United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q/A
[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
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THE PANDA PROJECT, INC.
Index
Page
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Condensed Balance Sheets - March 31, 1998,
December 31, 1997 and Pro Forma March 31, 1998 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 6-11
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 15
Part II - Other Information
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 19
Item 4 - Submission of Matters to Vote of Security Holders 19
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
Signatures 19
Exhibit Index 20
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<TABLE>
The Panda Project, Inc.
Condensed Balance Sheets
<CAPTION>
Pro Forma
March 31, December 31, March 31,
1998 1997 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,128,368 $ 619,683 $ 2,128,368
Accounts receivable-trade (net of allowance
of $10,006 at March 31, 1998 and
December 31, 1997) 69,543 224,851 69,543
Inventory 1,286,117 965,199 1,286,117
Other receivables 141,015 105,825 141,015
Prepaid expenses and other current assets 321,036 378,242 321,036
----------- ----------- -----------
Total current assets 3,946,079 2,293,800 3,946,079
----------- ----------- -----------
Property and equipment, net 2,940,398 2,818,218 2,940,398
Restricted cash 260,000 260,000 260,000
Debt issuance costs, net - 340,513 -
Other assets 1,499 1,299 1,499
----------- ----------- -----------
Total assets $ 7,147,976 $ 5,713,830 $ 7,147,976
=========== =========== ===========
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES, AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,614,698 $ 1,651,540 $ 1,614,698
Notes payable - 1,000,000 -
Accrued expenses and other current liabilities 914,064 964,586 914,064
----------- ----------- -----------
Total current liabilities 2,528,762 3,616,126 2,528,762
----------- ----------- -----------
Mandatorily 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 - -
----------- ----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value, 2,000,000
shares authorized: 1,000 shares designated
as Series A, no shares issued at
December 31, 1997 and 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 122,306 122,155 122,306
Additional paid-in capital 65,724,834 64,841,102 65,724,834
Accumulated deficit (66,676,586) (62,865,553) (66,676,586)
----------- ----------- -----------
Total stockholders' equity (deficit) (829,446) 2,097,704 4,619,214
----------- ----------- -----------
Total liabilities, mandatorily redeemable
securities and common stockholders' equity $ 7,147,976 $ 5,713,830 $ 7,147,976
=========== =========== ===========
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.
/TABLE
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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 mandatorily 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
mandatorily 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. Pro Forma Balance Sheet
The unaudited Pro Forma Balance Sheet as of March 31, 1998 gives
effect to the reclassification of the Series A Preferred shares to
permanent equity as if the amended terms as described in Note 5 under
the caption Second Revised Terms had been effective as of March 31,
1998.
3. 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.
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Page 7
4. 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
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.
5. Mandatorily Redeemable Convertible Preferred Stock
On February 11, 1998, the Company issued 600 shares of its Series A
Convertible Preferred Stock ("Series A Preferred") and Common Stock
Purchase Warrants ("Warrants") to purchase an aggregate of 150,000
shares of common stock for a total purchase price of $6,000,000. The
purchase price was allocated to the Series A Preferred and Warrants
based on their relative fair value. The Warrants, which have a term
of five years and an exercise price, subject to adjustment for stock
splits and similar events, of $6.10 per share, were valued at $411,000
using the Black-Scholes option pricing model. Issuance costs of
approximately $193,000 were deducted on a pro rata basis from the
gross proceeds assigned to the Series A Preferred and the Warrants.
Holders of Series A Preferred are entitled to a dividend of 5% per
annum of the purchase price for the shares, payable either in cash or
as an accrual to the purchase price utilized in computing the number
of shares of Series A Preferred issuable upon conversion. Dividends
payable 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
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(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
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.
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.
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Prior to February 11, 2002, the Company will not be required to
pay liquidated damages or redeem Series A Preferred shares should the
Company be unable to issue shares of its common stock pursuant to a
request for conversion due to limitations imposed by the Nasdaq
National 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 which had been classified in the balance sheet under the
caption Prepaid Expenses and Other Current Assets has been
reclassified to Additional Paid-in Capital as of March 31, 1998 to
give effect to the prospective treatment of the related amortization.
Revised Terms
- -------------
In May 1998, the terms of the Series A Preferred were modified to
give the Company the option of paying specified liquidated damages in
lieu of redeeming the preferred shares, if requested by the holders,
upon the occurrence of certain Triggering Events, as defined in the
agreement, and upon the occurrence of other specified events. Any
payment of liquidated damages would be made in eight equal
installments over a period of seven months subsequent to the
triggering event with interest accruing at the rate of 8% per annum on
the outstanding balance. The total amount of liquidated damages
payable over the seven month period would approximate the amount of
the respective redemption values as described above.
Second Revised Terms
- --------------------
On July 2, 1998, the terms were further amended to eliminate all
redemption and liquidated damage provisions described in the preceding
paragraphs and to reduce the Fixed Conversion Price to $3.50 (the
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"Second Revised Terms"). Under the Second Revised Terms, without the
prior written approval of the holders of 66 2/3% of the Series A
Preferred shares, the Company shall not (1) consolidate or merge with
another corporation or other entity or person, whereby the
shareholders of the Company own in the aggregate less than 50% of the
ultimate parent or surviving entity, 2)transfer all or substantially
all of the Company's assets to another corporation or other entity or
person, or 3) fix a record date for the declaration of a distribution
or dividend, whether payable in cash, securities or assets (other than
shares of common stock).
In addition, a "Triggering Event" shall be deemed to have occurred
under the following circumstances: (1)(a) the Company does not have
sufficient number of shares of common stock authorized and available,
(b) is otherwise prohibited by applicable law or by the rules or
regulations of any stock exchange or interdealer quotation system from
issuing such shares or (c) fails to have a sufficient number of shares
of common stock registered for resale under a registration statement,
and if such condition remains unremedied for a period of 30 days, (2)
suspension for a period of 30 consecutive days of a registration
statement covering shares issuable upon conversion of Series A
Preferred, (3) failure of the Common Stock to be listed, or suspension
of trading in the Company's Common Stock on the Nasdaq National Market
or the Nasdaq SmallCap Market for a period of five consecutive days,
or (4) notice by the Company to any holder of Series A Preferred of
its intention not comply with proper requests for conversion of Series
A Preferred. After a Triggering Event, the Company shall pay the
holders $100,000 on the first day of each month until the Triggering
Event is remedied.
In the event the Company is unable to issue shares of its common
stock pursuant to a request for conversion for any reason, including,
without limitation, because the Company (1) does not have sufficient
number of shares of common stock authorized and available, (2) is
otherwise prohibited by applicable law or by the rules or regulations
of any stock exchange from issuing such shares, or (3) fails to have a
sufficient number of shares of common stock registered for resale
under a registration statement, and if such condition remains
unremedied for a period of 30 days, the dividend rate for all shares
of Series A Preferred that cannot be converted into shares of common
stock pursuant to such limitations will increase on a formula basis
until such securities have been duly converted.
The Company also agreed to use its best efforts to obtain
shareholder approval prior to October 31, 1998 of issuance of shares
of common stock in excess of the number of shares issuable pursuant
the rules or regulations of the applicable stock exchange.
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6. 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.
7. Subsequent Events
On May 28, 1998 and June 22, 1998, the Company borrowed $750,000
and $1,000,000, respectively, from Helix. The loan for $750,000 is due
and payable on July 1, 1998 and the loan for $1,000,000 is due and
payable on August 15, 1998. Subsequently, Helix agreed to extend the
due date of the $750,000 note to July 10, 1998. Both loans are
secured by the Company's intellectual property. With respect to the
loans, the Company also agreed to issue Helix warrants to purchase an
aggregate of 350,000 shares of the Company's Common Stock at exercise
prices ranging from $3.5625 to $3.75 per share, or the price per share
at which the next equity financing is carried out by the Company, if
less. The warrants have a term of two years. 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.
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.
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 or
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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
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.
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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 $3.50 per share (in
accordance the revised terms effective July 2, 1998) 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 on July 2,
1998, provide that upon the occurrence of certain Triggering Events,
as defined, the Company may be required to pay the holders $100,000
per month until such time that the Triggering Event has been remedied.
Any requirement that the Company pay such amounts could have a
material adverse impact on the Company in the event the Triggering
Event causing such payment is not remedied on a timely basis.
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
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Page 14
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.
On May 28, 1998 and June 22, 1998, the Company borrowed $750,000
and $1,000,000, respectively, from Helix. The loan for $750,000 is due
and payable on July 10, 1998 and the loan for $1,000,000 is due and
payable on August 15, 1998. Both loans are secured by the Company's
intellectual property. The Company expects the proceeds of the Helix
financing and its other available resources will be sufficient to
sustain operations until completion of longer term financing, which
the Company is actively seeking.
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.
The Company is actively seeking additional financing. Although the
Company believes such financing will be completed, there can be no
assurance that the Company will be able to obtain such financing on
commercially reasonable terms or at all. The inability of the Company
to repay the Helix loans when due or the inability of the Company to
arrange longer term financing would have a material adverse affect on
the Company and could cause the Company to be unable to implement its
business strategy, or to otherwise significantly curtail or cease its
operations. 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. As of March 31, 1998, the Company was not in
compliance with the listing requirements of NMS. However, in
<PAGE>
Page 15
connection with the Second Revised Terms of the Series A Preferred
shares as described in Note 4 to the accompanying financial
statements, which became effective July 2, 1998, all provisions for
redemption and liquidated damages were eliminated. These revisions
allow for the reclassification of the balance of Series A Preferred
shares to permanent equity as of the effective date of the Second
Revised Terms. 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
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.
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Page 16
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
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
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Page 17
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
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 the same as those of the Series A
Preferred except as generally described in Note 4 to the accompanying
financial statements under the caption "Revised Terms".
On July 2, 1998, all holders of Series A-1 Preferred shares
exchanged their shares for Series A-2 Preferred shares. The rights,
preferences, privileges, and terms of the Series A-2 Preferred shares
are set forth in the Company's Sixth Articles of Amendment of Amended
<PAGE>
Page 18
and Restated Articles of Incorporation and are the same as those of
the Series A-1 Preferred except as generally described in Note 4 to
the accompanying financial statements under the caption "Second
Revised Terms".
<PAGE>
<PAGE>
Page 19
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.
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: July 2, 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>
Page 20
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
3.1 Fifth Articles of Amendment of Amended and Restated
Articles of Incorporation +
3.2 Sixth Articles of Amendment of Amended and Restated
Articles of Incorporation
10.1 Secured Promissory Note dated May 28, 1998 issued to
Helix (PEI) Inc.
10.2 Secured Promissory Note dated June 22, 1998 issued to
Helix (PEI) Inc.
27 Financial Data Schedule
- ----------------
+ previously filed.
Exhibit 10.1
THE PANDA PROJECT INC.
SECURED PROMISSORY NOTE
US$750,000 May 28, 1998
FOR VALUE RECEIVED the undersigned, The Panda Project Inc. (the
"Payor") promises to pay on July 1, 1998 to or to the order of Helix
(PEI) Inc. (the "Payee"), at 20 Great George Street, Landing Place,
Charlottetown, PEI or at such other address as the Payee may from time
to time in writing direct, the principal sum (the "Principal Sum") of
US$750,000, together with interest thereon at an annual rate of
interest equal to the prime rate of interest payable by the Royal Bank
of Canada on US dollar advances as at the date hereof plus 2%. This
Secured Promissory Note is non-transferable and non-negotiable.
As security for the payment of the Principal Sum by the Payor to the
Payee, the Payor grants to the Payee a security interest in all of the
Payor s present and after-acquired intellectual property (the
"Collateral").
Upon payment of the Principal Sum to the Payee, the security interests
created by this Secured Promissory Note shall be deemed to be released
without any action on the part of the Payee, and the Payee agrees to
execute and deliver to the Payor such documents as the Payor may
reasonably request to evidence the discharge of the security interest
created by this Secured Promissory Note.
Upon default by the Payor to pay the Principal Sum within ten days
after notice from the Payee that the same shall be due, the Payee may,
at its option, proceed to enforce payment of same and to exercise any
or all of the rights and remedies afforded by law, in equity, by this
Secured Promissory Note, or otherwise, including, without limitation,
all rights and remedies the Payee may have under the UNIFORM
COMMERCIAL CODE. Without restricting the generality of the foregoing,
the Payee may upon such default appoint by instrument in writing a
receiver, receiver-manager, or receiver and manager (herein a
"Receiver") of the Payor and of all or any part of the Collateral and
remove or replace such Receiver from time to time or may institute
proceedings in any court of competent jurisdiction for the appointment
of a Receiver. The Payee shall have the right to enforce one or more
remedies successively or concurrently in accordance with applicable
law.
The Payee may grant extensions of time and other indulgences, take and
give up securities, accept compositions, grant releases and
discharges, release the Collateral to third parties and otherwise deal
with the Payor's guarantors or sureties and others and with the
Collateral and other securities as the Payee may see fit without
prejudice to the obligation of Payor to pay the Principal Sum, or the
Payee s rights, remedies and powers under this Secured Promissory
Note. No extension of time, forbearance, indulgence or other
accommodation now, heretofore or hereafter given by the Payee of the
Payor shall operate as a waiver, alteration or amendment of the rights
of the Payee or otherwise preclude the Payee from enforcing such
rights.
The Payor hereby acknowledges receiving a copy of this Secured
Promissory Note. The Payor waives all rights to receive from the
Payee a copy of any financing statement, financing change statement or
verification statement filed at any time in respect of this Secured
Promissory Note.
This Secured Promissory Note is binding upon any successor corporation
of the Payor, including any successor corporation by way of
amalgamation of any other corporation or corporations with the Payor.
The Payor shall have the right, at any time, to pay all or any portion
of the balance of the Principal Sum outstanding on the date of such
payment without notice, bonus or penalty.
The Payor hereby waives demand for payment, notice of dishonour,
notice of non-payment, protest, notice of protest, and any and all
other notices and demands in connection with the delivery, acceptance,
performance, default or enforcement of this Secured Promissory Note.
The Panda Project Inc.
By: /S/ Stanford W. Crane, Jr.
----------------------------
Stanford W. Crane, Jr.
President and Chief Executive Officer
Authorized Signatory
SIXTH 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.5 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-2 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 Sixth 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 $3.50 per share;
provided, 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 May 14,
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. Without the prior written
approval of the holders of 66 2/3% of the then outstanding Series
A Preferred Shares, the Company shall not (a) consolidate or
merge with or into any other corporation or other entity or
person (whether or not the Company is the surviving corporation)
or complete any other corporate reorganization or transaction or
series of related transactions, as a result of which 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) transfer all or substantially all of the
Company's assets to another corporation or other entity or person
or (iii) 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").
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 at 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 will use its best efforts to 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.
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) 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 (a "Registration Statement Lapse");
(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 (a "Listing Failure");
(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, or its failure to effect any such conversion due to any of
the reasons set forth in Paragraph 26(a) below (a "Conversion
Announcement").
(b) Rights of Holders. In addition to all other
rights of the Holders of Series A Preferred Shares contained
herein, after a Triggering Event (as defined above), the Company
shall pay the Holders $100,000 on the first day of each month
until (i) in the case of a Registration Statement Lapse, the
applicable Registration Statement again becomes effective, (ii)
in the case of a Listing Failure, the Common Stock is listed or
trading with respect to the Common Stock is resumed on the Nasdaq
National Market, The Nasdaq SmallCap Market, The New York Stock
Exchange, Inc. or The American Stock Exchange, Inc., or (iii) in
the case of a Conversion Announcement, the Company announces that
it will comply with proper requests for conversions of Series A
Preferred Shares into Common Stock. Such $100,000 payment shall
be pro rated for partial months and shall be paid to the Holders
pro rata in accordance with their respective holdings of Series A
Preferred Shares.
26. Inability to Fully Convert.
(a) 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
herein defined), 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 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. The Company agrees to use its best efforts to
obtain shareholder approval prior to October 31, 1998 of issuance
of shares of Common Stock in excess of the Exchange Cap to permit
the Company to issue all of the Common Stock which is to be
issued to a Holder of Series A Preferred Shares pursuant to a
Conversion Notice.
(b) 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 some, but not all, of
the Series A Preferred Shares pursuant to this Paragraph 26, the
Company shall convert from each Holder of Series A Preferred
Shares electing to have Series A Preferred Shares converted 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 at such time.
27. 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.
28. 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.
29. 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.
30. 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.
31. 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 these Sixth 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 these Sixth 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 July 2, 1998, without shareholder action, which
was not required for effectiveness pursuant to Section 607.0602
of the Florida Business Corporation Act.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed by an officer thereunto duly authorized.
Dated: July 2, 1998
THE PANDA PROJECT, INC.
By: /s/ Melissa F. Crane
Print Name: Melissa F. Crane
Print Title: Vice President of
Strategic Business
Print Address: 901 Yamato Road
Boca Raton, FL 33431
ATTEST
Kevin J. Calhoun
______________________
Assistant Secretary
<PAGE>
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:
Exhibit 10.2
THE PANDA PROJECT INC.
SECURED PROMISSORY NOTE
US$1,000,000 June 22, 1998
FOR VALUE RECEIVED the undersigned, The Panda Project Inc. (the
"Payor") promises to pay on August 15, 1998 to or to the order of
Helix (PEI) Inc. (the "Payee"), at 20 Great George Street, Landing
Place, Charlottetown, PEI or at such other address as the Payee may
from time to time in writing direct, the principal sum (the "Principal
Sum") of US$1,000,000, together with interest thereon at an annual
rate of interest equal to the prime rate of interest payable by the
Royal Bank of Canada on US dollar advances as at the date hereof plus
2%. This Secured Promissory Note is non-transferable and non-
negotiable.
As security for the payment of the Principal Sum by the Payor to the
Payee, the Payor grants to the Payee a security interest in all of the
Payor s present and after-acquired intellectual property (the
"Collateral").
Upon payment of the Principal Sum to the Payee, the security interests
created by this Secured Promissory Note shall be deemed to be released
without any action on the part of the Payee, and the Payee agrees to
execute and deliver to the Payor such documents as the Payor may
reasonably request to evidence the discharge of the security interest
created by this Secured Promissory Note.
Upon default by the Payor to pay the Principal Sum within ten days
after notice from the Payee that the same shall be due, the Payee may,
at its option, proceed to enforce payment of same and to exercise any
or all of the rights and remedies afforded by law, in equity, by this
Secured Promissory Note, or otherwise, including, without limitation,
all rights and remedies the Payee may have under the UNIFORM
COMMERCIAL CODE. Without restricting the generality of the foregoing,
the Payee may upon such default appoint by instrument in writing a
receiver, receiver-manager, or receiver and manager (herein a
"Receiver") of the Payor and of all or any part of the Collateral and
remove or replace such Receiver from time to time or may institute
proceedings in any court of competent jurisdiction for the appointment
of a Receiver. The Payee shall have the right to enforce one or more
remedies successively or concurrently in accordance with applicable
law.
The Payee may grant extensions of time and other indulgences, take and
give up securities, accept compositions, grant releases and
discharges, release the Collateral to third parties and otherwise deal
with the Payor's guarantors or sureties and others and with the
Collateral and other securities as the Payee may see fit without
prejudice to the obligation of Payor to pay the Principal Sum, or the
Payee s rights, remedies and powers under this Secured Promissory
Note. No extension of time, forbearance, indulgence or other
accommodation now, heretofore or hereafter given by the Payee of the
Payor shall operate as a waiver, alteration or amendment of the rights
of the Payee or otherwise preclude the Payee from enforcing such
rights.
The Payor hereby acknowledges receiving a copy of this Secured
Promissory Note. The Payor waives all rights to receive from the
Payee a copy of any financing statement, financing change statement or
verification statement filed at any time in respect of this Secured
Promissory Note.
This Secured Promissory Note is binding upon any successor corporation
of the Payor, including any successor corporation by way of
amalgamation of any other corporation or corporations with the Payor.
The Payor shall have the right, at any time, to pay all or any portion
of the balance of the Principal Sum outstanding on the date of such
payment without notice, bonus or penalty.
The Payor hereby waives demand for payment, notice of dishonour,
notice of non-payment, protest, notice of protest, and any and all
other notices and demands in connection with the delivery, acceptance,
performance, default or enforcement of this Secured Promissory Note.
The Panda Project Inc.
By: /S/ Stanford W. Crane, Jr.
----------------------------
Stanford W. Crane, Jr.
President and Chief Executive Officer
Authorized Signatory
<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>
