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 September 30, 1998.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from _______ to _______
Commission File Number 0-24030
THE PANDA PROJECT, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0323354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
951 Broken Sound Parkway, N.W.
BOCA RATON, FLORIDA 33487
(Address of principal executive offices)
(561) 994-2300
(Registrant's telephone number)
901 Yamato Road
BOCA RATON, FLORIDA 33431
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes __x__ No ____.
Applicable Only to Issuers Involved In Bankruptcy
Proceedings During The Preceding Five Years
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ___ No ___.
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Common
Stock, $.01 Par Value -16,428,468 shares as of September 30, 1998
THE PANDA PROJECT, INC.
Index
Page
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Condensed Balance Sheets -September 30, 1998 and
December 31, 1997 2
Condensed Statements of Operations -Three and Nine
months ended September 30, 1998 and September 30, 1997 3
Condensed Statements of Cash Flows -Nine months
ended September 30, 1998 and September 30, 1997 4
Notes to Condensed Financial Statements -
September 30, 1998 5-11
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 15
Part II - Other Information
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to Vote of Security Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 17
Exhibit Index 18
The Panda Project, Inc.
Condensed Balance Sheets
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,283,493 $ 619,683
Accounts receivable-trade (net of allowance
of $10,000 at September 30, 1998 and
$10,006 at December 31, 1997) 178,753 224,851
Inventory 1,522,654 965,199
Other receivables 24,676 105,825
Prepaid expenses and other current assets 2,025,527 378,242
------------ ------------
Total current assets 5,035,103 2,293,800
------------ ------------
Property and equipment, net 2,532,424 2,818,218
Restricted cash 80,000 260,000
Debt issuance costs, net 25 340,513
Other assets 77,679 1,299
------------ ------------
Total assets $ 7,725,231 $ 5,713,830
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 934,135 $ 1,651,540
Notes payable 2,000,000 1,000,000
Accrued expenses and other current
liabilities 685,896 964,586
------------ ------------
Total current liabilities 3,620,031 3 ,616,126
------------ ------------
Stockholders' Equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized: 1,000
shares designated as Series A, no
shares issued at December 31, 1997
and 436 shares issued and outstanding
at September 30, 1998 4,064,606 -
Common stock, $.01 par value, 50,000,000
shares authorized: 16,428,468 shares
issued and outstanding at September 30,
1998 and 12,215,522 shares issued
and outstanding at December 31, 1997. 164,284 122,155
Additional paid-in capital 74,255,858 64,841,102
Accumulated deficit (74,379,548) (62,865,553)
------------ ------------
Total stockholders' equity 4,105,200 2,097,704
------------ ------------
Total liabilities and stockholders' equity $ 7,725,231 $ 5,713,830
============ ============
The Balance Sheet at December 31, 1997 has been derived from the
audited financial statements of the Company at that date. See Notes
to Condensed Financial Statements.
<TABLE>
The Panda Project, Inc.
Condensed Statements of Operations (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 193,268 $ 392,485 $ 515,186 $ 826,902
Licensing fees - 250,000 - 250,000
Contract research and
development revenues - 441,470 135,673 1,000,724
Less returns and
allowances (3,239) - (3,239) -
----------- ----------- ----------- -----------
Net revenues $ 190,029 $ 1,083,955 $ 647,620 $ 2,077,626
Costs and expenses:
Cost of sales 169,152 435,138 563,604 950,179
Research and development 803,722 1,050,581 2,832,242 3,138,700
Selling, general and
administrative 2,076,024 2,308,715 6,316,268 6,566,212
Costs associated with
asset impairments - - - 585,000
----------- ----------- ----------- -----------
Total costs and
expenses 3,048,898 3,794,434 9,712,114 11,240,091
----------- ----------- ----------- -----------
Operating loss (2,858,869) (2,710,479) (9,064,494) (9,162,465)
Amortization of debt
issuance costs (1,246,000) - (2,475,514) -
Interest income/
(expense) 21,299 49,021 (21,298) 125,957
Other income (expense) (3,075) (580) 47,311 55,635
----------- ----------- ----------- -----------
Net loss $(4,086,645) $(2,662,038) $(11,513,995)$(8,980,873)
----------- ----------- ----------- -----------
Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock (177,872) - (689,713) -
----------- ----------- ----------- -----------
Net loss applicable to
common stock (4,264,517) (2,662,038) (12,203,708) (8,980,873)
=========== =========== =========== ===========
Basic and diluted loss
per common share $ (0.31) $ (0.22) $ (0.95) $ (0.78)
=========== =========== =========== ===========
Weighted average shares
outstanding 13,850,943 12,076,161 12,779,174 11,535,999
=========== =========== =========== ===========
See Notes to Condensed Financial Statements.
</TABLE>
The Panda Project, Inc.
Condensed Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
1998 1997
Net cash used by operating activities $ (9,274,041) $ (7,078,807)
Cash flows from investing activities:
Additions to property and equipment (647,601) (684,840)
------------ ------------
Net cash used by investing activities (647,601) (684,840)
Cash flows from financing activities:
Proceeds from issuance of
convertible preferred stock 6,000,000 -
Proceeds from issuance of debentures - 4,800,000
Proceeds from issuance of common
stock 3,778,465 53,346
Proceeds from issuance of notes
payable 3,000,000 -
Repayment of notes payable (2,000,000) -
Payments of convertible preferred
stock issuance costs (193,013) (25,500)
------------ ------------
Net cash provided by
financing activities 10,585,452 4,827,846
------------ ------------
Net increase (decrease) in cash and
cash equivalents 663,810 (2,935,801)
Cash and cash equivalents at
beginning of period 619,683 5,114,015
------------ ------------
Cash and cash equivalents at end
of period $ 1,283,493 $ 2,178,214
============ ============
See Notes to Condensed Financial Statements.
The Panda Project, Inc.
Notes to Condensed Financial Statements (Unaudited)
September 30, 1998
1. Basis of Presentation
The accompanying condensed financial statements of The Panda Project,
Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles on a basis consistent in all material
respects with those applied in the Transition Report on Form 10-K for
the nine months ended December 31, 1997. The interim financial
information is unaudited, but reflects all normal and recurring
adjustments which are, in the opinion of management, necessary to
provide a fair statement of results of operations for the interim
periods presented. The interim financial statements should be read in
connection with the financial statements in the Company's Transition
Report on Form 10-K for the nine months ended December 31, 1997.
Change in Fiscal Year
- ---------------------
During 1997, the Company changed its fiscal year from April 1 through
March 31 to January 1 through December 31.
Earnings (Loss) per Common Share
- --------------------------------
Basic loss per share is calculated taking the net loss minus
preferred stock dividends divided by the weighted average number of
common shares outstanding in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share".
Diluted loss per common share is the same as the basic loss per share
due to the anti-dilutive effect (i.e. the effect of reducing loss per
share of the Company's convertible preferred stock, stock options and
warrants in accordance with SFAS 128.
2. Inventory
September 30, 1998 December 31, 1997
----------------------------------------
Raw materials $1,136,129 $879,756
Work in process 295,163 14,024
Finished goods 91,362 71,419
------------- -------------
$1,522,654 $965,199
============= =============
Inventory is valued at net realizable value ( lower of cost or
market), which is net of obsolescence reserves of approximately
$585,700 at September 30, 1998 and $600,000 at December 31, 1997.
3. Prepaid expenses and other current assets
September 30, 1998 December 31, 1997
----------------------------------------
Prepaid expenses $ 185,404 $ 326,470
Prepaid insurance 44,774 50,728
Prepaid consulting fees 1,250 -
Deferred costs 9,099 1,044
Debt issuance costs 2,520,000 -
Accumulated amortization
of debt issuance costs (735,000) -
------------ ------------
$ 2,025,527 $ 378,242
============ ============
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 5). The Company received additional
short-term loans from Helix during the quarter ended June 30, 1998
which aggregated $1,750,000, and an additional $250,000 was received
in July 1998. The loans are secured by the Company's intellectual
property. In connection with the issuance of these notes, the Company
issued warrants to Helix to purchase an aggregate of 850,000 shares
of the Company's common stock at exercise prices ranging from $1.63 to
$2.125 per share, as adjusted. The warrants have a term of two years
and were recorded as debt issuance costs at an aggregate value of
approximately $1,645,000 which is fully amortized as of September
30,1998. Total debt issuance costs, including the value of the
warrants, charged to amortization expense during the quarter ended
September 30, 1998 amounted to $511,000.
On August 7, 1998, Helix agreed to extend the maturity date of all
outstanding notes payable to February 15, 1999, from their original
due date of August 1998, in exchange for the issuance of a warrant to
purchase up to 2,000,000 shares of the Company's common stock (in
addition to the 850,000 shares covered by the warrants discussed in
the previous paragraph) at an exercise price equal to the fair market
value of the Company's common stock at the date of issuance ($2.125).
The note bears interest at a rate of prime plus 2 percentage points
(10.50% at September 30, 1998) computed in Canadian dollars payable
monthly. The warrant has a term of two years. The value of the warrant
of $2,520,000 will be charged to amortization expense through the
revised maturity date. During the quarter ended September 30,1998,
amortization expense related to these warrants amounted to $735,000.
Helix and its affiliates to the best of the Company's knowledge
currently hold approximately 10% of the Company's common stock. James
T. A. Wooder, a director of the Company, is a Vice President of
Helix's parent, Helix Investments (Canada), Inc.
5. Convertible Preferred Stock
On February 11, 1998, the Company issued 600 shares of its Series
A Convertible Preferred Stock ("Series A Preferred") and Common Stock
Purchase Warrants ("Warrants") to purchase an aggregate of 150,000
shares of common stock for a total purchase price of $6,000,000. The
purchase price was allocated to the Series A Preferred and Warrants
based on their relative fair value. The Warrants, which have a term
of five years and an exercise price, subject to adjustment for stock
splits and similar events, of $6.10 per share, were valued at $411,000
using the Black-Scholes option pricing model. Issuance costs of
approximately $193,000 were deducted on a pro rata basis from the
gross proceeds assigned to the Series A Preferred and the Warrants.
Holders of Series A Preferred are entitled to a dividend of 5% per
annum of the purchase price for the shares, payable either in cash or
as an accrual to the purchase price utilized in computing the number
of shares of Series A Preferred issuable upon conversion. Dividends
payable for the quarter ended September 30, 1998 in the amount of
$64,415 have been accrued and added to the purchase price of the
Series A Preferred in lieu of a cash payment.
Shares of Series A Preferred are convertible into shares of common
stock pursuant to a formula whereby the purchase price of the shares
to be converted plus any such dividends is divided by a conversion
price defined as the lower of (i) $3.50 subject to adjustment in the
event of certain dilutive issuances of securities by the Company or
for stock splits or similar events, or (ii) a percentage of the
average closing bid price of the common stock for the five days
immediately preceding conversion equal to 92%, if conversion occurs in
the period beginning 120 days and ending 180 days after issuance of
the Series A Preferred, or 90%, if conversion occurs after 180 days
from issuance of the Series A Preferred. From July 1, 1998 through
September 30, 1998, 164 shares of Series A Preferred were converted
into an aggregate of 1,918,670 shares of common stock of the Company.
The Company may require that all unconverted shares of Series A
Preferred be converted at any time if the closing bid price of common
stock is equal to or greater than $12.00 per share for a period of
twenty consecutive trading days. In addition, on February 11, 2003,
the Company may, at its option, require the holders to convert the
Series A Preferred shares which remain outstanding on such date (plus
accrued and unpaid dividends) or redeem such shares of Series A
Preferred. In the event certain conditions are met, the Company has
the right to cause the issuance of an additional 400 shares of Series
A Preferred for an aggregate purchase price of $4,000,000. In such
event, the Company would be required to issue Warrants to the
purchasers of Series A Preferred to purchase an additional 100,000
shares of common stock.
Under the terms of the transaction, as modified on July 2, 1998,
without the prior written approval of the holders of 66 2/3% of the
Series A Preferred shares, the Company shall not (1) consolidate or
merge with another corporation or other entity or person, whereby the
shareholders of the Company own in the aggregate less than 50% of the
ultimate parent or surviving entity, (2) transfer all or substantially
all of the Company's assets to another corporation or other entity or
person, or (3) fix a record date for the declaration of a distribution
or dividend, whether payable in cash, securities or assets (other than
shares of common stock).
In addition, a "Triggering Event" shall be deemed to have occurred
under the following circumstances: (1) the Company does not issue
shares of common stock registered for resale for any reason, including
(a) the Company does not have a sufficient number of shares of common
stock authorized and available, (b) is otherwise prohibited by
applicable law or by the rules or regulations of any stock exchange or
interdealer quotation system from issuing such shares (including as a
result of the Series A Exchange Cap discussed below) or (c) fails to
have a sufficient number of shares of common stock registered for
resale under a registration statement, and if such condition remains
unremedied for a period of 30 days, (2) suspension for a period of 30
consecutive days of a registration statement covering shares issuable
upon conversion of Series A Preferred, (3) failure of the Common Stock
to be listed, or suspension of trading in the Company's Common Stock
on the NASDAQ National Market or the NASDAQ SmallCap Market for a
period of five consecutive days, or (4) notice by the Company to any
holder of Series A Preferred of its intention not to comply with
proper requests for conversion of Series A Preferred. After a
Triggering Event, the Company is required to pay the holders $100,000
on the first day of each month until the Triggering Event is remedied.
In the event the Company is unable to issue shares of its common stock
pursuant to a request for conversion for any reason, including,
without limitation, because the Company (1) does not have sufficient
number of shares of Common Stock authorized and available, (2) is
otherwise prohibited by applicable law or by the rules or regulations
of any stock exchange from issuing such shares, or (3) fails to have a
sufficient number of shares of Common Stock registered for resale
under a registration statement, and if such condition remains
unremedied for a period of 30 days, the dividend rate for all shares
of Series A Preferred that cannot be converted into shares of Common
Stock pursuant to such limitations will increase on a formula basis
until such securities have been duly converted.
In connection with this transaction, the Company filed a registration
statement on form S-3 (the "form S-3") with the Securities and
Exchange Commission ("SEC") to effect the registration for resale of
2,000,000 shares of Common Stock issuable upon conversion of the
Series A Preferred and 150,000 shares of common stock issuable upon
exercise of the Warrants, plus an additional number of shares of
Common Stock, not to exceed the Exchange Cap, described below, that
may be usable upon conversion of the Series A Preferred as a result of
antidilution provisions. The Form S-3 has been declared effective by
the Securities and Exchange Commission. As of November 10, 1998,
1,999,796 shares of Common Stock issued upon conversion of Series A
Preferred had been sold pursuant to the Form S-3.
The beneficial conversion feature associated with the Series A
Preferred shares has been recognized and allocated to additional paid-
in capital. The amount of the beneficial conversion feature of
approximately $510,000 was calculated using the most favorable
conversion rate as defined by the terms of the Series A Preferred
stock and is being amortized over a period of six months. The amount
of amortization ($113,457 for the third quarter of 1998) is reflected,
along with accrued dividends, as an increase to net loss in the
Statement of Operations. The accounting for this transaction has no
effect on cash.
Under applicable NASDAQ rules, without shareholder approval, the
Company may issue no more than 2,443,104 shares of Common Stock upon
conversion of Series A Preferred and exercise of the warrants (the
"Series A Exchange Cap"). The terms of the Series A Preferred provide
that the Company will use its best efforts to obtain shareholder
approval prior to October 31, 1998 of issuances of shares of Common
Stock in excess of the Series A Exchange Cap. As of November 10 ,
1998, a shareholders meeting for the purpose of obtaining such
approval had not been scheduled, and the Company is attempting to
defer such a meeting to a later date or otherwise reach a settlement
with the holders of Series A Preferred. There can be no assurance
that such efforts will be successful or that holders of Series A
Preferred will not make claims against the Company for penalty
payments, damages or other relief, any of which could have a
substantial adverse effect on the Company.
6. August Private Placement
In August 1998, the Company completed the sale of 2,254,601
shares of its Common Stock in a private placement to accredited
investors with gross proceeds of $3,625,000 (the "Private Placement").
Expenses of the Private Placement were approximately $230,000. In
addition to the shares of Common Stock purchased by each investor in
the Private Placement, such investor received a warrant (the "Private
Placement Warrants") to purchase an equal number of shares of Common
Stock (the "Private Placement Warrant Shares"), subject to adjustment
for stock splits and similar events, at an exercise price of $2.55 per
share. The Private Placement Warrants have a term of five years
expiring August 13, 2003. Issuance of the Private Placement Warrant
Shares requires the approval of the Company's shareholders.
Under the terms of the Securities Purchase Agreement relating to the
Private Placement, if on either the six-month or the one-year
anniversary of the date of closing of the Private Placement (each
"Anniversary Date"), the average closing bid price of the Common Stock
for the twenty-trading day period ending on the trading day
immediately prior to the applicable Anniversary Date (the "Anniversary
Price") is less than the Closing Price ($2.0375), or the prior
Anniversary Price in the event the six-month Anniversary Price is less
than the Closing Price, respectively, the Company is required to issue
a number of shares of Common Stock within ten days after the
Anniversary Date equal to the product of ( i ) (x) the difference
between the Closing Price (or if the measurement date is the one-year
Anniversary Date, the six-month Anniversary Price if the six-month
Anniversary Price is less than the Closing Price) and the applicable
Anniversary Price, multiplied by .85, multiplied by (y) the number of
shares of Common Stock purchased by the investors in the Private
Placement and not sold or assigned to non-affiliated third parties,
divided by (ii) (x) the applicable Anniversary Price multiplied by (y)
.85. The shares issuable pursuant to this formula are referred to as
the "Fill-Up Shares". Issuance of the Fill-Up Shares pursuant to
these provisions requires the approval of the Company's shareholders.
In the event ( i ) the Common Stock is delisted or suspended from
trading on NASDAQ, (ii) the Fill-Up Shares or the Private Placement
Warrant Shares are not issuable or are not listed with NASDAQ. Or
(iii) the Company fails to issue Fill-Up Shares as required, then the
Company shall pay to the initial investors $100,000 for each full
30-day period that the condition continues.
In connection with the execution and delivery of the Securities
Purchase Agreement relating to the Private Placement, the Company
agreed to seek shareholder approval prior to October 31, 1998 of
issuance of the Fill-Up Shares and Private Placement Warrant Shares.
In the event approved of such proposal is not obtained by such date,
the Company could be required to pay investors in the Private
Placement $100,000 per month as a penalty.
As of November 10, 1998, a shareholders meeting for the purpose of
obtaining such approval had not been scheduled, and the Company is
attempting to defer such a meeting to a later date or otherwise reach
a settlement with participants in the Private Placement. There can be
no assurance that such efforts will be successful or that participants
in the Private Placement will not make claims against the Company for
penalty payments, damages or other relief, any of which could have a
substantial adverse effect on the Company.
The Company has filed a registration statement with respect to the
shares of Common Stock issuable in the Private Placement. Such
registration statement has not yet been declared effective. In the
event the registration statement is not declared effective by November
14, 1998, the Company could be liable for penalties of up to $36,000
for each month in
which effectiveness is not granted.
7. Commitments and Contingent Matters
The Company is involved in various lawsuits from time to time of the
type routinely encountered in the ordinary course of business.
Management aggressively defends these lawsuits and believes that the
ultimate outcome of these lawsuits will not have a material adverse
impact on the Company's financial statements. Following are
litigation matters that management considers to be material in nature
such that disclosure is appropriate.
On September 8,1998, a judgement in the amount of $1,227,041.09 was
entered in the Circuit Court for the 15th Judicial Circuit, Palm Beach
County, Florida against the Company in favor of Joseph A. Sarubbi, a
former director of the Company. The Company believes that the
judgement contains certain inconsistencies which could result in a
significant reduction in the damages related to stock sale damages and
has filed a notice of appeal. Filing of the appeal requires the
Company to provide a surety bond sufficient to secure the judgement.
The Company is working diligently to obtain this bond but had not done
so as of November 10,1998. If the Company is unable to obtain this
bond, or if Company's appeal is unsuccessful, the judgement would have
a severe adverse impact on the Company's business, financial condition
and results of operation. The Company has filed notices of the
judgement with the Company's insurance carriers.
On October 16, 1998, a complaint was filed against the Company in the
United States District Court for the Southern District of New York by
Promethean Investment Group, L.L.C. The complaint alleges breach of
contract by the Company for failing to proceed with a financing
transaction and seeks damages in an unspecified amount in excess of
$270,000 or a declaration that the Company is required to proceed with
the financing transaction. The Company has not yet filed an answer to
the complaint and the outcome is both immeasurable and undeterminable.
There can be no assurance that the Company will be successful in
defending this litigation.
8. Subsequent Events -
On October 21, 1998, the Company was notified by
PricewaterhouseCoopers LLP ("PWC") that PWC had terminated its
auditor-client relationship with the Company. The Company has begun a
search for new auditors and anticipates that the search will be
completed prior to December 31, 1998.
The Company has entered into a letter of intent with Round Stone
Holdings Ltd., a U.K.-based company ("Round Stone"), providing for the
grant to Round Stone of exclusive manufacturing, marketing and sales
rights with respect to the Company's Rock City and Archistrat
Computers (the "Systems Division") and the sale to Round Stone of all
Systems Division inventory. The letter of intent provides that at
closing Round Stone will pay an amount to be agreed for the Systems
Division inventory plus a one-time license fee of $250,000.
Thereafter, at the end of year 2000, 2001, 2002, and 2003
respectively, Round Stone will pay the Company $500,000, $750,000,
$1,500,000 and $2,000,000. For each of years 2004 and 2005, the
letter of intent provides that Round Stone will pay $2 for each Rock
City system sold and $10 for each Archistrat system sold, up to a
maximum of $2,000,000 in each year. Stanford W. Crane, Jr., President
and Chairman of the Board of Directors of the Company, owns a 30%
equity interest in Round Stone. Closing of the transaction is subject
to the execution and delivery of definitive legal agreements and
requisite approvals. There can be no assurance that the transaction
will occur.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview:
The Panda Project, Inc. (the "Company") is a technology company
engaged in the design, development, manufacture, licensing and sale of
interconnect solutions to generate greater throughput from silicon to
board to system. These technologies are embodied in VSPA, a
three-dimensional semiconductor package, and the Compass connector, a
board-to-board interconnect solution (collectively the "Technology
Products"). VSPA has received JEDEC Committee designation and has
passed Mil Std. 883. In addition, in September 1998, the Compass
Connector received Bellcore approval. The Company recently announced
a streamlining of operations that has included significant reduction
of operations related to the development of the Archistrat line of
computers and the Rock City line of desktop computers (collectively
the "Systems") and any board development related to the Systems. The
Company also announced that it will focus its efforts on Technology
Products. The Company believes that the streamlining of operations to
focus on the Technology Products will have a direct impact on overhead
costs which will be reduced significantly, as provided in the
following discussion of operating expenses.
The Company has firm purchase commitments for prototype,
pre-production and production orders of its Technology Products from
Veridicom, EG&G, SEEQ Technologies Incorporated, Motorola, Kaiser
Aerospace & Electronics, Honeywell, Tamarack Microelectronics Inc.,
Lucent Technologies, and Saab Dynamics. The Company anticipates that
these purchase commitments will result in increased revenues.
However, there can be no assurance that such anticipated revenues will
materialize.
Statements in this Report on Form 10-Q, that are not statements of
historical fact, are to be regarded as forward-looking statements
which are based on information available to the Company as of the date
hereof and involve a number of risks and uncertainties. Among the
important factors that could cause actual results to differ materially
from those indicated by such forward-looking statements are delays in
product development, competitive pressures, general economic
conditions, risks of intellectual property and other litigation, and
the factors detailed below under "Certain Factors That May Affect
Future Results" or elsewhere herein or set forth from time to time in
the Company's periodic reports and registration statements filed with
the Securities and Exchange Commission.
Results of Operations -Third Quarter and Nine Months Ended
September 30, 1998 and 1997
Net revenues decreased during the quarter ended September 30, 1998
("Third Quarter of 1998") to approximately $190,029 as compared to
$1,083,955 for the quarter ended September 30, 1997 ("Third Quarter of
1997"). Product sales for The Third Quarter of 1997 were $392,485.
In The Third Quarter of 1998 revenue was solely recognized from
product sales of the remaining Rock City Inventory and VSPA sales for
prototype, pre-production and production orders. In the Third Quarter
of 1997, a significant portion of the Company's revenue related to one
time licensing fees and contract research and development from the
Defense Advanced Research Projects Agency (DARPA) which was
successfully completed in April 1998. The Company does not anticipate
any further revenue recognition from grants during 1998.
Research and development ("R&D") expenses decreased to approximately
$803,722 for the Third Quarter of 1998 as compared to $1,050,581 for
the third Quarter of 1997. R&D for the Third Quarter of 1998 was
attributable to new custom VSPA designs for specific customer
applications, the refinement of the existing VSPA Flex automation
machines and new VSPA dedication insertion machines. The Company
believes that although its level of R&D spending is appropriate to
support current operations, it will need to increase future R&D
spending to enhance further development of VSPA, Compass Connectors,
Compass PGA and other derivative technologies as resources are
available. Management is currently evaluating the appropriate R&D
expense relative to the current level of activity in its Technology
Products.
Consistent with management's focus on decreasing fixed costs, selling,
general and administrative ("SG&A") expenses decreased for the Third
Quarter 1998 to $2,076,024 compared to $ 2,308,715 for the Third
Quarter 1997. The average number of employees has decreased from 69
at June 30, 1998 to 40 full time employees as of November 1, 1998.
The decrease in full-time employees is directly related to the
decrease in Systems activity. This is not necessarily reflected in
the Third Quarter of 1998 as a reduction was implemented during the
month of September. Monthly payroll decreased to approximately
$190,000 per month for October 1998 from $340,000 for August 1998.
The departments have been realigned to accurately reflect current
business actively related to the Technology Products. The departments
include Product and Equipment Design, Application Engineering, Quality
Control and Reliability, Production, Sales & Marketing and Material
Management. Management believes that this department structure can
adequately support operations of the initial commercialization of its
Technology Products. Management believes that additional employees
will need to be added with further commercialization of its Technology
Products.
Total debt issuance costs associated with the 1998 short-term
borrowings from Helix, including the value of the warrants issued in
connection with such borrowings, charged to amortization expense
during the quarter and nine months ended September 30, 1998, amounted
to approximately $1,246,000 and $2,475,514 respectively. The
valuation of the warrants and related amortization expense represents
a non-cash transaction.
During the quarter ended March 31, 1997, the Company determined that,
due to various events and changes in circumstances (including efforts
to streamline operations and to increase the use of strategic
alliances to manufacture and market the Company's products), certain
long-lived assets were impaired. As a result, in the first quarter of
1997, the Company recorded a charge of approximately $585,000.
For purposes of determining net loss applicable to common stock
for the quarter and nine months ended September 30, 1998, accrued
dividends payable in the amount of approximately $64,415 and $156,000,
respectively, and amortization of the beneficial conversion feature of
$113,457 and $533,713 respectively, related to the issuance of the
Series A Preferred Stock have been added to the net loss. Both amounts
represent non-cash transactions. Basic and diluted loss per share has
been calculated on the basis of net loss applicable to common stock.
YEAR 2000 READINESS
Historically, certain computer programs have been written using two
digits, rather than four digits, to define the applicable year. This
could lead, in many cases, to a computer's recognizing a date using
"00" as 1900 rather than the year 2000. This phenomenon could result
in major computer system failures or miscalculations, and is generally
referred to as the "Year 2000" problem or issue.
The Company is currently in the process of assessing its exposure to
the Year 2000 problem, and has established a comprehensive response to
that exposure. Generally, the Company has Year 2000 exposure in three
areas: (i) financial and management operating computer systems used to
manage the Company's business, (ii) microprocessors and other
electronic devices included as components of therapy and other
equipment used by the Company ("embedded chips") and (iii) computer
systems used by third parties, in particular financial institutions,
customers and suppliers of the Company.
The Company expects to substantially complete Year 2000 testing and
remediation of its financial and management operating systems by June
30, 1999.
The Company has begun an inventory and assessment of its exposure to
embedded chips in its facilities or equipment used in those facilities
and capability of vendors of such equipment to successfully remediate
Year 2000 problems in equipment with embedded chips.
If the Company is unsuccessful in completing remediation of
non-compliant systems, correcting embedded chips and if customers of
vendors cannot rectify Year 2000 issues, the Company could incur
additional costs, which may be substantial, to develop alternative
methods of managing its business and replacing non-compliant
equipment, and may experience delays in payments by customers or to
vendors. The Company has not yet established a contingency plan in
the event of non-compliance by its customers and vendors.
Liquidity and Capital Resources
During February 1998, the Company completed a private placement of
$6.0 million of Series A Preferred stock and received net proceeds of
approximately $5.8 million. The shares of preferred stock are
convertible into common stock at the lower of $3.50 per share (in
accordance the revised terms effective July 2, 1998) or a floating
conversion price. Through September 30, 1998, 164 shares of
preferred stock were converted into an aggregate of 1,918,670 shares
of the Company's common stock.
The Company may require that all unconverted shares of Series A
Preferred be converted at any time if the closing bid price of common
stock is equal to or greater than $12.00 per share for a period of
twenty consecutive trading days. In addition, on February 11, 2003,
the Company may, at its option, require the holders to convert the
Series A Preferred shares which remain outstanding on such date (plus
accrued and unpaid dividends) or redeem such shares of Series A
Preferred. The terms of the Series A Preferred, as revised on July 2,
1998, provide that upon the occurrence of certain Triggering Events,
as defined, the Company may be required to pay the holders $100,000
per month until such time that the Triggering Event has been remedied.
Any requirement that the Company pay such amounts could have a
material adverse impact on the Company in the event the Triggering
Event causing such payment is not remedied on a timely basis.
On August 14, 1998, the Company completed the sale of 2,254,601
shares of its Common Stock in a private placement to accredited
investors with gross proceeds of $3.625 million. Upon exercise of
certain warrants, the investors may elect to receive a reduced number
of shares of common stock in lieu of tendering the warrant exercise
price in cash. The warrants have a term of five years.
During May, June and July 1998, the Company borrowed an aggregate
of $2 million from Helix. The loans are secured by the Company's
intellectual property. During August 1998, Helix agreed to extend the
maturity date of all outstanding notes payable to February 15, 1999,
from their original due date in August 1998, in exchange for the
issuance of a warrant to purchase up to 2,000,000 shares of the
Company's common stock at an exercise price equal to the fair market
value of the Company's common stock at the date of issuance ($2.125).
The note bears interest at a rate of prime plus 2 percentage points
(10.50% at September 30, 1998) computed in Canadian dollars payable
monthly. The warrant has a term of two years. The inability of the
Company to repay Helix loans when due would have a material adverse
impact on the Company.
During the remainder of 1998, the Company expects to continue
development of its Technology Products and commence the commercial
production and sale of its VSPA semiconductor package. The Company
anticipates that sales of its VSPA semiconductor package and the
related revenue, as well as licensing and royalty revenue, will
provide additional resources to at least partially fund its activities
during 1998. However, there can be no assurance that revenues from any
or all of these sources will in fact be realized on the timetable
anticipated by the Company. In addition, no additional revenues
associated with the cooperative development agreement entered into
with the U.S. Government during 1996 will be recognized during the
remainder of 1998 as the agreement was successfully completed during
April 1998.
In the event the Company's working capital, as augmented by proceeds
from the recent sale of Common Stock described above and any sales
revenue, prove to be insufficient to fund operations (due to
unanticipated expenses, delays, problems, or otherwise), the Company
would be required to seek additional financing. Furthermore,
depending upon the Company's progress in the development of its
products and technology and manufacturing capabilities, acceptance of
its products and technology by third parties, and the state of the
capital markets, the Company may also determine that it is advisable
to raise additional equity capital. In addition, in the event that the
Company receives a larger than anticipated number of purchase orders
for VSPA semiconductor package, it may require resources substantially
greater than it currently has or than are otherwise available to the
Company, and the Company may be required to raise additional capital
or engage third parties (as to which engagement there can be no
assurance) to assist the Company in meeting such orders.
The Company is dependent upon the success of the efforts discussed
above to expand its marketing activities in order to obtain additional
orders for its VSPA semiconductor package to continue efforts that may
lead to the commercialization of additional products and technologies
and to finance other working capital requirements. There can be no
assurance that additional financing will be available to the Company
when needed on commercially reasonable terms or at all. The inability
of the Company to obtain additional financing when needed would have a
material adverse effect on the Company, including possibly requiring
the Company to significantly curtail or cease its operations. Any
financing could also result in substantial dilution to existing
investors in the Company.
The Common Stock of the Company is listed on the NASDAQ National
Market ("NMS") and as such, the Company must comply with the NMS
listing requirements including the maintenance of net tangible assets
of at least $4,000,000. On August 25, 1998, the Company announced it
had received a letter from the NASDAQ Stock Market stating that
continued listing of the Common Stock on NMS was no longer warranted.
The Company has appealed this decision and the Common Stock remains
listed on NMS pending resolution of the appeal. There can be no
assurance the Company will be successful in maintaining the listing of
the Common Stock on NMS. In the event the Company's Common Stock is
delisted from NMS, the Company plans to make application for listing
on the NASDAQ SmallCap Market. There can be no assurance the
Company's Common Stock will remain listed on NASDAQ. The delisting of
the Company's Common Stock from NASDAQ may adversely affect the
liquidity of the Company's Common Stock and the ability of the Company
to raise capital. In addition, delisting would cause the Company to
incur material penalty payments pursuant to its agreement with
investors as described in Notes 5 and 7 to the accompanying condensed
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
- -------------------------------------
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS
130 establishes standards for reporting and display of comprehensive
income and its components in financial statements. The Company
believes that this standard does not have an effect on its financial
statements and/or disclosures.
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information." The Company does not believe
that this new standard has a significant effect on its financial
statements and/or disclosures.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following issues and uncertainties, among others, should be
considered in evaluating the Company's outlook:
1. Limited Product Development And Concentration of
Customers; The Company has a limited operating history upon which an
evaluation of its prospects can be made. Such prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in the establishment of a new business in the evolving
electronics industry, which is characterized by an increasing number
of market entrants and intense competition, as well as those
encountered in the shift from development to commercialization of new
products based on innovative technologies. The Company has a limited
number of customers in the prototype, preproduction and early
production stage.
2. Limited Revenues; History Of Significant Losses;
Accumulated Deficit; Anticipated Future Losses; To date, the Company
has generated limited revenues from the sale of its Computer Systems
and Technology Products, from licensing fees and from the activities
associated with its grant from the Defense Advanced Research Projects
Agency. The Company does not anticipate deriving larger revenues from
operations until such time, if ever, that greater numbers of its
semiconductor packages and connectors can be sold, as to which there
can be no assurance. Since inception (April 8, 1992), the Company has
incurred significant net losses, including losses of $1,800,340,
$6,931,346, $23,894,426 and $20,874,101 during the fiscal years ended
March 31, 1994, 1995, 1996 and 1997, respectively, $8,949,652 during
the nine months ended December 31, 1997, and $11,513,995 during the
nine months ended September 30, 1998, resulting in an accumulated
deficit of $74,379,548 as of September 30, 1998. Inasmuch as the
Company expects to continue to incur substantial operating expenses
related to its research and development and sales and marketing
activities (including salaries of executive, technical and research
and development personnel), the Company anticipates that such losses
will continue until such time, if ever, as the Company is able to
generate sufficient revenues to support its operations. There can be
no assurance that the Company will ever be able to generate sufficient
revenues to achieve profitable operations. In addition, the Company
received a going concern opinion as discussed in Note 2 of Notes to
Financial Statements contained in its Form 10-K for the nine-month
transition period ended December 31, 1997.
3. Litigation
On September 8, 1998, a judgement in the amount of $1,227,041.09
was entered in the Circuit Court for the 15th Judicial Circuit, Palm
Beach County, Florida against the Company in favor of Joseph A.
Sarubbi, a former director of the Company. The Company believes that
the judgement contains certain inconsistencies which could result in a
significant reduction in the damages related to stock sale damages and
has filed a notice of appeal. Filing of the appeal requires the
Company to provide a surety bond sufficient to secure the judgement.
The Company is working diligently to obtain this bond but had not done
so as of November 10,1998. If the Company is unable to obtain this
bond, or if Company's appeal is unsuccessful, the judgement would have
a severe adverse impact on the Company's business, financial condition
and results of operation. The Company has filed notices of the
judgement with the Company's insurance carriers.
On October 16, 1998, a complaint was filed against the Company in
the United States District Court for the Southern District of New York
by Promethean Investment Group, L.L.C. The complaint alleges breach
of contract by the Company for failing to proceed with a financing
transaction and seeks damages in an unspecified amount in excess of
$270,000 or a declaration that the Company is required to proceed with
the financing transaction. The Company has not yet filed an answer to
the complaint and the outcome is both immeasurable and undeterminable.
There can be no assurance that the Company will be successful in
defending this litigation.
Even if the Company is successful in defending itself in such
litigation, the diversion of critical resources involved in defending
and settling these actions could have a substantial material adverse
effect on the Company.
4. Significant Capital Requirements; Need For Additional
Financing. The Company's capital requirements in connection with its
operations and development activities have been significant. The
Company has been dependent primarily upon the proceeds of sales of its
securities to fund its activities since inception. During the period
from inception through August 21, 1998, the Company raised capital of
approximately $76.3 million (after deduction of underwriting
discounts, commissions and other selling costs) through the sale of
Common Stock, Series A-3 Convertible Preferred Stock ("Series A
Preferred"), warrants and subordinated debentures and from the
exercise of stock options and warrants.
In the event the Company's working capital, as augmented by
proceeds from the recent sale of common stock described above and any
sales revenue, prove to be insufficient to fund operations (due to
unanticipated expenses, delays, problems, or otherwise). Furthermore,
depending upon the Company's progress in the development of its
products and technology and manufacturing capabilities, acceptance of
its products and technology by third parties, and the state of the
capital markets, the Company may also determine that it is advisable
to raise additional equity capital. In addition, in the event that
the Company receives a larger than anticipated number of purchase
orders for its VSPA semiconductor package, it may require resources
substantially greater than it currently has or than are otherwise
available to the Company, and the Company may be required to raise
additional capital or engage third parties (as to which engagement
there can be no assurance) to assist the Company in meeting such
orders. The Company is dependent upon the success of the efforts
discussed above to expand its marketing activities in order to obtain
additional orders for its VSPA semiconductor package to continue
efforts that may lead to the commercialization of additional products
and technologies and to finance other working capital requirements.
There can be no assurance that additional financing will be available
to the Company when needed on commercially reasonable terms or at all.
The inability of the Company to obtain additional financing when
needed would have a material adverse effect on the Company, including
possibly requiring the Company to significantly curtail or cease its
operations. To the extent that any future financing involves the sale
of the Company's equity securities, the Company's then existing
stockholders may be substantially diluted.
The Company has issued 600 shares of Series A Preferred for an
aggregate purchase price of $6,000,000. The terms of the Series A
Preferred, as amended, provide that upon the occurrence of certain
"Triggering Events", including suspension of sales under the
Registration Statement relating to shares issuable upon conversion of
Series A Preferred, failure of the Company's Common Stock to be
listed, or the suspension of trading in the Company's Common Stock, on
the NASDAQ National Market or the NASDAQ SmallCap Market
(collectively, "NASDAQ"), or failure of the Company to convert shares
of Series A Preferred as required, the Company shall pay the holders
$100,000 on the first day of each month until the Triggering Events
have been remedied. Any requirement that the Company pay such amounts
could have a material adverse impact on the Company in the event the
Triggering Event causing such payment is not remedied on a timely
basis. In addition, if the Company is unable to issue shares of
Common Stock upon conversion of Series A Preferred for any reason,
including because the Company (i) does not have a sufficient number of
shares of Common Stock authorized and available, (ii) is otherwise
prohibited by applicable law, rules or regulations, including without
limitation NASDAQ Rule 4460 (which prohibits the issuance at less than
market value of a number of shares which equals or exceeds 20% of a
company's outstanding securities without shareholder approval) (the
"Exchange Cap"), or (iii) fails to have a sufficient number of shares
of Common Stock registered for resale under a registration statement,
the rate of dividend on the Series A Preferred, shall be permanently
increased by 2% commencing on the first day of each of the second and
third such 30-day periods (or part thereof); and an additional 1% on
the first day of each consecutive 30-day period (or part thereof)
thereafter until such securities have been duly converted or redeemed;
provided that in no event shall the rate of dividend exceed the lower
of 20% and the highest rate permitted by applicable law. The Company
agreed to use its best efforts to obtain shareholder approval prior to
October 31, 1998 of issuance of shares of Common Stock in excess of
the Exchange Cap; however, a shareholder meeting for the purpose of
obtaining such approval has not yet been scheduled. Failure of the
Company to obtain such approval could result in the company being
required to pay the penalties described above.
Stock at exercise prices ranging from $1.63 to $2.125 per share
(collectively, the "Helix Warrants"). The Helix Warrants have
expiration dates ranging from December 19, 1999 to August 7, 2000.
Helix and its affiliates currently hold approximately 10% of the
Company's outstanding Common Stock (not including share issuable upon
exercise of warrants. James T.A. Wooder, a director of the Company,
is a Vice President of Helix's parent, Helix Investments (Canada),
Inc.
In August 1998, the Company completed a private placement of 2,254,601
shares of its Common Stock for aggregate gross proceeds of $3.625M
(the "Private Placement"). In addition to the shares of Common Stock
purchased by each investor in the Private Placement, such investor
received a warrant (the "Private Placement Warrants") to purchase an
equal number of shares of Common Stock, subject to adjustment for
stock splits and similar events, at an exercise price of $2.55 per
share. The Private Placement Warrants expire on August 13, 2003.
Issuance of shares of Common Stock pursuant to exercise of the Private
Placement Warrants is subject to approval of the Company's
shareholders. Under the terms of the Securities Purchase Agreement
relating to the Private Placement, in the event of certain decreases
in the price of the Company's Common Stock from the date of closing of
the Private Placement to the six-month and/or one-year anniversary
dates of such closing, the Company will also be required to issue
certain additional shares of common Stock to the investors (the
"Fill-Up Shares"). Issuance of the Fill-Up Shares required the
approval of the Company's shareholders. The Company agreed to seek
shareholder approval prior to October 31, 1998 of issuance of Fill-Up
Shares and shares of Common Stock issuable pursuant to the exercise of
the Private Placement Warrants; however, a shareholder meeting for the
purpose of obtaining such approval has not yet been scheduled.
In the event (i) the common Stock is delisted or suspended from
trading on NASDAQ, (ii) the Fill-Up Share of shares of Common Stock
issuable pursuant to the exercise of the Private Placement Warrants
are not issuable or are not listed with NASDAQ, or (iii) the Company
fails to issue the Fill-Up Shares as required, the Company shall pay
to the investors in the Private Placement $100,000 for each full
30-day period that the condition continues.
5. Potential for Dilution; Registration Rights; Outstanding
Options and Warrants. As of September 30, 1998, the Company had
issued 1,918,670 shares of Common Stock upon conversion of 164 shares
of Series A Preferred; 436 shares of Series A Preferred remain
outstanding. In the event certain conditions are met, the Company has
the right to cause the issuance of an additional 400 shares of Series
A Preferred. Shares of Series A Preferred are convertible into
shares of Common Stock pursuant to a formula whereby the purchase
price of the shares to be converted ($10,000 per share) plus any
accrued dividends are divided by a conversion price based on the
lesser of a fixed conversion price or a floating conversion price
based on the market price of the Common Stock. The number of shares
issuable upon conversion of Series A Preferred could prove to be
significantly greater in the event of a decrease in the trading price
of the Common Stock. Purchasers of Common Stock could therefore
experience substantial dilution upon conversion of the Series A
Preferred. In addition, an increase in the amount of Common Stock in
the public market as a result of such conversion could reduce the
market price of the Common Stock.
In connection with the Private Placement, the Company agreed that
in the event of decreases in the average closing bid price of the
Common Stock for the twenty trading days immediately preceding the
six-month and/or one-year anniversaries of the closing of the Private
Placement, the Company would, subject to shareholder approval, issue
to investors in the Private Placement a number of Fill-Up Shares which
would in effect cause the investors to have acquired the number of
shares of Common Stock which they would have purchased had the
purchase price paid by investors in the Private Placement as of the
closing date been the same as the twenty-day average closing bid price
of the Common Stock as of such anniversary dates. The number of
Fill-Up Shares to be issued could be substantial in the event of
significant decreases in the market price of the Common Stock. Such
an increase in the amount of Common Stock in the public market could
reduce the market price of the Common Stock and possibly result in a
change in control of the Company.
The Company has reserved 7,366,738 shares of Common Stock,
including 150,000 shares subject to warrants issued in connection with
the sale of the Series A Preferred, 2,346,626 shares subject to the
Private Placement Warrants and 2,850,000 shares subject to the Helix
Warrants, for issuance upon the exercise of warrants. In the event
the 400 additional shares of Series A Preferred described above are
issued, the Company would be required to issue Warrants to purchase an
additional 100,000 shares of Common Stock. In addition, the Company
has reserved 745,100 shares of Common Stock for issuance to employees,
officers, directors and consultants under its 1995 Employee Stock
Incentive Plan, 1993 Performance Incentive Plan and Non-Employee
Director Stock Option Plan. The price which the Company may receive
for the Common Stock issuable upon exercise of such warrants and
options will, in all likelihood, be less than the market price of the
Common Stock at the time of such exercise. Consequently, for the life
of such warrants and options, the holders thereof may have been given,
at nominal cost, the opportunity to profit from a rise in the market
price of the Common Stock. The exercise of all of the aforementioned
securities may also adversely affect the terms under which the Company
could obtain additional equity capital. Should a significant number
of these securities be exercised, the resulting increase in the amount
of the Common Stock in the public market may reduce the market price
of the Common Stock.
6. Compliance with NASDAQ Listing Requirements. The Common
Stock of the Company is listed on the NASDAQ National Market ("NMS")
and the Company must comply with NMS listing requirements, including
the maintenance of net tangible assets of at least $4,000,000. On
August 25, 1998, the Company announced it had received a letter from
the NASDAQ Stock Market stating that continued listing of the Common
Stock on NMS was no longer warranted. The Company has appealed this
decision and the Common Stock remains listed on NMS pending resolution
of the appeal. There can be no assurance the Company will be
successful in maintaining the listing of the Common Stock on NMS. In
the event the Company's Common Stock is delisted from NMS, the Company
plans to make application for listing on the NASDAQ SmallCap Market.
There can be no assurance the Company's Common Stock will remain
listed on NASDAQ. The delisting of the Company's Common Stock from
NASDAQ may adversely affect the liquidity of the Company's Common
Stock and the ability of the Company to raise capital. Delisting
could also result in the Company incurring substantial penalty
payments pursuant to its agreements with investors. In addition, if
the Company's Common Stock is no longer listed on NASDAQ, and the
trading price of the Common Stock is below $5.00 per share, trading in
the Common Stock would be subject to certain rules promulgated under
the Exchange Act, which impose additional sales practice requirements
on broker-dealers. For transactions covered by these rules, a
broker-dealer must make a special suitability determination of the
purchaser and have received the purchaser's prior written consent
prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting
transactions in the Common Stock, which could severely limit the
market liquidity of the Common Stock.
7. Uncertainty Of Market Acceptance. The products and
technologies currently being sold or developed by the Company utilize
newly developed designs. Although the Company believes that its
existing and proposed technology and products represent significant
advancements in semiconductor packaging technology, demand for the
Company's existing and proposed products is subject to a high degree
of uncertainty, as is typical in the case of newly-developed products.
Achieving marketing acceptance for the Company's technology and
existing and proposed products will require substantial marketing
efforts and expenditure of significant funds to educate end users as
to the distinctive characteristics and anticipated benefits of the
Company's proposed products and technologies. Accordingly, due to
their commitment to their own products, such entities may be inhibited
from doing business with the Company. In addition, many end users may
be reluctant to use or sell the Company's products and technologies
until a sufficient number of other end users have already committed to
do so. The Company has hired sales and marketing personnel for its
VSPA semiconductor package and Compass Connector. The Company's
ability to generate revenue from the sale of the VSPA semiconductor
packages or Compass Connectors will be dependent upon, among other
things, its ability to effectively use the internal sales force to
market its products. There can be no assurance that the Company's
marketing efforts will be successful.
8. Uncertainty Of Product And Technology Development;
Technological Factors; Dependence On Third-Party Product Design
Changes. The Company's success will depend in part upon its products
and technology meeting acceptable cost and performance criteria, and
upon their timely introduction into the marketplace. There can be no
assurance that the Company's products and technology will
satisfactorily perform the functions for which they are designed, that
they will meet applicable price or performance objectives or that
unanticipated technical or other problems will not occur which would
result in increased costs or material delays in their development or
commercialization. In addition, technology as complex as that which
will be incorporated into the Company's proposed products may contain
errors which become apparent subsequent to widespread commercial use.
Remedying such errors could delay the Company's plans and cause it to
incur additional costs which would have a material adverse effect on
the Company.
9. Competition; Technological Obsolescence. The markets that
the Company intends to enter are characterized by intense competition.
The Company's Technology Products compete with semiconductor packages
and connectors offered by numerous manufacturers. Many of these
companies have substantially greater financial, technical, personnel
and other resources than the Company and have established reputations
for success in the development, licensing, sale and servicing of their
products and technology. Certain of these competitors dominate their
industries and have the financial resources necessary to enable them
to withstand substantial price competition or downturns in the market
for semiconductor packages, related technologies and/or computers. In
addition, certain companies may be developing technologies or products
of which the Company is unaware, which may be functionally similar, or
superior, to some or all of the Company's products and technologies.
Accordingly, the ability of the Company to compete will depend on its
ability to complete development and introduce to the marketplace in a
timely and cost-competitive manner additional products and technology,
to continually enhance and improve its existing and proposed products,
to adapt its products to be compatible with specific products
manufactured by others, and to successfully develop and market new
products. There can be no assurance that the Company will be able to
compete successfully, that its competitors or future competitors will
not develop technologies or products that render the Company's
products and technology obsolete or less marketable or that the
Company will be able to successfully enhance its products or
technology or adapt them satisfactorily.
10. Dependence On Manufacturers And Suppliers; Lack Of
Manufacturing Experience And Capability. Although the Company has
developed the ability to manufacture the VSPA semiconductor package
and has made arrangements with third-party manufacturers to produce
certain versions of the VSPA semiconductor package, there can be no
assurance that sufficient quantities of VSPA will be able to be
produced to meet demand. In the event the Company's current sources
are unable to produce VSPA in sufficient volumes within a reasonable
period of time, or at all, delays in securing alternative
manufacturing sources would result and would have a material adverse
effect on the Company's operations.
The Company has an arrangement with LG Cable & Machinery Ltd. to
supply the Compass V Connector. Although the Company anticipates that
it will be able to obtain Compass V Connectors from LG Cable &
Machinery Ltd. under this arrangement, no assurance can be given that
the supply of such component will be in quantities sufficient to meet
the customer demand.
11. Dependence On Key Personnel. The success of the Company
will be dependent on the continued personal efforts of Stanford W.
Crane, Jr., its Chairman, President and Chief Executive Officer and
the principal inventor of its proprietary products and technologies,
and certain other key personnel. Although Mr. Crane has entered into a
five-year employment agreement with the Company which extends to
January 1999, the agreement provides that he may resign by giving six
months notice at any time. The loss of his services would have a
material adverse effect on the Company. The Company has obtained
key-man insurance on Mr. Crane's life in the amount of $2,000,000.
The success of the Company also is dependent upon its ability to hire
and retain additional qualified executive, scientific, production and
marketing personnel. Although the Company has been able to hire
qualified personnel, there can be no assurance that the Company will
be able to hire additional qualified personnel or retain such
necessary personnel.
12. Patents And Proprietary Information. The Company's
success will depend on its ability to obtain patents, protect trade
secrets, and operate without infringing on the proprietary rights of
others. As of August 26, 1998, the Company had obtained 13 United
States patents and an aggregate of 39 foreign patents. In addition,
the Company had pending a total of 18 United States and 28 foreign
patent applications. These patents and pending applications relate to
VSPA, Compass PGA, various designs of the Computer Systems, the use of
the Compass Connector in Compass PGA and in the Computer Systems, and
a PCB manufacturing technology known as "Well Tech PCB". The
Company's foreign patent filings have been made in selected countries,
including the Republic of China (Taiwan), Germany, the United Kingdom,
Ireland and France. The Company will continue to file applications in
certain foreign jurisdictions to secure protection in those
jurisdictions in accordance with the Patent Cooperation Treaty and the
Paris Convention for the Production of Industrial Property (which
allows such filings to relate back to the original filing date in the
United States) covering the Company's technology and proposed
products. To the extent possible, the Company also intends to file
patent applications with respect to products and technology that it
may develop in the future.
There can be no assurance that any of the Company's pending
patent applications will ultimately result in an issued patent.
Moreover, the patent laws of other countries may differ from those of
the United States as to the patentability of the Company's products or
technology, and the degree of protection afforded by foreign patents
may be different from that in the United States. The failure by the
Company to obtain patents for which applications are currently pending
could have a material adverse effect on the Company's ability to
commercialize successfully its proposed technology and products. Even
if the Company is able to obtain such patents, there can be no
assurance that any such patents will afford the Company commercially
significant protection for its technology or products. In addition,
other companies may independently develop equivalent or superior
technologies or products and may obtain patent or similar rights with
respect to them. Although the Company believes that its technology has
been independently developed and that its technology does not infringe
on the patents or violate the proprietary rights of others, there can
be no assurance that any of the Company's technology or products, will
not be determined to infringe upon the patents or proprietary rights
of others, or that patents or proprietary rights of others will not
have an adverse effect on the ability of the Company to do business.
If the Company's technology or products were determined to infringe on
the patents, trademarks or proprietary rights of others, the Company
could, under certain circumstances, become liable for damages, which
also could have a material adverse effect on the Company. Moreover, in
the event that the Company's technology or proposed products were
deemed to infringe upon the rights of others, the Company would be
required to obtain licenses to utilize such technology. There can be
no assurance that the Company would be able to obtain such licenses in
a timely manner or on acceptable terms and conditions, and the failure
to do so could have a material adverse effect on the Company. If the
Company were unable to obtain such licenses, it could encounter
significant delays in product market introductions while it attempted
to design around the infringed upon patents or rights, or could find
the development, manufacture or sale of products requiring such
licenses to be foreclosed. In addition, patent disputes are common in
the computer industry and there can be no assurance that the Company
will have the financial resources to enforce or defend a patent
infringement or proprietary rights action.
The Company relies on confidentiality and nondisclosure
arrangements with its employees, consultants and others involved with
the Company's product and technological development efforts. There
can be no assurance that these agreements will provide meaningful
protection to the Company or that other companies will not acquire
information which the Company considers proprietary. Moreover, there
can be no assurance that other companies will not independently
develop know-how comparable or superior to that of the Company.
The Company has registered the Archistrat, VSPA and Rock City
trademarks with the U.S. Patent and Trademark Office and has applied
for appropriate trademark, copyright and other legal protection for
its product names, logos and other identifications. There can be no
assurance that the Company will not be precluded by others from using
any of such identifications or creating proprietary rights with
respect to them.
13. Dependence On The Crane-Panda Licensing Agreement;
Potential Conflicts Of Interest. Pursuant to a license agreement
entered into in January 1996 between the Company and Mr. Crane (the
"Crane-Panda License"), Mr. Crane has granted the Company the
nonexclusive right to utilize the Compass Connector, a key component
in the commercialization of the Company's Computer Systems and the
development and commercialization of Compass PGA. The Crane-Panda
License was executed in connection with the conversion to a
nonexclusive license of the 3M License described below and supersedes
an earlier license agreement between Mr. Crane and the Company
relating to the Compass Connector. Under the Crane-Panda License, the
Company is required to pay Mr. Crane a royalty on any sales of Compass
Connectors as discrete parts in the amount of 5% of the net sales
price for the first five years of the term of the agreement, 2.5% of
the net sales price for the next five years of the term of the
agreement and 2% of the net sales price thereafter, provided that no
royalty is payable until aggregate net sales of the Compass Connector
as discrete parts exceed $100,000. The royalty rate will be reduced
after the fifth anniversary of the agreement if no patent remains in
effect with respect to the Compass Connector. No royalty is payable on
sales of the Compass Connector as incorporated in the Computer Systems
or other computer system or assembly. The Company may grant
sublicenses under the Crane-Panda License, but only for the use of
products as incorporated in the Computer Systems or other computer
system or assembly. To date, there have been no sales requiring the
payment of royalties to Mr. Crane under the Crane-Panda License. The
Crane-Panda License obligates the Company to maintain proprietary
information relating to the Compass Connector on a confidential basis,
notify Mr. Crane of any evidence of infringement with respect to the
Compass Connector and related technology, and cooperate with Mr. Crane
to contest any such infringement. In the event that the Company
becomes bankrupt or insolvent or defaults in any of its material
obligations under the Crane-Panda License and fails to cure any such
defaults within specified cure periods, Mr. Crane may terminate the
Crane-Panda License. The Company is substantially dependent upon the
Crane-Panda License. The termination of the agreement under any
circumstances would have a material adverse effect on the Company.
Although actions of the Company with respect to the Crane-Panda
License must be authorized by a majority of the Company's independent
directors, and the Company and Mr. Crane would be represented by
separate counsel in the event of a dispute concerning the Crane-Panda
license, there can be no assurance that conflicts of interest will not
arise with respect to the Crane-Panda License or that such conflicts
will be resolved in a manner favorable to the Company. In addition,
Mr. Crane retains ownership of the Compass Connector technology, and
has the right to grant licenses to or otherwise transfer rights to the
Compass Connector technology to third parties.
In September 1992, Mr. Crane granted an exclusive license (the
"3M License") to Minnesota Mining and Manufacturing Co. ("3M") to
develop, manufacture, use and sell the Compass Connector other than as
part of a computer system. In February 1996, Mr. Crane and 3M agreed
to convert the 3M License to a nonexclusive license. The 3M License
provides in certain circumstances for the payment of a royalty to Mr.
Crane. As of the date of this Prospectus, Mr. Crane had received no
such payments.
14. Risks Relating To Potential International Operations.
Although the Company currently prices all of its international sales
in U.S. dollars, future sales or licensing of its products or
technologies outside the U.S. may be subject to the risks associated
with fluctuations in currency exchange rates. The Company may also be
subject to other risks associated with international operations,
including tariff regulations and requirements for export licenses,
particularly with respect to the export of certain technologies (which
licenses may on occasion be delayed or difficult to obtain),
unexpected changes in regulatory requirements, longer accounts
receivable requirements, difficulties in managing international
operations, potentially adverse tax consequences, economic and
political instability, restrictions on repatriation of earnings, and
the burdens of complying with a wide variety of foreign laws. In
addition, the laws of certain countries do not protect the Company's
products and intellectual property rights to the same extent as do the
laws of the United States. There can be no assurance that such
factors will not have a material adverse effect on the Company's
future international sales or licenses and, consequently, on the
Company's business and operations as a whole.
15. Antitakeover Statutes. Florida has enacted legislation
that may deter or frustrate takeovers of the Company. The Florida
Control Share Act generally provides that shares acquired in excess of
certain specified thresholds, starting at 20%, will not possess any
voting rights unless such voting rights are approved by a majority
vote of a corporation's disinterested shareholders. The Florida
Affiliated Transactions Act generally requires supermajority approval
by disinterested directors or shareholders of certain specified
transactions between a corporation and holders of more than 10% of the
outstanding voting shares of the corporation or their affiliates.
16. Effect of Certain Charter and Bylaw Provisions. The
Company's Amended and Restated Articles of Incorporation authorize the
Board of Directors to issue up to 2,000,000 shares of Preferred Stock
and to determine the price, rights, preferences and privileges,
including voting rights, of those shares without any further vote or
action of the shareholders. The rights of the holders of the
Company's Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock issued
by the Company, including shares of Series A Preferred which are
currently outstanding or may be issued in the future. In addition,
without the prior written approval of the holders of 66 2/3% of the
Series A Preferred shares, the Company shall not (1) consolidate or
merge with another corporation or other entity or person, whereby the
shareholders of the Company own in the aggregate less than 50% of the
ultimate parent or surviving entity, (2) transfer all or substantially
all of the Company's assets to another corporation or other entity or
person, or (3) fix a record date for the declaration of a distribution
or dividend, whether payable in cash, securities or assets (other than
shares of Common Stock). The Company's Amended and Restated Articles
of Incorporation also provide for staggered terms for the members of
the Board of Directors. Certain provisions of the Company's By-laws,
the issuance of Preferred Stock, certain provisions of the Company's
Amended and Restated Articles Incorporation, and the staggered Board
of Directors could have a depressive effect on the Company's stock
price or discourage a hostile bid in which shareholders could receive
a premium for their shares. In addition, these provisions could have
the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, or delay,
prevent or deter a contest for the Company.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Part II -Other Information
Item 1. Legal Proceedings
On September 8,1998, a judgement in the amount of $1,227,041.09 was
entered in the Circuit Court for the 15th Judicial Circuit, Palm Beach
County, Florida against the Company in favor of Joseph A. Sarubbi, a
former director of the Company. The Company believes that the
judgement contains certain inconsistencies which could result in a
significant reduction in the damages related to stock sale damages and
has filed a notice of appeal. Filing of the appeal requires the
Company to provide a surety bond sufficient to secure the judgement.
The Company is working diligently to obtain this bond but had not done
so as of November 10,1998. If the Company is unable to obtain this
bond, or if Company's appeal is unsuccessful, the judgement would have
a severe adverse impact on the Company's business, financial condition
and results of operation. The Company has filed notices of the
judgement with the Company's insurance carriers.
On October 16, 1998, a complaint was filed against the Company in the
United States District Court for the Southern District of New York by
Promethean Investment Group, L.L.C. The complaint alleges breach of
contract by the Company for failing to proceed with a financing
transaction and seeks damages in an unspecified amount in excess of
$270,000 or a declaration that the Company is required to proceed with
the financing transaction. The Company has not yet filed an answer to
the complaint and the outcome is both immeasurable and undeterminable.
There can be no assurance that the Company will be successful in
defending this litigation.
Item 2. Changes in Securities
On February 11, 1998, the Company issued in a private placement 600
shares of its Series A Convertible Preferred Stock ("Series A
Preferred") for an aggregate purchase price of $6,000,000. See Note 4
to the accompanying condensed financial statements for a description
of the Series A Preferred stock.
During May 1998, all holders of Series A Preferred exchanged their
shares for Series A-1 Preferred shares. The rights, preferences,
privileges, and terms of the Series A-1 Preferred shares are set forth
in the Company's Fifth Articles of Amendment of Amended and Restated
Articles of Incorporation and are the same as those of the Series A
Preferred except as follows; the Company has the option of paying
specified liquidated damages in lieu of redeeming the preferred
shares, if requested by the holders, upon the occurrence of certain
Triggering Events, as defined in the agreement, and upon the
occurrence of other specified events Any payment of liquidated
damages would be made in eight equal installments over a period of
seven months subsequent to the triggering event with interest accruing
at the rate of 8% per annum on the outstanding balance. The total
amount of liquidated damages payable over the seven month period would
approximate the amount of the respective redemption values as
described above.
On July 2, 1998, all holders of Series A-1 Preferred shares exchanged
their shares for Series A-2 Preferred shares. The rights,
preferences, privileges, and terms of the Series A-2 Preferred shares
are set forth in the Company's Sixth Articles of Amendment of Amended
and Restated Articles of Incorporation and are the same as those of
the Series A-1 Preferred except as generally described in Note 4 to
the accompanying condensed financial statements.
On August 18, 1998, all holders of Series A-2 Preferred shares
exchanged their shares for Series A-3 Preferred shares. The rights,
preferences, privileges, and terms of the Series A-3 Preferred shares
are set forth in the Company's Seventh Articles of Amendment of
Amended and Restated Articles of Incorporation and are the same as
those of the Series A-2 Preferred except that the requirement to
convert a minimum number of shares of Series A-3 Preferred stock at a
particular time was eliminated.
In August 1998, the Company completed the sale of 2,254,601 shares of
its common stock in a private placement to accredited investors with
gross proceeds of approximately $3.625 million, (the "Private
Placement"). The Private Placement is described in Note 5 to the
accompanying condensed financial statements. The securities issued in
the Private Placement were issued pursuant to an exemption from
registration under Section 4 (2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) See the Exhibit Index included immediately preceding the
Exhibits to this report, which is incorporated herein by reference.
(b) Reports on Form 8-K:
The Company has filed the following reports on Form 8-K
since July 1, 1998:
Date of filing Items reported
-------------- --------------
1. July 30, 1998 Loan from Helix (PEI) Inc.
2. August 25, 1998 Notice from NASDAQ of delisting
proceedings
3. September 15, 1998 Judgement issued against Company in
Joseph Sarubbi litigation
4. October 8, 1998 Resignation of Kevin Calhoun as
Chief Financial Officer, appointment
of Melissa F. Crane as his
successor.
5. October 28, 1998 Termination of client-auditor
relationship with
PricewaterhouseCoopers LLP.
6. November 10, 1998 Letter of Intent to sell or license
Systems Division assets.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE PANDA PROJECT, INC.
Date: January 26, 1999
By: /s/ MELISSA F. CRANE
------------------------
Melissa F. Crane
Acting Chief Financial Officer
(On behalf of the Registrant
and as Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Description of Exhibit
- ---------- -------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company,
as amended (filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on November 3, 1997) *
3.2 Fourth Articles of Amendment of Amended and Restated Articles
of Incorporation (filed as Exhibit 4.1 to the Company's Form
8-K filed on February 23, 1998) *
3.3 Fifth Articles of Amendment of Amended and Restated Articles
of Incorporation (filed as Exhibit 3.1 to the Company's
Quarterly Report of Form 10-Q for the period ended March 31,
1998) *
3.4 Sixth Articles of Amendment of Amended and Restated Articles
of Incorporation (filed as Exhibit 3.2 to the Company's
amended Quarterly Report of Form 10-Q for the period ended
March 31, 1998 filed on July 2, 1998) *
3.5 Seventh Articles of Amendment of Amended and Restated Articles
of Incorporation (filed as Exhibit 3.5 to Registrant s
Quarterly Report on Form 10-Q for the period ended June 30,
1998) *
3.6 Amended and Restated By-Laws of the Company (filed as Exhibit
3.2 to the Company's Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on November 3,
1997) *
27 Financial Data Schedule
________________
* Incorporated herein by reference
ARTICLE: 5
PERIOD TYPE: 9-MOS
FISCAL YEAR END: DEC-31-1998
PERIOD END: SEP-30-1998
CASH: 1,283,493
SECURITIES: 0
RECEIVABLES: 188,753
ALLOWANCES: 10,000
INVENTORY: 1,522,654
CURRENT ASSETS: 5,035,103
PP&E: 6,653,900
DEPRECIATION: 4,121,476
TOTAL ASSETS: 7,725,231
CURRENT LIABILITIES: 3,620,031
BONDS: 0
PREFERRED MANDATORY: 4,064,606
PREFERRED: 0
COMMON: 164,284
OTHER SE: 74,255,858
TOTAL LIABILITY AND EQUITY: 7,725,231
SALES: 515,186
TOTAL REVENUES: 647,620
CGS: 563,604
TOTAL COSTS: 563,604
OTHER EXPENSES: 9,148,510
LOSS PROVISION: 0
INTEREST EXPENSE: 21,298
INCOME PRETAX: (11,513,995)
INCOME TAX: 0
INCOME CONTINUING: (11,513,995)
DISCONTINUED: 0
EXTRAORDINARY: 0
CHANGES: 0
NET INCOME: (11,513,995)
EPS PRIMARY: (0.95)
EPS DILUTED: (0.95)
