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 June 30, 1997
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 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 -- 12,168,026 shares as of July 31, 1997
THE PANDA PROJECT, INC.
Index
Page
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Condensed Balance Sheets - June 30, 1997 and
March 31, 1997 3
Condensed Statements of Operations - Three months
ended June 30, 1997 and June 30, 1996 4
Condensed Statements of Cash Flows - Three months
ended June 30, 1997 and June 30, 1996 5
Notes to Condensed Financial Statements -
June 30, 1997 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Part II - Other Information
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to Vote of Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
<PAGE>
Page 3
The Panda Project, Inc.
Condensed Balance Sheets
June 30, March 31,
1997 1997
(Unaudited)
(Restated)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,919,773 $ 3,243,505
Accounts receivable-trade (net of
allowance of $110,962 at June 30,
1997 and March 31, 1997) 166,160 165,093
Inventory 1,054,993 822,309
Other receivables 567,484 18,905
Prepaid expenses and other current assets 191,210 98,963
-------------- --------------
Total current assets 6,899,620 4,348,775
-------------- --------------
Property and equipment, net 2,531,715 2,823,798
Restricted cash 150,000 150,000
Other assets 14,130 14,747
Deferred issuance costs, net 193,729 -
-------------- --------------
Total assets $ 9,789,194 $ 7,337,320
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 993,364 $ 852,388
Accrued compensation and employee benefits 68,964 60,934
Accrued expenses and other current
liabilities 1,763,081 1,611,123
-------------- --------------
Total current liabilities 2,825,409 2,524,445
Subordinated convertible debentures 1,605,000 -
Stockholders' Equity:
Common Stock, $.01 par value, 50,000,000
shares authorized 11,431,314 shares at
June 30, 1997 and 10,124,643 shares at
March 31, 1997 issued and outstanding 114,314 101,247
Additional paid-in capital 62,730,134 58,627,529
Accumulated deficit (57,485,663) (53,915,901)
-------------- --------------
Total stockholders' equity 5,358,785 4,812,875
-------------- --------------
Total liabilities and
stockholders' equity $ 9,789,194 $ 7,337,320
============== ==============
The Balance Sheet at March 31, 1997 has been derived from the audited
financial statements of the Company at that date.
See Notes to Condensed Financial Statements.
<PAGE>
Page 4
The Panda Project, Inc.
Condensed Statements of Operations (Unaudited)
Three Months Ended
June 30,
1997 1996
(Restated)
Revenues:
Product sales $ 308,530 $ 596,569
Contract research and development
revenues 394,254 --
Less returns and allowances -- (163,457)
-------------- --------------
Net revenues $ 702,784 $ 433,112
Costs and expenses:
Cost of sales 343,820 790,106
Research and development 1,152,240 1,537,068
Selling, general and administrative 1,946,383 4,552,836
Costs associated with asset impairments -- 1,471,026
-------------- --------------
Total costs and expenses 3,442,443 8,351,036
-------------- --------------
Operating loss (2,739,659) (7,917,924)
Interest expense (907,317) --
Interest income 77,214 122,004
Other income -- 7,807
-------------- --------------
Net loss $ (3,569,762) $ (7,788,113)
============== ==============
Net loss per common share $ (.35) $ (.88)
============== ==============
Weighted average number of shares of
common stock and common stock equivalents
outstanding 10,339,127 8,810,664
============== ==============
See Notes to Condensed Financial Statements.
<PAGE>
Page 5
The Panda Project, Inc.
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended
June 30,
1997 1996
Net cash used by operating activities $ (3,050,237) $ (6,494,796)
Cash flows from investing activities:
Additions to property and equipment (73,495) (227,328)
-------------- --------------
Net cash used by investing activities (73,495) (227,328)
Cash flows from financing activities:
Proceeds from issuance of debentures 4,800,000 --
Proceeds from issuance of stock -- 2,877,247
-------------- --------------
Net cash provided by financing activities 4,800,000 2,877,247
-------------- --------------
Net increase (decrease) in cash and cash
equivalents 1,676,268 (3,844,877)
Cash and cash equivalents at beginning
of period 3,243,505 10,731,540
-------------- --------------
Cash and cash equivalents at end of period $ 4,919,773 $ 6,886,663
============== ==============
During the quarter ended June 30, 1997, $3,195,000 of the Company s 4%
subordinated convertible debentures were converted into 1,275,753 shares of
the Company s common stock.
See Notes to Condensed Financial Statements.
<PAGE>
Page 6
The Panda Project, Inc.
Notes to Condensed Financial Statements (Unaudited)
June 30, 1997
1. Basis of Presentation
Subsequent to the issuance of the Company's Form 10-Q for the
quarter ended June 30, 1997, and in connection with the review of a
Registration Statement on Form S-3 filed by the Company, the Securities
& Exchange Commission ("SEC") requested that the Company apply the
accounting treatment suggested in an announcement made by the SEC
related to the issuance of convertible debt securities. The Company
determined that it was necessary to restate the accompanying condensed
financial statements from those previously filed with the SEC to
recognize the effect of the beneficial conversion feature of the
subordinated convertible debentures issued by the Company in April 1997
(Note 3).
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 Annual Report on Form 10-K for the
year ended March 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 Annual Report on Form 10-K for the year
ended March 31, 1997.
2. Inventory
June 30, 1997 March 31, 1997
----------------------------------
Raw materials $ 568,441 $ 434,569
Work in process 150,611 43,341
Finished goods 335,941 344,399
----------------------------------
$ 1,054,993 $ 822,309
==================================
Inventory is valued at net realizable value, which is net of
obsolescence reserves of approximately $250,000 at June 30, 1997 and
March 31, 1997, respectively.
3. Subordinated Convertible Debentures
<PAGE>
Page 7
During April 1997, the Company completed a private placement of $4.8
million of 4% subordinated convertible debentures. The debentures are
due two years from the date of issuance and are convertible into shares
of common stock at the lower of $5.625 per share or 82% of the average
closing bid price of the Company's common stock for the five consecutive
trading days immediately preceding the date of conversion. Through June
30, 1997, $3,195,000 of such debentures had been converted into an
aggregate of 1,275,753 shares of the Company's common stock. During
July 1997, the remaining $1,605,000 of debentures were converted into an
aggregate of 721,072 shares of the Company's common stock.
In connection with the transaction, the Company paid placement fees of
$384,000 of which $192,000 was paid in cash and the balance by issuance
of 30,918 shares ("Placement Shares") of the Company's common stock. In
addition to the placement fees, the Company issued warrants to two
parties to purchase 70,096 shares of the Company's common stock.
Warrants to purchase 42,667 shares and 27,429 shares are exercisable
through April 2002 at an exercise price of $6.75 and $7.00 per share,
respectively. These warrants have been valued at approximately $163,000
as required by Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation. Total deferred issuance costs, including
the placement fees and the value of the warrants, are amortized as
interest expense. However, upon conversion of the related
debentures, the pro rata portion of any unamortized deferred issuance
costs are charged to Additional Paid-in Capital. In addition, the
Company has agreed to file and has filed a registration statement with
the Securities and Exchange Commission to effect the registration of the
Placement Shares. The Company has also agreed to effect the
registration of the shares issuable upon conversion of the debentures in
the event of certain amendments to certain securities regulations and
has granted certain piggyback registration rights to the holders of the
warrants.
At a meeting of the Emerging Issues Task Force held on March 13,
1997, the staff of the SEC announced its position on the accounting
treatment for the issuance of convertible debt securities with a
beneficial conversion feature such as that contained in the subordinated
convertible debentures issued by the Company. As required by this
announcement, the beneficial conversion feature has been recognized and
allocated to additional paid-in capital. The amount of the beneficial
conversion feature was calculated to be $907,317 at the date of issuance
of the subordinated convertible debentures, measured as the difference
between the conversion price and the fair market value of the Company's
common stock into which the debentures are convertible, multiplied by
the number of shares into which the debentures are convertible. The
debentures are fully convertible into shares of the Company's common
stock prior to June 30, 1997 and as such, the entire amount of the
<PAGE>
Page 8
beneficial conversion feature has been charged to interest expense
during the three months ended June 30, 1997. The accounting for this
transaction has no effect on cash or total stockholders' equity.
4. Commitments and Contingent Matters
During June 1997, the Company entered into a five year lease for a
48,800 square foot facility in Hayward, California, which requires
monthly payments of $18,544 during the first year increasing to $24,400
in the fifth year. In addition, the lease requires the Company to pay
real estate taxes, insurance and maintenance related to the facility,
and for the Company to issue an irrevocable letter of credit in the
amount of $110,000 as security.
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.
5. Subsequent Events
In July, 1997, the Company entered into a licensing agreement with LG
Cable & Machinery Ltd. ("LG") whereby LG was granted a license, for a
term that continues until the expiration of the last to expire of the
patents covered by the agreement, with respect to a semiconductor
package product owned by the Company. The license granted to LG is non-
exclusive except for certain limited exclusive manufacturing rights with
respect to specified Asian countries. In connection with this
agreement, the Company is entitled to a non-refundable license fee of
$250,000 that became immediately vested upon signing the agreement and
is payable within 45 days after execution of the agreement. In
addition, the Company is entitled to receive royalties on sales of the
semiconductor package products by LG or its affiliates.
During August, the Company entered into an agreement to sublet its
facility in San Jose, California, to a third party. The sublease
agreement continues through the end of the term of the Company's lease
agreement and requires monthly payments from the tenant of approximately
$5,000.
<PAGE>
Page 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company was incorporated in April 1992 to design, develop, and
license products incorporating the Company's proprietary semiconductor
packaging and interconnect technology (the "Technology Products") and to
develop, manufacture and market a line of powerful, modular computers
(the "Archistrat Computers"). The Company's fiscal year ends March 31.
This Report on Form 10-Q contains forward-looking statements. For this
purpose any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes", "anticipates", "plans",
"expects" and similar expressions are intended to identify forward-
looking statements. There are a number of important factors that could
cause the Company's actual results to differ materially from those
indicated by such forward-looking statements. These factors, include,
without limitation, delays in product development, potential claims and
possible litigation relating to the ownership of intellectual property,
competitive pressures, manufacturing risks, general economic conditions
and the risk factors detailed from time to time in the Company's
periodic reports and registration statements filed with the Securities
and Exchange Commission.
Results of Operations - First Quarter of 1997 Compared to First Quarter
of 1996
For the quarter ended June 30, 1997 (the "first quarter of fiscal
1998"), the Company recognized revenue related to its agreement with the
Defense Advanced Research Projects Agency, which commenced in October
1996, of $394,254. The Company recognizes revenue and is entitled to
receive payments based on the achievement of specific milestones set
forth in the agreement.
Net revenues from the sale of Archistrat Computers amounted to $308,530
during the quarter ended June 30, 1997 compared to revenues of $433,112
during the quarter ended June 30, 1996 (the "first quarter of fiscal
1997"). The Company will continue to actively market and sell the
workstation configuration of the Archistrat computer, primarily through
its own sales force, for animation, video, and high performance CAD/CAM
applications. In addition, the Company expects to begin offering a new
lower cost version workstation using the Company's proprietary
architecture and technology in a basic chassis, as well as Archistrat
subsystems to OEM's for their own production.
<PAGE>
Page 10
Research and development (R&D) expenses decreased to approximately $1.15
million for the first quarter of fiscal 1998 as compared to $1.54
million for the first quarter of fiscal 1997. The reduction in R&D
spending is reflective of the Company's progress in moving from a
development stage enterprise to one seeking to commercialize its core
technologies. The Company believes that its level of R&D spending is
appropriate to support current operations and to continue to maintain
efforts to enhance development of VSPA, Compass Connectors, Compass PGA,
and the Archistrat Computers and related technologies. During the
quarter ended June 30, 1997, research and development activities
included continued testing and qualification of VSPA as well as the
design and development of high-speed manufacturing equipment for VSPA,
and the development of new processor boards for the Company's Archistrat
Computers utilizing DEC's Alpha microprocessor.
Selling, general and administrative (SG&A) expenses for the first
quarter of fiscal 1998 decreased approximately $2.6 million or 57% to
$1.9 million as compared to $4.6 million for the first quarter of fiscal
1997. The net decrease in SG&A expenses is due principally to the
streamlining of operations, including a $1.6 million or 59% decrease in
employee compensation, benefits and related expenses, a decrease of
approximately $323,000 in selling and marketing expenses, as well as
reductions in professional fees, travel costs, rent and insurance.
Management will continue to evaluate and adjust its cost controls and
expects the Company's spending level to remain relatively stable over
the next few quarters, however, there can be no assurance that
fluctuations in the Company's cost structure will not occur due to the
dynamic nature of the Company's business and stage of development.
As of June 30, 1997, the Company has reduced its number of full-time
employees to approximately 50 as compared with 140 at June 30, 1996.
The Company anticipates that this number may increase in the event of
expected growth in sales over the remainder of the fiscal year,
principally in the areas of manufacturing , sales and marketing.
During the quarter ended June 30, 1996, 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 fiscal 1997,
the Company recorded a charge of approximately $1.5 million.
Interest expense in the amount of $907,317 was recognized during the
quarter ended June 30, 1997 related to the issuance of the subordinated
convertible debentures representing the beneficial conversion feature
associated with the debentures. The amount was measured at the date of
issuance of the subordinated convertible debentures as the difference
<PAGE>
Page 11
between the conversion price and the fair of the Company's common stock
into which the debentures are convertible, multiplied by the number of
shares into which the debentures are convertible. The accounting for
this transaction has no effect on cash or on total stockholders' equity.
Interest and other income for the first quarter of fiscal 1998 decreased
to approximately $77,000 from $130,000 for the first quarter of fiscal
1997 as a result of a net decrease in cash and cash equivalents.
The Company anticipates that it will be dependent on third parties for
the manufacture and/or assembly of printed circuit boards, frame,
exterior, base fabrication and other subassemblies, as well as for the
supply of various of the components, incorporated into the Archistrat
Computers, and for performing the final assembly configuration, certain
quality control testing and delivery of such computers. The Company has
identified certain potential manufacturers and suppliers for its
subassembly and component needs, however, the Company has not yet
entered into any additional manufacturing or supply arrangements. The
Company believes it will be able to negotiate satisfactory manufacturing
and supply contracts; however, the failure to do so could have a
material adverse effect on the Company. Even if the Company were able to
enter into suitable manufacturing arrangements for necessary
subassemblies, there can be no assurance that such manufacturers will
dedicate sufficient production capacity to satisfy the Company's
requirements within scheduled delivery times or at all.
Liquidity and Capital Resources
During April 1997, the Company completed a private placement of $4.8
million of 4% subordinated convertible debentures and received net
proceeds of approximately $4.5 million. The debentures are convertible
into shares of common stock at the lower of $5.625 per share or 82% of
the average closing bid price of the Company's common stock for the five
consecutive trading days immediately preceding the date of conversion.
During June and July 1997, all of the debentures were converted into an
aggregate of 1,996,825 shares of the Company's common stock.
The Company's capital requirements in connection with its operations and
development activities have been and may continue to be significant.
During the remainder of fiscal year 1998, the Company expects to
continue its development efforts related to certain of its Technology
Products, complete the construction of several high-speed production
machines for its VSPA product which are expected to be sold to licensees
of VSPA and/or utilized within the Company to manufacture product for
direct sales, and continue to transition its current modular
workstations and server products into higher volume production.
<PAGE>
Page 12
The Company previously announced its agreement to enter into a joint
venture with Taiwanese partners to manufacture and sell VSPA in that
region. It is anticipated that the joint venture will be operational by
the first calendar quarter of 1998 and will be selling VSPA units
produced with manufacturing equipment developed and constructed by the
Company. The Company will own a majority stake in the joint venture.
The Company's initial investment will be a noncash contribution in the
form of a license agreement between the Company and the joint venture
and VSPA manufacturing equipment.
The Company anticipates, based on its discussions with certain
customers, that it will commence the production and shipment of modest
quantities of VSPA semiconductor packages during the third quarter of
fiscal 1998. The Company anticipates that it will realize royalty
revenue as early as the second quarter of fiscal year 1998 related to
its Technology Products from the arrangements announced during the past
year, including, but not limited to, license agreements with LG Cable &
Machinery. The Company also expects to continue to earn revenues
related to the cooperative development agreement entered into with the
U.S. Government during fiscal year 1997. Further, the Company may enter
into additional licensing agreements during fiscal year 1998 that will
generate licensing fees for the Company. 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 or that the Company
will become profitable in the foreseeable future.
The Company has been dependent upon the proceeds of sales of its
securities to fund its activities since inception. The Company expects
that licensing and royalty revenue related to its Technology Products,
sales of VSPA directly to customers and through the Taiwanese joint
venture, increased shipments of Archistrat Computers and the related
revenue, and revenue associated with the cooperative development
agreement, noted above will provide additional resources to at least
partially fund its activities during fiscal year 1998.
During fiscal year 1997, the Company successfully implemented a cost
reduction plan and was able to significantly decrease the amount of
average monthly cash consumption. Cash flows used by operating
activities decreased $3.4 million from $6.5 million during the first
quarter of fiscal year 1997 to $3.1 million during the first quarter of
fiscal year 1998. The Company will continue to focus on cost controls
during fiscal year 1998 and will take further cost reduction actions as
deemed necessary. However, there can be no assurances that such efforts
will be successful or that such plans will result in adequate cost
reductions.
<PAGE>
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The Company is dependent upon the success of the efforts discussed above
to expand its marketing activities in order to obtain additional orders
for its Technology Products and Archistrat Computers, to continue
efforts that may lead to the commercialization of additional products
and technologies and to finance other working capital requirements. The
Company may need to seek additional sources of funding during fiscal
year 1998 in order to achieve its goals.
Part II - Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
The Company issued a warrant to Jefferies & Company, Inc. in
connection with the completion of a private placement of
subordinated convertible debentures dated April 14, 1997,
exercisable during the period beginning April 2, 1997 and ending
April 2, 2002 to purchase 27,429 shares of common stock of the
Company at an exercise price of $7.00 per share. The warrant was
issued pursuant to an exemption from registration under Section 4
(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) See the Exhibit Index included immediately preceding the Exhibits
to this report, which is incorporated herein by reference.
(b) Reports on Form 8-K:
A current report on Form 8-K dated April 14, 1997 was filed on
April 21, 1997 reporting the sale of equity securities pursuant
to Regulation S, an event reported under Item 9.
<PAGE>
Page 14
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: January 16, 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 15
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
10.1 * # License Agreement, executed as of July 15, 1997, between
the Company and LG Cable & Machinery Ltd.
10.2 # Standard Industrial Lease Agreement, dated as of July 16,
1997, between the Company and IBG Huntwood Associates.
27 Financial Data Schedule
- ----------------
* - Confidential treatment requested.
# - Previously filed.
[ARTICLE] 5
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] MAR-31-1998
[PERIOD-END] JUN-30-1997
[CASH] 4,919,773
[SECURITIES] 0
[RECEIVABLES]
[ALLOWANCES]
[INVENTORY] 1,054,993
[CURRENT-ASSETS] 6,899,620
[PP&E] 5,037,251
[DEPRECIATION] 2,505,536
[TOTAL-ASSETS] 9,789,194
[CURRENT-LIABILITIES] 2,825,409
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 114,314
[OTHER-SE]
[TOTAL-LIABILITY-AND-EQUITY] 9,789,194
[SALES] 308,530
[TOTAL-REVENUES] 702,784
[CGS] 343,820
[TOTAL-COSTS] 343,820
[OTHER-EXPENSES] 3,098,623
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 907,317
[INCOME-PRETAX] (3,569,762)
[INCOME-TAX] 0
[INCOME-CONTINUING] (3,569,762)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (3,569,762)
[EPS-PRIMARY] (.35)
[EPS-DILUTED] (.35)
