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 March 31, 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.)
901 YAMATO ROAD
BOCA RATON, FLORIDA 33431
(Address of principal executive offices)
(561) 994-2300
(Registrant's telephone number)
Former fiscal year end: March 31
(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 -- 12,233,601 shares as of April 30, 1998
THE PANDA PROJECT, INC.
Index
Page
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Condensed Balance Sheets - March 31, 1998 and
December 31, 1997 3
Condensed Statements of Operations - Three months
ended March 31, 1998 and March 31, 1997 4
Condensed Statements of Cash Flows - Three months
ended March 31, 1998 and March 31, 1997 5
Notes to Condensed Financial Statements -
March 31, 1998 6-9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 12
Part II - Other Information
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 13
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
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The Panda Project, Inc.
Condensed Balance Sheets
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,128,368 $ 619,683
Accounts receivable-trade (net of
allowance of $10,006 at March 31,
1998 and December 31, 1997) 69,543 224,851
Inventory 1,286,117 965,199
Other receivables 141,015 105,825
Prepaid expenses and other current
assets 692,611 378,242
-------------- --------------
Total current assets 4,317,654 2,293,800
-------------- --------------
Property and equipment, net 2,940,398 2,818,218
Restricted cash 260,000 260,000
Debt issuance costs, net - 340,513
Other assets 1,499 1,299
-------------- --------------
Total assets $ 7,519,551 $ 5,713,830
============== ==============
LIABILITIES, REDEEMABLE SECURITIES, AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,614,698 $ 1,651,540
Notes payable - 1,000,000
Accrued expenses and other current
liabilities 914,064 964,586
-------------- --------------
Total current liabilities 2,528,762 3,616,126
Redeemable Series A convertible
preferred stock, no shares issued
at December 31, 1997 and 600 shares
issued and outstanding at
March 31, 1998 5,448,660 -
Common Stock, $.01 par value,
50,000,000 shares authorized:
12,230,601 shares at March 31, 1998
and 12,215,522 shares at December 31,
1997 issued and outstanding 122,306 122,155
Additional paid-in capital 66,096,409 64,841,102
Accumulated deficit (66,676,586) (62,865,553)
-------------- --------------
Total liabilities, redeemable
securities and common
stockholders' equity $ 7,519,551 $ 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.
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The Panda Project, Inc.
Condensed Statements of Operations (Unaudited)
Three Months Ended
March 31,
1998 1997
Revenues:
Product sales $ 125,754 $ 125,887
Contract research and development
revenues 18,416 165,000
-------------- --------------
Net revenues $ 144,170 $ 290,887
Costs and expenses:
Cost of sales 160,406 171,219
Research and development 1,004,833 935,879
Selling, general and administrative 1,987,582 2,311,123
Amortization of debt issuance costs 808,514 -
Costs associated with asset
impairments - 585,000
-------------- --------------
Total costs and expenses 3,961,335 4,003,221
-------------- --------------
Operating loss (3,817,165) (3,712,334)
Other income 6,132 55,936
-------------- --------------
Net loss $ (3,811,033) $ (3,656,398)
-------------- --------------
Dividends and amortization of
beneficial conversion feature
related to redeemable convertible
preferred stock (178,438) -
-------------- --------------
Net loss applicable to common stock $ (3,989,471) $ (3,656,398)
============== ==============
Basic and diluted loss per common
share $ (.33) $ (.36)
============== ==============
Weighted average shares outstanding 12,220,803 10,113,040
============== ==============
See Notes to Condensed Financial Statements.
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The Panda Project, Inc.
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
1998 1997
Net cash used by operating activities $ (2,871,347) $ (1,770,148)
Cash flows from investing activities:
Additions to property and equipment (452,660) (74,862)
-------------- --------------
Net cash used by investing activities (452,660) (74,862)
Cash flows from financing activities:
Proceeds from issuance of redeemable
convertible preferred stock 6,000,000 -
Proceeds from issuance of common
stock 25,705 -
Proceeds from issuance of notes
payable 1,000,000 -
Repayment of notes payable (2,000,000) -
Payments of stock issuance costs (193,013) (25,500)
-------------- --------------
Net cash provided by (used in)
financing activities 4,832,692 (25,500)
-------------- --------------
Net increase (decrease) in cash and
cash equivalents 1,508,685 (1,870,510)
Cash and cash equivalents at
beginning of period 619,683 5,114,015
-------------- --------------
Cash and cash equivalents at end
of period $ 2,128,368 $ 3,243,505
============== ==============
See Notes to Condensed Financial Statements.
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The Panda Project, Inc.
Notes to Condensed Financial Statements (Unaudited)
March 31, 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
March 31, 1998 December 31, 1997
----------------------------------
Raw materials $ 1,200,491 $ 879,756
Work in process 13,281 14,024
Finished goods 72,345 71,419
----------------------------------
$ 1,286,117 $ 965,199
==================================
The agreement between the Company and a third-party for the
manufacture and assembly of the Company's computer systems expired in
September 1996. A dispute arose regarding liability for certain
inventory allegedly purchased on behalf of the Company. During
February 1998, the Company settled this dispute by purchasing
inventory from the contract manufacturer for $520,000. Inventory is
valued at net realizable value, which is net of obsolescence reserves
of approximately $600,000 at March 31, 1998 and December 31, 1997.
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 4). In connection with the issuance of
these notes, the Company issued warrants to Helix to purchase an
aggregate of 400,000 shares of the Company's common stock at exercise
prices ranging from $4.00 to $4.50 per share. The warrants have a
term of two years and were recorded as debt issuance costs at an
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Page 7
aggregate value of approximately $872,000 (including $404,000 recorded
during the period ended December 31, 1997). Total debt issuance
costs, including the value of the warrants, charged to amortization
expense during the quarter ended March 31, 1998 amounted to
approximately $808,000.
Helix and its affiliates currently hold approximately 12% 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. Redeemable Convertible Preferred Stock
The terms of the preferred stock described below represent the
original terms that existed upon issuance of such shares (the
"Original Terms"). Subsequently, in May 1998, the terms were changed
to eliminate the mandatory redemption features (the "Revised Terms").
However, because the terms did not change until May 1998, the
preferred stock has been classified in the accompanying Balance Sheet
as temporary equity as of March 31, 1998. These securities will be
reclassified to permanent equity as of the effective date of the
change in terms.
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 as of March 31, 1998 in the amount of $39,452 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) $6.10 subject to adjustment in the
event of certain dilutive issuances of securities by the Company or
for stock splits or similar events (the "Fixed Conversion Price"), 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 ("the Floating
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Page 8
Conversion Price"). No conversion of Series A Preferred into shares of
common stock may occur during the period prior to 120 days after
issuance except at the Fixed Conversion Price. Through March 31,
1998, no conversions have taken place.
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 Original Terms, Holders may require that the Company redeem
unconverted shares of Series A Preferred at a price of 120% of the
Purchase Price plus accrued dividends under the following
circumstances: 1) consolidation or merger whereby the shareholders of
the Company own in the aggregate less than 50% of the ultimate parent
or surviving entity, 2) the Company transfers all or substantially all
of the Company's assets to another corporation or other entity or
person, or 3) the Company shall 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, holders may
require that the Company redeem the unconverted shares of Series A
Preferred at the greater of a) 125% of the Purchase Price plus accrued
dividends or b) the amount calculated using the Floating Conversion
Price, under the following circumstances: 1) the Company is unable to
issue common stock in accordance with a conversion notice due to
limitations imposed by regulations of the Nasdaq National Market, 2)
effectiveness of the related registration statement lapses for any
reason for a period of 30 consecutive trading days, 3) failure of the
Company to be listed or the suspension of trading of the common stock
on the Nasdaq National Market, The Nasdaq SmallCap Market, The New
York Stock Exchange, Inc. or The American Stock Exchange, Inc. for a
period of five consecutive days, 4) the Company's notice to any holder
of its intention not to comply with proper requests for conversion of
any Series A Preferred Stock into shares of common stock.
Under the Revised Terms, the mandatory redemption provisions described
in the preceding paragraph were modified to give the Company the
option of redeeming the preferred shares or paying specified
liquidated damages. 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 amount of liquidated damages
approximate the amount of the respective redemption values described
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in the preceding paragraph. Prior to February 1, 2002, holders may
not elect to require the Company to pay liquidated damages or redeem
Series A Preferred shares under the circumstances that the Company is
prohibited from issuing shares of common stock due to limitations
imposed by the Nasdaq Stock Market. However, 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 or
redeemed.
In connection with this transaction, the Company has filed a
registration statement with the Securities and Exchange Commission to
effect the registration for resale of the common stock issuable upon
conversion of the Series A Preferred and upon exercise of the
Warrants. Such Registration Statement has not been declared effective
by the Securities and Exchange Commission.
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 ($138,986 for the first 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. The unamortized portion of the beneficial conversion
feature as of March 31, 1998 is included in the balance sheet under
the caption Prepaid Expenses and Other Current Assets.
5. Commitments and Contingent Matters
There are various legal proceedings and claims pending against the
Company, including disputes with a former director of the Company and
former employees. While it is not possible to determine the ultimate
outcome of these matters, it is the opinion of management, based on
advice from counsel, that the resolution of such matters will not have
an aggregate material adverse effect on the Company's financial
position.
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 development, manufacture and sale of computer systems,
including the Archistrat line of powerful, modular workstations and
the recently announced Rock City line of desktop computers ("the
Computer Systems"), and the Company's proprietary semiconductor
packaging and interconnect devices ("the Technology Products"). During
1997, the Company changed its fiscal year from April 1 through March
31 to January 1 through December 31.
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Statements in this Report on Form 10-Q that are not historical 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 litigation, and the factors detailed below under
"Certain Factors That May Affect Future Results" 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 March 31, 1998 Compared to
Quarter Ended March 31, 1997
Net revenues decreased during the quarter ended March 31, 1998 (the
"first quarter of 1998") to approximately $144,000 as compared to
$291,000 for the quarter ended March 31, 1997 (the "first quarter of
1997"). The decrease was primarily attributed to a reduction in
revenue associated with the agreement with the Defense Advanced
Research Projects Agency which is nearing its completion. The Company
has refocused its efforts with regards to the Computer Systems toward
the recently announced Rock City product line which is expected to be
available for sale during the second quarter of 1998. The efforts
made during the first quarter of 1998 were strategic in nature and
encompassed building the infrastructure to support the launch of Rock
City computers, negotiations with suppliers and contract
manufacturers, development of the initial marketing campaigns and
promotional efforts, as well as making refinements to the product
configurations and components.
Research and development ("R&D") expenses increased to approximately
$1,005,000 for the first quarter of 1998 as compared to $936,000 for
the first quarter of 1997. While the aggregate amount of R&D spending
increased only 7%, development expenses related to the Technology
Products, including the design of new versions of VSPA for specific
customer applications and the refinement of manufacturing equipment
for VSPA, increased approximately $364,000 while R&D related to
Computer Systems decreased.
Selling, general and administrative (SG&A) expenses for the first
quarter of 1998 decreased approximately $234,000, or 14%, to
$1,987,000 as compared to $2,311,000 for the first quarter of 1997.
The net decrease in SG&A expenses is due principally to the reduction
of facilities rent expense of approximately $228,000. During the
quarter ended March 31, 1997, the Company entered into an agreement
with a landlord which released the Company from portions of its
primary facility lease and resulted in a charge to rent expense of
approximately $159,000. In addition, during the first quarter of 1997
the Company recognized a charge of $145,000 associated with the
settlement of a lawsuit.
Total debt issuance costs associated with short-term borrowings from
Helix, including the value of the warrants issued in connection with
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Page 11
such borrowings, charged to amortization expense during the quarter
ended March 31, 1998 amounted to approximately $808,000. The
valuation of the warrants and related amortization expense represents
a noncash 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 first quarter of 1998, accrued dividends payable in the amount of
$39,452 and amortization of the beneficial conversion feature of
$138,986 related to the issuance of the Series A Preferred Stock have
been added to the net loss. Both amounts represent noncash
transactions. Basic and diluted loss per share has been calculated on
the basis of net loss applicable to common stock.
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 $6.10 per share or a
floating conversion price. Through the date hereof, no shares of
preferred stock were converted into 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 in May
1998, provide that upon the occurrence of certain events, the Company
at its option, may be required to pay liquidated damages or redeem all
or a portion of the outstanding shares.
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 and its new Rock
City line of computer systems. The Company anticipates that sales of
its VSPA semiconductor package and increased shipments of its Computer
Systems 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, revenues
associated with the cooperative development agreement entered into
with the U.S. Government during 1996 will be limited during 1998 as
the agreement nears its end.
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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 and Computer Systems, to
continue efforts that may lead to the commercialization of additional
products and technologies and to finance other working capital
requirements.
In the event the Company's working capital, as augmented by proceeds
from 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 its Computer Systems or 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. 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.
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. Assuming the reclassification of the Series A
Preferred stock to permanent equity, as of March 31, 1998, the Company
believes it was in compliance with the listing requirements of NMS.
However, in the event the Company is unable to maintain such
requirements in the future, its common stock could be subject to
delisting from the NMS. If this were to occur, the Company's common
stock could be adversely affected and the Company's ability to raise
additional capital could be limited.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Part II - Other Information
Item 1. Legal Proceedings
Not applicable
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Page 13
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. In
connection with this transaction, the Company also issued Common Stock
Purchase Warrants ("Warrants") to purchase an aggregate of 150,000
shares of Common Stock. In the event certain conditions are met, the
Company has the right to cause the issuance of 400 additional shares
of Series A Preferred. The Series A Preferred and Warrants were
issued pursuant to a private placement under Section 4(2) the
Securities Act of 1933.
The Board of Directors of the Company has designated 1,000 shares
of the Preferred Stock as Series A Preferred with the rights,
preferences, privileges and terms set forth in the Company's Fourth
Articles of Amendment of Amended and Restated Articles of
Incorporation ("Articles of Amendment").
Holders of Series A Preferred are entitled to receive a dividend
of 5% per annum of the purchase price of such shares, payable
quarterly, at the option of the Company either in cash or as an
accrual to the purchase price utilized in computing the number of
shares of Series A Preferred issuable on conversion. So long as any
Series A Preferred is outstanding, no dividends may be paid nor shall
any distribution be made, on Common Stock or other shares junior in
rank to the Series A Preferred ("Junior Shares") unless all dividends
for all past quarterly dividend periods have been paid or declared and
a sum of cash or amount of shares sufficient for the payment thereof
set apart.
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series A
Preferred are entitled to receive in cash from the assets of the
Company, before any amount shall be paid to holders of Junior Shares,
an amount per share of Series A Preferred equal to the sum of (i) the
purchase price for such share and (ii) any accrued but unpaid
dividends thereon. If the amounts available for distribution are
insufficient to pay the full amount due to holders of Series A
Preferred, and shares of other classes or series of preferred stock of
the Company that are of equal rank to the Series A Preferred then each
holder of Series A Preferred and such other shares shall receive a
percentage of the amounts available for distribution ratably in
proportion to the respective amounts of such assets to which they
otherwise would be entitled.
Holders of Series A Preferred shall have no voting rights except
as required by law or as specified in the Articles of Amendment.
Pursuant to the Articles of the Amendment, the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A
Preferred is required for (i) any amendment to the Company's Articles
of Incorporation which would alter the rights and preferences of the
Series A Preferred or otherwise impair the rights of the holders of
Series A Preferred relative to the holders of the Common Stock or the
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Page 14
holders of any other class of capital stock, or (ii) any issuance of
more than the 1,000 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 plus accrued dividends are divided by a
conversion price defined as the lower of (i) $6.10, subject to
adjustment in the event of certain dilutive issuances of securities by
the Company or for stock splits or similar events (the "Fixed
Conversion Price"), 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 during 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. The conversion of Series A Preferred into
shares of Common Stock may not occur during the period prior to 120
days after issuance except at the Fixed Conversion Price. All
outstanding Series A Preferred will automatically convert into Common
Stock, at the then applicable conversion price, on the fifth
anniversary of issuance. In addition, the Company has the right to
require that all unconverted shares of Series A Preferred be converted
to Common Stock at any time if the closing bid price of the Common
Stock is equal to $12.00 per share for a period of twenty consecutive
trading days.
In the event of a merger or other transaction which results in
the shareholders of the Company owning less than 50% of the voting
power or common equity of the Company, a transfer by the Company of
all or substantially all of its assets or the fixing of a record date
for the declaration of a distribution or dividend (other than a
dividend payable in Common Stock), the holders of Series A Preferred
may, at their option, participate in any such transaction as a class
with the holders of Common Stock, or may require that the Company
redeem such Series A Preferred at a redemption price equal to 120% of
such holders' purchase price plus accrued but unpaid dividends. In
addition, upon the occurrence of certain "Triggering Events",
including suspension for a period of 30 consecutive days of a
registration statement covering shares issuable upon conversion of
Series A Preferred, 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 notice by the Company to any holder of Series A
Preferred of its intention not comply with proper requests for
conversion of Series A Preferred, each holder of Series A Preferred
shall have the right at such holder's option, to require the Company
to redeem all or a portion of such holder's Series A Preferred shares
at a price (the "Redemption Price") equal to the greater of (i) the
sum of 125% of the purchase price of such Series A Preferred shares
plus any accrued but unpaid dividends thereon and (ii) the product of
the applicable conversion rate for such Series A Preferred multiplied
by the closing bid price of the Common Stock as of the date
immediately preceding such Triggering Event. In no event shall the
Company be obligated to issue upon conversion of the Series A
Preferred, in the aggregate, more than a number of shares of Common
<PAGE>
Page 15
Stock which, when added to the number of shares issuable upon exercise
of the Warrants, shall equal 19.99% of the outstanding shares of
Common Stock of the Company (the "Exchange Cap"). If after the fourth
anniversary of issuance of the Series A Preferred, conversion of the
Series A Preferred would result in the issuance of a number of shares
of Common Stock in excess of the Exchange Cap, and the Company is not
able to secure shareholder approval of such issuance or a waiver of
applicable Nasdaq rules, the Company shall be required within 120 days
thereafter to redeem all of the Series A Preferred at the Redemption
Price, calculated as of the date the holder requested conversion.
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 identical to those of the Series A
Preferred except as generally described in Note 4 to the accompanying
financial statements.
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:
A current report on Form 8-K dated February 11, 1998 was filed
on February 23, 1998 reporting the sale of equity securities pursuant
to Regulation D, an event reported under Item 5.
<PAGE>
Page 16
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: May 20, 1998
By: /s/ C. DARYL HOLLIS
-------------------------
C. Daryl Hollis
Chief Financial Officer
(On behalf of the Registrant
and as Principal Financial
and Accounting Officer)
<PAGE>
Page 17
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
3.1 Fifth Articles of Amendment of Amended and Restated
Articles of Incorporation
27 Financial Data Schedule
- ----------------
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,128,368
<SECURITIES> 0
<RECEIVABLES> 79,549
<ALLOWANCES> 10,006
<INVENTORY> 1,286,117
<CURRENT-ASSETS> 4,317,654
<PP&E> 6,458,957
<DEPRECIATION> 3,518,559
<TOTAL-ASSETS> 7,519,551
<CURRENT-LIABILITIES> 2,528,762
<BONDS> 0
5,448,660
0
<COMMON> 122,306
<OTHER-SE> (580,177)
<TOTAL-LIABILITY-AND-EQUITY> 7,519,551
<SALES> 125,754
<TOTAL-REVENUES> 144,170
<CGS> 160,406
<TOTAL-COSTS> 160,406
<OTHER-EXPENSES> 3,800,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,120
<INCOME-PRETAX> (3,811,033)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,811,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,811,033)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
FIFTH ARTICLES OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF
INCORPORATION OF THE PANDA PROJECT, INC.
Pursuant to the provisions of Section 607.1006 of the Florida
Business Corporation Act, The Panda Project, Inc. (the "Company"),
adopts the following Articles of Amendment to its Amended and Restated
Articles of Incorporation.
FIRST: The name of the Company is The Panda Project, Inc.
SECOND: Article III of the Amended and Restated Articles of
Incorporation of the Company is hereby amended by redesignating
Section B.3 thereof as Section B.4 and by inserting the following as
new Section B.3, which reads as follows:
3. SERIES A CONVERTIBLE PREFERRED STOCK
------------------------------------
One Thousand (1,000) shares of Preferred Stock of the Company are
hereby designated as "Series A-1 Convertible Preferred Stock" (the
"Series A Preferred Shares"), par value $.01 per share, which shall
have the following preferences, limitations and relative rights:
1. DIVIDENDS. (a) The holders of the Series A Preferred Shares
(each a "Holder" and, collectively, the "Holders"), in preference to
the holders of Junior Shares, shall be entitled to receive cash
dividends on each Series A Preferred Share at the rate of 5% per annum
of the Purchase Price (as defined in the Subscription Agreement
hereafter referred to), due and payable quarterly in arrears on the
last day of March, June, September and December of each year (each a
"Dividend Payment Date"), with the first such payment due on March 31,
1998. Accrual of dividends shall commence on the first business day
to occur after February 11, 1998 and shall continue until all of the
Series A Preferred Shares have been converted in full. The dividends
so payable will be paid to the person in whose name the Series A
Preferred Shares (or one of more predecessor Series A Preferred
Shares) are registered on the records of the Company regarding
registration and transfers of the Series A Preferred Shares (the
"Series A Preferred Shares Register"); provided, however, that the
Company's obligation to a transferee of the Series A Preferred Shares
shall arise only if such transfer, sale or other disposition is made
in accordance with the terms and conditions of the Subscription
Agreement dated as of February 11, 1998 between the Company and the
Subscribers thereto (the "Subscription Agreement"). The dividends are
payable in such coin or currency of the United States of America, to
each Holder, at the address last appearing on the Series A Preferred
Shares Register as designated in writing by such Holder of Series A
Preferred Shares from time to time; provided, however, that in lieu of
paying such dividends in coin or currency, the Company may, at its
option, pay dividends on the Series A Preferred Shares for any
Dividend Payment Date by adding the amount of such dividend to the
Purchase Price ("PIK Dividend") pursuant to a statement in the form of
Exhibit 2 hereto ("PIK Statement") delivered by the Company to each of
the Holders on or prior to the applicable Dividend Payment Date. If
neither the cash dividend due hereunder is paid, nor the PIK Statement
is delivered, to the Holders within 10 calendar days of the applicable
Dividend Payment Date, the Company shall no longer have the right to
choose the PIK Dividend option with respect to the dividend payable on
such Dividend Payment Date and each Holder may elect either the cash
dividend or the PIK Dividend hereunder at its option with respect to
the dividend payable on such Dividend Payment Date. Any PIK Dividend
when so added to the Purchase Price shall, for all purposes of this
Certificate of Designations, be deemed to be part of the Purchase
Price for purposes of determining dividends thereafter payable
hereunder and amounts thereafter convertible into Common Stock
hereunder. The Company will pay all accrued and unpaid dividends due
to the person that is the holder of the Series A Preferred Shares on
the records of the Company as of the tenth (10th) day prior to the
applicable payment date and addressed to such Holder at the last
address appearing on the Series A Preferred Shares Register. Except
as otherwise provided herein, dividends due hereunder shall bear
interest, from and after the occurrence and during the continuance of
a failure to declare or pay a dividend hereunder, at the rate equal to
the lower of twenty percent (20%) per annum and the highest rate
permitted by law.
(b) If the stated dividends on the Series A Preferred
Shares are not paid in full, Series A Preferred Shares and all Pari
Passu Shares, if any, shall share ratably in the payment of dividends
on such shares in accordance with the sums which would be payable on
such shares if all dividends were paid in full. So long as any Series
A Preferred Share is outstanding, no dividends whatever shall be paid
or declared, nor shall any distribution be made, on any Junior Shares,
unless all cash dividends or PIK Dividends on Series A Preferred
Shares for all past quarterly dividend periods shall have been paid or
declared and a sum of cash or amount of Series A Preferred Shares
sufficient for the payment thereof set apart.
2. TRANSFERS. The Series A Preferred Shares have been issued
subject to investment representations of the original purchaser
thereof and may be transferred or exchanged in the United States only
in compliance with the registration requirements of the Securities Act
of 1933, as amended (the "Act"), and applicable state securities laws
as an exemption therefrom. Prior to due presentment for transfer of
the Series A Preferred Shares, the Company may treat the person in
whose name the Series A Preferred Shares are duly registered on the
Series A Preferred Shares Register as the owner thereof for the
purpose of receiving payment as herein provided and all other
purposes, and the Company shall not be affected by notice to the
contrary.
3. DEFINITIONS. For purposes hereof the following definitions
shall apply:
"CERTIFICATE OF DESIGNATIONS" shall mean Section B.3 of
Article III of the Company's Amended and Restated Articles of
Incorporation as set forth in these Fifth Articles of Amendment of
Amended and Restated Articles of Incorporation of the Company.
"COMMON STOCK" shall mean the Common Stock, par value $0.01
per share, of the Company.
"CONVERSION DATE MARKET PRICE" shall mean, as of any Holder
Conversion Date or other date of designation, an amount that is equal
to the lesser of, subject to adjustment as provided herein, (a) the
Fixed Conversion Price and (b) that percentage of the average Market
Price for Shares of Common Stock during the five (5) trading days
immediately preceding the Holder Conversion Date equal to (i) 92% if
converted during the period beginning 120 days from the applicable
Issuance Date and ending 180 days from the applicable Issuance Date,
or (ii) 90% if converted at any time after 180 days from the
applicable Issuance Date.
"CONVERSION NOTICE" shall have the meaning set forth in
Paragraph 6(c).
"CONVERSION RATE" shall have the meaning set forth in
Paragraph 6(b).
"FIXED CONVERSION PRICE" shall mean an amount equal to 115%
of the average of the closing bid price per share of Common Stock for
the five (5) trading days immediately preceding the applicable
Issuance Date; provided, however, that in the event that the Company
offers, sells, contracts to sell or otherwise issues or agrees to
issue any securities of the Company, convertible or otherwise, in a
private placement transaction (other than pursuant to any existing
stock or option or similar equity-based compensation plans for
employees, officers, directors or consultants, as hereinafter
amended), with a maximum conversion price per share of Common Stock
of, or in the case of a Common Stock offering a purchase price per
share equal to, an amount less than 115% of the average of the closing
bid price per share of Common Stock for the five (5) trading days
immediately preceding the applicable Issuance Date, then the "Fixed
Conversion Price" shall mean, for any Series A Preferred Shares not
yet converted, such lower conversion price or offer price per share;
and provided, further, that in the event of any stock split,
subdivision, combination, reorganization, exchange, substitution or
reclassification, the Fixed Conversion Price shall be equitably and
appropriately adjusted to reflect such change.
"HOLDER CONVERSION DATE" shall have the meaning set forth in
Paragraph 6(c).
"INITIAL SHARES" shall mean the Old Series A Shares and the
New Series A Shares issued in exchange therefor pursuant to Paragraph
32.
"ISSUANCE DATE" shall mean, with respect to the Initial
Shares, February 11, 1998, and with respect to other Preferred Shares,
the date of issuance of the applicable Preferred Share pursuant to the
Subscription Agreement.
"JUNIOR SHARES" shall have the meaning set forth in
Paragraph 13.
"LIQUIDATION VALUE" shall have the meaning set forth in
Paragraph 13.
"MANDATORY CONVERSION DATE" shall have the meaning set forth
in Paragraph 7(a).
"MARKET PRICE FOR SHARES OF COMMON STOCK" shall mean the
price of one share of Common Stock determined as follows:
(i) If the Common Stock is listed on NASDAQ, the
closing bid price as reported by the Bloomberg Service on the date of
valuation;
(ii) If the Common Stock is listed on a national
securities exchange, the lowest reported bid price on such exchange on
the date of valuation;
(iii) If neither clause (i) nor (ii) above applies but
the Common Stock is quoted in the over-the-counter market on the pink
sheets or bulletin board, the lesser of (A) the lowest sales price or
(B) the lowest reported "bid" price thereof on the date of valuation;
and
(iv) If neither clause (i), (ii) or (iii) above
applies, the market value as determined by a nationally recognized
investment banking firm or other nationally recognized financial
advisor retained by the Company for such purpose, taking into
consideration, among other factors, the earnings history, book value
and prospects for the Company, and the prices at which shares of
Common Stock recently have been traded. Such determination shall be
conclusive and binding on all persons.
"NEW SERIES A SHARES" shall mean the 600 Series A Preferred
Shares to be issued in exchange for the Old Series A Shares upon the
filing hereof.
"OLD SERIES A SHARES" shall mean the 600 shares of Series A
Convertible Preferred Stock originally issued on February 11, 1998.
"PARAGRAPH 4 TRANSACTION" shall mean a merger, consolidation
or other transaction referred to in Paragraph 4.
"PARI PASSU SHARES" shall have the meaning set forth in
Paragraph 13.
"PREFERRED FUNDS" shall have the meaning set forth in
Paragraph 13.
"REGISTRATION RIGHTS AGREEMENT" shall have the meaning set
forth in the Subscription Agreement.
"SUBSCRIPTION AGREEMENT" shall have the meaning set forth on
page 1 of this Certificate of Designations.
"UNDERLYING SHARES" shall mean the Common Stock issuable
upon conversion of the Series A Preferred Shares.
4. PARAGRAPH 4 TRANSACTIONS. (a) If at any time (i) there
occurs any consolidation or merger of the Company with or into any
other corporation or other entity or person (whether or not the
Company is the surviving corporation) or there occurs any other
corporate reorganization or transaction or series of related
transactions, and as a result thereof the shareholders of the Company
pursuant to such merger, consolidation, reorganization or other
transaction own in the aggregate less than 50% of the voting power or
common equity of the ultimate parent corporation or other entity
surviving or resulting from such merger, consolidation, reorganization
or other transaction, (ii) the Company transfers all or substantially
all of the Company's assets to another corporation or other entity or
person or (iii) the Company shall 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) (a "Paragraph
4 Transaction"), then each Holder of Series A Preferred Shares, at
such Holder's option, (a) may participate in any such Paragraph 4
Transaction as a class with common shareholders on the same basis as
if the Series A Preferred Shares had been converted one day prior to
the announcement of such transaction (or record date for such
distribution or dividend), or (b) may require that the Company at its
option (i) pay to the holder as liquidated damages and not as a
penalty an amount equal to 120% of the Holder's Purchase Price of such
Series A Preferred Shares, which amount has been determined to be
reasonable in view of the difficulty of estimating actual damages, or
(ii) redeem such Holder's Series A Preferred Shares at a redemption
price per Series A Preferred Share equal to 120% of such Holder's
Purchase Price of such Series A Preferred Shares, plus accrued but
unpaid dividends to the date of redemption. Any payment of liquidated
damages by the Company may be made in eight equal installments, the
first installment to be paid within ten (10) days after the Paragraph
4 Transaction and the remaining seven installments to be paid on the
last day of each succeeding calendar month thereafter, such
installments to include interest of 8% per annum on the outstanding
balance from the date of the Paragraph 4 Transaction. Notice of the
Holder's election under this Paragraph 4 shall be given not less than
five (5) days prior to the consummation of such Paragraph 4
Transaction, and in the case of a redemption pursuant to clause
(b)(ii), shall include a representation by the Company that the
Company possesses, and will possess, legally available funds
sufficient to consummate such redemption.
5. CONVERSION AT THE OPTION OF THE COMPANY. (a) If, at any time
after the Issuance Date, the closing bid price of the Common Stock is
equal to or greater than $12.00 per share for the twenty (20)
consecutive trading days immediately preceding the date of the
Company's notice of conversion delivered pursuant to Paragraph 5(b)
hereof, the Company may require the Holders to convert the Series A
Preferred Shares, in whole but not in part, provided that: the notice
provisions set forth in Paragraph 5(b) hereof have been complied with;
the Registration Statement for the Common Stock issuable upon
conversion of the Series A Preferred Shares is effective on each day
during the period beginning 20 days prior to the date of the Company's
notice of conversion and ending on and including the date of
conversion; the Common Stock is designated for quotation on the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American
Stock Exchange, Inc. and is not suspended from trading thereon; during
the period beginning on the Issuance Date and ending on and including
the date of conversion, the Company shall have delivered shares of
Common Stock upon conversion of the Series A Preferred Shares on a
timely basis as set forth in Paragraph 6(c) of this Certificate of
Designations; and the Company otherwise has satisfied its obligations
and is not in default under this Certificate of Designations, the
Subscription Agreement or the Registration Rights Agreement.
(b) Notice of the Company's intention to require conversion
shall be given to each Holder of Series A Preferred Shares subsequent
to the twenty (20) consecutive trading day period referred to in
Paragraph 5(a) and not less than sixty (60) days prior to the date of
conversion of the Series A Preferred Shares, by first class mail,
postage prepaid, to such Holder of Series A Preferred Shares at the
address of such Holder; provided, that such 60-day period shall be
extended by the number of days in such period, if any, during which
trading of Common Stock is suspended or otherwise restricted. Each
such notice shall state: (i) a conversion date, which shall be not
less than 60 days following the date of mailing of the notice, (ii)
each Holder's pro rata share of outstanding Series A Preferred Shares
and (iii) the number of the Series A Preferred Shares to be converted.
(c) Notice having been mailed as aforesaid, the Holder
shall convert, on the date specified in the Company's notice, the
maximum of (i) the number of Series A Preferred Shares specified in
the Company's notice and (ii) the number of outstanding Series A
Preferred Shares on such date, in each case at the Conversion Rate
determined in accordance with Paragraph 6(b).
6. CONVERSION OF THE OPTION OF THE HOLDER. A Holder of Series A
Preferred Shares shall have the following conversion rights:
(a) HOLDER'S RIGHTS TO CONVERT. Such Holder's Series A
Preferred Shares shall be convertible at any time after the applicable
Issuance Date, in whole or in part, but at a minimum number of five
Series A Preferred Shares, at the option of such Holder, into fully
paid, validly issued and nonassessable shares of Common Stock. If the
Series A Preferred Shares are converted in part, the remaining portion
of the Series A Preferred Shares not so converted shall remain
entitled to the conversion rights provided herein. Prior to 120 days
subsequent to the applicable Issuance Date, the Holder may so convert
only at the Fixed Conversion Price.
(b) CONVERSION PRICE FOR HOLDER CONVERTED SHARES. Series A
Preferred Shares shall be convertible into the number of shares of
Common Stock which results from application of the following formula:
(P*N) + D
_____________________
Conversion Date Market Price
P = Purchase Price
N = Number of Series A Preferred Shares submitted for conversion
D = accrued but unpaid dividends (not previously added to the
Purchase Price on a PIK Statement) on P as of the Holder
Conversion Date
The number of shares of Common Stock into which each $1,000
aggregate Liquidation Value (as hereinafter defined) of the Series A
Preferred Shares hereto may be converted pursuant to this Paragraph
6(b) is hereafter referred to as the "Conversion Rate."
(c) MECHANICS OF CONVERSION. In order to convert Series A
Preferred Shares (in whole or in part) into full shares of Common
Stock, the Holder thereof shall surrender the certificates
representing the Series A Preferred Shares (the "Preferred Share
Certificates"), duly endorsed, by either overnight courier or 2-day
courier, to the office of the transfer agent for the Series A
Preferred Shares (or to the principal office of the Company if the
Company serves as its own transfer agent), and shall give written
notice in the form of Exhibit 1 hereto (the "Conversion Notice") by
facsimile (with the original of such Notice forwarded with the
foregoing courier) to the office of the designated transfer agent or
the principal office of the Company, as the case may be, that the
Holder elects to convert a number of Series A Preferred Shares (plus
accrued but unpaid dividends) specified therein, which Conversion
Notice shall be irrevocable by the Holder; provided, however, that the
Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the
Preferred Share Certificates are delivered to the Company or its
designated transfer agent as provided above, or the Holder notifies
the Company or its designated transfer agent that such Series A
Preferred Shares have been lost, stolen or destroyed and promptly
executes an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection with
such Series A Preferred Shares.
The Company shall use its best efforts to issue and deliver,
by either overnight courier or two-day courier, within three business
days after delivery to the Company of such Preferred Share
Certificate, or after receipt of such agreement and indemnification,
to such Holder of Series A Preferred Shares at the address of the
Holder, or to its designee (and registered in the name of the Holder
or its designee), a certificate or certificates for the number of
shares of Common Stock to which the Holder shall be entitled as
aforesaid, together with a calculation of the Conversion Rate and the
number of Series A Preferred Shares of such Holder not submitted for
conversion. The effective date of conversion (the "Holder Conversion
Date") shall be deemed to be the date on which the Company receives by
facsimile the Conversion Notice, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such
shares of Common Stock on such date. If the number of Series A
Preferred Shares represented by the Preferred Share Certificate(s)
submitted for conversion is greater than the number of Series A
Preferred Shares being converted, then the Company shall, as soon as
practicable and in no event later than three business days after
receipt of the Preferred Share Certificate(s) and at its own expense,
issue and deliver to the Holder a new Preferred Share Certificate
representing the number of Series A Preferred Shares not converted.
7. MANDATORY CONVERSION DATE. (a) On the date which is the
fifth anniversary of the applicable Issuance Date (the "Mandatory
Conversion Date"), the Company may, at its option, (i) require the
Holders to convert the Series A Preferred Shares which remain
outstanding on such date, in whole but not in part, at the Conversion
Rate determined in accordance with Paragraph 6(b) or (ii) redeem such
shares of Preferred Stock at a price in cash equal to the aggregate
Liquidation Value thereof. Notice of the Company's election under
this Paragraph 7(a) shall be given not less than 30 days prior to the
Mandatory Conversion Date and, in the case of a redemption pursuant to
clause (ii), shall include a representation by the Company that the
Company possesses, and will possess, legally available funds
sufficient to consummate such redemption.
(b) If the Company elects to require conversion of the
Series A Preferred Shares on the Mandatory Conversion Date pursuant to
Paragraph 7(a)(i), the Series A Preferred Shares outstanding at such
time shall be automatically and without notice converted into Common
Stock on the Mandatory Conversion Date in accordance with the terms of
this Certificate of Designations. The Company shall use its best
efforts to issue and deliver to a Holder within three business days
after delivery to the Company by such Holder of such Holder's
Preferred Share Certificates, or after receipt of the agreement and
indemnification described in Paragraph 6(c) above, at the address of
such Holder, or to its designee (and registered in the name of such
Holder or its designee), a certificate or certificates for the number
of shares of Common Stock which such Holder shall be entitled to
receive hereunder, together with a calculation of the Conversion Rate.
The person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on the
Mandatory Conversion Date. The Mandatory Conversion Date shall be a
"Holder Conversion Date" for purposes of this Certificate of
Designations.
8. STOCK SPLITS; DIVIDENDS; ADJUSTMENTS; REORGANIZATIONS.
(a) STOCK SPLITS AND COMBINATIONS. The Company shall not
effect any stock split, subdivision or combination with an effective
date within five (5) trading days of the Mandatory Conversion Date.
(b) ADJUSTMENT OF FIXED CONVERSION PRICE UPON SUBDIVISION
OR COMBINATION OF COMMON STOCK. If the Company at any time subdivides
(by way of stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Fixed Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced.
If the Company at any time combines (by way of combination, reverse
stock split or otherwise) one or more classes of its outstanding
shares of Common Stock into a smaller number of shares, the Fixed
Conversion Price in effect immediately prior to such combination will
be proportionately increased.
(c) CERTAIN DIVIDENDS AND DISTRIBUTIONS. The Company shall
not make, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Common Stock, with an effective date
within five (5) trading days of the Mandatory Conversion Date.
(d) ADJUSTMENT FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In
the event the Company at any time or from time to time after the
Issuance Date makes, or fixes a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other
distribution payable in securities of the Company other than shares of
Common Stock, then and in each such event provision shall be made so
that the Holders of Series A Preferred Shares shall receive upon
conversion thereof pursuant to Paragraph 6 hereof, in addition to the
number of shares of Common Stock receivable thereupon, the amount of
such other securities of the Company to which a Holder on the relevant
record or payment date, as applicable, of the number of shares of
Common Stock so receivable upon conversion would have been entitled,
plus any dividends or other distributions which would have been
received with respect to such securities had such Holder thereafter,
during the period from the date of such event to and including the
Holder Conversion Date, retained such securities, subject to all other
adjustments called for during such period under this Paragraph 8 with
respect to the rights of the Holders of the Series A Preferred Shares.
For purposes of this Paragraph 8(d), the number of shares of Common
Stock so receivable upon conversion by the Holder shall be deemed to
be that number which the Holder would have received upon conversion of
all Series A Preferred Shares held by such Holder if the Holder
Conversion Date had been the day preceding the date upon which the
Company announced the making of such dividend or other distribution.
(e) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION. In the event that at any time or from time to time
after the Issuance Date, the Common Stock issuable upon the conversion
of the Series A Preferred Shares is changed into the same or a
different number of shares of any class or classes of stock or other
securities or property, whether by recapitalization, reclassification
or otherwise (other than a subdivision or combination of shares or
stock dividend or reorganization provided for elsewhere in this
Paragraph 8 or a merger or consolidation provided for in Paragraph 4),
then and in each such event each Holder of Series A Preferred Shares
shall have the right thereafter to convert such Series A Preferred
Shares into the kind and amount of shares of stock or other securities
or property receivable upon such recapitalization, reclassification or
other change by holders of shares of Common Stock, all subject to
further adjustment as provided herein. In such event, the formulae
set forth herein for conversion and redemption shall be equitably
adjusted to reflect such change in number of shares or, if shares of a
new class of stock are issued, to reflect the market price of the
class or classes of stock (applying the same factors used in
determining the Market Price for shares of Common Stock) issued in
connection with the above described transaction.
(f) REORGANIZATIONS. If at any time or from time to time
after the applicable Issuance Date there is a capital reorganization
of the Common Stock (other than a recapitalization, subdivision,
combination, reclassification or exchange of shares provided for
elsewhere in this Paragraph 8) then, as a part of such reorganization,
effective provision shall be made so that the Holders of the Series A
Preferred Shares shall thereafter be entitled to receive upon
conversion of the Series A Preferred Shares the number of shares of
stock or other securities or property to which a holder of the number
of shares of Common Stock deliverable upon such conversion would have
been entitled with respect to such capital reorganization. In any
such case, appropriate adjustment shall be made in the application of
the provisions of this Paragraph 8 with respect to the rights of the
Holders of the Series A Preferred Shares after the reorganization to
the end that the provisions of this Paragraph 8 shall be applicable
after that event and be as nearly equivalent as may be practicable,
including, by way of illustration and not limitation, by equitable
adjustment of the formulae set forth herein for conversion and
redemption to reflect the market price of the securities or property
(applying the same factors used in determining the Market Price for
Shares of Common Stock) issued in connection with the above described
transaction.
(g) DISPUTE RESOLUTION. In the event of a dispute between
a Holder of Series A Preferred Shares and the Company with respect to
any of the adjustments required pursuant to the provisions of this
Paragraph 8, then the Series A Preferred Shares shall be converted in
a manner consistent with the Schedule of Computations delivered as set
forth in paragraph (h) below, and the Company shall immediately
deliver to the Holder that number of Series A Preferred Shares
consistent with such Schedule of Computations. Such Holder of Series
A Preferred Shares shall then be entitled, within 60 days of receipt
of the Schedule of Computations, to submit such dispute to the
American Arbitration Association for resolution according to then
applicable rules thereof, which determination shall be final and
binding. If it shall be determined that a Holder of Series A
Preferred Shares should have received additional shares of Common
Stock upon such conversion (the "Undelivered Shares") then, within
three trading days of receipt of written notice of such determination,
the Company shall issue to such Holder that number of additional
shares of Common Stock as shall have a value, based upon the then
Market Price for Shares of Common Stock, as shall equal the
Undelivered Shares times the Market Price for Shares of Common Stock
on the date of conversion. The cost of such proceeding shall be
shared 50% by the Holder or Holders of Series A Preferred Shares
involved in such dispute and 50% by the Company, except that the
prevailing party, as determined by the arbitrator presiding over the
arbitration, shall be entitled to recover reasonable attorney's fees,
in addition to other costs and expenses and any other available
remedy.
(h) SCHEDULE OF COMPUTATIONS. All adjustments pursuant to
this Paragraph 8 shall be notified in writing to the Holders of Series
A Preferred Shares within three (3) trading days of the occurrence
thereof and such notice shall be accompanied by a schedule of
computations setting forth in detail the calculations used to
determine such adjustments ("Schedule of Computations"). If so
requested by a Holder of Series A Preferred Shares, the Company shall
provide to such Holder within ten (10) trading days of its request
therefor a certification of concurrence to the Schedule of
Computations by the independent public accountants of the Company.
9. FRACTIONAL SHARES. No fractional shares of Common Stock or
scrip representing fractional shares of Common Stock shall be issuable
hereunder. The number of shares of Common Stock that are issuable
upon any conversion shall be rounded up or down to the nearest whole
share.
10. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company
shall reserve and keep available at all times out of its authorized
and unissued Common Stock, free of preemptive rights, such number of
shares of Common Stock as shall be sufficient to enable the Company to
satisfy any obligation to issue shares of Common Stock upon conversion
of all of the Series A Preferred Shares pursuant hereto.
11. TAXES. The Company shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of Common
Stock upon conversion of the Series A Preferred Shares.
12. VOTING RIGHTS. Holders of Series A Preferred Shares shall
have no voting rights, except as required by law, including but not
limited to the General Corporation Act of the State of Florida, and as
expressly provided in this Certificate of Designations.
13. LIQUIDATION, DISSOLUTION, WINDING-UP. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Series A Preferred Shares shall be
entitled to receive in cash out of the assets of the Company, whether
from capital or from earnings available for distribution to its
shareholders (the "Preferred Funds"), before any amount shall be paid
to the holders of any of the capital stock of the Company of any class
junior in rank to the Series A Preferred Shares (the "Junior Shares")
in respect of the preferences as to the distributions and payments on
the liquidation, dissolution and winding up of the Company, an amount
per Series A Preferred Share equal to the sum of (i) the Purchase
Price and (ii) any accrued but unpaid dividends (such sum being
referred to as the "Liquidation Value"); provided that, if the
Preferred Funds are insufficient to pay the full amount due to the
holders of Series A Preferred Shares and holders of shares of other
classes or series of preferred stock of the Company that are of equal
rank with the Series A Preferred Shares as to payments of Preferred
Funds (the "Pari Passu Shares"), then each holder of Series A
Preferred Shares and Pari Passu Shares shall receive a percentage of
the Preferred Funds equal to the full amount of Preferred Funds
payable to such holder as a liquidation preference, in accordance with
their respective Certificate of Designations, Preferences and Rights,
as a percentage of the full amount of Preferred Funds payable to all
holders of Series A Preferred Shares and Pari Passu Shares. The
purchase or redemption by the Company of stock of any class, in any
manner permitted by law, shall not, for the purposes hereof, be
regarded as a liquidation, dissolution or winding up of the Company.
Neither the consolidation or merger of the Company with or into any
other person, nor the sale or transfer by the Company of substantially
all or less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution or winding
up of the Company. No holder of Series A Preferred Shares shall be
entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Company other than the
amounts provided for herein.
14. PREFERRED RANK. All shares of Common Stock shall be of
junior rank to all Series A Preferred Shares in respect to the
preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Company. The rights of the shares
of Common Stock shall be subject to the preferences and relative
rights of the Series A Preferred Shares. Without the prior express
written consent of the Holders of not less than two-thirds (2/3) of
the then outstanding Series A Preferred Shares, the Company shall not
hereafter authorize or issue additional or other capital stock that is
of senior rank to the Series A Preferred Shares in respect of the
preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Company. Without the prior express
written consent of the Holders of not less than two-thirds (2/3) of
the then outstanding Series A Preferred Shares, the Company shall not
hereafter authorize or make any amendment to the Company's Articles of
Incorporation or by-laws, or file any resolution of the board of
directors of the Company with the Secretary of State of the State of
Florida, containing any provisions which would adversely affect or
otherwise impair the rights or relative priority of the holders of the
Series A Preferred Shares relative to the holders of the Common Stock
or the holders of any other class of capital stock. Unless the
Company shall comply with Paragraph 4 above, in the event of the
merger or consolidation of the Company with or into another
corporation, the Series A Preferred Shares shall maintain their
relative powers, designations and preferences provided for herein.
15. RESTRICTION ON REDEMPTION AND CASH DIVIDENDS WITH RESPECT TO
OTHER CAPITAL STOCK. Until all of the Series A Preferred Shares have
been converted or redeemed as provided herein, the Company shall not,
directly or indirectly, redeem, or declare or pay any cash dividend or
distribution on, its Common Stock without the prior express written
consent of the Holders of not less than two-thirds (2/3) of the then
outstanding Series A Preferred Shares.
16. LIMITATION ON NUMBER OF CONVERSION SHARES. The Company
shall not be obligated to issue upon conversion of the Series A
Preferred Shares, in the aggregate, more than a number of shares of
Common Stock which, when added to the number of shares issuable upon
exercise of the warrants to purchase up to 250,000 shares of Common
Stock issued in connection with the Series A Preferred Shares, shall
equal 19.99% (such percentage to be appropriately adjusted in the
event of any change in the regulations of the Nasdaq National Market
or other principal securities exchange or market upon which the Common
Stock is or becomes traded) of the number of shares of Common Stock
outstanding on the Issuance Date (such amount to be proportionately
and equitably adjusted from time to time in the event of stock splits,
stock dividends, combinations, reverse stock splits,
reclassifications, capital reorganizations and similar events relating
to the Common Stock) (the "Exchange Cap"), if issuance of a greater
number of shares of Common Stock would constitute a breach of the
Company's obligations under the rules or regulations of The Nasdaq
Stock Market, Inc. or any other principal securities exchange or
market upon which the Common Stock is or becomes traded. The Exchange
Cap shall be allocated among the Series A Preferred Shares pro rata
based on the total number of authorized Series A Preferred Shares. In
the event that the Company does not issue Common Stock to a Holder of
Series A Preferred Shares pursuant to this Section 16, such Holder may
then make an election pursuant to Paragraph 26.
17. VOTE TO CHANGE THE TERMS OF OR ISSUE SERIES A PREFERRED
SHARES. The affirmative vote at a meeting duly called for such
purpose or the written consent without a meeting, of the Holders of
not less than two-thirds (2/3) of the then outstanding Series A
Preferred Shares, shall be required for the following actions to be
taken by the Company: (1) any change to this Certificate of
Designations or the Company's Articles of Incorporation which would
amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Series A Preferred Shares or otherwise
impair the rights or relative priority of the Holders of the Series A
Preferred Shares relative to the holders of the Common Stock or the
holders of any class of capital stock, or (2) any issuance of Series A
Preferred Shares other than pursuant to the Subscription Agreement.
18. NO REISSUANCE OF SERIES A PREFERRED SHARES. No Series A
Preferred Shares acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such
Series A Preferred Shares shall be retired. No additional shares of
Series A Convertible Preferred Stock shall be authorized or issued in
addition to the Preferred Shares without the consent of at least 66
2/3% in interest of the Holders of Series A Preferred Shares
outstanding immediately prior thereto.
19. NO IMPAIRMENT. The Company shall not intentionally take any
action which would impair the rights and privileges of the Series A
Preferred Shares set forth herein or the Holders thereof.
20. LIMITATIONS ON HOLDER'S RIGHT TO CONVERT. Notwithstanding
anything to the contrary contained herein, each Conversion Notice
shall contain a representation that, after giving effect to the
issuance of the shares of Common Stock pursuant to such conversion
notice, the total number of shares of Common Stock deemed beneficially
owned by the Holder (excluding shares that might otherwise be deemed
beneficially owned by reason of the conversion right in the Series A
Preferred Shares owned by the Holder), together with all shares of the
Common Stock deemed beneficially owned by the Holder's "affiliates" as
defined in Rule 144 of the Act, will not exceed 4.9% of the total
issued and outstanding shares of Common Stock.
21. REGISTRATION SUSPENSION. In the event that at any time or
from time to time the effectiveness of any registration statement with
respect to the Common Stock issuable upon conversion of the Series A
Preferred Shares is suspended or trading in the Common stock on the
New York Stock Exchange or the NASDAQ National Market System is
suspended for a period of time ("Blackout Period"), the Mandatory
Conversion Date hereunder shall be extended for a period equal to 1.5
times the number of days in such Blackout Period. Furthermore,
additional provisions pertaining to the suspension of effectiveness of
such registration statement set forth in Section 6 of the Registration
Rights Agreement shall be applicable in the event of a Blackout Period
and are specifically incorporated by reference herein.
22. WAIVERS OF DEMAND, ETC. The Company hereby expressly waives
demand and presentment for payment, notice of nonpayment, protest,
notice of protest, notice of dishonor, notice of acceleration or
intent to accelerate, bringing of suit and diligence in taking any
action to collect amounts called for hereunder and will be directly
and primarily liable for the payment of all sums owing and to be owing
hereunder, regardless of and without any notice, diligence, act or
omission as or with respect to the collection of any amount called for
hereunder.
23. REPLACEMENT SERIES A PREFERRED SHARES. In the event that
any Holder notifies the Company that its Series A Preferred Shares
have been lost, stolen or destroyed, a replacement certificate
identical in all respects to the original certificate (except for
registration number and Purchase Price, if different than that shown
on the original certificate) shall be promptly issued by the Company
to such Holder, provided that the Holder executes and delivers to the
Company an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection with
such Series A Preferred Shares.
24. PAYMENT OF EXPENSES. The Company agrees to pay all
reasonable debts and expenses, including reasonable attorneys' fees,
which may be incurred by the Holder in enforcing the provisions of
this Certificate of Designations, the Subscription Agreement, the
Warrants (as defined in the Subscription Agreement) or the
Registration Rights Agreement.
25. ADDITIONAL RIGHTS.
(a) LIQUIDATED DAMAGES OR REDEMPTION OPTION UPON TRIGGERING
EVENT. In addition to all other rights of the Holders of Series A
Preferred Shares contained herein, after a Triggering Event (as
defined below), each Holder of Series A Preferred Shares shall have
the right, at such Holder's option, to require that the Company at its
option (i) pay to the Holder as liquidated damages and not as a
penalty an amount equal to the greater of (A) 125% of the Holder's
Purchase Price of such Series A Preferred Shares, which amount has
been determined to be reasonable in view of the difficulty of
estimating actual damages, and (B) the product of (1) the Conversion
Rate at such time and (2) the closing bid price of the Common Stock
calculated as of the date immediately preceding such Triggering Event
on which the exchange or market on which the Common Stock is traded is
open (the "Liquidated Damages Amount") , or (ii) redeem such Holder's
Series A Preferred Shares at a redemption price per Preferred Share
equal to the greater of (A) the sum of (1) 125% of the Purchase Price
of the Series A Preferred Shares and (2) any accrued but unpaid
dividends, and (B) the product of (1) the Conversion Rate at such time
and (2) the closing bid price of the Common Stock calculated as of the
date immediately preceding such Triggering Event on which the exchange
or market on which the Common Stock is traded is open ("Redemption
Price"). Any payment of liquidated damages by the Company may be made
in eight equal installments, the first installment to be paid within
ten (10) days after the Triggering Event and the remaining seven
installments to be paid on the last day of each succeeding calendar
month thereafter, such installments to include interest of 8% per
annum on the outstanding balance from the date of the Triggering
Event.
(b) "TRIGGERING EVENT". A "Triggering Event" shall be
deemed to have occurred at such time as any of the following events:
(i) while a Registration Statement is required to be
maintained effective pursuant to the terms of the
Registration Rights Agreement, the effectiveness of
such Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop
order) or is unavailable to the Holder of the Series A
Preferred Shares for sale of the Registrable Securities
(as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights
Agreement, and such lapse or unavailability continues
for a period of thirty consecutive trading days;
(ii) the failure of the Common Stock to be listed or the
suspension of trading of the Common Stock on the Nasdaq
National Market, The Nasdaq SmallCap Market, The New
York Stock Exchange, Inc. or The American Stock
Exchange, Inc. for a period of five consecutive days;
(iii) the Company's notice to any Holder of Series A
Preferred Shares, including by way of public
announcement, at any time, of its intention not to
comply with proper requests for conversion of any
Series A Preferred Shares into shares of Common Stock,
including due to any of the reasons set forth in
Paragraph 26(a) below.
(c) MECHANICS OF LIQUIDATED DAMAGES PAYMENT OR REDEMPTION
UPON TRIGGERING EVENT. Within one (1) day after the occurrence of a
Triggering Event, the Company shall deliver written notice thereof via
facsimile and overnight courier ("Notice of Triggering Event") to each
Holder of Series A Preferred Shares. At any time after receipt of a
Notice of Triggering Event, any Holder of the Series A Preferred
Shares then outstanding may, subject to Section 26 below, require the
Company to elect payment of damages or redemption by delivering
written notice thereof via facsimile and overnight courier ("Notice of
Buyer Upon Triggering Event") to the Company, which Notice of Buyer
Upon Triggering Event shall indicate (i) the number of Series A
Preferred Shares that such Holder is submitting for redemption, should
the Company elect redemption, and (ii) the applicable Triggering Event
Redemption Price, as calculated pursuant to Paragraph 25(a) above.
Notwithstanding the foregoing, if (A) the Triggering Event is one
described in Paragraph 25(b)(i) above, and (B) such lapse discontinues
and a Holder of Series A Preferred Shares receives notice from the
Company that the lapse in the effectiveness of the Registration
Statement no longer continues prior to such Holder's delivery to the
Company of the Holder's Notice of Buyer Upon Triggering Event, then
the Holder shall no longer have the right to deliver a Notice of Buyer
Upon Triggering Event to the Company with respect to such lapse.
26. INABILITY TO FULLY CONVERT.
(a) HOLDER'S OPTION IF COMPANY CANNOT FULLY CONVERT. If,
upon the Company's receipt of a Conversion Notice, the Company does
not issue shares of Common Stock registered for resale under the
Registration Statement for any reason, including, without limitation,
because the Company (x) does not have a sufficient number of shares of
Common Stock authorized and available, (y) is otherwise prohibited by
applicable law or by the rules or regulations of any stock exchange,
interdealer quotation system or other self-regulatory organization
with jurisdiction over the Company or its securities, including
without limitation the Exchange Cap (as defined herein), from issuing
all of the Common Stock which is to be issued to a Holder of Series A
Preferred Shares pursuant to a Conversion Notice or (z) fails to have
a sufficient number of shares of Common Stock registered for resale
under the Registration Statement, then the Company shall issue as many
shares of Common Stock as it is able to issue in accordance with such
Holder's Conversion Notice and, if such condition remains unremedied
for a period of thirty days after the Company's receipt of a
Conversion Notice with respect to the unconverted Series A Preferred
Shares, the Holder, solely at such Holder's option, can elect to: (i)
require that the Company at its option (I) pay to the holder as
liquidated damages and not as a penalty an amount equal to the
Liquidated Damages Amount, calculated as of such Conversion Date (as
opposed to the date referred to in Paragraph 25(a) above), which
amount has been determined to be reasonable in view of the difficulty
of estimating actual damages, or (II) redeem such Holder's Series A
Preferred Shares for which the Company is unable to issue Common Stock
in accordance with such Holder's Conversion Notice ("Mandatory
Redemption") at a redemption price per Preferred Share (the "Mandatory
Redemption Price") equal to the Redemption Price calculated as of such
Conversion Date (as opposed to the date referred to in Paragraph 25(a)
above); (ii) if the Company's inability to fully convert Series A
Preferred Shares is pursuant to Paragraph 26(a)(z) above, require the
Company to issue restricted shares of Common Stock in accordance with
such Holder's Conversion Notice; or (iii) void its Conversion Notice
and retain or have returned, as the case may be, the nonconverted
Series A Preferred Shares that were to be converted pursuant to such
Holder's Conversion Notice; provided, that, prior to the fourth
anniversary of the Initial Closing Date (as defined in the
Subscription Agreement), the Holder shall not have the right to elect
to require the Company to pay liquidated damages or redeem Series A
Preferred Shares pursuant to subsection (i) of this Paragraph 26(a) in
the event the Company is prohibited by the Exchange Cap from issuing
all of the Common Stock which is to be issued to a Holder of Series A
Preferred Shares pursuant to a Conversion Notice pursuant to
subsection (y) of this Paragraph 26(a) and, on and after such fourth
anniversary, the Holder shall have such right of redemption only if
the Company shall have failed to satisfy its obligations under the
rules or regulations of The Nasdaq Stock Market, Inc. or any other
principal securities exchange or market upon which the Common Stock is
or becomes traded for a period of 120 days after the Holders and their
respective "affiliates" shall have acquired a number of shares of
Common Stock equal to the Exchange Cap, which 120-day period shall
begin no earlier than such fourth anniversary. The Company agrees to
use its best efforts to satisfy the foregoing obligations in order to
issue a number of shares of Common Stock in excess of the Exchange Cap
in the event that the Conversion Rate shall not exceed $2.50 for
thirty (30) consecutive trading days subsequent to the aforementioned
120-day period. In addition to the foregoing, the rate of dividend on
all of the Series A Preferred Shares (including Series A Preferred
Shares for which a Conversion Notice has not yet been sent), shall, to
the maximum extent permitted by law, be permanently increased by two
percent (2%) (i.e., from 5% to 7%) commencing on the first day of the
thirty (30) day period (or part thereof) following the receipt of a
Conversion Notice; an additional two percent (2%) commencing on the
first day of each of the second and third such thirty (30) day periods
(or part thereof); and an additional one percent (1%) on the first day
of each consecutive thirty (30) day period (or part thereof)
thereafter until such securities have been duly converted or redeemed
as herein provided; provided that in no event shall the rate of
dividend exceed the lower of 20% and the highest rate permitted by
applicable law. Any such dividend which is not paid when due shall,
to the maximum extent permitted by law, accrue dividends until paid at
the rate from time to time currently equal to the dividend rate on the
Series A Preferred Shares. Any payment of liquidated damages by the
Company may be made in eight equal installments, the first installment
to be paid within ten (10) days after the Triggering Event and the
remaining seven installments to be paid on the last day of each
succeeding calendar month thereafter, such installments to include
interest of 8% per annum on the outstanding balance from the date of
the event giving rise to the payment of liquidated damages under this
Paragraph 26 (a "Paragraph 26 Event").
(b) MECHANICS OF FULFILLING HOLDERS ELECTION. The Company
shall immediately send via facsimile to a Holder of Series A Preferred
Shares, upon receipt of a facsimile copy of a Conversion Notice from
such Holder which cannot be fully satisfied as described in Paragraph
26(a) above, a notice of the Company's inability to fully satisfy such
Holder's Conversion Notice (the "Inability to Fully Convert Notice").
Such Inability to Fully Convert Notice shall indicate (i) the reason
why the Company is unable to fully satisfy such Holder's Conversion
Notice, (ii) the number of Series A Preferred Shares which cannot be
converted, and (iii) the applicable Mandatory Redemption Price. Such
Holder must within ten (10) business days of receipt of such Inability
to Fully Convert Notice deliver written notice via facsimile to the
Company ("Notice in Response to Inability to Convert") of its
election pursuant to Paragraph 26(a) above.
(c) PRO-RATA CONVERSION AND REDEMPTION. In the event the
Company receives a Conversion Notice from more than one Holder of
Series A Preferred Shares on the same day and the Company can convert
and redeem some, but not all, of the Series A Preferred Shares
pursuant to this Paragraph 26, the Company shall convert and redeem
from each Holder of Series A Preferred Shares electing to have Series
A Preferred Shares converted and redeemed at such time an amount equal
to such Holder's pro-rata amount (based on the number of Series A
Preferred Shares held by such Holder relative to the number of Series
A Preferred Shares outstanding) of all Series A Preferred Shares being
converted and redeemed at such time; provided, that no redemption
shall be required if the Company elects to pay liquidated damages
pursuant to Section 26(a)(i)(I).
27. PAYMENT OF REDEMPTION PRICE. Upon the Company's receipt of
a Notice(s) of Buyer Upon Triggering Event from any Holder of Series A
Preferred Shares, the Company shall immediately notify each Holder of
Series A Preferred Shares by facsimile of the Company's receipt of
such Notice(s) Option of Buyer Upon Triggering Event and each Holder
which has sent such a Notice shall promptly submit to the Company or
its designated transfer agent such Holder's Preferred Share
Certificates which such Holder has elected to have redeemed. Subject
to the last sentence of this Paragraph 27, the Company shall deliver
the applicable Redemption Price to such Holder within ten business
days after the Company's receipt of the requisite notices required to
effect a redemption; provided that a Holder's Preferred Share
certificates shall have been so delivered to the Company or its
designated transfer agent; provided further that if the Company is
unable to redeem all of the Series A Preferred Shares to be redeemed,
the Company shall redeem an amount from each Holder of Series A
Preferred Shares being redeemed equal to such Holder's pro-rata amount
(based on the number of Series A Preferred Shares held by such Holder
relative to the number of Series A Preferred Shares outstanding) of
all Series A Preferred Shares being redeemed. If the Company shall
fail to redeem all of the Series A Preferred Shares submitted for
redemption (other than pursuant to a dispute as to the arithmetic
calculation of the Redemption Price), in addition to any remedy such
Holder of Series A Preferred Shares may have under this Certificate of
Designations and the Subscription Agreement, the applicable Redemption
Price payable in respect of such unredeemed Series A Preferred Shares
shall bear interest at the lesser of the highest rate permitted by law
and the rate of 2.0% per month (prorated for partial months) until
paid in full. Until the Company pays such unpaid applicable
Redemption Price in full to a Holder of Series A Preferred Shares
submitted for redemption, such Holder shall have the option (the "Void
Optional Redemption Option") to, in lieu of redemption, require the
Company to promptly return to such Holder(s) all of the Series A
Preferred Shares that were submitted for redemption by such Holder(s)
under this Paragraph 27 and for which the applicable Redemption Price
has not been paid, by sending written notice thereof to the Company
via facsimile (the "Void Optional Redemption Notice"). Upon the
Company's receipt of such Void Optional Redemption Notice(s) and prior
to payment of the full applicable Redemption Price to such Holder, (i)
the Notice(s) of Redemption at Option of Buyer Upon Triggering Event
shall be null and void with respect to those Series A Preferred Shares
submitted for redemption and for which the applicable Redemption Price
has not been paid, (ii) the Company shall immediately return any
Series A Preferred Shares submitted to the Company by each Holder for
redemption under this Paragraph 27 and for which the applicable
Redemption Price has not been paid, (iii) the Fixed Conversion Price
of such returned Series A Preferred Shares shall be adjusted to the
lesser of (A) the Fixed Conversion Price as in effect on the date on
which the Void Optional Redemption Notice(s) is delivered to the
Company and (B) the lowest closing bid price of the Common Stock
during the period beginning on the date on which the Notice(s) of
Buyer Upon Triggering Event is delivered to the Company and ending on
the date on which the Void Optional Redemption Notice(s) is delivered
to the Company; provided that no adjustment shall be made if such
adjustment would result in an increase of the Fixed Conversion Price
then in effect. Payment of redemption pursuant to this Paragraph 27
shall be inapplicable in the event the Company elects to pay
liquidated damages pursuant to Paragraph 25(a) or 27(a)(i)(I). Any
Holder who receives the full amount of liquidated damages which such
Holder is entitled to receive pursuant to Paragraph 4, 25 or 26 as a
result of a Paragraph 4 Transaction, a Triggering Event or a Paragraph
26 Event shall no longer have the right to receive liquidated damages
or to compel redemption of such Holder's Series A Preferred Shares in
the event of a subsequent Paragraph 4 Transction, Triggering Event or
Paragraph 26 Event. In addition, if the Company has commenced payment
of liquidated damages due to a Paragraph 4 Transaction, Triggering
Event or Paragraph 26 Event, it will still have the right to redeem
Series A Preferred Shares by paying the full redemption price payable
under Paragraph 4, Paragraph 25 or Paragraph 26, as the case may be,
and upon payment of such full redemption price, the Company's
obligation to continue paying such liquidated damages shall cease.
28. SAVINGS CLAUSE. In case any provision of this Certificate
of Designations is held by a court of competent jurisdiction to be
excessive in scope or otherwise invalid or unenforceable, such
provision shall be adjusted rather than voided, if possible, so that
it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Certificate of
Designations will not in any way be affected or impaired thereby.
29. ENTIRE AGREEMENT. This Certificate of Designations, the
Subscription Agreement, the Warrant, the Registration Rights Agreement
and the agreements referred to in this Certificate of Designations
constitute the full and entire understanding and agreement between the
Company and the Holder with respect to the subject hereof. Neither
this Certificate of Designations nor any term hereof may be amended,
waived, discharged or terminated other than by a written instrument
signed by the Company and the Holder.
30. ASSIGNMENT, ETC. The Holder may, subject to compliance with
the Subscription Agreement and to applicable Federal and state
securities laws, transfer or assign the Series A Preferred Shares or
any interest therein and may mortgage, encumber or transfer any of its
rights or interest in and to the Series A Preferred Shares or any part
hereof and, without limitation, each assignee, transferee and
mortgagee (which may include any affiliate of the Holder) shall have
the right to transfer or assign its interest. Each such assignment
shall be of a minimum of ten (10) Series A Preferred Shares, or shall
be all of the Holder's Series A Preferred Shares. Each such assignee,
transferee and mortgagee shall have all of the rights of the Holder
under this Certificate of Designations. The Company agrees that,
subject to compliance with the Subscription Agreement, after receipt
by the Company of written notice of assignment from the Holder or from
the Holder's assignee, all amounts which then and thereafter become
due under this Certificate of Designations shall be paid to such
assignee at the place of payment designed in such notice. This
Certificate of Designations shall be binding upon the Company and its
successors and shall insure to the benefit of the Holder and its
successors and assigns.
31. NO WAIVER. No failure on the part of the Holder to
exercise, and no delay in exercising, any right, remedy or power
hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise by the Holder of any right, remedy or power hereunder
preclude any other or future exercise of any other right, remedy or
power. Each and every right, remedy or power hereby granted to the
Holder or allowed it by law or other agreement shall be cumulative and
not exclusive of any other, and may be exercised by the Holder from
time to time.
32. MISCELLANEOUS. Unless otherwise provided herein, any notice
or other communication to a party hereunder shall be sufficiently
given if in writing and personally delivered or mailed to said party
by certified mail, return receipt requested, at its address set forth
herein or such other address as either may designate for itself in
such notice to the other and communications shall be deemed to have
been received when delivered personally or, if sent by mail or
facsimile, then when actually received by the party to whom it is
addressed. Immediately upon filing of this Fifth Articles of
Amendment, the New Series A Shares shall be deemed to have been issued
in exchange for the Old Series A Shares and references herein to
Series A Preferred Shares shall be be deemed to be references to New
Series A Shares. Each holder of a certificate representing Old Series
A Shares shall be entitled to exchange such certificate for a new
certificate representing New Series A Shares, but the failure to
effect such an exchange of certificates shall not impair such
holder's rights as a holder of New Series A Shares. Whenever the
sense of this Fifth Articles of Amendment requires, words in the
singular shall be deemed to include the plural and words in the plural
shall be deemed to include the singular. If more than one Company is
named herein, the liability of each shall be joint and several.
Paragraph headings are for convenience only and shall not affect the
meaning of this document.
THIRD: The amendment was duly adopted by the directors of
the Company on May 14, 1998, without shareholder action, which was not
required for effectiveness pursuant to Section 607.0602 of the Florida
Business Corporation Act.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: May 14, 1998
THE PANDA PROJECT, INC.
By: /s/ Stanford W. Crane, Jr.
-----------------------------
Print Name: Stanford W. Crane, Jr.
Print Title: President & CEO
Print Address: 901 Yamato Road
Boca Raton, FL 33431
ATTEST
C. Daryl Hollis
- -------------------------
Secretary
EXHIBIT 1
(To be Executed by Registered Holder
in order to Convert Series A Preferred Shares)
CONVERSION NOTICE
-----------------
FOR
---
SERIES A CONVERTIBLE PREFERRED STOCK
------------------------------------
The undersigned, as Holder of __ shares of Series A Convertible
Preferred Stock of The Panda Project, Inc. (the "Company"), Nos.
_________ (the "Series A Preferred Shares"), hereby irrevocably elects
to convert the Series A Preferred Shares into shares of Common Stock,
par value $.01 per share (the "Common Stock"), of the Company
according to the conditions of the Certificate of Designations,
Preferences and Rights of the Series A Preferred Shares, as of the
date written below. The undersigned hereby requests that share
certificates for the Common Stock to be issued to the undersigned
pursuant to this Conversion Notice be issued in the name of, and
delivered to, the undersigned or its designee as indicated below. If
shares are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with
respect thereto. No fee will be charged to the Holder for any
conversion, except for transfer taxes, if any.
The undersigned represents that, after giving effect to the shares of
the Common Stock to be issued pursuant to such conversion notice, the
total number of shares of Common Stock deemed beneficially owned by
the undersigned, together with all shares of Common Stock deemed
beneficially owned by the undersigned's "affiliates" as defined in
Rule 144 of the Act, will not exceed 4.9% of the total issued and
outstanding shares of Common Stock.
Conversion Information: NAME OF HOLDER:
By: _________________________
Print Name:
Print Title:
Print Address of Holder: _________________________
Issue Common Stock to: _________________________
at: _________________________
Date of Conversion _______________
Applicable Conversion Rate
EXHIBIT 2
PIK STATEMENT
Date: _____________
To: [Name of Holder of Series A Preferred Shares]("Holder")
Re: Series A Convertible Preferred Stock ("Series A Preferred
Shares") of The Panda Project, Inc. (the "Company") Nos.
________.
In lieu of paying dividends on the above-referenced Series A Preferred
Shares in coin or currency, the Company hereby elects to pay dividends
on the Series A Preferred Shares, for the Dividend Payment Date
indicated below, by having the amount of such dividends added to the
Purchase Price of the Series A Preferred Shares. The Company hereby
certifies to the Holder, its successors and assigns, that the Purchase
Price of the Series A Preferred Shares after delivery of this PIK
Statement equals the amount indicated below. Capitalized terms used in
this PIK Statement and not otherwise defined shall have the meaning
ascribed thereto in the Certificate of Designations for the Series A
Preferred Shares.
Dividend Payment Date: ________________
Purchase Price prior to issuance
of this PIK Statement: US$_____________
PIK Dividend: US$_____________
Purchase Price After
issuance of this PIK Statement: US$_____________
IN WITNESS WHEREOF, this PIK Statement has been duly
executed and delivered on the date first written above.
THE PANDA PROJECT, INC.
By: __________________________
Print Name:
Print Title:
