a reduced number of shares of common stock in lieu of
tendering the warrant exercise price in cash. The warrants have a term of
five years.
During May, June and July 1998, the Company borrowed an aggregate of $2
million from Helix. The loans are secured by the Company's intellectual
property. During August 1998, Helix agreed to extend the maturity date of
all outstanding notes payable to February 15, 1999, from their original due
date in August 1998, in exchange for the issuance of a warrant to purchase
up to 2,000,000 shares of the Company's common stock at an exercise price
equal to the fair market value of the Company's common stock at the date of
issuance ($2.125). The warrant has a term of two years. The inability of
the Company to repay Helix loans when due would have a material adverse
impact on the Company.
During the remainder of 1998, the Company expects to continue development
of its Technology Products, commence the commercial production and sale of
its VSPA semiconductor package. The Company anticipates that sales of its
VSPA semiconductor package and the related revenue, as well as licensing
and royalty revenue, will provide additional resources to at least
partially fund its activities during 1998. However, there can be no
assurance that revenues from any or all of these sources will in fact be
realized on the timetable anticipated by the Company. In addition, no
additional revenues associated with the cooperative development agreement
entered into with the U.S. Government during 1996 will be recognized during
the remainder of 1998 as the agreement was successfully completed during
April 1998.
In the event the Company's working capital, as augmented by proceeds from
the recent sale of Common Stock described above and any sales revenue,
prove to be insufficient to fund operations (due to unanticipated expenses,
delays, problems, or otherwise), the Company would be required to seek
additional financing. Furthermore, depending upon the Company's progress
in the development of its products and technology and manufacturing
capabilities, acceptance of its products and technology by third parties,
and the state of the capital markets, the Company may also determine that
it is advisable to raise additional equity capital. In addition, in the
event that the Company receives a larger than anticipated number of
purchase orders for VSPA semiconductor package, it may require resources
substantially greater than it currently has or than are otherwise available
to the Company, and the Company may be required to raise additional capital
or engage third parties (as to which engagement there can be no assurance)
to assist the Company in meeting such orders.
The Company is dependent upon the success of the efforts discussed above to
expand its marketing activities in order to obtain additional orders for
its VSPA semiconductor package to continue efforts that may lead to the
commercialization of additional products and technologies and to finance
other working capital requirements. There can be no assurance that
additional financing will be available to the Company when needed on
commercially reasonable terms or at all. The inability of the Company to
obtain additional financing when needed would have a material adverse
effect on the Company, including possibly requiring the Company to
significantly curtail or cease its operations. Any financing could also
result in substantial dilution to existing investors in the Company.
The Common Stock of the Company is listed on the NASDAQ National Market
("NMS") and as such, the Company must comply with the NMS listing
requirements including the maintenance of net tangible assets of at least
$4,000,000. On August 25, 1998, the Company announced it had received a
letter from the NASDAQ Stock Market stating that continued listing of the
Common Stock on NMS was no longer warranted. The Company has appealed this
decision and the Common Stock remains listed on NMS pending resolution of
the appeal. There can be no assurance the Company will be successful in
maintaining the listing of the Common Stock on NMS. In the event the
Company's Common Stock is delisted from NMS, the Company plans to make
application for listing on the NASDAQ SmallCap Market. There can be no
assurance the Company's Common Stock will remain listed on NASDAQ. The
delisting of the Company's Common Stock from NASDAQ may adversely affect
the liquidity of the Company's Common Stock and the ability of the Company
to raise capital. In addition, delisting would cause the Company to incur
material penalty payments pursuant to its agreement with investors as
described in Notes 5 and 7 to the accompanying condensed financial
statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following issues and uncertainties, among others, should be
considered in evaluating the Company's outlook:
1. Limited Product Development And Concentration of Customers;
The Company has a limited operating history upon which an evaluation of its
prospects can be made. Such prospects must be considered in light of the
risks, expenses and difficulties frequently encountered in the
establishment of a new business in the evolving electronics industry, which
is characterized by an increasing number of market entrants and intense
competition, as well as those encountered in the shift from development to
commercialization of new products based on innovative technologies. The
Company has a limited number of customers in the prototype, preproduction
and early production stage.
2. Limited Revenues; History Of Significant Losses; Accumulated
Deficit; Anticipated Future Losses; To date, the Company has generated
limited revenues from the sale of its Computer Systems and Technology
Products, from licensing fees and from the activities associated with its
grant from the Defense Advanced Research Projects Agency. The Company does
not anticipate deriving larger revenues from operations until such time, if
ever, that greater numbers of its semiconductor packages and connectors can
be sold, as to which there can be no assurance. Since inception (April 8,
1992), the Company has incurred significant net losses, including losses of
$1,800,340, $6,931,346, $23,894,426 and $20,874,101 during the fiscal years
ended March 31, 1994, 1995, 1996 and 1997, respectively, $8,949,652 during
the nine months ended December 31, 1997, and $10,778,995 during the nine
months ended September 30, 1998, resulting in an accumulated deficit of
$74,064,548 as of September 30, 1998. Inasmuch as the Company expects to
continue to incur substantial operating expenses related to its research
and development and sales and marketing activities (including salaries of
executive, technical and research and development personnel), the Company
anticipates that such losses will continue until such time, if ever, as the
Company is able to generate sufficient revenues to support its operations.
There can be no assurance that the Company will ever be able to generate
sufficient revenues to achieve profitable operations. In addition, the
Company received a going concern opinion as discussed in Note 2 of Notes to
Financial Statements contained in its Form 10-K for the nine-month
transition period ended December 31, 1997.
3. Litigation
On September 8, 1998, a judgement in the amount of $1,227,041.09 was
entered in the Circuit Court for the 15th Judicial Circuit, Palm Beach
County, Florida against the Company in favor of Joseph A. Sarubbi, a former
director of the Company. The Company believes that the judgement contains
certain inconsistencies which could result in a significant reduction in
the damages related to stock sale damages and has filed a notice of appeal.
Filing of the appeal requires the Company to provide a surety bond
sufficient to secure the judgement. The Company is working diligently to
obtain this bond but had not done so as of November 10,1998. If the
Company is unable to obtain this bond, or if Company's appeal is
unsuccessful, the judgement would have a severe adverse impact on the
Company's business, financial condition and results of operation. The
Company has filed notices of the judgement with the Company's insurance
carriers.
On October 16, 1998, a complaint was filed against the Company in the
United States District Court for the Southern District of New York by
Promethean Investment Group, L.L.C. The complaint alleges breach of
contract by the Company for failing to proceed with a financing transaction
and seeks damages in an unspecified amount in excess of $270,000 or a
declaration that the Company is required to proceed with the financing
transaction. The Company has not yet filed an answer to the complaint and
the outcome is both immeasurable and undeterminable. There can be no
assurance that the Company will be successful in defending this litigation.
Even if the Company is successful in defending itself in such
litigation, the diversion of critical resources involved in defending and
settling these actions could have a substantial material adverse effect on
the Company.
4. Significant Capital Requirements; Need For Additional
Financing. The Company's capital requirements in connection with its
operations and development activities have been significant. The Company
has been dependent primarily upon the proceeds of sales of its securities
to fund its activities since inception. During the period from inception
through August 21, 1998, the Company raised capital of approximately $76.3
million (after deduction of underwriting discounts, commissions and other
selling costs) through the sale of Common Stock, Series A-3 Convertible
Preferred Stock ("Series A Preferred"), warrants and subordinated
debentures and from the exercise of stock options and warrants.
In the event the Company's working capital, as augmented by proceeds
from the recent sale of common stock described above and any sales revenue,
prove to be insufficient to fund operations (due to unanticipated expenses,
delays, problems, or otherwise). Furthermore, depending upon the Company's
progress in the development of its products and technology and
manufacturing capabilities, acceptance of its products and technology by
third parties, and the state of the capital markets, the Company may also
determine that it is advisable to raise additional equity capital. In
addition, in the event that the Company receives a larger than anticipated
number of purchase orders for its VSPA semiconductor package, it may
require resources substantially greater than it currently has or than are
otherwise available to the Company, and the Company may be required to
raise additional capital or engage third parties (as to which engagement
there can be no assurance) to assist the Company in meeting such orders.
The Company is dependent upon the success of the efforts discussed above to
expand its marketing activities in order to obtain additional orders for
its VSPA semiconductor package to continue efforts that may lead to the
commercialization of additional products and technologies and to finance
other working capital requirements. There can be no assurance that
additional financing will be available to the Company when needed on
commercially reasonable terms or at all. The inability of the Company to
obtain additional financing when needed would have a material adverse
effect on the Company, including possibly requiring the Company to
significantly curtail or cease its operations. To the extent that any
future financing involves the sale of the Company's equity securities, the
Company's then existing stockholders may be substantially diluted.
The Company has issued 600 shares of Section A Preferred for an
aggregate purchase price of $6,000,000. The terms of the Series A
Preferred, as amended, provide that upon the occurrence of certain
"Triggering Events", including suspension of sales under the Registration
Statement relating to shares issuable upon conversion of Series A
Preferred, failure of the Company's Common Stock to be listed, or the
suspension of trading in the Company's Common Stock, on the NASDAQ National
Market or the NASDAQ SmallCap Market (collectively, "NASDAQ"), or failure
of the Company to convert shares of Series A Preferred as required, the
Company shall pay the holders $100,000 on the first day of each month until
the Triggering Events have been remedied. Any requirement that the Company
pay such amounts could have a material adverse impact on the Company in the
event the Triggering Event causing such payment is not remedied on a timely
basis. In addition, if the Company is unable to issue shares of Common
Stock upon conversion of Series A Preferred for any reason, including
because the Company (i) does not have a sufficient number of shares of
Common Stock authorized and available, (ii) is otherwise prohibited by
applicable law, rules or regulations, including without limitation NASDAQ
Rule 4460 (which prohibits the issuance at less than market value of a
number of shares which equals or exceeds 20% of a company's outstanding
securities without shareholder approval) (the "Exchange Cap"), or (iii)
fails to have a sufficient number of shares of Common Stock registered for
resale under a registration statement, the rate of dividend on the Series A
Preferred, shall be permanently increased by 2% commencing on the first day
of each of the second and third such 30-day periods (or part thereof); and
an additional 1% on the first day of each consecutive 30-day period (or
part thereof) thereafter until such securities have been duly converted or
redeemed; provided that in no event shall the rate of dividend exceed the
lower of 20% and the highest rate permitted by applicable law. The Company
agreed to use its best efforts to obtain shareholder approval prior to
October 31, 1998 of issuance of shares of Common Stock in excess of the
Exchange Cap; however, a shareholder meeting for the purpose of obtaining
such approval has not yet been scheduled. Failure of the Company to obtain
such approval could result in the company being required to pay the
penalties described above.
Stock at exercise prices ranging from $1.63 to $2.125 per share
(collectively, the "Helix Warrants"). The Helix Warrants have expiration
dates ranging from December 19, 1999 to August 7, 2000. Helix and its
affiliates currently hold approximately 10% of the Company's outstanding
Common Stock (not including share issuable upon exercise of warrants.
James T.A. Wooder, a director of the Company, is a Vice President of
Helix's parent, Helix Investments (Canada), Inc.
In August 1998, the Company completed a private placement of 2,254,601
shares of its Common Stock for aggregate gross proceeds of $3.625M (the
"Private Placement"). In addition to the shares of Common Stock purchased
by each investor in the Private Placement, such investor received a warrant
(the "Private Placement Warrants") to purchase an equal number of shares of
Common Stock, subject to adjustment for stock splits and similar events, at
an exercise price of $2.55 per share. The Private Placement Warrants
expire on August 13, 2003. Issuance of shares of Common Stock pursuant to
exercise of the Private Placement Warrants is subject to approval of the
Company's shareholders. Under the terms of the Securities Purchase
Agreement relating to the Private Placement, in the event of certain
decreases in the price of the Company's Common Stock from the date of
closing of the Private Placement to the six-month and/or one-year
anniversary dates of such closing, the Company will also be required to
issue certain additional shares of common Stock to the investors (the
"Fill-Up Shares"). Issuance of the Fill-Up Shares required the approval of
the Company's shareholders. The Company agreed to seek shareholder
approval prior to October 31, 1998 of issuance of Fill-Up Shares and shares
of Common Stock issuable pursuant to the exercise of the Private Placement
Warrants; however, a shareholder meeting for the purpose of obtaining such
approval has not yet been scheduled.
In the event (i) the common Stock is delisted or suspended from trading on
NASDAQ, (ii) the Fill-Up Share of shares of Common Stock issuable pursuant
to the exercise of the Private Placement Warrants are not issuable or are
not listed with NASDAQ, or (iii) the Company fails to issue the Fill-Up
Shares as required, the Company shall pay to the investors in the Private
Placement $100,000 for each full 30-day period that the condition
continues.
5. Potential for Dilution; Registration Rights; Outstanding
Options and Warrants. As of October 30, 1998, the Company had issued
1,999,976 shares of Common Stock upon conversion of 166 shares of Series A
Preferred; 486 shares of Series A Preferred remain outstanding. In the
event certain conditions are met, the Company has the right to cause the
issuance of an additional 400 shares of Series A Preferred. Shares of
Series A Preferred are convertible into shares of Common Stock pursuant to
a formula whereby the purchase price of the shares to be converted ($10,000
per share) plus any accrued dividends are divided by a conversion price
based on the lesser of a fixed conversion price or a floating conversion
price based on the market price of the Common Stock. The number of shares
issuable upon conversion of Series A Preferred could prove to be
significantly greater in the event of a decrease in the trading price of
the Common Stock. Purchasers of Common Stock could therefore experience
substantial dilution upon conversion of the Series A Preferred. In
addition, an increase in the amount of Common Stock in the public market as
a result of such conversion could reduce the market price of the Common
Stock.
In connection with the Private Placement, the Company agreed that in
the event of decreases in the average closing bid price of the Common Stock
for the twenty trading days immediately preceding the six-month and/or
one-year anniversaries of the closing of the Private Placement, the Company
would, subject to shareholder approval, issue to investors in the Private
Placement a number of Fill-Up Shares which would in effect cause the
investors to have acquired the number of shares of Common Stock which they
would have purchased had the purchase price paid by investors in the
Private Placement as of the closing date been the same as the twenty-day
average closing bid price of the Common Stock as of such anniversary dates.
The number of Fill-Up Shares to be issued could be substantial in the event
of significant decreases in the market price of the Common Stock. Such an
increase in the amount of Common Stock in the public market could reduce
the market price of the Common Stock and possibly result in a change in
control of the Company.
The Company has reserved 7,366,738 shares of Common Stock, including
150,000 shares subject to warrants issued in connection with the sale of
the Series A Preferred, 2,346,626 shares subject to the Private Placement
Warrants and 2,850,000 shares subject to the Helix Warrants, for issuance
upon the exercise of warrants. In the event the 400 additional shares of
Series A Preferred described above are issued, the Company would be
required to issue Warrants to purchase an additional 100,000 shares of
Common Stock. In addition, the Company has reserved 745,100 shares of
Common Stock for issuance to employees, officers, directors and consultants
under its 1995 Employee Stock Incentive Plan, 1993 Performance Incentive
Plan and Non-Employee Director Stock Option Plan. The price which the
Company may receive for the Common Stock issuable upon exercise of such
warrants and options will, in all likelihood, be less than the market price
of the Common Stock at the time of such exercise. Consequently, for the
life of such warrants and options, the holders thereof may have been given,
at nominal cost, the opportunity to profit from a rise in the market price
of the Common Stock. The exercise of all of the aforementioned securities
may also adversely affect the terms under which the Company could obtain
additional equity capital. Should a significant number of these securities
be exercised, the resulting increase in the amount of the Common Stock in
the public market may reduce the market price of the Common Stock.
6. Compliance with NASDAQ Listing Requirements. The Common Stock of
the Company is listed on the NASDAQ National Market ("NMS") and the Company
must comply with NMS listing requirements, including the maintenance of net
tangible assets of at least $4,000,000. On August 25, 1998, the Company
announced it had received a letter from the NASDAQ Stock Market stating
that continued listing of the Common Stock on NMS was no longer warranted.
The Company has appealed this decision and the Common Stock remains listed
on NMS pending resolution of the appeal. There can be no assurance the
Company will be successful in maintaining the listing of the Common Stock
on NMS. In the event the Company's Common Stock is delisted from NMS, the
Company plans to make application for listing on the NASDAQ SmallCap
Market. There can be no assurance the Company's Common Stock will remain
listed on NASDAQ. The delisting of the Company's Common Stock from NASDAQ
may adversely affect the liquidity of the Company's Common Stock and the
ability of the Company to raise capital. Delisting could also result in
the Company incurring substantial penalty payments pursuant to its
agreements with investors. In addition, if the Company's Common Stock is
no longer listed on NASDAQ, and the trading price of the Common Stock is
below $5.00 per share, trading in the Common Stock would be subject to
certain rules promulgated under the Exchange Act, which impose additional
sales practice requirements on broker-dealers. For transactions covered by
these rules, a broker-dealer must make a special suitability determination
of the purchaser and have received the purchaser's prior written consent
prior to sale. The additional burdens imposed upon broker-dealers by such
requirements may discourage broker-dealers from effecting transactions in
the Common Stock, which could severely limit the market liquidity of the
Common Stock.
7. Uncertainty Of Market Acceptance. The products and technologies
currently being sold or developed by the Company utilize newly developed
designs. Although the Company believes that its existing and proposed
technology and products represent significant advancements in semiconductor
packaging technology, demand for the Company's existing and proposed
products is subject to a high degree of uncertainty, as is typical in the
case of newly-developed products. Achieving marketing acceptance for the
Company's technology and existing and proposed products will require
substantial marketing efforts and expenditure of significant funds to
educate end users as to the distinctive characteristics and anticipated
benefits of the Company's proposed products and technologies. Accordingly,
due to their commitment to their own products, such entities may be
inhibited from doing business with the Company. In addition, many end users
may be reluctant to use or sell the Company's products and technologies
until a sufficient number of other end users have already committed to do
so. The Company has hired sales and marketing personnel for its VSPA
semiconductor package and Compass Connector. The Company's ability to
generate revenue from the sale of the VSPA semiconductor packages or
Compass Connectors will be dependent upon, among other things, its ability
to effectively use the internal sales force to market its products. There
can be no assurance that the Company's marketing efforts will be
successful.
8. Uncertainty Of Product And Technology Development;
Technological Factors; Dependence On Third-Party Product Design Changes.
The Company's success will depend in part upon its products and technology
meeting acceptable cost and performance criteria, and upon their timely
introduction into the marketplace. There can be no assurance that the
Company's products and technology will satisfactorily perform the functions
for which they are designed, that they will meet applicable price or
performance objectives or that unanticipated technical or other problems
will not occur which would result in increased costs or material delays in
their development or commercialization. In addition, technology as complex
as that which will be incorporated into the Company's proposed products may
contain errors which become apparent subsequent to widespread commercial
use. Remedying such errors could delay the Company's plans and cause it to
incur additional costs which would have a material adverse effect on the
Company.
9. Competition; Technological Obsolescence. The markets that the
Company intends to enter are characterized by intense competition. The
Company's Technology Products compete with semiconductor packages and
connectors offered by numerous manufacturers. Many of these companies have
substantially greater financial, technical, personnel and other resources
than the Company and have established reputations for success in the
development, licensing, sale and servicing of their products and
technology. Certain of these competitors dominate their industries and have
the financial resources necessary to enable them to withstand substantial
price competition or downturns in the market for semiconductor packages,
related technologies and/or computers. In addition, certain companies may
be developing technologies or products of which the Company is unaware,
which may be functionally similar, or superior, to some or all of the
Company's products and technologies. Accordingly, the ability of the
Company to compete will depend on its ability to complete development and
introduce to the marketplace in a timely and cost-competitive manner
additional products and technology, to continually enhance and improve its
existing and proposed products, to adapt its products to be compatible with
specific products manufactured by others, and to successfully develop and
market new products. There can be no assurance that the Company will be
able to compete successfully, that its competitors or future competitors
will not develop technologies or products that render the Company's
products and technology obsolete or less marketable or that the Company
will be able to successfully enhance its products or technology or adapt
them satisfactorily.
10. Dependence On Manufacturers And Suppliers; Lack Of
Manufacturing Experience And Capability. Although the Company has developed
the ability to manufacture the VSPA semiconductor package and has made
arrangements with third-party manufacturers to produce certain versions of
the VSPA semiconductor package, there can be no assurance that sufficient
quantities of VSPA will be able to be produced to meet demand. In the
event the Company's current sources are unable to produce VSPA in
sufficient volumes within a reasonable period of time, or at all, delays in
securing alternative manufacturing sources would result and would have a
material adverse effect on the Company's operations.
The Company has an arrangement with LG Cable & Machinery Ltd. to
supply the Compass V Connector. Although the Company anticipates that it
will be able to obtain Compass V Connectors from LG Cable & Machinery Ltd.
under this arrangement, no assurance can be given that the supply of such
component will be in quantities sufficient to meet the customer demand.
11. Dependence On Key Personnel. The success of the Company will
be dependent on the continued personal efforts of Stanford W. Crane, Jr.,
its Chairman, President and Chief Executive Officer and the principal
inventor of its proprietary products and technologies, and certain other
key personnel. Although Mr. Crane has entered into a five-year employment
agreement with the Company which extends to January 1999, the agreement
provides that he may resign by giving six months notice at any time. The
loss of his services would have a material adverse effect on the Company.
The Company has obtained key-man insurance on Mr. Crane's life in the
amount of $2,000,000. The success of the Company also is dependent upon
its ability to hire and retain additional qualified executive, scientific,
production and marketing personnel. Although the Company has been able to
hire qualified personnel, there can be no assurance that the Company will
be able to hire additional qualified personnel or retain such necessary
personnel.
12. Patents And Proprietary Information. The Company's success
will depend on its ability to obtain patents, protect trade secrets, and
operate without infringing on the proprietary rights of others. As of
August 26, 1998, the Company had obtained 13 United States patents and an
aggregate of 39 foreign patents. In addition, the Company had pending a
total of 18 United States and 28 foreign patent applications. These
patents and pending applications relate to VSPA, Compass PGA, various
designs of the Computer Systems, the use of the Compass Connector in
Compass PGA and in the Computer Systems, and a PCB manufacturing technology
known as "Well Tech PCB". The Company's foreign patent filings have been
made in selected countries, including the Republic of China (Taiwan),
Germany, the United Kingdom, Ireland and France. The Company will continue
to file applications in certain foreign jurisdictions to secure protection
in those jurisdictions in accordance with the Patent Cooperation Treaty and
the Paris Convention for the Production of Industrial Property (which
allows such filings to relate back to the original filing date in the
United States) covering the Company's technology and proposed products. To
the extent possible, the Company also intends to file patent applications
with respect to products and technology that it may develop in the future.
There can be no assurance that any of the Company's pending patent
applications will ultimately result in an issued patent. Moreover, the
patent laws of other countries may differ from those of the United States
as to the patentability of the Company's products or technology, and the
degree of protection afforded by foreign patents may be different from that
in the United States. The failure by the Company to obtain patents for
which applications are currently pending could have a material adverse
effect on the Company's ability to commercialize successfully its proposed
technology and products. Even if the Company is able to obtain such
patents, there can be no assurance that any such patents will afford the
Company commercially significant protection for its technology or products.
In addition, other companies may independently develop equivalent or
superior technologies or products and may obtain patent or similar rights
with respect to them. Although the Company believes that its technology has
been independently developed and that its technology does not infringe on
the patents or violate the proprietary rights of others, there can be no
assurance that any of the Company's technology or products, will not be
determined to infringe upon the patents or proprietary rights of others, or
that patents or proprietary rights of others will not have an adverse
effect on the ability of the Company to do business. If the Company's
technology or products were determined to infringe on the patents,
trademarks or proprietary rights of others, the Company could, under
certain circumstances, become liable for damages, which also could have a
material adverse effect on the Company. Moreover, in the event that the
Company's technology or proposed products were deemed to infringe upon the
rights of others, the Company would be required to obtain licenses to
utilize such technology. There can be no assurance that the Company would
be able to obtain such licenses in a timely manner or on acceptable terms
and conditions, and the failure to do so could have a material adverse
effect on the Company. If the Company were unable to obtain such licenses,
it could encounter significant delays in product market introductions while
it attempted to design around the infringed upon patents or rights, or
could find the development, manufacture or sale of products requiring such
licenses to be foreclosed. In addition, patent disputes are common in the
computer industry and there can be no assurance that the Company will have
the financial resources to enforce or defend a patent infringement or
proprietary rights action.
The Company relies on confidentiality and nondisclosure arrangements
with its employees, consultants and others involved with the Company's
product and technological development efforts. There can be no assurance
that these agreements will provide meaningful protection to the Company or
that other companies will not acquire information which the Company
considers proprietary. Moreover, there can be no assurance that other
companies will not independently develop know-how comparable or superior
to that of the Company.
The Company has registered the Archistrat, VSPA and Rock City
trademarks with the U.S. Patent and Trademark Office and has applied for
appropriate trademark, copyright and other legal protection for its product
names, logos and other identifications. There can be no assurance that the
Company will not be precluded by others from using any of such
identifications or creating proprietary rights with respect to them.
13. Dependence On The Crane-Panda Licensing Agreement; Potential
Conflicts Of Interest. Pursuant to a license agreement entered into in
January 1996 between the Company and Mr. Crane (the "Crane-Panda License"),
Mr. Crane has granted the Company the nonexclusive right to utilize the
Compass Connector, a key component in the commercialization of the
Company's Computer Systems and the development and commercialization of
Compass PGA. The Crane-Panda License was executed in connection with the
conversion to a nonexclusive license of the 3M License described below and
supersedes an earlier license agreement between Mr. Crane and the Company
relating to the Compass Connector. Under the Crane-Panda License, the
Company is required to pay Mr. Crane a royalty on any sales of Compass
Connectors as discrete parts in the amount of 5% of the net sales price for
the first five years of the term of the agreement, 2.5% of the net sales
price for the next five years of the term of the agreement and 2% of the
net sales price thereafter, provided that no royalty is payable until
aggregate net sales of the Compass Connector as discrete parts exceed
$100,000. The royalty rate will be reduced after the fifth anniversary of
the agreement if no patent remains in effect with respect to the Compass
Connector. No royalty is payable on sales of the Compass Connector as
incorporated in the Computer Systems or other computer system or assembly.
The Company may grant sublicenses under the Crane-Panda License, but only
for the use of products as incorporated in the Computer Systems or other
computer system or assembly. To date, there have been no sales requiring
the payment of royalties to Mr. Crane under the Crane-Panda License. The
Crane-Panda License obligates the Company to maintain proprietary
information relating to the Compass Connector on a confidential basis,
notify Mr. Crane of any evidence of infringement with respect to the
Compass Connector and related technology, and cooperate with Mr. Crane to
contest any such infringement. In the event that the Company becomes
bankrupt or insolvent or defaults in any of its material obligations under
the Crane-Panda License and fails to cure any such defaults within
specified cure periods, Mr. Crane may terminate the Crane-Panda License.
The Company is substantially dependent upon the Crane-Panda License. The
termination of the agreement under any circumstances would have a material
adverse effect on the Company. Although actions of the Company with
respect to the Crane-Panda License must be authorized by a majority of the
Company's independent directors, and the Company and Mr. Crane would be
represented by separate counsel in the event of a dispute concerning the
Crane-Panda license, there can be no assurance that conflicts of interest
will not arise with respect to the Crane-Panda License or that such
conflicts will be resolved in a manner favorable to the Company. In
addition, Mr. Crane retains ownership of the Compass Connector technology,
and has the right to grant licenses to or otherwise transfer rights to the
Compass Connector technology to third parties.
In September 1992, Mr. Crane granted an exclusive license (the "3M
License") to Minnesota Mining and Manufacturing Co. ("3M") to develop,
manufacture, use and sell the Compass Connector other than as part of a
computer system. In February 1996, Mr. Crane and 3M agreed to convert the
3M License to a nonexclusive license. The 3M License provides in certain
circumstances for the payment of a royalty to Mr. Crane. As of the date of
this Prospectus, Mr. Crane had received no such payments.
14. Risks Relating To Potential International Operations. Although
the Company currently prices all of its international sales in U.S.
dollars, future sales or licensing of its products or technologies outside
the U.S. may be subject to the risks associated with fluctuations in
currency exchange rates. The Company may also be subject to other risks
associated with international operations, including tariff regulations and
requirements for export licenses, particularly with respect to the export
of certain technologies (which licenses may on occasion be delayed or
difficult to obtain), unexpected changes in regulatory requirements, longer
accounts receivable requirements, difficulties in managing international
operations, potentially adverse tax consequences, economic and political
instability, restrictions on repatriation of earnings, and the burdens of
complying with a wide variety of foreign laws. In addition, the laws of
certain countries do not protect the Company's products and intellectual
property rights to the same extent as do the laws of the United States.
There can be no assurance that such factors will not have a material
adverse effect on the Company's future international sales or licenses and,
consequently, on the Company's business and operations as a whole.
15. Antitakeover Statutes. Florida has enacted legislation that
may deter or frustrate takeovers of the Company. The Florida Control Share
Act generally provides that shares acquired in excess of certain specified
thresholds, starting at 20%, will not possess any voting rights unless such
voting rights are approved by a majority vote of a corporation's
disinterested shareholders. The Florida Affiliated Transactions Act
generally requires supermajority approval by disinterested directors or
shareholders of certain specified transactions between a corporation and
holders of more than 10% of the outstanding voting shares of the
corporation or their affiliates.
16. Effect of Certain Charter and Bylaw Provisions. The Company's
Amended and Restated Articles of Incorporation authorize the Board of
Directors to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges, including voting
rights, of those shares without any further vote or action of the
shareholders. The rights of the holders of the Company's Common Stock will
be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock issued by the Company, including shares of Series A
Preferred which are currently outstanding or may be issued in the future.
In addition, without the prior written approval of the holders of 66 2/3%
of the Series A Preferred shares, the Company shall not (1) consolidate or
merge with another corporation or other entity or person, whereby the
shareholders of the Company own in the aggregate less than 50% of the
ultimate parent or surviving entity, (2) transfer all or substantially all
of the Company's assets to another corporation or other entity or person,
or (3) fix a record date for the declaration of a distribution or dividend,
whether payable in cash, securities or assets (other than shares of Common
Stock). The Company's Amended and Restated Articles of Incorporation also
provide for staggered terms for the members of the Board of Directors.
Certain provisions of the Company's By-laws, the issuance of Preferred
Stock, certain provisions of the Company's Amended and Restated Articles
Incorporation, and the staggered Board of Directors could have a depressive
effect on the Company's stock price or discourage a hostile bid in which
shareholders could receive a premium for their shares. In addition, these
provisions could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
or delay, prevent or deter a contest for the Company.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Part II -Other Information
Item 1. Legal Proceedings
On September 8,1998, a judgement in the amount of $1,227,041.09 was entered
in the Circuit Court for the 15th Judicial Circuit, Palm Beach County,
Florida against the Company in favor of Joseph A. Sarubbi, a former
director of the Company. The Company believes that the judgement contains
certain inconsistencies which could result in a significant reduction in
the damages related to stock sale damages and has filed a notice of appeal.
Filing of the appeal requires the Company to provide a surety bond
sufficient to secure the judgement. The Company is working diligently to
obtain this bond but had not done so as of November 10,1998. If the
Company is unable to obtain this bond, or if Company's appeal is
unsuccessful, the judgement would have a severe adverse impact on the
Company's business, financial condition and results of operation. The
Company has filed notices of the judgement with the Company's insurance
carriers.
On October 16, 1998, a complaint was filed against the Company in the
United States District Court for the Southern District of New York by
Promethean Investment Group, L.L.C. The complaint alleges breach of
contract by the Company for failing to proceed with a financing transaction
and seeks damages in an unspecified amount in excess of $270,000 or a
declaration that the Company is required to proceed with the financing
transaction. The Company has not yet filed an answer to the complaint and
the outcome is both immeasurable and undeterminable. There can be no
assurance that the Company will be successful in defending this litigation.
Item 2. Changes in Securities
On February 11, 1998, the Company issued in a private placement 600 shares
of its Series A Convertible Preferred Stock ("Series A Preferred") for an
aggregate purchase price of $6,000,000. See Note 4 to the accompanying
condensed financial statements for a description of the Series A Preferred
stock.
During May 1998, all holders of Series A Preferred exchanged their shares
for Series A-1 Preferred shares. The rights, preferences, privileges, and
terms of the Series A-1 Preferred shares are set forth in the Company's
Fifth Articles of Amendment of Amended and Restated Articles of
Incorporation and are the same as those of the Series A Preferred except as
follows; the Company has the option of paying specified liquidated damages
in lieu of redeeming the preferred shares, if requested by the holders,
upon the occurrence of certain Triggering Events, as defined in the
agreement, and upon the occurrence of other specified events Any payment
of liquidated damages would be made in eight equal installments over a
period of seven months subsequent to the triggering event with interest
accruing at the rate of 8% per annum on the outstanding balance. The total
amount of liquidated damages payable over the seven month period would
approximate the amount of the respective redemption values as
described above.
On July 2, 1998, all holders of Series A-1 Preferred shares exchanged their
shares for Series A-2 Preferred shares. The rights, preferences,
privileges, and terms of the Series A-2 Preferred shares are set forth in
the Company's Sixth Articles of Amendment of Amended and Restated Articles
of Incorporation and are the same as those of the Series A-1 Preferred
except as generally described in Note 4 to the accompanying condensed
financial statements.
On August 18, 1998, all holders of Series A-2 Preferred shares exchanged
their shares for Series A-3 Preferred shares. The rights, preferences,
privileges, and terms of the Series A-3 Preferred shares are set forth in
the Company's Seventh Articles of Amendment of Amended and Restated
Articles of Incorporation and are the same as
those of the Series A-2 Preferred except that the requirement to convert a
minimum number of shares of Series A-3 Preferred stock at a particular time
was eliminated.
In August 1998, the Company completed the sale of 2,254,601 shares of its
common stock in a private placement to accredited investors with gross
proceeds of approximately $3.625 million, (the "Private Placement"). The
Private Placement is described in Note 5 to the accompanying condensed
financial statements. The securities issued in the Private Placement were
issued pursuant to an exemption from registration under Section 4 (2) of
the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) See the Exhibit Index included immediately preceding the
Exhibits to this report, which is incorporated herein by reference.
(b) Reports on Form 8-K:
The Company has filed the following reports on Form 8-K since
July 1, 1998:
Date of filing Items reported
-------------- --------------
1. July 30, 1998 Loan from Helix (PEI) Inc.
2. August 25, 1998 Notice from NASDAQ of delisting
proceedings
3. September 15, 1998 Judgement issued against Company in
Joseph Sarubbi litigation
4. October 8, 1998 Resignation of Kevin Calhoun as
Chief Financial Officer, appointment
of Melissa F. Crane as his
successor.
5. October 28, 1998 Termination of client-auditor
relationship with
PricewaterhouseCoopers LLP.
6. November 10, 1998 Letter of Intent to sell or license
Systems Division assets.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE PANDA PROJECT, INC.
Date: November 13, 1998
By: /s/ MELISSA F. CRANE
------------------------
Melissa F. Crane
Acting Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Description of Exhibit
- ---------- -------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company,
as amended (filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on November 3, 1997) *
3.2 Fourth Articles of Amendment of Amended and Restated Articles
of Incorporation (filed as Exhibit 4.1 to the Company's Form
8-K filed on February 23, 1998) *
3.3 Fifth Articles of Amendment of Amended and Restated Articles
of Incorporation (filed as Exhibit 3.1 to the Company's
Quarterly Report of Form 10-Q for the period ended March 31,
1998) *
3.4 Sixth Articles of Amendment of Amended and Restated Articles
of Incorporation (filed as Exhibit 3.2 to the Company's
amended Quarterly Report of Form 10-Q for the period ended
March 31, 1998 filed on July 2, 1998) *
3.5 Seventh Articles of Amendment of Amended and Restated Articles
of Incorporation (filed as Exhibit 3.5 to Registrant s
Quarterly Report on Form 10-Q for the period ended June 30,
1998) *
3.6 Amended and Restated By-Laws of the Company (filed as Exhibit
3.2 to the Company's Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on November 3,
1997) *
27 Financial Data Schedule
________________
* Incorporated herein by reference
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