As filed with the Securities and Exchange Commission on October 21, 1999
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
The Panda Project, Inc.
-------------------------------------------
(Name of Registrant as Specified in its Charter)
-------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
$200.00
[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date filed: _________________________
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
October 20, 1999
----------------------
ANNUAL MEETING OF SHAREHOLDERS
YOUR VOTE IS VERY IMPORTANT
----------------------
To the Shareholders of The Panda Project, Inc.
On behalf of the Board of Directors of The Panda Project, Inc., a
Florida corporation ("Panda" or the "Company"), I cordially invite you to
attend an Annual Meeting of the shareholders of Panda, to be held at
10:00 a.m. (Eastern time) on Monday, November 22, 1999 at the Hilton
Hotel, 100 Fairway Drive, Deerfield Beach, Florida 33441. As previously
announced, Panda has entered into an agreement (the "Asset Purchase
Agreement") to sell substantially all of its operating assets to Silicon
Bandwidth, Inc., a Delaware corporation ("SBI"). The terms of the
proposed sale are described more fully in the enclosed Proxy Statement,
and a copy of the Asset Purchase Agreement is attached as Annex A to the
Proxy Statement.
Panda entered into this Asset Purchase Agreement, and the Board of
Directors is recommending that Panda's shareholders approve the proposed
sale, because the Board is of the view that Panda will not be able to
generate sufficient revenues and resulting gross profits to cover its
fixed costs in order to continue its operations in the future. The Board
believes that this reason, coupled with Panda's continued negative cash
flow and the general decline of its financial condition, suggest that the
interests of Panda shareholders would be better served if Panda pursues
the sale of substantially all of its operating assets to SBI. The sale
of substantially all of Panda's operating assets, if approved by the
shareholders, will help Panda minimize its negative cash flow and allow
it to continue to exist as a public "holding" corporation. If approved
by the shareholders, the sale will take place on a date mutually agreed
upon by Panda and SBI, but in no event later than December 30, 1999,
unless extended by the parties.
Panda will receive 10% of SBI's capital stock in exchange for Panda's
operating assets. As part of the closing conditions to the Proposed
Sale, SBI will assist Panda in eliminating certain outstanding
obligations. Panda's shareholders will not receive any dividend or other
form of payment or distribution as a result of the completion of the sale
of the operating assets to SBI. The ownership of Panda's common stock by
the shareholders will not be affected by the sale, and Panda will
continue to be subject to the reporting requirements of the Securities
Exchange Act of 1934. Panda expects that its common stock will continue
to trade on the OTC Bulletin Board. However, Panda will not have any
control over whether, or to what extent, a trading market will exist
following completion of the sale to SBI.
If the proposed sale to SBI is not approved by Panda shareholders,
Panda anticipates that its negative cash flow will continue indefinitely
and that it will likely be unable to continue as a going concern. As
such, if the proposed sale to SBI is not approved by Panda shareholders,
Panda intends to continue its search for another purchaser of its
operating assets.
We cannot complete the sale to SBI without the approval of Panda's
shareholders. We have therefore scheduled an Annual Meeting of Panda's
shareholders to consider and vote upon the proposed sale of Panda's
operating assets to SBI. A majority of the issued and outstanding shares
of Panda's Common Stock must vote in favor of the proposal for the sale
to SBI to be completed.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED, AND RECOMMENDS THAT
YOU VOTE "FOR," THE PROPOSED SALE OF SUBSTANTIALLY ALL OF PANDA'S
OPERATING ASSETS TO SBI. In arriving at its recommendation, the Board of
Directors has given careful consideration to a number of factors which
are described in the enclosed Proxy Statement, including a recommendation
of a special committee of its board of directors that the consideration
SBI will deliver to Panda for Panda's operating assets in the proposed
transaction is in the best interest of Panda.
Panda is also seeking your vote to (1) elect a new director to
serve on Panda's Board of Directors, (2) amend its Articles of
Incorporation (the "Amendment to the Articles") to increase the number of
authorized shares of its common stock from 50,000,000 to 100,000,000 and
(3) ratify the selection by Panda's Board of Directors of Grant Thornton
LLP as independent accountants for the current fiscal year. This
increase in the number of authorized but unissued shares is necessary to
fulfill Panda's obligations under certain existing agreements.
Whether or not you plan to attend the Annual Meeting, please take the
time to vote by completing and mailing the enclosed proxy card to us.
Sending in your proxy will not prevent you from voting in person at the
Annual Meeting, but will assure that your vote is counted if you are
unable to attend the Annual Meeting. If you sign, date and mail your
proxy card to us without indicating how you wish to vote on the proposed
sale to SBI, your proxy will be counted as a vote in favor of the
adoption of the Asset Purchase Agreement and approval of the proposed
sale. If you fail to return your proxy card, the effect will be the same
as a vote against the adoption of the Asset Purchase Agreement and
against the approval of the proposed sale.
The enclosed Proxy Statement provides you with detailed information
about (1) the proposed sale of Panda's operating assets to SBI, (2)
Panda's plans following the completion of the sale and (3) the Amendment
to the Articles. We encourage you to read the entire Proxy Statement,
including the Annexes, and consider the information carefully prior to
casting your vote.
/s/ Stanford W. Crane, Jr.
Stanford W. Crane, Jr.
President and Chief Executive Officer
PRELIMINARY COPY CONFIDENTIAL
FOR USE OF THE COMMISSION ONLY
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 22, 1999
The Panda Project, Inc. ("Panda") will hold an annual meeting of
its shareholders (the "Annual Meeting") on November 22, 1999, 10:00 a.m.
Eastern time, at the Hilton Hotel, 100 Fairway Drive, Deerfield Beach,
Florida 33441 for the following purposes:
1. To consider and vote on a proposal (the "Proposed Sale") to
approve an Asset Purchase Agreement, dated as of July 19, 1999, as
amended (the "Asset Purchase Agreement"), between Panda and Silicon
Bandwidth, Inc., a Delaware corporation ("SBI"), and related transactions
for the sale of substantially all the operating assets of Panda.
2. To consider and vote upon a proposal to amend Panda's Articles
of Incorporation (the "Amendment to the Articles") to increase the
authorized shares of its common stock, par value $.01 per share (the
"Panda Common Stock"), from 50,000,000 to 100,000,000.
3. To elect a director to serve on Panda's Board of Directors until
the 2002 Annual Meeting and until his successor is duly elected and
qualified.
4. To ratify the selection by the Board of Directors of Grant
Thornton LLP as independent accountants for the current fiscal year.
5. To transact such other business as may properly come before the
Annual Meeting.
Panda has fixed the close of business on October 26, 1999 as the
Record Date for the determination of shareholders entitled to vote at the
Annual Meeting or any adjournment thereof. A list of such shareholders
will be available for inspection by shareholders of record during
business hours at Panda's principal place of business in Boca Raton,
Florida for ten days prior to the date of the Annual Meeting, and will
also be available at the Annual Meeting.
Approval of the Proposed Sale requires the affirmative vote of a
majority of the outstanding shares of Panda Common Stock entitled to vote
at the Annual Meeting. Approval of the other proposals requires that the
number of votes cast in favor of these proposals at the Annual Meeting
exceed those votes cast against. Failure to return a properly executed
proxy card or to vote at the Annual Meeting will have the same effect as
a vote against the Proposed Sale.
The Board of Directors unanimously recommends that shareholders vote
to approve the Proposed Sale, which is described in detail in the
accompanying Proxy Statement, and the other proposals.
Please sign and promptly return the proxy card in the enclosed
envelope, whether or not you expect to attend the Panda Annual Meeting.
By Order of the Board of Directors,
/s/ Melissa F. Crane
Secretary
Boca Raton, Florida
October 20, 1999
TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING
STATEMENTS 1
PANDA'S ANNUAL MEETING 3
Proposal 1: Proposed Sale of Substantially
All of Panda's Assets 3
VOTING SECURITIES OF PANDA 3
Times and Places; Quorum; Votes Required
for Approval 3
Intentions and Agreements to Vote 3
No Dissenters' Rights 5
Proxies 5
Votes Required for Approval of Proposal 1 5
THE PROPOSED SALE 6
Panda 6
SBI 6
VantagePoint Venture Partners 7
Use of Proceeds 7
Background of the Proposed Sale 7
Panda's Reasons for the Proposed Sale;
Recommendation of the Board of Directors 9
Recommendation of the Special Committee 10
Absence of Financial Advisor 11
Approval of the Panda Series A Preferred Shareholders 12
Interests of Certain Persons in the Proposed Sale 12
Transition Planning 12
Changes in Shareholder Rights after the Proposed Sale 13
Continued Operations of the Company 13
Accounting Treatment; Material Federal
Income Tax Consequences 13
Regulatory Approvals 14
RISKS AND CONSIDERATIONS RELATED TO
THE PROPOSED SALE 14
Holding Company Structure 14
Unregistered Stock; Absence of a Public Trading Market 14
Absence of an Operating History 14
Absence of a Financial Advisor 15
No Dividends on SBI Common Stock 15
Minority Interest; No Voting Power 15
Remaining Panda Assets Have Limited Value 15
No Reporting Requirements 15
THE ASSET PURCHASE AGREEMENT 15
Terms of the Asset Purchase Agreement 15
Operating Assets Being Sold and Liabilities
and Obligations Assumed 15
Consideration Price 16
Closing 17
Conditions to Closing 17
Representations and Warranties 18
Covenants 20
Stockholders Agreement 21
Indemnification 21
Termination and Waiver 22
UNAUDITED PRO FORMA FINANCIAL INFORMATION 22
PROPOSAL 2: AMENDMENT TO ARTICLES OF INCORPORATION TO
INCREASE AUTHORIZED SHARES 30
Votes Required for Approval of Proposal 2 32
PROPOSAL 3: ELECTION OF DIRECTORS 33
SUMMARY COMPENSATION 39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 43
Recent Panda Securities Issuance 44
SELECTED FINANCIAL DATA 46
MARKET FOR PANDA'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 47
INFORMATION REGARDING PANDA 48
Business 48
Properties 54
Legal Proceedings 55
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 56
Change in Fiscal Year End 56
Results of Operations 56
Liquidity and Capital Resources 59
Year 2000 Issues 60
Votes Required for Approval of Proposal 3 61
PROPOSAL 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS 62
Votes Required for Approval of Proposal 4 62
EXPERTS 63
SHAREHOLDER PROPOSALS 63
SHAREHOLDER LIST 63
WHERE YOU CAN FIND MORE
INFORMATION 64
Annex A: Asset Purchase Agreement
Annex B: Text of Amendment to Panda's Articles of Incorporation
<PAGE>
Page 1
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements regarding Panda's future financial condition, results
of operations, cash flows, financing plans, business strategy, projected
costs and capital expenditures, operations after the proposed sale of
substantially all of Panda's operating assets and words such as
"anticipate," "estimate," "expect," "project," "intend," and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks, uncertainties and assumptions.
All of these forward-looking statements are based on estimates and
assumptions made by Panda's management which, although believed by
Panda's management to be reasonable, are inherently uncertain.
Stockholders are cautioned that such forward-looking statements are not
guarantees of future performance or results and involve risks and
uncertainties and that actual results or developments may differ
materially from the forward-looking statements as a result of various
considerations, including the considerations described in this Proxy
Statement.
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
----------------------
Proxy Statement
for Annual Meeting of Shareholders
to be held November 22, 1999
----------------------
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of The Panda Project,
Inc. ("Panda" or the "Company") for use at the Annual Meeting of the
Shareholders of Panda (the "Annual Meeting") to be held on November 22,
1999 at 10:00 a.m. Eastern time, at the Hilton Hotel, 100 Fairway Drive,
Deerfield Beach, Florida 33441, and at any adjournment or postponement
thereof for the purposes stated in the attached Notice of Annual Meeting
of the Shareholders. This Proxy Statement, the Notice of Annual Meeting
of Shareholders and the accompanying form of Proxy are first being mailed
to shareholders on or about October 20, 1999. Panda also will mail with
this Proxy Statement, its Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1998 and its Quarterly Report on Form 10-Q/A for
the quarter ended June 30, 1999.
The matters to be considered and voted upon at the Annual Meeting will
be:
1. A proposal (the "Proposed Sale") to approve an Asset Purchase
Agreement, dated as of July 19, 1999, as amended (the "Asset Purchase
Agreement"), between Panda and Silicon Bandwidth, Inc., a Delaware
corporation ("SBI"), and related transactions for the sale of
substantially all the operating assets of Panda.
2. A proposal to amend Panda's Articles of Incorporation (the
"Amendment to the Articles") to increase the authorized shares of its
common stock, par value $.01 per share (the "Panda Common Stock"), from
50,000,000 to 100,000,000.
3. A proposal to elect a director to serve on Panda's Board of
Directors until the 2002 Annual Meeting and until his successor is duly
elected and qualified.
4. A proposal to ratify the selection by the Board of Directors of
Grant Thornton LLP as independent certified public accountants for the
current fiscal year.
5. Such other business as may properly come before the Annual
Meeting.
A copy of the Asset Purchase Agreement is attached as Annex A to this
Proxy Statement.
<PAGE>
Page 2
The description of the proposals set forth above is intended only as a
summary and is qualified in its entirety by the more detailed information
contained elsewhere in this Proxy Statement.
<PAGE>
Page 3
PANDA'S ANNUAL MEETING
PROPOSAL 1:
PROPOSED SALE OF SUBSTANTIALLY ALL OF PANDA'S ASSETS
----------------------------------------------------
VOTING SECURITIES OF PANDA
Times and Places; Quorum; Votes Required for Approval
The Annual Meeting will be held at the Hilton Hotel, 100 Fairway
Drive, Deerfield Beach, Florida 33441, on November 22, 1999, starting at
10:00 a.m. Eastern time. The Board of Directors has fixed the close of
business on October 26, 1999, as the Panda Record Date. Only holders of
record of shares of Panda Common Stock on the Record Date are entitled to
notice of and to vote at the Annual Meeting. On the Record Date, there
were 29,689,425 shares of Panda Common Stock outstanding and entitled to
vote at the Panda Annual Meeting held by 285 shareholders of record.
Each holder of record, as of the Record Date, of Panda Common Stock is
entitled to cast one vote per share. The presence, in person or by
proxy, of the holders of a majority of the outstanding shares of Panda
Common Stock entitled to vote is necessary to constitute a quorum at the
Annual Meeting. The affirmative vote, in person or by proxy, of the
holders of a majority of the shares of Panda Common Stock outstanding on
the Record Date is required to approve and adopt the Proposed Sale.
THE MEMBERS OF THE BOARD OF DIRECTORS HAVE UNANIMOUSLY APPROVED THE
PROPOSED SALE (SUBJECT TO SHAREHOLDER APPROVAL) AND RECOMMEND A VOTE FOR
THE ADOPTION AND APPROVAL OF THE PROPOSED SALE.
Intentions and Agreements to Vote
In connection with the Proposed Sale, a majority of shareholders,
who in the aggregate will own approximately 52% of Panda Common Stock on
the Record Date, have agreed pursuant to a settlement agreement with
Panda and a voting agreement (the "Voting Agreement") with SBI to vote
their shares of Panda Common Stock in favor of the Proposed Sale.
Shareholders who are a party to the Voting Agreement include GAM
Arbitrage Fund L.P., AGR Halifax Fund, Ltd., Leonardo L.P., Ramius Fund,
Ltd., Raphael L.P., Helix (PEI) Inc. and AG Super Fund L.P. Listed below
are the parties to the Voting Agreement and the number of shares of Panda
Common Stock they agreed to vote:
Shares to be
Received Upon Total Number
Conversion of of Shares
Total Shares the Series A to be
Shareholder Currently Held Preferred Stock Voted
- ----------- -------------- --------------- -------
GAM Arbitrage Fund
L.P. 0 601,719 601,719
AGR Halifax
Fund Ltd. 1,366,619 11,682,842 13,049,461
Leonardo L.P. 911,077 6,492,420 7,403,497
Ramius Fund,
Ltd. 273,325 0 273,325
Raphael L.P. 182,217 900,472 1,082,689
Helix (PEI) Inc. 1,000,000 0 1,000,000
AG Super Fund L.P. 0 585,228 585,228
All of these entities are holders of Series A Preferred Stock
except for Helix (PEI) Inc., which is Panda's largest creditor. Except
for Helix (PEI) Inc., the number of shares to be voted by each entitiy
includes shares issuable upon conversion of the Series A Preferred Stock
into shares of Common Stock. Joseph A. Sarubbi also agreed to vote his
2,100,000 shares in favor of the Proposed Sale pursuant to the Amended
Settlement Agreement (as defined herein). He has delivered an
irrevocable proxy to Panda voting in favor of the Proposed Sale.
<PAGE>
Page 4
The Series A Preferred shareholders agreed to enter into the Voting
Agreement pursuant to the Exchange Agreement (as defined herein) to
induce SBI to consummate the Proposed Sale. Helix (PEI) Inc. agreed to
enter into the Voting Agreement to induce SBI to consummate the Proposed
Sale and to assume Panda's obligations to Helix (PEI) Inc.
The Voting Agreement and the Amended Settlement Agreement provide that
Panda shareholders party thereto vote their shares of Panda Common Stock
in favor of the approval of the Proposed Sale and any matter that could
reasonably be expected to facilitate the Proposed Sale and against
approval of any proposal for any recapitalization, merger, sale of assets
or other business combination (other than the Proposed Sale) between
Panda and any person or entity other than SBI (an "Opposing Proposal").
The Voting Agreement also provides that, prior to the Record Date for the
Panda Annual Meeting relating to the Proposed Sale, holders of Share
Equivalents will exercise or convert such number of Share Equivalents, as
the case may be, into capital stock of Panda, pro rata in the amount
determined by SBI to be necessary to achieve approval of the Proposed
Sale or rejection of an Opposing Proposal, and vote such shares of Panda
Common Stock as set forth above. "Share Equivalents" are defined in the
Voting Agreement as any securities of Panda convertible into or
exercisable for shares of capital stock of Panda. The Voting Agreement
also provides that Panda shareholders will execute and deliver
irrevocable proxies appointing the board of directors of SBI as their
sole and exclusive proxies.
Joseph A. Sarubbi and the parties to the Voting Agreement constitute a
majority of the outstanding shares of Panda Common Stock entitled to vote
on the proposals that are the subject of this Proxy Statement.
Therefore, absent an extraordinary event, Panda believes that approval of
the proposals is assured.
In addition, the Voting Agreement provides that Panda will enter into
an agreement with Helix, a shareholder and holder of a security interest
in certain assets of Panda, to restructure the indebtedness of Panda (the
"Secured Debt") currently secured by Helix's security interest in certain
assets of Panda (the "Restructuring Agreement"). The Restructuring
Agreement provides that (i) Helix will release its security interest in
all assets of Panda other than its intellectual property assets and (ii)
the terms of the Secured Debt will be modified so that (A) the Secured
Debt accrues interest after the Closing at a rate of 6% per annum,
calculated on a monthly basis, (B) any interest accrued with respect to
the Secured Debt prior to the Closing is forgiven by Helix and (C) the
Secured Debt will be subject to (x) a principal payment obligation of
$1,000,000 immediately after the Closing and (y) principal and interest
payments aggregating $100,000 per month on each of the monthly
anniversaries of the Closing (and such lesser amount on the eleventh
monthly anniversary of the Closing as will satisfy all remaining
principal and interest on the Secured Debt).
Panda entered into the Exchange Agreement, dated May 12, 1999, by
and among Panda and the Panda Series A Preferred shareholders (the
"Exchange Agreement"). Pursuant to the Exchange Agreement, all holders
of Series A Preferred Stock agreed to exchange their Series A Preferred
Stock for shares of Panda Common Stock. In the Exchange Agreement, Panda
agreed to allow the conversion of certain shares of Series A Preferred
Stock into Panda Common Stock at a rate of $0.261 and to permit the sale
of the Panda Common Stock. This conversion rate was equal to the
conversion rate under the terms of the Series A Preferred Stock. Panda
also agreed to issue penalty shares to the holders of Series A Preferred
Stock at the same exchange rate to satisfy a covenant in the agreement
with the holders requiring Panda to pay the Holders an aggregate of
$100,000 per month during such time as Panda is not listed on a national
securities exchange or NASDAQ. The total amount of the penalty was
$916,500. The holders of Series A Preferred Stock agreed (i) to enter
into a voting agreement to vote their shares of Panda Common Stock in
favor of the Proposed Sale and (ii) not to sell certain amounts of their
Panda Common Stock received pursuant to the Exchange Agreement. Holders
of the Series A Preferred Stock also agreed to release Panda from all
existing obligations to them. No other agreements were entered into
among Panda and the Series A Preferred shareholders to induce them to
exchange their shares of Series A Preferred Stock and to vote for the
Proposed Sale.
Since beginning discussions with SBI, Panda has issued 2,100,000
shares of Panda Common Stock to Joseph Sarubbi and 1,000,000 shares of
Panda Common Stock to Helix (PEI), all of which shares are subject to
voting agreements.
<PAGE>
Page 5
No Dissenters' Rights
Holders of Panda Common Stock are not entitled to dissenters' rights
in connection with the Proposed Sale.
Proxies
All shares of Panda Common Stock represented by properly executed
proxies received prior to or at the Annual Meeting, as the case may be,
and not revoked, will be voted in accordance with the instructions
indicated in such proxies. If no instructions are indicated on a
properly executed returned proxy, such proxies will be voted FOR the
approval of the Proposed Sale. A properly executed proxy marked
"ABSTAIN," although counted for purposes of determining whether there is
a quorum and for purposes of determining the aggregate voting power and
number of shares represented and entitled to vote at the applicable
Annual Meeting, will not be voted. Accordingly, since the affirmative
vote of a majority of outstanding shares is required for approval of the
Proposed Sale, a proxy marked "ABSTAIN" will have the effect of a vote
against such Proposed Sale. Shares represented by "broker non-votes"
(i.e., shares held by brokers or nominees which are represented at a
meeting but with respect to which the broker or nominee is not empowered
to vote on a particular proposal) will be counted for purposes of
determining whether there is a quorum at the applicable Annual Meeting.
Brokers and nominees are precluded from exercising their voting
discretion with respect to the approval and adoption of the Proposed Sale
and thus, absent specific instructions from the beneficial owner of such
shares, are not empowered to vote such shares with respect to the
approval and adoption of such proposals. Therefore, since the
affirmative vote of a majority of the aggregate voting power is required
for approval of the Proposed Sale, a "broker non-vote" with respect to
either proposal will have the effect of a vote against the Proposed Sale.
The Board of Directors is not currently aware of any business to be
acted upon at the Annual Meeting other than as described herein. If,
however, other matters are properly brought before the Annual Meeting, or
any adjournments or postponements thereof, the persons appointed as
proxies will have discretion to vote or act thereon according to their
best judgment. Such adjournment may be for the purpose of soliciting
additional proxies. Shares represented by proxies voting against the
approval and adoption of the Proposed Sale will be voted against a
proposal to adjourn the respective Annual meeting for the purpose of
soliciting additional proxies. Panda does not currently intend to seek
an adjournment of its Meeting.
A shareholder may revoke his or her proxy at any time prior to its use
by delivering to the Secretary of Panda a signed notice of revocation or
a later-dated signed proxy or by attending the Annual Meeting and voting
in person. Attendance at the Annual Meeting will not in itself
constitute the revocation of a proxy.
It is the policy of Panda to keep confidential proxy cards, ballots
and voting tabulations that identify individual shareholders, except
where disclosure is mandated by law and in other limited circumstances.
The cost of solicitation of proxies will be paid by Panda for Panda
proxies. In addition to solicitation by mail, arrangements will be made
with brokerage houses and other custodians, nominees and fiduciaries to
send proxy material to beneficial owners; and Panda will, upon request,
reimburse them for their reasonable expenses in so doing. Panda has
retained ADP to aid in the solicitation of proxies and to verify certain
records related to the solicitation at a fee of $8,000 plus expenses. To
the extent necessary in order to ensure sufficient representation at its
Annual Meeting, Panda may request by telephone or telegram the return of
proxy cards. The extent to which this will be necessary depends entirely
upon how promptly proxy cards are returned. Shareholders are urged to
send in their proxies without delay.
Votes Required for Approval of Proposal 1
Approval of Proposal 1 requires the affirmative vote of a majority of
the outstanding shares of Panda Common Stock issued and outstanding as of
the Record Date.
<PAGE>
Page 6
THE PROPOSED SALE
Panda
Panda is a technology company engaged in the development, manufacture
and sale of Panda's proprietary semiconductor packaging and interconnect
devices (the "Technology Products"). Panda also has been engaged in the
design and manufacturing of modular workstations and desk top computers
("Systems"). Due to financial constraints, Panda discontinued all
operations related to the Systems business in December 1998. The
features and design of the Technology Products, many of which are
protected by United States and foreign patents or patent applications,
are intended to address the need for greater bandwidth in electronics
products. Panda believes that its products will satisfy the market's
demand for increased bandwidth in computer, telecommunications,
automotive and other electronics industries by enhancing the performance
of new generations of high speed semiconductors.
SBI
SBI was recently organized as a Delaware corporation for the purpose
of acquiring the intellectual property portfolio and certain fixed assets
related to the interconnect and semiconductor packaging business of
Panda. SBI will initially be capitalized with $6,000,000, of which
$1,000,000 will be paid to Helix upon closing of the transaction. Within
the first year of ongoing operations, SBI anticipates the need for
additional financing which it will seek from the private capital markets.
SBI intends to continue marketing, manufacturing and selling the
technology acquired from Panda. Additionally, SBI intends to
commercialize other related technologies for the semiconductor packaging
and interconnect markets.
SBI's strategy is to (i) continue the commercialization of the VSPA
and Compass V technology as well as continuing to design and produce
leading-edge custom packaging solutions; (ii) maintain advanced
manufacturing capabilities through partnerships with LG Cable & Machinery
as well as Possehl Hong Kong Machinery Ltd. and (iii) leverage the scale
and scope of the packaging and interconnect capabilities to provide
Integrated Interface Modules for silicon to system applications.
After the acquisition, SBI will be controlled by VantagePoint Venture
Partners. The board of directors will initially have five members
including the chief executive officer of SBI, three representatives of
VantagePoint Venture Partners and one outside director. The chief
executive officer and the representatives of VantagePoint Venture
Partners will not receive any additional compensation for serving on the
board of directors. The independent directors will have some level of
compensation for service.
Principal elements of the Company's strategy are set forth below.
Similar forces drive future customer demand for the packaging and
interconnect products acquired by SBI. The electronics industry is
seeking greater "Bandwidth" to increase performance in a variety of
applications. Panda's VSPA and the new Cluster Grid Array address the
semiconductor market for high I/O with thermal requirements as well as
new emerging markets such as System on Chip, Monitor on Chip and
Integrated modules for the telecommunications, medical and computer
industries.
VSPA competes very effectively with the enhanced versions of the BGA.
A customer application that currently uses a BGA with a heatsink for
additional thermal dissipation is an ideal candidate for VSPA. Using
VSPA will reduce cost while improving thermal performance. Target
customers include Fabless companies designing all types of Integrated
Circuits ("IC") for the telecommunications, graphics chips, and sensor
markets. VSPA is also able to withstand a tremendous amount of
environmental stress including high temperature and the potentially
explosive automotive engine environment. The new Cluster Grid Array
("CGA") addresses the high I/O market segment and competes against very
expensive LGA, BGA and CCGA. These problems of these current packages,
which include difficulties with the SMT process and routing, open the
door for a robust high density pluggable chip scale package.
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The interconnect technology includes the Compass V connector which
recently received Bellcore approval. The interconnect has been designed
for use in backplane applications specifically for the telecommunications
industry.
Other technologies developed but never commercialized include
Welltech, a routing technology for printed circuit boards to increase the
amount of traces thereupon without degradation of signal integrity. As
the industry moves to higher I/O, then a new routing technology will be
required. Welltech has never been introduced.
SBI believes that partnering with large companies for high volume
manufacturing will be a key factor in future success and in attracting
and retaining customers. SBI will produce all prototype and
preproduction orders using the acquired VSPA Flex machines. SBI will
maintain Panda's current suppliers in order to facilitate the transition.
SBI believes that there will be no interruption of production to current
customers.
SBI believes that by bringing new package designs to market early, its
designs are more likely to enjoy a competitive advantage, which in turn
will allow the Company to obtain higher margins. SBI also seeks to
capture substantial market share and to spur the industry-wide adoption
of its integrated interface solutions in specific market areas. SBI
believes these modules types will comprise some of the highest growth and
more profitable segments of the interconnect and packaging market in
coming years.
VantagePoint Venture Partners
VantagePoint Venture Partners ("Vantage" or "VantagePoint") manages
three private venture capital funds with more than $800 million. The
firm offers a unique blend of venture capital, investment banking,
operations, legal, sales, marketing and advertising experience, combined
with deep expertise in data networking, next-generation communications
services, e-commerce and the Internet.
Use of Proceeds
Panda intends to hold SBI common stock received in the Proposed Sale
for investment purposes. Panda shareholders will not receive any
dividend or other form of payment or distribution as a result of the
completion of the sale of Panda's Assets as defined in the Asset Purchase
Agreement (the "Operating Assets") to SBI. In the event, if ever, that
SBI completes an initial public offering or is acquired, the Board of
Directors intends to dissolve the Company and distribute to the Panda
shareholders either SBI common stock or the proceeds received by Panda if
SBI is acquired. Panda has agreed not to distribute the SBI common stock
to its shareholders so long as SBI remains a private company. The
ownership of Panda's Common Stock by the Panda shareholders will not be
affected by the Proposed Sale, and Panda will continue to be subject to
the reporting requirements of the Securities Exchange Act of 1934. Panda
expects that Panda Common Stock will continue to trade on the OTC
Bulletin Board. However, Panda will not have any control over whether,
or to what extent, a trading market will exist following completion of
the Proposed Sale.
Background of the Proposed Sale
Since 1996, Panda has experienced significant operating losses in
attempts to develop its Technology Products and Systems business. Panda
has lacked additional capital funding for its operations and the Board of
Directors believes Panda has exhausted all resources for such financing.
The financing Panda has received has been dilutive and has had a negative
effect on the price of Panda Common Stock. Other non-operational events
also had a significant effect on Panda's operations. In August 1998,
Panda received a notice from the National Association of Securities
Dealers, Inc. regarding the delisting of Panda Common Stock from the
Nasdaq National Market. In September 1998, Joseph Sarubbi obtained a
judgment against Panda in the amount of $1,227,041.
In September 1998, the Board of Directors determined that Panda would
not be able to generate sufficient revenues and resulting gross profits
to cover its fixed costs in order to continue its operations in the
future. The Board of Directors believed the factors mentioned above,
coupled with Panda's continued negative cash flow and the general decline
of its financial condition, suggested that the interests of Panda's
shareholders would be better served if Panda pursued the sale of
substantially all of its Operating Assets.
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Panda's management contacted over 35 companies and venture capital
firms between March 1997 and May 1999 regarding their interest in
providing capital to Panda, acquiring Panda or acquiring Panda's assets.
None of the parties approached expressed a serious interest in such a
transaction except for VantagePoint Venture Partners ("Vantage").
Archimedes Capital LLC ("Archimedes"), an entity controlled by Matthew A.
Ocko, a partner of Vantage, entered into a consulting arrangement with
Panda four months prior to discussions between Vantage and Panda for the
sale of Panda's assets. Mr. Ocko ceased consulting to Panda once
discussions between Panda and Vantage commenced. In February 1999,
Vantage indicated it would be willing to consider an acquisition of
Panda, but only if the transaction was structured as an asset acquisition
in which Vantage or an entity founded by Vantage would assume only
certain liabilities of Panda.
In February 1999, Panda defaulted on certain loans from Helix (PEI)
Inc. ("Helix"). Helix possessed a security interest in all of the
intellectual property assets of Panda. Helix communicated to Panda that,
in order to avoid an "Event of Default" under the parties' loan agreement
and resulting foreclosure on Panda's intellectual property assets, either
(i) the Helix loans would need to be repaid in full or (ii) the capital
structure of Panda would need to be restructured in order to modify the
rights of Panda's preferred shareholders. Helix also requested 10% of
the equity of Panda with protection for antidilution.
In light of these developments, the Board of Directors, in a special
meeting held on April 23, 1999, decided to take the course of the
strategy it had originally discussed in its February 1999 meeting by
selling Panda's Operating Assets to SBI, discontinuing Panda's business
operations, and continuing the existence of Panda as a public "holding"
corporation whose principal asset would be the ownership of its interest
in SBI. At the special meeting, the Board of Directors approved the
execution and delivery of a letter of intent with SBI for the sale of
substantially all of Panda's Operating Assets to SBI. The Board of
Directors opted for the Proposed Sale to Vantage because (1) it believed
it was optimizing the return on the value of Panda's assets, (2) Vantage
agreed to assume a significant amount of Panda's liabilities and (3) the
Board of Directors had confidence in Vantage's ability to conclude the
transaction in a timely manner. To determine whether Panda was
optimizing the return on its assets, the Board of Directors reviewed the
total consideration to be received from SBI in comparison to all other
viable offers previously received for Panda and its Operating Assets.
Panda and Vantage commenced preliminary discussions concerning the
Proposed Sale in February 1999. Between February and May 1999, Vantage
and Panda engaged in significant negotiations related to the sale of
Operating Assets. There were several financing alternatives contemplated
with the intentions to maximize the return for the Company's common
shareholders and restructure the Helix loans. It was concluded that the
likely liquidation value of the Company's intellectual property if sold
through the method permitted under the Helix loan documents would yield a
lower value than if the intellectual property was sold in conjunction
with certain fixed assets to manufacture the product as well. It was
determined that the Company had payables in excess of $1,000,000, loans
to Helix in the amount of $2,000,000 and other various on going
obligations. The Company had a negative book value. If the Company were
liquidated, the shareholders would receive nothing for their shares.
There have been studies performed on liquidation values of business
entities such as one by Hite, Owers & Rogers. It was concluded that the
sale value was approximately 50% of the market value of the assets. The
10% offer to Panda shareholders was determined by Vantage Point as a
reasonable and fair premium to pay over the Company's current book value
for the intellectual property and certain fixed assets. On May 14, 1999,
Panda announced it had entered into a letter of intent with SBI with
respect to the sale of substantially all of its operating assets. During
the months of May and June 1999, the parties exchanged drafts of the
Asset Purchase Agreement and negotiated the remaining terms of the
transaction. During the period, Panda furnished Vantage with requested
due diligence materials. On July 15, 1999, the Board of Directors, which
was comprised of Stanford W. Crane, Jr. and William E. Ahearn, approved
the Asset Purchase Agreement. The Asset Purchase Agreement was executed
by SBI and Panda on July 19, 1999.
Other than as discussed above with respect to the negotiations
regarding the Asset Purchase Agreement and related agreements, the only
other material contracts arrangement, understanding, relationship,
negotiation or transaction between SBI and Panda in the last two fiscal
years or in 1999 has been the "bridge" loans extended by SBI to Panda.
On October 1, 1999, August 17, 1999, July 15, 1999 and June 11, 1999,
Panda entered into agreements with SBI to borrow $300,000, $325,000,
$325,000 and $300,000, respectively. In connection with these loans,
Panda has granted to SBI a security interest in substantially all of the
assets of the Company pursuant to a security agreement. The loans will
bear interest at a rate of 6% per annum and are due and payable on
December 30, 1999. Panda and SBI have engaged in discussions regarding
the forgiveness of loans made by SBI to Panda. In exchange for the
forgiveness by SBI of the loans, Panda would agree to reduce the
capitalization requirements of SBI by the amount of the loans forgiven.
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Page 9
Panda's Reasons for the Proposed Sale; Recommendation of the Board of
Directors
THE BOARD OF DIRECTORS OF PANDA HAS UNANIMOUSLY APPROVED THE PROPOSED
SALE AND RECOMMENDS APPROVAL OF THE PROPOSED SALE BY PANDA SHAREHOLDERS.
As discussed above under "Background of the Proposed Sale," since
1996, Panda has had negative cash flow and a consistent decline in its
financial condition. Panda also has had extreme difficulty in securing
additional financing to fund operations. Panda has been forced to enter
into several complex and dilutive financings in order to continue
operations. These financings have adversely affected Panda's stock
price.
In response to these critical problems affecting Panda's business
operations, the Board of Directors had instructed Panda's management to
develop and adopt a business strategy which would continue Panda's
existing business operations while simultaneously (i) seeking to minimize
its expenses and (ii) considering and pursuing all potential merger,
acquisition, sales, joint-venture and other combination options. Panda's
management implemented this strategy and sought out appropriate potential
merger and acquisition candidates.
Other interested parties included two parties from Europe and one
party from the United States. All parties which expressed interest,
however, were never able to access any substantial capital. The United
States interest came from an individual who could not even produce
approximately $200,000 committed in a prior transaction. SBI was the
only legitimate alternative to provide both capital and a vehicle for
Panda shareholders to obtain a potential return on their investment.
As described above under "Background of the Proposed Sale," the
decision of Panda's Board of Directors to approve the Proposed Sale and
recommend that Panda shareholders vote in favor of the Proposed Sale
followed many months of analyzing Panda's future prospects, discussing
the advantages and disadvantages of merging or disposing of Panda's
assets and exploring sale alternatives. As of February 15, 1999, the
Company was in default of its loan agreement with Helix, although no
notice of default was delivered to Panda by Helix. The Company was
unable to repay the principal due in the amount of $2,000,000 and Helix
had the right to foreclose on the intellectual property. If Helix had
foreclosed on the intellectual property of the Company and sold it to a
third party, the value of the Company's other assets would be severely
diminished. As of March 31, 1999, the Company had assets of $2,608,219
and current liabilities of $4,593,208. As of March 31, 1999, the deficit
was $1,984,989. The Company asked Helix not to foreclose and allow it
additional time to identify other sources of capital to repay the loan.
Due to the complexity of the Company's capital structure, including the
Helix loans and the Series A Preferred Stock, the Company was faced with
few alternatives. The Board calculated that the Panda shareholders would
receive in the transaction (i) a 10% stake in SBI valued at $600,000,
this value is based on SBI's $6 million initial capitalization (ii) the
ability to assign the $2,000,000 note and interest on the note of
approximately $183,000 and (iii) $500,000 for payable and other accrued
expenses extended to the Company. The value of the funds being received
by the Panda shareholders totaled $3,283,000 before including any of the
advanced funds for continuing operations. When SBI expressed interest in
acquiring substantially all of Panda's Operating Assets, the Board
considered whether or not the interests of the Panda shareholders would
be better served if Panda's Operating Assets would be retained and (i)
Panda would instead be dissolved, or (ii) Panda would continue its
business operations. If Panda were to be dissolved, Helix had the
ability to sell Panda's intellectual property assets in a private sale
within five days of the notice of dissolution. The Board concluded that
Panda's prospects for future success have continued to diminish because
Panda has not been able to achieve a self-sustaining level of revenues.
The Board determined that Panda's failure to generate sufficient revenues
to warrant its operations in the future, coupled with Panda's continued
negative cash flow and the general decline of its financial condition,
suggest that the interests of the Panda shareholders would be better
served if Panda did not continue its business operations. In making its
recommendation of the Proposed Sale to Panda's shareholders, the Board
considered a number of factors, including those summarized below:
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Page 10
- the likelihood of Panda achieving sustained profitability from its
current and planned operations in view of the limited financial resources
available to it;
- the terms of the Asset Purchase Agreement;
- the potential courses of action available to Helix due to Panda's
default under the loan;
- the fact that no firm offers have been received by Panda involving
cash consideration, although various indications of interest have been
expressed by other potential buyers; and
- the recommendation of William E. Ahearn, independent director,
stating that, subject to the matters and limitations set forth therein,
the consideration to be received by Panda in the Proposed Sale is in the
best interests of Panda.
The positive factors of the SBI transaction were that the capital
available from SBI's venture backers would allow Helix to be paid off,
and the shareholders in Panda would have an opportunity to have ownership
in a company with adequate resources to potentially show a return to the
investors. The negative factors were the lack of liquidity for this
ownership stake and the relatively low ownership position of Panda in the
new company. After weighing these factors, the SBI transaction seemed a
far better alternative to liquidation to satisfy the Helix debt.
The main reason the Board of Directors believed that SBI could succeed
with the assets of Panda when Panda could not was that SBI is funded by a
large venture capitalist, VantagePoint Venture Partners, which gives them
access to substantial capital needed to grow the business. Additionally,
VantagePoint Venture Partners has extensive contacts through its limited
partners, and other investments, to assist in commercializing the
acquired Panda technologies in the target marketplace.
Based on these factors, the Board of Directors concluded that the sale
of substantially all of Panda's Operating Assets to SBI would help
minimize these adverse financial conditions and would therefore serve the
interests of the Panda shareholders. The Board of Directors believes
this transaction is fair and in the best interests of all the Panda
shareholders.
If the Proposed Sale is not approved by Panda shareholders, Panda
has insufficient working capital to operate its business and will be
unable to continue as a going concern. Currently, Panda is relying upon
capital borrowed from SBI to continue operations. As such, if the
Proposed Sale is not approved by Panda shareholders, Panda intends to
continue its search for another purchaser of its Operating Assets. The
approximate value of the operating assets assumes that the intellectual
property and the fixed assets are not segregated. The property and
equipment was valued on the balance sheet at $1,467,967 as of the quarter
ending June 30, 1999. However, the value of the property and equipment
would be substantially less, with an approximate salvage value of
$150,000, if the intellectual property was sold separately. Most of the
equipment related to VPSA would not be usable by a third party without a
license to the intellectual property. If the transaction does not close
with SBI, Helix has retained its rights to foreclose on the intellectual
property.
Recommendation of the Special Committee
At a meeting of the Board of Directors on February 25, 1999, the
Board of Directors established a special committee for reviewing and
negotiating the proposal by Vantage to purchase the Operating Assets.
Board members Claud L. Gingrich and Rao R. Tummala were named as the
members of the special committee. On March 18, 1999, Mr. Gingrich and
Dr. Tummala resigned as members of the special committee and the Board of
Directors. Neither Mr. Gingrich nor Dr. Tummala believed he possessed
(i) the expertise to examine the Proposed Sale or (ii) the time to
thoroughly review the Proposed Sale. Dr. Tummala is an academician who
viewed his technical expertise as of little relevance to the then current
situation. Both directors viewed William E. Ahearn, a former officer of
Panda, as much more experienced in matters of this type because he had
experience with nineteen acquisitions while at AMP Incorporated and was
working with another small company on a capital/sale issue early in 1999.
Mr. Gingrich and Dr. Tummala then decided to elect Mr. Ahearn to the
Board and have him conduct the activities of the special committee. At a
Board of Directors meeting on May 18, 1999, Mr. Gingrich and Dr. Tummala
resigned from the Board of Directors.
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Page 11
Mr. Ahearn was elected as a member of the Board of Directors and
appointed to review and negotiate the Vantage proposal. Mr. Ahearn was a
former IBM executive, MIT Media Scholar, AMP Incorporated executive
instrumental in nineteen acquisitions, as well as a former Vice President
at the Company. Mr. Ahearn was familiar with the Company's products and
business challenges and therefore, was the most qualified person to
handle the negotiations with SBI.
Mr. Ahearn also had discussions with European investment advisor Sven
Josting of Teamwork related to potential investment by European
institutions. Nothing substantive, however, came from those discussions.
Additionally, Mr. Ahearn had extensive discussions with ART Computer of
France, and their representatives related to both licensing the Company's
systems technology and investment in, or purchase of, the Company. Upon
reviewing the financial capability of ART, the Company believed ART would
be unable to produce even the initial $250,000 payment for the license to
the Systems business. Mr. Ahearn then decided the proposal of
VantagePoint Venture Partners was the only viable option for the Company.
Mr. Ahearn concluded that the Proposed Sale was in the best
interest of Panda and its shareholders. Mr. Ahearn recommended to the
Board of Directors that Panda enter into the Proposed Sale. Mr. Ahearn
based his recommendation on a number of factors affecting Panda. Panda's
poor financial condition and Panda's inability to raise additional
capital to fund its operations were the primary factors in his
recommendation. Panda has sought a purchaser for its assets for a
considerable period of time. Mr. Ahearn valued the 10% interest in SBI
at $600,000. This value is based on SBI's $6 million initial
capitalization. Panda also would assign the $2,000,000 note and interest
of approximately $183,000 of Helix (PEI) Inc. to SBI and receive $500,000
from SBI for payables and other expenses. Mr. Ahearn valued the total
consideration to be received in the Proposed Sale by Panda to be
$3,283,000.
In arriving at his recommendation, Mr. Ahearn, among other things, (i)
reviewed drafts of the Letter of Intent, dated March 17, 1999 and
thereafter, by and between Panda and SBI; (ii) reviewed the Annual
Reports to shareholders and Forms 10-K for the years 1997 and 1998, and
the Form 10-Q for March 31, 1999, which were provided to Mr. Ahearn by
Panda; (iii) discussed the future prospects, including financing needs of
Panda, with the management of Panda and its creditors; (iv) reviewed
correspondence between Panda and certain financial institutions,
investment banking firms and venture capital groups regarding the sale of
Panda; (v) had discussions with Vantage and other potential purchasers of
Panda's Operating Assets; (vi) had discussions with Helix and Panda's
preferred shareholders regarding the financial situation of Panda; (vii)
reviewed the asset listing provided to Mr. Ahearn by Panda; and (viii)
performed such other analyses and reviews as he deemed necessary and
appropriate.
In preparing his recommendation, Mr. Ahearn relied on the accuracy and
completeness of all information that was publicly available, supplied or
communicated to him by or on behalf of Panda, and Mr. Ahearn has not
assumed any responsibility to independently verify the same. Mr. Ahearn
assumed that the financial forecasts provided to him were reasonably
prepared on bases reflecting the best currently available estimates and
good faith judgments of the management of Panda as to the future
performance of Panda.
Mr. Ahearn reviewed the asset listing of Panda to determine the
approximate purchase value of the assets. Mr. Ahearn determined that the
assets being sold included all the operating assets of Panda. In his
analysis, Mr. Ahearn has assumed that the highest and best use of the
assets is in their continued use in a business enterprise.
In connection with Mr. Ahearn's time to analyze and evaluate the
Proposed Sale as well as assist in the negotiations with Helix and the
Series A Preferred shareholders, Mr. Ahearn was paid approximately
$10,500 including out-of-pocket expenses. Mr. Ahearn retained outside
non-affiliated legal counsel to assist him in the required procedures to
make an independent recommendation. Panda paid his legal fees of $10,000
related to his services. The Company does not expect any additional
expenses related to Mr. Ahearn s services. No portion of Mr. Ahearn's
fee is contingent upon the successful completion of the Proposed Sale.
In addition, Panda has agreed to indemnify Mr. Ahearn and his agents
against certain liabilities incurred in connection with their services,
including liabilities under federal securities laws.
Absence of Financial Advisor
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Page 12
The Board of Directors did not, and did not consider it advisable
to, engage an independent financial advisor to render a fairness opinion
with respect to the Proposed Sale. The Asset Purchase Agreement was
negotiated at arm's length between Panda and SBI. Given Panda's limited
resources, the Board of Directors did not believe that it was in the best
interest of the Panda shareholders to incur the cost of a fairness
opinion. In addition, the Board of Directors believed that other factors
to be reviewed, such as the value of the assets, the need for additional
capital, the inability to attract new personnel and the extent of
existing liabilities, were within the competence of the Board of
Directors The absence of a financial advisor forces Panda shareholders to
rely solely on the recommendation of Mr. Ahearn and the Board of
Directors. The lack of review by an independent third party does create
the risk that the review of the Proposed Sale by Mr. Ahearn and the Board
of Directors may not consider all relevant factors that a third party
with extensive expertise may consider.
Approval of the Panda Series A Preferred Shareholders
Prior to any transfer of substantially all of the assets of Panda to
another entity, Panda must receive the written approval of the holders of
66-2/3% of the Panda Series A Preferred Stock.
Interests of Certain Persons in the Proposed Sale
In early September, SBI engaged in discussions with Stanford W.
Crane, Jr., Panda's Chief Executive Officer, and Melissa F. Crane,
Panda's acting Chief Financing Officer, regarding potential employment
opportunities for these individuals with SBI. If the Proposed Sale is
completed, these individuals may become employees of or consultants to
SBI and may therefore receive compensation for their services to SBI.
During the negotiations with SBI, Mr. Ahearn received no information
about the terms of any potential employment or consulting agreements
between these individuals and SBI. SBI intends to hire seven to ten
employees from Panda's current workforce, and no contracts have been
executed or agreed to for their employment.
During 1998, Panda entered into a consulting agreement with Archimedes
whereby Archimedes would provide assistance to Panda in connection with
seeking a corporate partnering transaction or a sale of Panda. Mr. Ocko
became a partner of VantagePoint four months after such agreement was
signed. In connection with that agreement, Panda granted to Archimedes a
warrant convertible into 2% of Panda capital stock upon the completion of
a successful transaction. SBI has agreed that upon completion of the
transactions set forth herein, Archimedes will receive 2% of SBI's
preferred stock in exchange for this warrant (the "Archimedes Exchange").
Pursuant to the Asset Purchase Agreement, 20% of SBI capital stock
will be reserved for issuance to SBI's employees, officers and directors
upon the exercise of employee stock options. SBI has not determined (i)
which employees, officers or directors of SBI, including any current
employees of Panda that become employees of SBI, will receive this SBI
capital stock or (ii) the amount they will receive.
A license agreement between Stanford W. Crane, Jr., the President and
Chief Executive Officer of Panda, and Panda (the "Crane-Panda License")
is being transferred to SBI. Any royalties received from SBI by Mr.
Crane under the Crane-Panda License would be at the same rate at which he
currently receives royalties.
Transition Planning
Melissa F. Crane, Acting Chief Financial Officer of Panda, and Alan
Salzman, a partner of VantagePoint, respectively, will be jointly
responsible for coordinating all aspects of transition planning and
implementation relating to the Proposed Sale and the other transactions
contemplated by the Asset Purchase Agreement. Until the consummation of
the Proposed Sale, Ms. Crane and Mr. Salzman jointly will (i) examine
various alternatives regarding the manner in which to best organize and
manage the businesses of SBI and Panda after the consummation of the
Proposed Sale and (ii) coordinate policies and strategies with respect to
regulatory authorities and bodies, in all cases subject to applicable
law.
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Changes in Shareholder Rights after the Proposed Sale
Following the completion of the Proposed Sale, Panda's shareholders
will retain their same equity interests in Panda. The completion of the
Proposed Sale will not result in any changes in the rights of Panda's
shareholders. As discussed above, Panda does not intend to distribute
any of the SBI common stock from the sale to Panda shareholders through a
special dividend or similar device.
Continued Operations of the Company
After the consummation of the Proposed Sale, Panda expects to have
the same directors. Director William E. Ahearn has indicated he will
serve as Panda's President, and Susana Van Arsdale will serve as Panda's
Controller. Ms. Van Arsdale has worked for Panda since 1995 as the
Accounting Manager and became controller June of 1999. Ms. Van Arsdale
is a CPA and was previously employed by PriceWaterhouseCoopers L.L.C.
Panda's financial obligations after the Proposed Sale will be
comprised of accounts payable of approximately $1,098,000. Of this
amount, Panda has paid approximately $24,000 of interest expense owed to
Helix (PEI) Inc. through the issuance of 1,000,000 shares during the
second quarter of 1999, approximately $34,000 owed to L.G. Cable will be
deducted from the $100,000 licensing fee due in October 1999 pursuant to
verbal agreement with L.G. Cable and $663,000 related to professional
fees is in the process of being negotiated and settled for less than the
amount owed. Panda owes approximately $300,000 in liquidated damages to
purchasers of Panda Common Stock in the August 1998 Private Placement,
which Panda is negotiating to pay off with 4,500,000 newly authorized
shares of Panda Common Stock. In addition, approximately $162,000 is in
dispute between Panda and various vendors for services which did not meet
specifications or parameters in accordance with purchase orders. The
expense of maintaining Exchange Act requirements is expected to be
approximately $100,000 in the first year and approximately $100,000 in
the subsequent year.
Panda expects to fulfill its obligations to creditors and pay its
expenses related to Exchange Act requirements through future licensing
fees, the sale of remaining assets and the use of returned security
deposits on existing leases. The assets remaining after the sale will be
systems inventory assets which were reserved as of December 31,1998. The
Company expects to recover approximately $60,000 of security deposits
paid on leases. In addition, $80,000 related to a letter of credit as
security on a terminated lease agreement will be refunded if no event of
default occurs by the new tenant, $40,000 of which will be released in
July 2000 and the remaining $40,000 of which will be released in July
2002.
Accounting Treatment; Material Federal Income Tax Consequences
The Proposed Sale will be accounted for as a sale, and Panda will
recognize gain or loss on the sale of its Operating Assets to the extent
the portion of the purchase price allocated to such Operating Assets
exceeds or is less than Panda's basis therein. For federal income tax
purposes, when a trade or business is sold, each asset is treated as sold
separately in determining the seller's income, gain or loss. The
purchase price is allocated among the assets sold using a residual value
method in the case of a sale of assets to which goodwill could be
attached. The characterization of income or loss on property used in a
trade or business is generally governed by Section 1231 of the Internal
Revenue Code. If the Section 1231 gains exceed the losses, each gain or
loss is a long term capital gain or loss derived from the sale of a
capital asset to the extent the asset has been held for twelve months or
more. If the losses exceed the gains, all gains and losses are treated
as ordinary gains or losses. Any gain attributable to the sale of
inventory and any depreciation recapture, will produce ordinary income.
Capital gains of a corporation can be used to offset capital losses
only, with no offset against ordinary income. A three year carry-back and
five year carry-forward is available.
The Proposed Sale will not have any federal tax consequences to the
Panda shareholders.
<PAGE>
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THE FOREGOING DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY
VARY WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER,
EXCEPT FOR THE DISCUSSION OF TRANSFER TAXES ABOVE, THIS DISCUSSION DOES
NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX
CONSEQUENCES OF THE PROPOSED SALE. THIS DISCUSSION DOES NOT ADDRESS THE
TAX CONSEQUENCES OF ANY TRANSACTION OTHER THAN THE PROPOSED SALE.
Regulatory Approvals
To Panda's knowledge, completion of the Proposed Sale does not require
any regulatory approvals other than the filings in connection with this
Proxy Statement required under Federal securities laws.
RISKS AND CONSIDERATIONS RELATED TO THE PROPOSED SALE
The Panda shareholders need to understand the issues related to the
Proposed Sale which are set forth below. In particular, the Panda
shareholders should be aware of the risks related to the ownership of SBI
common stock, which will be Panda's main asset upon consummation of the
Proposed Sale.
Holding Company Structure
If the Proposed Sale is approved and consummated, Panda will cease
conducting operations and become a holding company, with its sole
significant asset consisting of a 10% equity interest in SBI's common
stock subject to possible future dilution. Panda will not have a direct
ownership interest in any assets of SBI and will solely be entitled to
those rights that it may have as a shareholder of SBI under Delaware law.
In addition, Panda's right, and the right of Panda's creditors, to
participate in any distribution of the assets of SBI upon SBI's
liquidation or reorganization or otherwise, will necessarily be subject
to the prior claims of creditors of SBI, except to the extent that a
bankruptcy court recognizes Panda's claims as a creditor of SBI.
Unregistered Stock; Absence of a Public Trading Market
The shares of SBI common stock which Panda will receive as part of the
Proposed Sale have not been registered under the Securities Act or any
state securities laws and, unless so registered, may not be offered or
sold except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act and
applicable state securities law. The shares of SBI common stock are new
securities for which there is currently no public market. In addition,
Panda has agreed not to dispose of the SBI shares for a period of five
years. As a result, Panda's investment in SBI will be illiquid and there
can be no assurance that a public trading market for SBI stock will
develop in the future or, that if developed, such a trading market will
be sustained.
Absence of an Operating History
SBI was recently formed and has not yet commenced operations.
Accordingly, SBI has no operating history on which to base an evaluation
of its business prospects. SBI's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development. Such risks for SBI
include, but are not limited to, an evolving and unpredictable business
model and the management of growth. To address these risks, SBI must,
among other things, develop high quality "Integrated Interface" products,
establish, maintain and increase its customer base, implement and
successfully execute its business and marketing strategies, develop and
upgrade its technology and transaction-processing systems, respond to
competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that the SBI will be successful in
addressing such risks, and the failure to do so could have a material
adverse effect on SBI's business, prospects, financial condition and
results of operations.
Absence of a Financial Advisor
<PAGE>
Page 15
Panda did not engage an independent financial advisor to render a
fairness opinion with respect to the Proposed Sale. The absence of a
financial advisor forces shareholders to rely solely on the
recommendation of Mr. Ahearn and the Board of Directors. The lack of
review by an independent third party does create the risk that the review
of the Proposed Sale by Mr. Ahearn and the Board of Directors may not
consider all relevant factors that a third party with extensive expertise
may consider.
No Dividends on SBI Common Stock
Since Panda's primary source of income will be its investment in SBI,
Panda's ability to declare cash dividends in the future will depend
exclusively on SBI's ability to pay cash dividends. Currently, SBI
intends to retain future earnings to finance the development and
expansion of SBI's business and does not anticipate paying any cash or
stock dividends on its common stock in the foreseeable future. The
declaration and payment of any dividends in the future will be determined
by the board of directors of SBI, in its discretion, and will depend on a
number of factors, including SBI's earnings, capital requirements and
overall financial condition.
Minority Interest; No Voting Power
If the Proposed Sale is approved, Panda will own an aggregate of
approximately 10% of the outstanding common stock of SBI. Given this
minority equity position, Panda will not have the ability to influence
the day to day management of SBI. In addition, Panda will not have
sufficient shares of SBI common stock to be able to individually control
matters submitted to a vote of the SBI shareholders.
Remaining Panda Assets Have Limited Value
After the Proposed Sale, Panda's sole significant asset will be its
10% equity stake in SBI's common stock. All of Panda's other remaining
assets will be of limited or no value. As a result, Panda's future
prospects, and the future value of Panda's Common Stock, will depend
almost entirely on the success or failure of SBI.
No Reporting Requirements
Although Panda will continue to be subject to the reporting
requirements of the Exchange Act following the Proposed Sale, SBI has no
reporting obligations under the Exchange Act. As a result, subject to
certain circumstances, SBI will not have an ongoing duty to publicly
disclose material information or developments related to its business,
financial condition or results of operations. In addition, there can be
no assurance that Panda will independently have timely knowledge of such
developments or access to such information. Accordingly, Panda
shareholders may not obtain information on SBI that is directly relevant
to their investment in Panda in a timely manner or at all.
THE ASSET PURCHASE AGREEMENT
Terms of the Asset Purchase Agreement
The following is a brief summary of the material provisions of the
Asset Purchase Agreement. The Asset Purchase Agreement contemplates the
sale of substantially all of Panda's Operating Assets to SBI. THE
DESCRIPTION OF THE ASSET PURCHASE AGREEMENT SET FORTH HEREIN DOES NOT
PURPORT TO BE COMPLETE AND PANDA SHAREHOLDERS SHOULD REVIEW THE ASSET
PURCHASE AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT
AS ANNEX A AND IS INCORPORATED HEREIN BY REFERENCE. YOU ARE URGED TO
CAREFULLY READ THE ASSET PURCHASE AGREEMENT IN ITS ENTIRETY.
Operating Assets Being Sold and Liabilities and Obligations Assumed
Panda has agreed to sell to SBI the following Operating Assets and
rights of Panda relating to Panda's business operations:
<PAGE>
Page 16
- all permits, authorizations, licenses and other governmental and
third-party rights and privileges, in each case used in Panda's business
operations;
- all tangible personal property owned by Panda and used in Panda's
business operations and all right, title and interest of Panda in the
inventory and supplies of Panda used in its business operations;
- any and all contracts and other rights, in each case used in
Panda's business operations, except for contracts which are excluded
below;
- all patents, trade and service marks, designs, drawings, software
(except for software necessary for the continuation of Panda's
operations), trade names, copyrights, mask works, applications therefor,
licenses thereof and similar intangible property (collectively,
"Intellectual Property"), in each case used in Panda's business
operations; and
- all of Panda's accounts receivable as of the closing date of the
asset sale transaction.
Those assets (other than assets constituting Intellectual Property)
exclusively used in Panda's computer systems business will not be sold
under the Asset Purchase Agreement.
In addition, SBI has agreed to assume or observe, subsequent to the
closing date of the Proposed Sale, Panda's obligations pursuant to the
contracts that are assigned by Panda to SBI in connection with the sale
of Operating Assets. The obligations to be assumed include the
following:
- Panda's trade accounts payable outstanding on the closing date (up
to a maximum amount of $300,000);
- specific items included in Panda's accrued payroll and benefits
account outstanding on the closing date, which will not exceed $100,000;
- specific items included in Panda's "other current liabilities"
account on the closing date, which will not exceed $100,000;
- up to $2,000,000 of Panda's indebtedness to Helix, effective upon
such indebtedness' restructuring as described in the Voting Agreement
among SBI, Panda and certain shareholders of Panda dated May 14, 1999;
and
- Panda's obligations under certain agreements assigned by Panda to
SBI.
These liabilities are collectively referred to herein as the "Assumed
Liabilities."
Consideration Price
The aggregate consideration for the Operating Assets will be (i)
shares of SBI's common stock initially representing 10% of SBI's capital
stock on a fully diluted basis and (ii) the assumption of the Assumed
Liabilities. In addition to Panda's initial 10% fully diluted common
equity interest, the capital structure of SBI upon consummation of the
Proposed Sale will be comprised of Vantage's 70% fully diluted preferred
equity interest and a 20% fully diluted pool of common shares reserved
for issuance upon exercise of stock options to be issued to SBI's
officers, directors, employees and consultants. Each of these interests
will be diluted pro rata by the issuance of a 2% fully diluted preferred
equity interest to Archimedes upon completion of the Archimedes Exchange.
See "Interests of Certain Persons in the Proposed Sale." The SBI Common
Stock to be received by Panda will be entitled to one vote per share and
to such dividends, if any, as are declared by the SBI Board of Directors.
SBI has indicated that it does not intend to pay any common stock
dividends for the foreseeable future. The Vantage preferred equity
interest will be comprised of shares of preferred stock, the material
terms of which include:
- one vote per share in all matters voted on by the common stock;
<PAGE>
Page 17
- a liquidation preference equal in the aggregate to Vantage's
initial $6,000,000 investment in SBI plus a participation interest along
with SBI's common stock;
- non-cumulative 6% dividends;
- the right to convert on a one-for-one basis (subject to customary
weighted average anti-dilution protection) into shares of SBI common
stock;
- a pro rata right of first refusal on future stock issuances by
SBI; and
- the ability to appoint a majority of the board of directors of
SBI.
Upon consummation of the Proposed Sale, the authorized capital
stock of SBI will be 30,000,000 shares of Common Stock and 10,000,000
shares of Series A Preferred Stock. Of these shares, 1,000,000 shares of
Common Stock will be issued to Panda, 2,000,000 additional shares of
Common Stock will be reserved for issuance upon exercise of employee
stock options and 7,000,000 shares of Series A Preferred Stock will be
issued and outstanding. Any additional issuance of currently authorized
capital stock of the Company, or any additional issuances of capital
stock of the Company that is not currently authorized but is authorized
after the consummation of the Proposed Sales will further dilute Panda's
ownership of SBI. Panda's ownership interest in SBI will not be
sufficient to allow Panda to control SBI's future authorization or
issuance of securities or to control any other corporate decision.
In connection with the Asset Purchase Agreement, Panda and SBI will
execute additional agreements to facilitate transfer of Panda's assets
(the "Ancillary Agreements").
Closing
The closing of the Proposed Sale will take place within three business
days of approval of the Proposed Sale by the Panda shareholders. The
closing, however, must in all events occur before December 30, 1999.
Conditions to Closing
Conditions to Obligations of Purchaser
SBI's obligation to consummate the Proposed Sale is subject to the
satisfaction (or waiver) of various conditions, including the following:
- the representations and warranties of Panda contained in the Asset
Purchase Agreement will have been true and correct when made and as of
the closing, and the covenants and agreements in the Asset Purchase
Agreement to be complied with by Panda on or before the closing date have
been complied with;
- no action will have been commenced or threatened against Panda or
SBI that would render inadvisable the consummation by SBI of the
transactions contemplated by the Asset Purchase Agreement, except in the
case where SBI has solicited or encouraged any such transaction;
- SBI and Panda will each have received all authorizations,
consents, orders and approvals which SBI reasonably deems necessary or
desirable for the consummation of the transactions contemplated by the
Asset Purchase Agreement and the Ancillary Agreements;
- SBI will have received amendments or novations of the contracts
identified in the Asset Purchase Agreement;
- no circumstance, change in or effect on Panda's operations will
have occurred which has a material adverse effect on the Operating
Assets;
<PAGE>
Page 18
- the approval of the number of Panda's shareholders necessary to
effect the Asset Purchase Agreement, including preferred shareholders;
- the receipt by purchaser of all permits, authorizations, licenses
and other governmental and third party rights and privileges necessary to
operate the Business as currently conducted (collectively, "Approvals");
- the delivery by Panda to SBI of a signed counterpart of a
stockholders' agreement as set out in the Asset Purchase Agreement;
- SBI's satisfaction that Panda is able to sell, convey and assign
to SBI, free and clear of all claims, liens and interests except as
provided in the Asset Purchase Agreement, title and interest in the
Operating Assets;
- Panda's compliance in all material respects with its covenants and
agreements under the Asset Purchase Agreement;
- the absence of any injunction, stay or restraining order staying
the effectiveness of any Approval; and
- the absence of any threatened or pending suit, action,
investigation, inquiry or other proceeding which could have a material
adverse effect on SBI's ability to acquire, use, operate or enjoy the
Operating Assets of Panda.
Panda has executed the contract amendments and novations required for
Closing. No governmental approvals are required for the consummation of
the Proposed Sale.
Conditions to Obligations of Seller
Panda's obligation to consummate the Proposed Sale will be subject to
the satisfaction (or waiver) of various conditions, including the
following:
- the Asset Purchase Agreement will have been approved and adopted
by the requisite vote of the Panda shareholders;
- the representations and warranties of SBI contained in the Asset
Purchase Agreement will have been true and correct when made and as of
the closing, and the covenants and agreements in the Asset Purchase
Agreement to be complied with by SBI on or before the closing date have
been complied with;
- the delivery by SBI to Panda of a signed counterpart of a
stockholders' agreement as set out in the Asset Purchase Agreement;
- SBI will be capitalized with equity capital of not less than
$6,000,000 in cash and commitments; and
- SBI's compliance in all material respects with its covenants and
agreements under the Asset Purchase Agreement.
SBI has been sufficiently capitalized to satisfy that condition for
Closing.
Representations and Warranties
The Asset Purchase Agreement contains various representations and
warranties customary for transactions of this type, including
representations and warranties of Panda relating to, among other things:
- the due organization, valid existence, and good standing of Panda
and similar corporate matters;
- the authorization, execution, delivery, and enforceability of the
Asset Purchase Agreement;
<PAGE>
Page 19
- the accuracy and completeness of each report or proxy statement
delivered to SBI;
- Panda's compliance with the requirements of the Securities Act of
1933 and the Securities Exchange Act of 1934;
- the compliance of Panda's financial statements as to form with
applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, and the accuracy of Panda's
financial statements;
- the collectibility and status of Panda's accounts receivable;
- the good condition and saleability of Panda's business
inventories;
- Panda's compliance with all applicable laws and government orders;
- Panda's receipt of all required government permits, licenses,
authorizations, certificates and approvals;
- Panda's environmental, tax, labor and employee benefit matters;
- the legality, validity, enforceability, and assignability of all
contracts entered into by Panda that are necessary or useful for the
operation of its business, and the absence of any breach of these
contracts by Panda;
- Panda's ownership of the Intellectual Property that it will sell
to SBI under the Asset Purchase Agreement;
- Panda's year 2000 compliance;
- Panda's title to the Operating Assets;
- the insurance coverage of all the Operating Assets;
- Panda's authority to execute the Asset Purchase Agreement and the
Ancillary Agreements;
- the absence of any pending, threatened or contemplated
investigation of or administrative or legal proceeding against Panda
which Panda has not disclosed;
- the absence of any material inaccuracy or omission in the Asset
Purchase Agreement or in any document filed by Panda with the SEC on or
prior to the date of the Asset Purchase Agreement;
- the absence of any undisclosed changes in Panda's condition that,
in the aggregate, are materially adverse to SBI;
- the absence of any undisclosed material liabilities;
- the absence of any material tax liability, except for taxes which
Panda reasonably disputes, the filing of all returns and reports due, and
the absence of any tax liens on the Operating Assets;
- the absence of any event or circumstance which, under applicable
law, would require public disclosure but which has not been so publicly
disclosed;
- the absence of conflicts under Panda's charter or by-laws,
required consents or approvals, and violations of any instrument or law;
<PAGE>
Page 20
- the absence of any notice that any significant customer has ceased
or substantially reduced, or will cease or substantially reduce, its use
of Panda's products;
- the absence of any notice that any significant supplier will not
sell goods related to the Business at any time after the closing date on
terms and conditions similar to those imposed on current sales to Panda;
- the absence of certain liabilities by Panda under ERISA, and the
absence of any excise tax liabilities under certain sections of the
Internal Revenue Code;
- the absence of any undisclosed facts that affect Panda's
operations adversely or could do so in the future; and
- the absence of any broker's or finder's fees.
The Asset Purchase Agreement also contains various representations and
warranties of SBI with respect to the following:
- the due organization, valid existence, and good standing of SBI
and similar corporate matters;
- the authorization, execution, delivery, and enforceability of the
Asset Purchase Agreement;
- SBI's capitalization;
- SBI's financing commitments;
- the absence of any broker's or finder's fees; and
- the absence of conflicts under SBI's charter or by-laws, required
consents or approvals, and violations of any instrument, law, or
governmental order.
Covenants
In the Asset Purchase Agreement, Panda has agreed to the following
covenants:
- between the date of the Asset Purchase Agreement and the closing
date, Panda will not conduct its operations relating to the Operating
Assets other than in the ordinary course and consistent with Panda's past
practice;
- Panda will provide SBI full and complete access to all facilities,
relevant documents and personnel;
- Panda will use commercially reasonable efforts to obtain all
authorizations, consents, orders, and approvals that may be or become
necessary for execution and delivery of the Asset Purchase Agreement and
the Ancillary Agreements;
- prior to the closing, Panda will promptly notify SBI of all
events, circumstances, facts and occurrences arising subsequent to the
date of the Asset Purchase Agreement which could have a material effect
on its operations;
- Panda will not use any of the Intellectual Property after the
closing date of the Proposed Sale;
- Panda and SBI agree to cooperate and coordinate the making of any
public announcements concerning the Asset Purchase Agreement and the
Ancillary Agreements; and
- from the date of the execution of the Asset Purchase Agreement
until December 30, 1999, except as required pursuant to any fiduciary
duty, neither Panda nor any of its directors, officers, agents or
representatives will (i) solicit, encourage, initiate or participate in
any negotiations or discussions with respect to any offer or proposal to
acquire all or any part of its operations or assets whether by purchase
of assets or otherwise, (ii) disclose any information not customarily
disclosed to any person concerning its operations or the Assets or afford
to any person or entity access to the properties, books or records of its
operations or the assets or (iii) cooperate with any person to make any
proposal to purchase all or any part of the assets of its operations or
the assets (directly or indirectly) other than inventory or non-essential
or excess assets sold in the ordinary course of business.
<PAGE>
Page 21
Stockholders Agreement
Panda will be required to enter into a stockholders agreement as a
condition to the receipt of SBI common stock. The stockholder agreement
will include the following terms:
- the SBI common stock held by Panda is not transferable for a
period of five years, except in limited circumstances such as an initial
public offering;
- Panda must vote its shares of SBI common stock proportionately in
accordance with the vote of all other holders of SBI common stock;
- if holders of 50% of the SBI preferred shares dispose of their
preferred shares, Panda may be required to sell their shares on the same
terms as the SBI preferred shareholders;
- SBI will have the right of first refusal for any sales of SBI
common stock; and
- SBI common stock will have registration rights on substantially
the same terms as the SBI preferred shares.
Indemnification
The representations, warranties, covenants, agreements and obligations
contained in the Asset Purchase Agreement, or in any document or
instrument executed and delivered in connection with that agreement, will
survive the closing of the Proposed Sale for a period of one year. In
addition, the Asset Purchase Agreement requires Panda to indemnify and
hold harmless SBI, its successors and assigns from, for and against any
loss, damage, liability, injury or deficiency which results from the
inaccuracy of any representation or the breach of any warranty made by
Panda in that agreement or the failure of Panda duly to perform or
observe any term, provision, covenant, agreement or condition of the
Asset Purchase Agreement relating to the period prior to the closing date
(other than with respect to the liabilities that SBI will assume). In
addition, the Asset Purchase Agreement requires Panda to indemnify and
hold harmless SBI, its successors and assigns from, for and against any
loss damage, liability, injury or deficiency that results from the
transport or arranged transport or disposal of any hazardous materials to
any location which is listed or proposed for listing on any federal or
state list of sites requiring investigation or remediation. The right of
indemnification for any of the environmental problems does not apply to
any post-acquisition activities. Panda does not have knowledge of any
current environmental liability.
The Asset Purchase Agreement also requires SBI to indemnify and hold
harmless Panda, its successors and assigns from, for and against any
loss, damage, liability or deficiency which results from the inaccuracy
of any representation or the breach of any warranty made by SBI or any
failure of SBI duly to perform or observe any term, provision, covenant,
agreement or condition of the Asset Purchase Agreement. The liability of
Panda to indemnify SBI is limited to $200,000 (the "Indemnification
Limit"), and no damage can be recovered unless the aggregate amount of
damages exceeds $50,000, provided, however, that once such threshold is
met, the full amount of damages, from the first dollar, can be recovered.
Panda agrees to indemnify and hold harmless SBI against the following
taxes and against any loss, damage, liability or expense, including
reasonable fees for attorneys and other outside consultants, incurred in
contesting or otherwise in connection with any such taxes:
<PAGE>
Page 22
- taxes imposed on SBI with respect to taxable periods ending on or
before the closing date;
- with respect to taxable periods beginning before the closing date
and ending after the closing date, taxes imposed on SBI or the operations
of Panda which are allocable to the portion of such period ending on the
closing date; and
- taxes imposed as a result of any breach of warranty or
misrepresentation of the Asset Purchase Agreement.
Indemnification obligations resulting from tax liabilities or employee
benefit liabilities are not subject to the Indemnification Limit.
The Asset Purchase Agreement imposes specific procedures, terms and
conditions on any party seeking indemnification under the Asset Purchase
Agreement, including, without limitation, notice requirements, defense of
claim procedures and settlement conditions.
Termination and Waiver
The Asset Purchase Agreement may be terminated at any time prior to
the closing:
- by SBI, if between the date of the Asset Purchase Agreement and
the time scheduled for closing an event or condition occurs that has
resulted in or SBI reasonably believes may result in a material adverse
effect;
- by either Panda or SBI if the closing will not have occurred by
December 30, 1999, provided that such a right will not be available to
any party who causes the failure of the closing to occur on or prior to
such date;
- by either Panda or SBI in the event that any governmental
authority will have issued an order, decree, or ruling or taken any other
action restraining, enjoining or otherwise prohibiting the transactions
contemplated by the Asset Purchase Agreement and such order, decree,
ruling or other action will have become final and nonappealable; or
- by the mutual written consent of Panda and SBI.
Pursuant to Section 5.07 of the Asset Purchase Agreement, Panda's Board
of Directors can negotiate a competing transaction consistent with its
fiduciary obligations if Panda receives a superior proposal to SBI's
proposal.
To the extent material provisions or conditions of the Asset Purchase
Agreement are waived or amended or the termination date is extended,
Panda will amend the Proxy Statement and resolicit proxies.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Financial Information gives effect
to the consummation of Panda's sale of substantially all of its
operating assets to SBI as if it had been consummated (i) on June 30,
1999, in the case of the Unaudited Pro Forma Balance Sheet, and (ii) on
April 1, 1996, the first day of Panda's fiscal year, in the case of the
Unaudited Pro Forma Statements of Operations for the fiscal year ended
March 31, 1997, the nine months ended December 31, 1997 and the fiscal
year ended December 31, 1998.
The following Unaudited Pro Forma Financial Information is presented
for illustrative purposes only and does not purport to be indicative of
the Company's actual financial position or results of operations as of
the date hereof, or as of or for any other future date, and is not
necessarily indicative of what the Company's actual financial position or
results of operations would have been had the Proposed Sale been
consummated on the above-referenced dates, nor does it give effect to (i)
any transactions other than the Proposed Sale and those described in the
Notes to the Unaudited Pro Forma Financial Information or (ii) Panda's
results of operations since June 30, 1999.
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Page 23
The following Unaudited Pro Forma Financial Information is based upon
the historical financial data of Panda and should be read in conjunction
with the information appearing in "The Asset Purchase Agreement,"
"Selected Historical Financial Data" and other financial data included in
or incorporated by reference in this Proxy Statement. In the preparation
of the following Unaudited Pro Forma Financial Information, it has been
assumed that Panda's 10% interest in SBI is valued at $600,000 based upon
the initial $6,000,000 capitalization of SBI.
The Unaudited Pro Forma Balance Sheet at June 30, 1999, is based upon
Panda's financial position at June 30, 1999. The Unaudited Pro Forma
Statement of Operations for the six months ended June 30, 1999 is based
upon Panda's results of operations for the six months ended June 30,
1999. The Unaudited Pro Forma Statements of Operations for the fiscal
year ended March 31, 1997, the nine months ended December 31, 1997 and
the fiscal year ended December 31, 1998 is based on Panda's results of
operations for those periods.
<PAGE>
Page 24
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BALANCE SHEET
June 30, 1999
6/30/99 Pro Forma 6/30/99
Historical Adjustment As Adjusted
Current assets ---------- ---------- ----------
Cash and cash equivalents $ 106,625 $ - $ 106,625
Accounts receivable
(net of allowance
of $295,292 45,387 (45,387)(1) -
Inventory 38,634 (38,634)(1) -
Other receivables 34,481 (34,481)(1) -
Prepaid expenses and
other current assets 87,940 (87,940)(1) -
---------- ----------- ----------
Total current assets 313,067 (206,442) 106,625
Property and equipment, net 1,467,967 (1,467,967)(1) -
Restricted cash 80,000 - 80,000
Debt issuance costs, net - - -
Other assets 83,739 - 83,739
Investment in SBI - 600,000(1) 600,000
---------- ----------- ----------
Total assets $1,944,773 $(1,074,409) $ 870,364
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $1,398,458 $ (300,000)(1) $1,098,458
Notes payable Helix 2,000,000 (2,000,000)(1) -
Notes payable SBI 300,000 - 300,000
Other current
liabilities 1,259,547 (2,608)(1) 773,439
(100,000)(1)
(383,500)(5)
---------- ----------- ----------
Total current
liabilities 4,958,005 (2,786,108) 2,171,897
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, $.01 par
value, 2,000,000 shares
authorized; 529 shares
issued and outstanding 4,867,945 - 4,867,945
Common stock, $.01 par
value, 50,000,000
shares authorized;
29,683,834 shares issued
and outstanding 296,838 - 296,838
Additional paid-in capital 77,508,622 - 77,508,622
383,500(5)
Accumulated deficit (85,686,637) 1,328,199(1) (83,974,938)
---------- ----------- ----------
Total stockholders'
equity (deficit) (3,013,232) 1,711,699 (1,301,533)
---------- ----------- ----------
Total liabilities
and stockholders'
equity (deficit) $1,944,773 $(1,074,409) $ 870,364
========== =========== ==========
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1999
Six Months Six Months
Ended Ended
6/30/99 Pro Forma 6/30/99
Historical Adjustment As Adjusted
----------- ----------- -----------
Revenues
Product sales $ 403,740 $ (403,740)(2) $ -
Licensing fees 500,000 (500,000)(2) -
Contract research and
development revenues - - -
Net revenues 903,740 (903,740) -
Other expenses
Cost of sales 194,121 (194,121)(2) -
Research and development 571,664 (571,664)(2) -
Selling, general and
administrative 2,690,631 (2,690,631)(2) -
Amortization of debt issuance 208,453 (6) 208,453
costs/ accrued penalties 2,551,542 (2,551,542)(2) -
Cost associated with asset
impairments - - -
---------- ----------- ----------
Total operating
expenses 6,007,958 (5,799,505) 208,453
Operating loss (5,104,218) 4,895,765 (208,453)
Interest expense 302,717 (302,717)(2) (9,000)
(9,000)(4)
Interest income - - -
Other income 60,547 (60,547)(2) -
---------- ----------- ----------
Net loss from operations (5,346,388) 5,128,935 (217,453)
Dividends and amortization
of beneficial
conversion feature
related to convertible
preferred stock (54,067) - (54,067)
---------- ----------- ----------
Net loss applicable
to common stock (5,400,455) 5,128,935 (271,520)
========== =========== ==========
5,128,935
Net loss from discontinued
operations - (5,128,935)(3) -
---------- ----------- ----------
Net loss $(5,400,455) (5,128,935) $ (271,520)
========== =========== ==========
Basic and diluted loss
per share $ (.24) $ (.01)
========== ===========
Weighted average shares
outstanding 21,989,513 21,989,513
========== ===========
<PAGE>
Page 26
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Twelve Months Ended December 31, 1998
Twelve Twelve
Months Ended Months Ended
12/31/98 Pro Forma 12/31/98
Historical Adjustment As Adjusted
----------- ----------- -----------
Revenues
Product sales $ 586,907 $ (586,907)(2)$ -
Licensing fees 100,000 (100,000)(2) -
Contract research and
development revenues 135,673 (135,673)(2) -
----------- ----------- -----------
Net revenues 822,580 (822,580) -
Other expenses
Cost of sales 1,739,418 (1,739,418)(2) -
Research and development 3,395,577 (3,395,577)(2) -
416,906 416,906
Selling, general and
administrative 9,263,283 (9,263,283)(2) -
Cost associated with asset (6)
impairments 125,038 (125,038)(2) -
----------- ----------- -----------
Total operating
expenses 14,523,316 (14,106,410) 416,906
----------- ----------- -----------
Operating loss (13,700,736) 13,283,830 (416,906)
Interest expense (3,881,406) 3,881,406(2) -
(18,000)(4) (18,000)
Interest income 72,345 (72,345)(2) -
Other income 35,101 (35,101)(2) -
----------- ----------- -----------
Net loss from
operations (17,474,696) 17,039,790 (434,906)
Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock (741,886) - (741,886)
----------- ----------- -----------
Net loss
applicable
to common stock (18,216,582) 17,039,790 (1,176,792)
17,039,790
Net loss from discontinued
operations - (17,039,790)(3) -
----------- ----------- -----------
Net loss $(18,216,582) $17,456,696 $(1,176,792)
============ =========== ===========
Basic and diluted loss
per share $ (1.33) $ (.09)
============ ===========
Weighted average shares
outstanding 13,732,936 13,732,936
============ ===========
<PAGE>
Page 27
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Nine Months Ended December 31, 1997
Nine Months Nine Months
Ended Ended
12/31/97 Pro Forma 12/31/97
Historical Adjustment As Adjusted
----------- ----------- -----------
Revenues
Product sales $ 923,792 $ (923,792)(2)$ -
Licensing fees 350,000 (350,000)(2) -
Contract research and
development revenues 973,003 (973,003)(2) -
----------- ----------- -----------
Net revenues 2,246,795 (2,246,795) -
Other expenses
Cost of sales 1,028,577 (1,028,577)(2) -
Research and development 3,255,335 (3,255,335)(2) -
Selling, general and
administrative 6,113,255 (6,113,255)(2) -
Cost associated with asset 312,680(6) 312,680
impairments - - -
----------- ----------- -----------
Total operating
expenses 10,397,167 (10,084,487) 312,680
----------- ----------- -----------
Operating loss (8,150,372) 7,837,692 (312,680)
Interest expense (955,014) 955,014(2) -
(18,000)(4) (18,000)
Interest income 144,449 (144,449)(2) -
Other income 11,285 (11,285)(2) -
----------- ----------- -----------
Net loss from
operations (8,949,652) 8,618,972 (330,680)
Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock - - -
----------- ----------- -----------
Net loss applicable
to common stock (8,949,652) 8,618,972 (330,680)
8,618,972
Net loss from discontinued
operations - (8,618,972)(3) -
----------- ----------- -----------
Net loss $(8,949,652) $ 8,618,972 $ (330,680)
=========== =========== ===========
Basic and diluted loss
per share $ (.78) $ (.03)
=========== ===========
Weighted average shares
outstanding 11,541,811 11,541,811
=========== ===========
<PAGE>
Page 28
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Twelve Months Ended March 31, 1997
Twelve Twelve
Months Ended Months Ended
3/31/97 Pro Forma 3/31/97
Historical Adjustment As Adjusted
----------- ----------- -----------
Revenues
Product sales $ 1,547,896 $(1,547,896)(2)$ -
Licensing fees 100,000 (100,000)(2) -
Contract research and
development revenues 734,123 (734,123)(2) -
----------- ----------- -----------
Net revenues 2,382,019 (2,382,019) -
Other expenses
Cost of sales 2,762,936 (2,762,936)(2) -
Research and development 5,722,717 (5,722,717)(2) -
Selling, general and
administrative 13,142,099 (13,142,099)(2) -
Cost associated with
asset 416,906(6) 416,906
impairments 2,056,025 (2,056,025)(2) -
----------- ----------- -----------
Total operating
expenses 23,683,777 (23,266,871) (416,906)
Operating loss (21,301,758) 20,884,852 (416,906)
Interest expense - (18,000)(4) (18,000)
Interest income 427,657 (427,657)(2) -
Other income - - -
----------- ----------- -----------
Net loss from
operations (20,874,101) 20,439,195 (434,906)
Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock - - -
----------- ----------- -----------
Net loss applicable
to common stock (20,874,101) 20,439,195 (434,906)
20,439,195
Net loss from discontinued
operations - (20,439,195)(3) -
----------- ----------- -----------
Net loss $(20,874,101) $20,856,101 $ (434,906)
============ =========== ===========
Basic and diluted loss
per share $ (2.15) $ (.04)
============ ===========
Weighted average shares
outstanding 9,723,801 9,723,801
============ ===========
<PAGE>
Page 29
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) To reflect the sale of certain assets to and the assumptions of
certain liabilities by SBI under the capital asset purchase agreement.
As a result of the proposed sale, the Panda Project will recognize a
gain of $1,328,199, which was not presented herein.
(2) To reclassify the operating loss to discontinued operations as a
result of the proposed sale of the operating business per Accounting
Principles Board Opinion No. 30.
(3) To eliminate the loss as a result of the sale of the proposed sale
of the business as if it had occurred at the beginning of the period.
(4) To reflect interest on the new $300,000 SBI bridge loan at the 6%
annual interest rate as per the promissory note.
(5) To reflect elimination of accrued penalties on Class A Preferred
Stock and certain common stock penalties in the amount of $383,500.
The Company had previously accrued certain penalties under the Class
A preferred Stock agreement, but under the new exchange agreement
executed in connection with the SBI purchase agreement, the preferred
shareholders waived the penalties due both for the Class A Preferred
Stock as well as their share of the accrued common stock penalties
totaling $383,500.
(6) To reflect estimated legal fees, accounting fees and other general
and administrative costs including payroll and rent to be incurred as a
result of the sale. Estimated operating costs for the 12 month-period,
nine-month period, and the six month period are $416,906, $312,680, and
$208,453; respectively.
<PAGE>
Page 30
PROPOSAL 2:
AMENDMENT TO
ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED SHARES
-----------------------------
Description
The Board of Directors proposes and recommends to the shareholders
an amendment to the Panda Articles of Incorporation (the "Panda
Articles") increasing the number of authorized shares of Panda Common
Stock from 50,000,000 shares to 100,000,000.
The text of the proposed amendment to the Panda Articles is set forth
on Annex B to this Proxy Statement.
Additional Shares Necessary to Meet Current Commitments
The Board of Directors determined that additional shares of Panda
Common Stock (the "Additional Shares") should be authorized to fulfill
Panda's obligations under certain commitments and obligations that, if
not fulfilled, threaten Panda's solvency.
Sarubbi is entitled to 3,750,000 shares of Panda Common Stock to
fulfill Panda's obligation under the Amended Settlement Agreement after
the Panda Shareholders approve Proposal 2. In the event the Panda
shareholders do not approve this Proposal 2, Panda will be in breach of
the Amended Settlement Agreement due to a lack of authorized shares to
fulfill this obligation, which will materially affect Panda. See "Legal
Proceedings."
Under the terms of the August 1998 Private Placement, Panda is
obligated to issue certain Fill-Up Shares related to the one-year
anniversary date of the closing of the Private Placement. Pursuant to
the Agreement, additional shares are issuable to purchasers if the
average closing bid price of the common stock for the 20 trading day
period immediately prior to the anniversary date (August 15, 1999) is
less than the prior anniversary price (February 15, 1999 anniversary
date). Upon approval of Proposal 2, Panda will issue approximately
6,000,000 shares of the Company's Common Stock under the Fill-Up
Provision of the August 1998 Private Placement. In addition, the
Company is in the process of negotiating with August 1998 Private
Placement holders who are not Series A Preferred shareholders to accept
shares of common stock in lieu of the accrued liquidating damages of
$383,000 as a result of the Company's common stock delisting from
Nasdaq. Upon approval of Proposal 2 and the agreement with August 1998
Private Placement investors, Panda will issue 4,500,000 shares.
There were 50,000,000 authorized shares of Panda Common Stock,
with 29,698,425 shares outstanding as of October 20, 1999. Panda
anticipates that there will be approximately 49,961,106 shares of Panda
Common Stock outstanding as of the Record Date for the Annual Meeting.
The anticipated increase in the number of shares of Common Stock
outstanding prior to the Record Date is due to the expected conversion
of the remaining shares of the Series A Preferred Stock. After the
Record Date, there will be 38,894 authorized shares of Panda Common
Stock reserved for issuance pursuant to options, warrants, contractual
commitments or other arrangements. As of October 20, 1999, Panda has
commitments to issue 40,930,105 additional shares of Panda Common Stock,
including 20,262,681 shares pursuant to the Exchange Agreement, as
follows:
<PAGE>
Page 31
Purpose for which Number of
Shares are Reserved Reserved Shares
------------------- ---------------
Employee Stock Option Plans 815,900
Warrants:
1996 Equity Transaction 112,500
1998 Equity Transaction 2,223,928
Helix (PEI) Inc. 2,850,000
Convertible Preferred
Transaction in February 1998 120,000
Fees related to Convertible
Debenture in August 1997 70,096
Warrants issued related to
Investor Relation Services 225,000
Contractual Agreements:
Joseph A. Sarubbi Amendment
to Settlement Agreement
dated December 1998 (see "Legal
Proceedings") 3,750,000
Fill-Up Shares pursuant to the
August 1998 private
placement (approx.) 6,000,000
Other:
Potential shares in lieu of
liquidating damages related to the
August 1998 private placement upon
issuance of new authorized shares 4,500,000
Of the Panda Common Stock reserved for issuance, it is highly
unlikely that 3,500,000 options and warrants would be issued due to
exercise prices that range from $0.75 to $44.25 within the given time
criteria pursuant to the respective option and warrant agreements.
There are no authorized and unissued shares of Panda Common Stock that
are not currently reserved for any specific use and available for future
issuances. If Proposal 2 is approved, there will be 29,371,470 such
authorized and unissued shares of Panda Common Stock that are not
reserved for any specific use and available for future issuances.
Additional Authorized Shares Requested
Having the Additional Shares available for issuance in the future
would give the Company greater flexibility by allowing shares to be
issued without incurring the delay and expense of a special
stockholders' meeting. Except as described in this Proxy Statement, the
Company has no other definitive plans or comments to issue the
Additional Shares. The Additional Shares, together with other
authorized and unissued shares of Panda Common Stock, generally would be
available for issuance without the requirement for further stockholder
approval, unless action is required by applicable law or Panda's
governing documents.
Shareholders of Panda do not have any pre-emptive or similar rights
to subscribe for or purchase any additional shares of Panda Common Stock
that may be issued in the future, and therefore future issuances of
Panda Common Stock may, depending on the circumstances, have a dilutive
effect on the earnings and equity per share, voting power and other
interests of the existing shareholders of Panda.
<PAGE>
Page 32
The increase in the authorized number of shares of Panda Common Stock
also could be viewed as having anti-takeover effects. Although the
Board of Directors has no current plans to do so, shares of Panda Common
Stock could be issued in various transactions that would make a change
in control of the Company more difficult or dilute stock ownership of a
person seeking to obtain control.
The availability of this defensive strategy to the Company could
discourage unsolicited takeover attempts, thereby limiting the
opportunity for the Company's shareholders to realize a higher price for
their shares than is generally available in the public markets. The
Company is not aware of any effort to accumulate shares of Panda Common
Stock or obtain control of the Company by a tender offer, proxy contest
or otherwise, and the Company has no present intention to use the
Additional Shares for anti-takeover purposes.
The Board of Directors recommends a vote FOR approval of the
amendment to the Panda Articles.
Votes Required for Approval of Proposal 2
Approval of Proposal 2 requires that the number of votes cast in
favor of Proposal 2 exceed the number of votes cast against. Votes for
Proposal 2 may be cast in favor of or against the proposal or may
abstain from voting. Abstentions, therefore, will not have the effect
of a negative vote. Abstentions may be specified on the proposal and
will be considered present at the Annual Meeting, but will not be
counted as affirmative votes. In addition, broker non-votes, where
brokers are prohibited from exercising discretionary authority in voting
shares for beneficial owners who have not provided voting instructions,
will not be included in vote totals for Proposal 2, but will be counted
for purposes of determining whether there is a quorum at the Annual
Meeting.
<PAGE>
Page 33
PROPOSAL 3:
ELECTION OF DIRECTORS
Panda's Articles of Incorporation provide that the Board of
Directors shall consist of not less than three nor more than nine
members, the exact number of directors to be fixed by the Board of
Directors. The Board of Directors has set the number of directors at
three. The Board of Directors has three classes, each of whose members
serve for a staggered three-year term. Currently, the Board consists of
one Class II director William E. Ahearn, one Class III director John T.
Friedline and one Class I director Stanford W. Crane, Jr. At each
annual meeting of shareholders, a class of directors is elected for a
three-year term to succeed the directors of the same class whose terms
are expiring. At Panda's upcoming annual meeting, the Class II director
will be elected for a term expiring at the 2002 Annual Meeting of
Shareholders and until his successor is duly elected and qualified,
subject to his earlier death, resignation or removal. The Board of
Directors has nominated William E. Ahearn for election as Class II
director at the Annual Meeting.
The persons named in the accompanying form of proxy intend to vote
all valid proxies received in favor of the election of Mr. Ahearn as
Class II director unless authority is withheld.
Set forth below is certain biographical information furnished to
Panda by the director nominee. The nominee currently serves as a
director of Panda. For a summary of stock ownership information
concerning the director nominee, see "Security Ownership of Certain
Beneficial Owners and Management." In the event the nominee is unable
or unwilling to serve, discretionary authority is reserved to the
persons named in the accompanying form of proxy to vote for a substitute
nominee. Management does not anticipate that such an event will occur.
Also set forth below is certain information concerning the Class I and
Class III directors, whose terms of office will continue after the
Annual Meeting until the 2001 and 2003 annual meetings, respectively.
Nominee for Class II Director
William E. Ahearn, age 61, was appointed to the Board of Directors
in November 1998 by the directors then in office. Mr. Ahearn joined
Panda in March of 1996 and served as President of the Archistrat Systems
division from April 1996 to December 1996. He served as Vice President
of Technology at Panda from January 1997 to September 1997 and as Vice
President and Chief Scientist from September 1997 to November 1998.
From 1993 to 1996, he was Director of Multimedia Products at AMP
Incorporated. AMP is a manufacturer of electronic components. From
1964 to 1993, Mr. Ahearn served in a variety of positions at
International Business Machines Corporation ("IBM"), including Product
Manager for Digital Video Interactive and Collaborative Work Products
IBM Europe, Product and Project Manager for Input/Output Technology
Entry Systems and Electro-Optical Technologies at IBM Corporate
Headquarters, and as staff member of IBM's T.J. Watson Research Center.
From 1984 to 1989, Mr. Ahearn was a visiting scholar at the MIT Media
Lab.
The Board of Directors recommends that shareholders vote "FOR" the
nominee for director.
Class III Director
John T. Friedline, age 58, was appointed to the Board of Directors
in June 1999 by the directors then in office. Since 1994, Mr. Friedline
has been President and Chief Executive Officer of Friedline &
Associates, Inc., an independent management consultant primarily in the
multi media arena. From 1965 to 1994, Mr. Friedline held various
positions at IBM Corp. ("IBM"). From 1965 to 1988, he served in IBM's
domestic offices, holding positions that included National Marketing
Manager - PCS and Application Development and Director - Systems
Application Architecture Marketing. From 1988 to 1994, he served in
IBM's European headquarters as Director of its New Business Solutions
Unit. From 1963 to 1965, Mr. Friedline was an engineer at Union
Carbide. He holds a B.S. in Engineering from Bucknell University and an
MBA from the University of Buffalo.
Class I Director
<PAGE>
Page 34
Stanford W. Crane, Jr., age 48, has served as President, Chief
Executive Officer and Chairman of the Board of Directors of the Company
since its inception in April 1992 and, since November 1993, as Senior
Vice President -Product Design and Development. From May 1990 to April
1992, Mr. Crane was self-employed, principally engaged in the
development of the Compass Connector. From 1984 to April 1990, Mr.
Crane was president of Crane Electronics, Inc., which supplied advanced
interconnection technology for military and commercial products. From
1980 until 1984, Mr. Crane was an executive at Molex Corporation, a
publicly held corporation manufacturing and selling electronic
interconnect devices, and served from 1982 to 1984 on the Chairman's
staff for the Advanced Development Committee and assisted in marketing
and strategic planning for domestic and international operations. From
1976 to 1980, Mr. Crane served as a sales executive for AMP
Incorporated, a manufacturer of electronic components.
Board and Committee Meetings
The Board of Directors of Panda held 19 meetings during 1998. The
Board has a standing Audit Committee and a standing Compensation and
Stock Option Committee. The Compensation and Stock Option Committee and
the Audit Committee met several times during 1998 to address Mr. Crane's
contract and employee stock option grants. A contract with Mr. Crane
was not renewed. Additional stock option grants were approved by the
Board of Directors in October 1998. Panda does not have a nominating
committee. During the most recent fiscal year, each director attended
at least 75% of the meetings of the Board and any committee on which
such director served.
Mr. Gingrich and James T.A. Wooder, a former director, served on the
Audit Committee of the Board of Directors until their resignation in
March 1999 and November 1998, respectively, the members of which make
recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the results
of the audit engagement, approve professional services provided by the
independent accountants, review the independence of the independent
public accountants, consider the range of audit and non-audit fees and
review the adequacy of Panda's internal accounting controls. Mr. Ahearn
now serves as the Audit Committee.
Mr. Gingrich and Dr. Tummala comprised the Compensation and Stock
Option Committee of the Board of Directors, which makes recommendations
to the Board regarding the executive and employee compensation programs
of Panda and which administers the 1993 Performance Incentive Plan, the
1995 Employee Stock Incentive Plan and the Nonemployee Director Stock
Option Plan. Mr. Gingrich and Dr. Tummala both have resigned as of
March 1999. The Board has not replaced those members and has decreased
the number of directors to three.
Directors' Compensation
All directors hold office until the next annual meeting of
shareholders and the election and qualification of their successors.
Directors who are not employees and do not otherwise receive
compensation from Panda are entitled to a retainer of $2,000 per month
for serving on the Board of Directors in addition to the reimbursement
of reasonable expenses incurred at any meetings.
In addition, each outside director participates in Panda's
Nonemployee Director Stock Option Plan ("Director Plan"). Under this
plan each outside director receives an option to purchase 4,000 shares
of Panda Common Stock at each annual meeting of shareholders of Panda.
Such options have a per share exercise price equal to the fair market
value of the Panda Common Stock on the date of grant, vest annually in
four equal installments beginning on the first anniversary of grant and,
unless sooner terminated, expire five years from the date of grant.
During 1998, Messrs. Gingrich, Tummala and Wooder each received an
option to purchase 4,000 shares of Panda Common Stock under the Director
Plan at an exercise price of $3.81 per share. At the Annual Meeting, an
additional option to purchase 4,000 shares of Panda Common Stock will be
granted to each of the existing directors.
Annual and Long-Term Incentive Compensation
Panda has no formal bonus program for its key employees.
Occasionally, bonus payments may be made to key employees based on the
achievement of agreed upon performance objectives or as a part of the
recruitment process.
<PAGE>
Page 35
Panda's stock option plans are designed to promote the identity of
long-term interests between Panda's employees and its shareholders and
to assist in the retention of executives. The size of option grants is
generally intended by the Committee to reflect the executive's position
with Panda and his or her contributions to Panda. Stock options
generally vest over a four-year period in order to encourage key
employees to continue in the employ of Panda. Stock options are granted
at an option price equal to the fair market value of Panda's Common
Stock on the date of grant; however, Panda reserves the right to grant
stock options having exercise prices less than the fair market value of
the Panda Common Stock on the date of grant, to modify the terms of
existing options and to reprice the options as an incentive for
employees to remain with Panda.
Benefits
Panda's executive officers are entitled to receive medical and life
insurance benefits and to participate in Panda's 401(k) Retirement
Savings Plan on the same basis as other full-time employees of Panda.
The amount of perquisites, as determined in accordance with the rules
of the Securities Exchange Commission relating to executive
compensation, did not exceed 10% of salary and bonus for 1998 for any of
the named executive officers.
Summary of Compensation of Chief Executive Officer
For the fiscal year ended December 31, 1998, Mr. Crane, Panda's
President and Chief Executive Officer, received a salary of $150,000.
Compliance with Internal Revenue Code Section 162(m)
Panda does not believe Section 162(m) of the Internal Revenue Code,
which disallows a tax deduction for certain compensation in excess of $1
million, will generally have an effect on Panda. The Compensation
Committee intends to review the potential effect of Section 162(m)
periodically and in the future may decide to structure the
performance-based portion of its executive officer compensation to
comply with Section 162(m). The Compensation Committee has approved the
per-participant limitations included in Panda's 1993 Performance
Incentive Plan and in Panda's 1995 Employee Stock Incentive Plan as a
means of preserving flexibility in structuring executive officer
compensation.
Company Stock Price Performance
The following graph shows a comparison of cumulative total return
since December 1994 for the Company's stock, the Nasdaq Composite Index
and the Philadelphia Semiconductor Index. The performance graph shows
cumulative percentage increases or decreases in each investment.
<PAGE>
Page 36
Comparison of Cumulative Return since December 31, 1994*
[graph]
The Panda Nasdaq Philadelphia
Project, Inc. Composite Index Semiconductor Index
------------- --------------- -------------------
12/31/94 100 100 100
12/31/95 195.51 139.92 143.24
12/31/96 33.15 171.69 171.54
12/31/97 41.01 208.83 188.19
12/31/98 4.21 291.60 250.25
- --------------------
* Assumes $100 invested on December 31, 1994 in each investment.
Total Return assumes reinvestment of dividends.
Compensation and Stock Option Committee Interlocks and Insider
Participation
The members of the Compensation and Stock Option Committee were Rao
R. Tummala and Claud L. Gingrich until March 1999 when they resigned.
No member of the Compensation and Stock Option Committee was at any time
during fiscal year 1998, or formerly, an officer or employee of Panda.
Employment Agreements
Mr. Crane entered into an employment agreement with Panda on November
8, 1993, as amended and restated on February 22, 1994, which expired on
January 1, 1999 (subject to certain termination provisions). Under this
agreement Mr. Crane receives an annual base salary of $150,000. Mr.
Crane is also eligible to receive discretionary bonuses as determined by
the Board of Directors. Furthermore, the agreement provides that Mr.
Crane is entitled to participate in any medical, stock option and
benefit plans that Panda may establish. Mr. Crane does not currently
have an employment agreement.
<PAGE>
Page 37
Mr. Crane's employment is terminable at will by Mr. Crane upon six
months' prior notice, and is terminable by Panda for cause at any time
or in the event that Mr. Crane becomes disabled and, as a result, is
unable to perform his obligations under the agreement for three
consecutive months. In the event that the agreement is terminated other
than as a result of Mr. Crane's death or disability or for cause, Mr.
Crane will be entitled to receive an amount equal to the greater of
$150,000 or his annual compensation for the preceding calendar year. In
addition, Mr. Crane has agreed not to compete with Panda for a period of
two years after the termination of his employment provided he receives
payments during that period equal to twice the greater of $150,000 or
his salary at the time of such termination, calculated on an annualized
basis.
Mr. Crane has assigned to Panda all improvements or related
discoveries or inventions developed or conceived by him during the term
of the agreement and the two-year non-competition period which (i)
relate to the technology assigned by Mr. Crane to Panda pursuant to the
assignment by Mr. Crane in November 1993 of all of his rights to certain
prefabricated semiconductor packaging, printed circuit board technology
and computer technologies and products, including VSPA, Compass PGA,
Well Tech printed circuit board technology and Archistrat 4 Computers,
as well as certain other products and technology being developed by him
on behalf of Panda, and all related proprietary information (the "Crane
Assignment"), or (ii) would enable the development of replacements for
the products developed by Panda. See "Certain Relationships and Related
Transactions."
Mr. Crane's employment agreement also provides that he may develop
products or technologies ("Unrelated Investigations") unrelated to
Panda's technology and proposed products provided that the cost to Panda
of such Unrelated Investigations is not significant in the reasonable
judgment of Panda's Board of Directors. Mr. Crane has agreed to
disclose the results of any Unrelated Investigations to Panda and
negotiate in good faith the terms pursuant to which Panda may
participate in any such products or technology. If no agreement is
reached, Mr. Crane may independently commercialize such products or
technology, but will pay Panda a 5% royalty on any sales, licensing fees
or other remuneration he receives with respect to Unrelated
Investigations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon the formation of Panda in April 1992, Panda issued 2,283,000
shares of Common Stock to Mr. Crane in connection with Mr. Crane's
agreement to assign and license to Panda certain technology and
products. Such license agreement (the "Crane-Panda License") was
amended in January 1996.
Under the Crane-Panda License, Mr. Crane has granted Panda the
nonexclusive right to utilize the Compass Connector, a key component in
the commercialization of Panda's Archistrat Computers and the
development and commercialization of the Compass PGA product. The
Crane-Panda License was executed in connection with the conversion to a
nonexclusive license of the 3M License described below. Under the
Crane-Panda License, Panda 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 Archistrat Computers or
other computer system or assembly. Panda may grant sublicenses under
the Crane-Panda License, but only for the use of products as
incorporated in the Archistrat Computers 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 Panda 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 Panda 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. Panda is
substantially dependent upon the Crane-Panda License. The termination
of the agreement under any circumstances would have a material adverse
effect on Panda. 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 Panda. 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.
<PAGE>
Page 38
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. Pursuant to the 3M License,
Mr. Crane is entitled to receive from 3M, in general, a 5% royalty
(decreasing to 2.5% after five years, and to 2% after ten years) on net
sales of the Compass Connector (including sales to Panda). The 3M
License provides in certain circumstances for the payment of a royalty
to Mr. Crane. As of April 20, 1998, Mr. Crane had received no such
payments.
In April 1999, Mr. Crane licensed the Compass Connector technology to
Winchester Electronics to develop, manufacture and sell on a
non-exclusive world-wide basis. Winchester Electronics competes in a
number of different market segments and is not currently competing with
any specific product versions offered by Panda.
In October 1993, Panda settled litigation with Jack R. Moore and Gary
Marvel, former officers and promoters of Panda. In connection with the
settlement, the former officers, or their designees, received 197,860
shares of Panda's Common Stock which were being held by an escrow agent
(the "Escrowed Shares") subject to Panda's or its assignee's right to
repurchase them. In February 1994, Panda's rights to purchase the
Escrowed Shares were assigned to Mr. Crane in connection with his
employment agreement. In March 1996, Mr. Crane purchased the Escrowed
Shares for an aggregate purchase price of $312,000.
In July 1996, Mr. Crane purchased 1,000 shares of Panda Common Stock
at a purchase price of $9.00 per share in connection with a private
placement financing and warrants to purchase 1,000 shares of Panda
Common Stock in connection with such purchase having a term of five
years and an exercise price of $11.00 per share.
In October 1996, Panda and Mr. Crane entered into a license agreement
with LG Cable & Machinery Ltd. ("LG") whereby LG was granted a license
with respect to Compass Connector technology owned by Mr. Crane and
certain enhanced Compass Connector technology owned by Panda. The
license granted to LG is non-exclusive except for certain limited
exclusive manufacturing rights with respect to specified Asian
countries. The $1 million license fee will be split equally between Mr.
Crane and Panda. In addition, Panda and Mr. Crane are entitled to
receive royalties on sales of the Compass Connector products by LG or
its affiliates, which will be split equally between Mr. Crane and Panda.
As of June 30, 1999, Mr. Crane had received an aggregate of $300,000 in
payments under this Agreement.
In August 1997, Panda hired Melissa Crane, wife of Stanford W. Crane,
Jr., as Director of Strategic Business at an annual salary of $100,000
per year. In September 1997, Ms. Crane was granted an option to
purchase 50,000 shares of Panda Common Stock at an exercise price of
$6.13 per share. In November 1997, the Board of Directors elected Ms.
Crane Vice President of Strategic Business and authorized an increase in
her annual salary to $125,000 per year. See "Executive Compensation."
In October 1998, the Board of Directors appointed Ms. Crane the Acting
Chief Financial Officer.
With respect to each transaction between Panda and an affiliate of
Panda, a majority of the disinterested members of the Board of Directors
determined that such transactions were on terms at least as fair as had
they been consummated with unrelated third parties.
<PAGE>
Page 39
Continuation of 1993 Performance Incentive Plan and 1995 Employee Stock
Incentive Plan
The 1993 Performance Incentive Plan and the 1995 Employee Stock
Incentive Plan remain in effect pursuant to their existing terms.
Compliance with Section 16(a) of the Exchange Act
Federal securities laws require the Company's directors, certain of
its officers, and person owning beneficially more than ten percent of
Panda's Common Stock to file reports of initial ownership and is
required to disclose into this Proxy Statement any failure of the
foregoing persons to file timely into this Form 10K any failure of the
foregoing persons to file timely those reports during its fiscal year
ended December 31, 1998. To the best of the Company's knowledge, they
solely upon a review of copies of reports furnished to it and written
representations that no other reports were required to report, and
greater that then percent beneficial owners made all such filing timely,
except that Mr. Ahearn and Helix filed their respective Form 4's late on
one occasion.
SUMMARY COMPENSATION
The following table sets forth the compensation paid by the Company
for services performed on the Company's behalf during the fiscal year
ended December 31, 1998 with respect to the Company's Chief Executive
Officer and the Company's four other most highly compensated executive
officers as of December 31, 1998 (the "Named Executive Officers").
<TABLE>
SUMMARY COMPENSATION TABLE
-------------------------------------------------
<CAPTION>
Annual Long-Term
Fiscal Compensation Compensation All Other
Name and Principal Position Period Salary Bonus Options (#) Compensation
<S> <C> <C> <C> <C> <C>
Stanford W. Crane, Jr.
President, Chief Executive 1998 $150,000 - - $ 7,200 (2)
Officer and Chairman of Transition
the Board Period 112,500 283 (1) - 9,600 (2)
1997 150,000 100 (1) - 7,613 (3)
William E. Ahearn
Vice President and 1998 96,666(10) - 5,000 6,000 (2)
Chief Scientist Transition
Period 93,750 283 (1) - 5,400 (2)
1997 143,752 50,100 (7) 70,000 4,800 (2)
C. Daryl Hollis
Executive Vice 1998 78,125 (11) - 5,000 6,000 (2)
President, Secretary Transition
Treasurer and Chief Period 93,750 10,283 (8) 15,000 7,200 (2)
Financial Officer 1997 93,754 25,100 (7) 70,000 4,800 (2)
Melissa F. Crane
Vice President of 1998 125,000 25,000 (3) 35,000 5,035 (4)
Strategic Business Transition
Period 41,779 (5) 25,155 (12) 50,000 -
1997 - - - -
<PAGE>
Page 40
Roy Lee
Vice President 1998 125,000 - 55,000 3,150 (2)
Engineering Transition
Period 93,750 - 30,000 -
1997 54,688 (15) - 40,000 -
Kevin J. Calhoun
Controller 1998 85,000 (13) - 2,500 1,650 (2)
Transition
Period 82,500 17,783 (14) 17,500 -
1997 73,334 (16) - 10,000 -
- --------------------
(1) Holiday bonus.
(2) Car allowance.
(3) $25,000 bonus paid to Ms. Crane in connection with achieving certain performance
objectives.
(4) $5,035 commission paid to Ms. Crane in connection with achieving certain performance
objectives and car allowance.
(5) Ms. Crane was hired during the transition period and her salary was prorated.
(6) $10,000 bonus paid to Mr. Hollis in connection with achieving certain performance
objectives and $283 holiday bonus.
(7) $50,000 bonus paid to Mr. Ahearn in connection with achieving certain performance
objectives and $100 holiday bonus.
(8) $25,000 bonus paid to Mr. Hollis in connection with achieving certain performance
objectives and $100 holiday bonus.
(9) Consists of car allowance of $4,800 and Company contribution to 401(k) Plan of $2,183.
(10) Mr. Ahearn's salary is prorated as he resigned on October 30, 1998.
(11) Mr. Hollis' salary is prorated as he resigned on August 14, 1998.
(12) $25,000 bonus paid to Mr. Hollis in connection with achieving certain performance
objectives and $155 holiday bonus.
(13) Mr. Calhoun's salary is prorated as he resigned on September 30, 1998.
(14) Mr. Calhoun was paid a bonus in connection with achieving certain objectives.
(15) Mr. Lee was hired during fiscal year 1997 and his salary was prorated.
(16) Mr. Calhoun was hired during fiscal year 1997 and his salary was prorated.
</TABLE>
<PAGE>
Page 41
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Option Grants. The following table summarizes option grants during
the fiscal year ended December 31, 1998 to the Named Executive Officers:
Potential
Realizable
Value at
Assumed
Annual Rates
Percent of Stock
of Total Price
Options Appreciation
Options Granted to Exercise for Option
Granted Employees Price Expiration Term (2)
Name (#) (3) In Period ($/Share)(1) Date 5%($) 10%($)
- ---- ------- --------- ----------- ---------- ------ ------
Stanford W.
Crane, Jr - - - - - -
William E.
Ahearn 5,000 * 5.25 01/29/08 16,508 41,835
Daryl Hollis 5,000 * 5.25 01/29/08 16,508 41,835
Melissa F.
Crane 35,000 4.5% 5.25 01/29/08 115,559 292,850
Roy Lee 5,000 * 5.25 01/29/08 16,508 41,835
50,000 6.45% 0.78 10/29/08 24,527 62,155
Kevin J. Calhoun 2,500 * 5.25 01/29/08 8,254 20,918
- --------------------
* represents less than 1%.
(1) Equals fair market value of Panda Common Stock on the date of
grant.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock price appreciation of 5% and
10% compounded annually from the date of grant to their expiration date.
Actual gains, if any, on stock option exercises will depend upon the
future performance of Panda Common Stock and the date on which the
options are exercised.
(3) Options to purchase 20% of shares of Panda Common Stock are
exercisable six months from the date of grant; the remainder become
exercisable in equal annual installments on the first, second, third and
fourth anniversaries of grant.
Option Exercises and Year-End Values. None of the Named Executive
Officers exercised any stock options during the twelve-month period for
the year ended December 31, 1998. The following table summarizes the
value of options held by such persons as of December 31, 1998:
<PAGE>
Page 42
YEAR-END OPTION VALUES
Number of Unexercised Value of Unexercised
Options at December 31, 1998 In-the-Money Options
Year-End (#) December 31, 1998 ($) (1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Stanford W.
Crane, Jr. - - - -
William E.
Ahearn (2) - - - -
C. Daryl
Hollis (2) - - - -
Melissa F.
Crane 34,000 51,000 - -
Roy Lee 45,000 80,000 - -
Kevin
Calhoun (2) - - - -
- --------------------
(1) As of December 31, 1998, the closing sale price of the
Company's Common Stock was $.4688 per share.
(2) Mr. Hollis' and Mr. Ahearn's options expired in November
15,1998 and January 30, 1999 respectively. Mr. Calhoun's options
expired December 30,1998.
<PAGE>
Page 43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below is based on information obtained from the persons
named below with respect to the shares of Panda Common Stock
beneficially owned, as of October 20, 1999 (except as noted below), by
(i) each person known by Panda to be the owner of more than 5% of the
outstanding shares of Panda Common Stock, (ii) each executive officer
included in the Summary Compensation Table and (iii) all executive
officers and directors of Panda as a group.
Amount and
Name and Address Nature of Percentage of
of Beneficial Beneficial Outstanding Shares
Owner Ownership (1) Owned (2)
- ---------------- ------------ ------------------
Stanford W Crane, Jr. (3) 6,860 *
William E. Ahearn 0 *
John Friedline 0 *
Melissa F. Crane (4) 41,000 *
Helix (PEI) Inc. 3,850,000 7.71%
Joseph A. Sarubbi (6) 2,100,000 4.20%
Gam Arbitrage
Fund L.P. (7) 604,719 1.20%
AGR Halifax
Fund, Ltd. (7) 13,577,584 27.17%
Leonardo L.P. (7) 7,738,249 15.48%
Ramius Fund, Ltd. (7) 375,350 0.75%
Raphael L.P. (7) 1,150,039 2.30%
AG Super Fund L.P. (7) 588,228 1.17%
All executive officers and
directors as a group (3 ) 34,140 *
- --------------------
* Less than 1%.
(1) The number of shares of Panda Common Stock beneficially owned by
each person is determined under the rules of the SEC, and the
information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares as to which the individual has sole or shared voting power or
investment power and also any shares of Panda Common Stock which the
individual has the right to acquire within 60 days after September 17,
1999 through the exercise of any stock option or other right. The
inclusion herein of any shares of Panda Common Stock deemed beneficially
owned does not constitute an admission of beneficial ownership of those
shares. Unless otherwise indicated, the persons named in the table have
sole voting and investment power with respect to all shares of Panda
Common Stock shown as beneficially owned by them.
(2) The number of shares deemed outstanding includes 29,698,425
shares outstanding as of October 20, 1999 plus any shares subject to
options or warrants held by the person in question that are currently
exercisable within 60 days after October 20, 1999 and the number of
shares issuable on exchange of the Series A Preferred Stock.
(3) Includes 6,860 shares held by Mr. Crane jointly with his wife, of
which 1,000 shares are issuable upon exercise of a warrant.
(4) Includes 6,860 shares held by Ms. Crane jointly with her husband,
of which 1,000 shares are issuable upon exercise of a warrant.
(5) Helix has 2,850,000 shares issuable upon exercise of outstanding
warrants at a price to be adjusted at the closing of the proposed
transaction pursuant to a letter agreement between Panda and Helix.
Helix is a wholly owned subsidiary of Helix Investments (Canada) Inc.,
which is a venture capital company.
(6) Includes 2,100,000 shares issued pursuant to the Settlement
Agreement. See "Legal Proceedings."
(7) Includes all shares of Panda Common Stock to be received pursuant
to the Exchange Agreement as well as all warrants delivered pursuant to
the 1998 Convertible Preferred issuance and the August 1998 Private
Placement.
Shareholders who are a party to agreements whereby they agree to
vote in favor of the Proposed Sale include Joseph A. Sarubbi, GAM
Arbitrage Fund L.P., AGR Halifax Fund ,Ltd., Leonardo L.P., Ramius Fund,
Ltd., Raphael L.P., Helix (PEI) Inc. and AG Super Fund L.P. These
shareholders will vote approximately 52% of the outstanding Panda Common
Stock in favor of the Proposed Sale.
Recent Panda Securities Issuances
Since January 1998, the Company has issued securities through private
placements, its stock option plan and its 401K plan. Listed below is a
chart of all such securities from January 1, 1998 through June 30, 1999.
<PAGE>
Page 45
<TABLE>
<CAPTION>
Exemption
from Class of
Reason Registration Fiscal Person to Aggregate
Shares for for Initial Registration Quarter whom Shares Offering
Shareholder Issued Issuance Issuance Statement Issuance Were Sold Price
- ----------- ------ ------ ---------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Sophisticated
Stock Preferred Section 7/7/1998 S-3 2nd Quarter & Institutional
Issuance 600 Stock 4(2) of 1998 Investors $6,000,000
the
Securities
Act
Preferred Preferred Not a
Stock Stock sale; 7/7/1998 S-3 2nd Quarter - -
Dividends 30 Financing payment 1998
Agreement of stock
dividend
630
===
Common Stock
- ------------
Ballin &
Partners 5,000 Investor Section Not 3rd Quarter Sophisticated $18,125
Relations 4(2) Registered 1998 & Institutional
Services of the Investors
Securities
Act
August 1998 2,254,602 Financing Section Pending S-2 3rd Quarter Sophisticated $3,675,000*
Private 4(2) 1998 & Institutional
Placement of the Investors
Securities
Act
Samtec, Inc. 666,667 Financing Section Not 1st Quarter Sophisticated -
4(2) Registered 1999 & Institutional
of the Investors
Securities
Act
Fill-Up
Shares 4,441,829 August 1998 Not a Not 2nd Quarter Sophisticated -
Private Sale; Registered 1999 & Institutional
Placement Shares Investors
Issued
Pursuant to
the terms
of the
August 1998
Private
Placement
Helix 1,000,000 SBI/Helix/ Section Not 2nd Quarter Sophisticated $266,000
Panda 4(2) Registered 1999 & Institutional
Agreement of the Investors
Securities
Act
ISO
Exercise 3,000 Incentive No 2/12/98 S-8 1st Quarter Employee $12,250
Stock Exemption 1998 Option
Option required; Exercise
Plan shares
registered
pursuant to
an S-8
401K 13,138 401K Plan No 2/12/98 S-8 1st Quarter Employee $54,382
exemption 1998 401K Plan
required;
shares
registered
pursuant to
an S-8
Joseph
Sarubbi 3,875,000 Legal Section 2/3/99 S-2 1st & 2nd Legal $1,087,600
Settlement 4(2) of & 7/26/99 Quarters Settlement
Agreement the Pending S-2 1999 Agreement
Securities
Act
Preferred 4,637,426 Preferred Shares 7/17/98 S-3 Various Sophisticated $2,517,561
Stock Stock issued & Institutional
Conversions Agreement pursuant to Investors
the terms
of the
Preferred
Stock
Agreement
IIRG 18,462 Investor Section Not 2nd Quarter Sophisticated $76,852
Relation 4(2) of Registered 1998 & Institutional
Services the Investors
Securities
Act
Warrant 553,333 Warrant No 10/28/96 S-3 1st Quarter Sophisticated $415,175
Exercise Exercise Exemption 1999 & Institutional
Agreement required; Investors
shares
registered
pursuant
to an S-3
---------
Common
Shares
Issued
1/1/98
- - 6/30/99 17,468,457
==========
* Aggregate Underwriting Discount or Commission of $117,500.
</TABLE>
<PAGE>
Page 46
SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of and for
the twelve months ended December 31, 1998, the nine months ended
December 31, 1997 and 1996 (unaudited) and the twelve months ended March
31, 1997, 1996 and 1995. This information is qualified in its entirety
by, and should be read in conjunction with, the financial statements and
the notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations which are included elsewhere in this
Proxy Statement. The following data insofar as it relates to the
twelve-month period ended December 31, 1998, the nine months ended
December 31, 1997 and each of the years in the three-year period ended
March 31, 1997 has been derived from audited financial statements.
<TABLE>
STATEMENT OF OPERATIONS DATA:
<CAPTION>
Six Months Ended Year Ended Nine Months Ended
June 30, December 31, December 31, Fiscal Year Ended March 31,
----------------------- ----------- ------------------------------ ------------------------------------
1999 1998 1998 1997 1996 1997 1996 1995
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 903,740 $ 457,591 $ 822,580 $ 2,246,795 $ 2,091,132 $ 2,382,019 $ 870,658 --
Research and
development
costs 571,664 2,028,520 3,395,577 3,255,335 4,786,838 5,722,717 7,954,924 3,494,260
Selling,
general and
administrative
expenses 2,690,631 4,240,244 9,263,283 6,113,255 10,830,976 13,142,099 15,810,701 3,744,914
Costs
associated
with asset
impairments 25,038 1,471,025 2,056,025
Net loss (5,346,388) (7,427,350) (17,474,696) (8,949,652) (17,217,703) (20,874,101) (23,894,426) (6,931,346)
Basic and
diluted
loss per
share ($0.24) ($0.65) ($1.33) ($0.78) ($1.79) ($2.15) ($3.07) ($1.25)
Weighted
average
shares
outstanding 21,989,513 12,230,798 13,732,936 11,541,811 9,605,280 9,723,801 7,786,426 5,531,941
</TABLE>
<TABLE>
Balance Sheet
<CAPTION>
December 31, March 31,
---------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Assets $2,837,837 $5,713,830 $7,337,320 $18,557,681 $10,245,133
Total
Liabilities $4,563,731 $3,616,126 $2,524,445 $ 3,690,090 $ 1,069,810
Accumulated
Deficit (80,340,249)(62,865,553)(53,915,901) (33,041,800) (9,147,374)
Stockholders'
Equity $(1,725,894)$ 2,097,704 $4,812,875 $14,867,591 $9,175,323
</TABLE>
Panda computes per share data in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Due to
losses from continuing operations, the effect of stock options and
warrants is antidilutive. Accordingly, Panda's presentation of diluted
earnings per share is the same as that of basic earnings per share.
<PAGE>
Page 47
MARKET FOR PANDA'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Panda's Common Stock had been traded since May 1994 to December 16,
1998 on the Nasdaq National Market under the symbol "PNDA." The stock
currently trades on the OTC Electronic Bulletin Board. Prior to that
time, there was no public market for the Panda Common Stock. The
following table sets forth the range of high and low closing sale prices
for the Panda Common Stock as reported during each of the quarters
presented. The quotations set forth below are inter-dealer quotations,
without retail mark-ups, mark-downs or commissions and do not
necessarily represent actual transactions.
Common Stock
----------------
Quarterly Period Ended High Low
---------------------- ------ ------
1999
----
June 30, 1999 $ .43 $ .10
March 31, 1999 $ .41 $ .31
1998
----
December 31, 1998 $ 1.50 $ .19
September 30, 1998 $ 3.44 $ .19
June 30, 1998 $ 6.25 $ 3.13
March 31, 1998 $ 6.25 $ 3.88
1997
----
December 31, 1997 $ 9.38 $ 3.81
September 30, 1997 $ 7.31 $ 2.50
June 30, 1997 $ 6.00 $ 2.63
March 31, 1997 $ 9.25 $ 3.75
The closing bid price on the date immediately prior to the
announcement of the Proposed Sale, May 17, 1999, was $0.20 per share.
The closing bid price of Panda's Common Stock on the OTC Electronic
Bulletin Board on September 17, 1999 was $0.14 per share. As of
September 17, 1999, there were approximately 29,698,425 shares of Panda
Common Stock outstanding and 294 holders of record of Panda's Common
Stock. This number does not include beneficial owners of Panda Common
Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
Panda has never declared or paid any cash dividends. After the
consummation of the Proposed Sale, Panda intends to invest any income
received as Panda believes appropriate under the circumstances, which
may include U.S. Government Securities and other short-term instruments.
Panda currently intends to retain any future earnings to finance the
growth and development of its business and future operations, and
therefore does not anticipate paying any cash dividends in the
foreseeable future.
In addition, in February 1998, Panda issued shares of Series A
Preferred Stock, the terms of which prohibit Panda from paying any
dividends on Panda Common Stock or other shares junior in rank to the
Series A Preferred Stock unless all dividends for all past quarterly
periods have been paid or declared and a sum of cash or amount of shares
sufficient for the payment thereof set apart. Further, the terms of the
Series A Preferred Stock allow for the redemption of any outstanding
shares of Series A Preferred Stock in the event Panda declares a
dividend (other than a dividend payable in Panda Common Stock).
<PAGE>
Page 48
INFORMATION REGARDING PANDA
BUSINESS
Overview
Statements in this Proxy Statement that are not statements of
historical fact are to be regarded as forward-looking statements which
are based on information available to Panda 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 Panda's periodic
reports and registration statements filed with the SEC.
Panda 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 JC-11 Committee
designation and has passed Mil Std. 883. The JEDEC JC-11 Committee is
responsible for setting standards for semiconductor packages. The
Company obtained JEDEC designation in 1997. The JEDEC designation for
VSPA is PQFP-B. Semiconductor manufacturers can obtain relevant
mechanical data and specifications regarding the VSPA product. Military
standard 883D is the reliability standard for electrical and mechanical
testing parameters which indicate the level of future durability and
performance for components. In order for VSPA to be commercially
viable, it was necessary to prove its performance by achieving industry
standard levels. In addition, in September 1998, the Compass Connector
received Bellcore approval. Bellcore approval is an important series of
reliability, mechanical and electrical tests for the telecommunications
industry. In order for an interconnect to be used in commercial
applications for the telecommunications industries, most potential end
users will require that the connector be Bellcore approved.
In September 1998, Panda announced a streamlining of operations that
included a 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 upgradable
mother board development related to the Systems. Due to further cash
constraints in November 1998, Panda elected to exit its Systems business
entirely. Panda continues to focus its efforts on the Technology
Products.
Panda has delivered products for commitments of prototype,
pre-production and production orders of its Technology Products from
Veridicom, Motorola, Kaiser Aerospace & Electronics, Honeywell and
National Semiconductor. Several of these customers have notified Panda
that the VSPA parts have passed Mil Std. 883 level of qualification for
their specific application. See "Semiconductor Packages."
Technology Products
The proliferation of increasingly sophisticated semiconductors for
computer operating systems and other electronic applications, along with
the explosive growth in Internet usage, have created the need for
substantially greater bandwidth in products ranging from the
semiconductor to the printed circuit board. Bandwidth refers to the
capacity for transmitting data inside the electronic device as well as
between two or more devices. In recent years, improvements in the speed
at which microprocessors and other integrated circuits can process data
have far outpaced the data transmission capacity of other electronic
components and of the connectors and lines which link the devices. The
resulting bandwidth bottlenecks have effectively negated some of the
improvement in processing speed attributable to the enhanced
microprocessors. The Technology Products include semiconductor packages
and interconnect devices which incorporate designs which Panda believes
enable these products to effectively address the bandwidth bottlenecks.
In addition, these Company products, which are protected by a variety of
patents which have either been issued or for which applications are
currently pending, have significant advantages over currently available
products, including:
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Density of Electrical Connections. The Technology Products embody
proprietary geometrics that allow the placement of a greater number of
conductive leads than is possible with conventional designs. This
permits the access and transport of an increased volume of data.
Reduced Size. Due to their higher contact density, the Technology
Products require less surface area and routing layers than is required
by conventional semiconductor packages and interconnect devices to
accommodate the same number of leads. This improves the performance
and, lowers the cost of using the products in electronic applications.
Superior Electrical and Thermal Characteristics. The Technology
Products are designed to provide faster electrical connections while
minimizing the interference (parasitics) which can occur in a high
density electrical environment. The materials, used in the Technology
Products, are also constructed in such a way to dissipate heat better
than conventional designs. Panda believes that its Technology Products
will withstand the rigors of environmentally stressful applications such
as automotive and other high-temperature applications.
Compatibility; Reduced Cost of Manufacture. The Technology Products
are intended to be compatible with existing industry standards. For
example, while one of Panda's semiconductor packages (VSPA) incorporates
a proprietary array of electrical leads, the space (pitch) between the
leads, which is of critical importance in the surface mount
manufacturing process, is no smaller than that of conventional packages
such as Plastic Quad Flat Pack ("PQFP"), and Ball Grid Array packages
("BGA"). In addition, use of VSPA in an assembly environment, requires
only minor modifications to be compatible with standard die attachment
and wire bonding equipment such as the ESEC 3008 and K&S 8020
wirebonders. Additionally, test sockets for electrical testing, post
assembly, and complete manufacturing procedures are available for
customers. Panda believes that customers housing their silicon devices
in the Technology Products will experience reduced overall production
cost in high volume.
Semiconductor Packages. Semiconductor companies are facing ever
increasing demands for greater lead counts, improved thermal
performance, miniaturization and lower packaging costs in Semiconductor
packages. As a result of the trend in semiconductors, there have been
increasing strains on the packaging. Semiconductor companies have
turned to independent packaging companies for technology development and
innovation.
Semiconductor companies are striving to shorten the time to market
for new products. Having a flexible packaging technology, quick turn
programs and capacity available are critical in attracting new
customers.
Another trend in the semiconductor market is in the "fabless" segment
of the market. These companies have a core competency in the silicon
design process. This market segment relies solely on independent
companies for their packaging of their semiconductors.
There is a broad range of semiconductor packages available in the
market today for both commodity and custom products. These products are
broken into three categories: Leadframe, BGA and PGA. Samples of
leadframe products include SOIC, QFP and PLCC. These packages generally
range from 8 leads to 304 leads. BGA or laminate products include the
BGA family of products like the PBGA, MicroBGA and FlipChip products.
These packages range in lead counts from 8-600. Another market segment
are the PGA's which are pluggable packages which traditionally have been
used for microprocessor applications.
Leadframe products are the most widely recognizable package types in
the marketplace. The chip is encapsulated in a plastic mold compound
with metal leads extending peripherally from the perimeter. Laminate
products have been gaining market acceptance. The BGA uses a laminate,
usually plastic or tape substrate rather than a leadframe substrate.
Tiny balls are attached in an array to the bottom. PGA's are made from
plastic or ceramic and have pins extend perpendicularly from the bottom
of the package arranged in several rows.
Panda has developed and patented 2 semiconductor packages: VSPA,
which a peripherally leaded package with one or multiple tiers, and
Compass PGA, a pluggable pin grid array. Both packages are made from
similar materials.
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VSPA has been designed to address the increasing demands on bandwidth
from the silicon to the PCB. VSPA is a low cost surface mount
semiconductor package that provides higher I/O in less space with
improved electrical and thermal performance as compared to other
packages on the market today. VSPA, also called PQFP-B, is registered
with JEDEC JC-11 committee under MO-198 and has passed Military Standard
883D. The qualification testing from the VSPA was performed by
independent companies including ISE/IQL Labs, Inc., Lockheed Martin and
the Georgia Tech Packaging Research Center.
VSPA is based on a three-dimensional architecture that utilizes
multiple rows of pins that are tiered to achieve a greater density
within a smaller area. The VSPA is scalable in X, Y, and Z axes being
either square or rectangular in shape. By using individual,
pre-stamped, pins the VSPA package does away with a traditional lead
frame and many of the labor intensive molding steps. As a result, it
allows leads to be interleaved and arranged in several tiers. The
number of tiers depends upon the target die size and necessary number of
I/O. VSPA can be configured with one to six tiers, allowing packages up
to and over 1,000 pins. This allows the package to shrink and grow
depending on the customer's chip application.
VSPA is also available in both 'cavity down' and 'cavity up'
versions. With VSPA's wide range of I/O's and variable package
dimensions, multichip modules (MCMs) are also possible with the VSPA.
This scalability allows silicon designers considerable flexibility in
choosing a VSPA package that will best suit their specific package
requirements.
This minimum lead length yields low package parasitic and inductance
by keeping pins a constant size for each tier and a common part number
for each package size. These parameters remain constant for each
package size since only the frame is scaled to accommodate different die
sizes. This cannot be achieved in PQFP or BGA packages. The electrical
characteristics of VSPA allow it to perform with faster rise times and
the ability to support high performance applications at much higher
frequencies. VSPA has tested resonance free to 3.5GHz with the next
generation projected for a 10GHz range.
In 1998, Panda introduced several versions of the VSPA package
including the thermally enhanced and super thermally enhanced versions
to address market demands. Panda shipped pre-production parts of the
VSPA TE and submitted several designs using the VSPA STE.
In January 1998, Panda received its first production order for 1
million units for a customized version of the VSPA package from
Veridicom. As of June 1, 1999, Panda shipped in excess of 115,000 units
to Veridicom. Additionally, Panda has delivered prototype and
pre-production parts to Lucent Technologies, Motorola, EG&G Heimann,
Honeywell SSEC, Samsung, SEEQ Technologies, National Semiconductor,
Kaiser Electronics and several other companies. While Panda believes
that production orders may materialize from the initial orders received,
there can be no assurance that any of these activities will result in
sales of the VSPA product.
Compass PGA is a high density PGA semiconductor product primarily
designed to address the high density chipscale segment of the packaging
market. The Compass PGA employs multiple leads and requires less
surface area of the PCB to accommodate the same number of leads in
traditional PGA packages. Additional design and qualification work must
be done prior to commercialization of this product. The Compass PGA can
be used with existing wirebond and FlipChip technologies. Panda
believes that densities in excess of 1,100 can be achieved. In July
1996, Panda received a patent covering the Compass PGA product.
Interconnect Products. Panda has been granted a license to the
Compass interconnect product by Stanford W. Crane, Jr., its inventor and
Company President and Chief Executive Officer. Panda has produced the
Compass II version in a 152 position right angle female, and 152
position vertical male connector. Currently Panda purchases and resells
the Compass V version from LG Cable & Machinery ("LG Cable"), part of
the LG Group in Korea, and a licensee of the Compass technology. The
Compass V is a 196 position connector available in both straight and
right angle female versions, and vertical male versions.
Compass V is the most dense interconnect currently in production. On
the edge of a printed circuit board it delivers 146 contacts per linear
inch when used in a double-sided arrangement. This compares with 80
contacts per linear inch in the most widely used products used in high
density applications. LG Cable contracted for Bellcore testing of the
Compass V with Contech, an independent testing group. The Compass V
connector received Bellcore approval in 1998. Compass uses a patented
arrangement of contacts and is actually capable of delivering over 300
contacts per linear inch on the edge of a printed circuit board, and
over 1100 in a parallel configuration in one square inch.
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Compass also forms the basic platform for Compass PGA (pin grid
array). Compass PGA utilizes the design of Compass to connect
semiconductors in a pluggable fashion to another substrate, such as a
printed circuit board.
Manufacturing
Panda has developed the ability to manufacture the VSPA semiconductor
package at its production facility in Boca Raton, Florida, using two
automated machines designed and built by Panda. The machines have a
wide range of flexibility in terms of the pin count of the VSPA packages
it will produce, and their production capacity ranges from 235,000 parts
per month to 290,000 parts per month, depending upon the pin count of
the package (i.e., the higher the pin count, the lower the monthly
production capacity). The first machine became operational in late
September 1997 and the second machine, after undergoing refinements
based on data derived from operating the first machine, became
operational in 1998. Although these machines have been designed and
developed by Panda, most of the components from which they are built are
available from multiple suppliers. Panda believes these machines can be
readily replicated to increase manufacturing capacity as demand for VSPA
increases. If Panda is successful in commercializing VSPA, such
commercialization will require Panda to expand its manufacturing
capacity for VSPA parts or enter into additional licensing arrangements,
joint ventures or strategic alliances with respect to the manufacture of
VSPA parts. See "Marketing and Strategic Relationships."
Panda has an arrangement with LG Cable, a unit of Korea-based LG
Group and a licensee of Panda's Compass technology, to acquire the
Compass V Connectors for distribution as discrete parts to customers.
Panda believes that this source of supply is sufficient to meet the
demand for Compass V Connectors for the foreseeable future. If Panda is
successful in commercializing the Compass V Connector for use by third
parties, such commercialization may require its strategic partners to
expand their manufacturing capacity for Compass V Connectors or for
Panda to enter into additional licensing arrangements, joint ventures or
strategic alliances with respect to the manufacture of Compass
Connectors. See "Marketing and Strategic Relationships."
Panda has also subcontracted with LG Cable for the manufacturing of
the VSPA 80/1 package for Veridicom. In addition to the single row
production machines Panda added internally, LG has built a fully
automated assembly line with capacity of 350,000 units per month.
In 1998, Panda contracted with Possehl Hong Kong Machinery limited
("PBE") for the production of the VSPA 360 and 240 products. PBE
specializes in providing leadframe and other raw materials for the
semiconductor packaging market. PBE has 16 factories in 12 countries
located in Europe, Asia and the U.S. The 360 and 240 have the same body
size and have an interchangeable footprint on the PCB. In March 1999,
the machine at PBE was being qualified for production. PBE will be
responsible for all VSPA high volume production for these products.
Marketing and Strategic Relationships. In June 1996, September 1996,
July 1997 and January 1999, Panda licensed the VSPA semiconductor
packaging technology to AMP Incorporated, Pantronix Corporation, LG
Cable and Samtec, Inc., respectively. Under the terms of each licensing
agreement, the licensee has been granted worldwide rights to manufacture
and sell VSPA. Panda currently has only received up-front licensing
fees and is unable to predict the amount of sales revenue or royalty
revenue, if any, that may be earned in the future under these
agreements.
In October 1996, Panda and Stanford W. Crane, Jr., Panda's President
and Chairman, entered into an agreement with LG Cable, under which LG
Cable was granted a license to the Compass technology. The license
granted to LG Cable is non-exclusive except for certain limited
exclusive manufacturing rights with respect to specified Asian
countries. LG Cable has built a production facility in Korea for
production of Compass V, an enhanced version of the Compass Connector.
Based on information supplied to Panda by LG Cable, production
capability of the Compass V reached 250,000 parts per month in January
1998. Under the terms of the agreement, LG Cable is to pay Panda and
Mr. Crane a royalty based on the sales price of each Compass Connector
produced and sold. See "Patents; Proprietary Information Systems."
Such royalties are to be divided equally between Panda and Mr. Crane.
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Panda has also established relationships with semiconductor
assemblers for the back-end assembly process for VSPA which includes
mounting the chip, wirebonding, encapsulation and marking of the
finished product. These relationships include Gateway Semiconductor,
ATEC and ASE Malaysia. Other companies such as STATs, have
qualification underway. These relationships are needed for Panda's
customers to utilize the VSPA package. Additionally, Panda has worked
closely with ESEC, a Swiss manufacturer of die attachment and
wirebonding equipment, to optimize their equipment for the VSPA package.
Panda markets it products through a direct sales force and a network
of independent sales representatives. At the present time Panda has
four salespeople engaged in the sales and marketing of its VSPA product.
Panda is engaged in recruiting additional personnel for various
geographic locations and positions.
Backlog. As of September, 1999, the Company's revenue backlog
amounted to approximately $966,000. The Company and/or SBI expect to
completely fill the current backlog within the next fiscal year. As of
September 14, 1999, the backlog consisted of product to be shipped to
Veridicom under their respective original purchase orders.
In the first quarter ending March 31, 1998, the Company reported a
backlog of approximately $1,700,000. Of the $1,700,000 reported,
$707,500 was recognized during year ending December 31, 1998. The
remaining portion of the backlog of $992,500 related to one customer was
not recognized due to delays to Veridicom in shipment of their silicon
wafers. Veridicom uses the VSPA product to house their proprietary
silicon. If Veridicom has delays in shipment of their silicon wafers,
then there would be a delay of ordering additional VSPA packages. It is
expected that Veridicom will continue to order parts for this specific
version of their product and therefore it is expected that the original
purchase order will be fulfilled by Panda prior to the closing of the
transaction and by SBI after closing the transaction.
Research and Development
In early 1998, Panda's principal research and development efforts
were devoted to the design and development of VSPA and Rock City. The
Rock City development included new upgradable boards as well as a new
chassis design. Since September 1998, all research and development was
for the VSPA product and specific customer applications. In 1998, Panda
spent approximately $3,400,000 on research and development. For the
nine months ending December 31,1997, Panda spent approximately
$3,300,000 on research and development. There will be no further
development related to the Systems business.
Panda currently anticipates that its research and development
activities over the next year will focus on enhancements to the
automated machine for producing VSPA, and developing specific
applications for VSPA and the Compass Connector. Panda believes that
its spending on research and development in the current fiscal year will
be approximately the same amount as it was during the previous twelve
months.
Patents and Proprietary Information
Panda'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 July 12, 1999, Panda had obtained 18 United States
patents and an aggregate of 41 foreign patents. In addition, Panda had
pending a total of 18 United States and 29 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." Panda's foreign
patent filings have been made in selected countries, including the
Republic of China (Taiwan), Germany, the United Kingdom, Ireland and
France. Panda 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 Panda's
technology and proposed products. To the extent possible, Panda also
intends to file patent applications with respect to products and
technology that it may develop in the future.
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There can be no assurance that any of Panda'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 Panda'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 Panda to obtain patents
for which applications are currently pending could have a material
adverse effect on Panda's ability to commercialize successfully its
proposed technology and products. Even if Panda is able to obtain such
patents, there can be no assurance that any such patents will afford
Panda 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 Panda 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 Panda'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 Panda to do business. If
Panda's technology or products were determined to infringe on the
patents, trademarks or proprietary rights of others, Panda could, under
certain circumstances, become liable for damages, which also could have
a material adverse effect on Panda. Moreover, in the event that Panda's
technology or proposed products were deemed to infringe upon the rights
of others, Panda would be required to obtain licenses to utilize such
technology. There can be no assurance that Panda 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 Panda. If Panda 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 Panda will
have the financial resources to enforce or defend a patent infringement
or proprietary rights action.
Panda 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 Panda will not be precluded by others from using any of
such identifications or creating proprietary rights with respect to
them.
Pursuant to a license agreement entered into in January 1996 between
Panda and Mr. Crane (the "Crane-Panda License"), Mr. Crane has granted
Panda the nonexclusive right to utilize the Compass Connector, a key
component in the commercialization of Panda's Archistrat Computers 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 Panda relating to the Compass
Connector. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Factors That May Affect
Future Results" and "--Dependence On The Crane-Panda License Agreement;
Potential Conflicts Of Interest." Under the Crane-Panda License, Panda
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 Archistrat Computers or other computer
system or assembly. Panda may grant sublicenses under the Crane-Panda
License, but only for the use of products as incorporated in the
Archistrat Computers 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 Panda
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 Panda 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. Panda is substantially dependent upon the
Crane-Panda License. The termination of the agreement under any
circumstances would have a material adverse effect on Panda. 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 Panda. 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.
Panda relies on confidentiality and nondisclosure arrangements with
its employees, consultants and others involved with Panda's product and
technological development efforts. There can be no assurance that these
agreements will provide meaningful protection to Panda or that other
companies will not acquire information which Panda considers
proprietary. Moreover, there can be no assurance that other companies
will not independently develop know-how comparable or superior to that
of Panda.
Competition
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Panda competes with many large corporations for sales on
semiconductor packages and interconnect devices. These corporations all
have significantly greater financial resources than Panda. In
semiconductor packaging, companies such as IBM, Motorola and Amkor have
significant development capabilities and financial strength to develop
new semiconductor packages. VSPA competes against well established
products such as QFP's, BGA's and PGA's. Panda also depends on third
party subcontractors for volume production and may have difficulties
getting supply from time to time.
In the connector market, Compass competes with the AMP's Mictor Line
and the Teradyne VHDM connectors. These companies have significant
resources, not only financially, but also in manufacturing and sales and
marketing.
Employees
On October 1, 1999, Panda had 17 full-time employees. Mr. Crane
divides his time between product research, manufacturing, and general
management. Panda considers its relations with its employees to be
good. None of Panda's employees are represented by labor unions.
PROPERTIES
Panda leases its principal offices at 951 Broken Sound Parkway in
Boca Raton, Florida. This facility has housed Panda's operations since
November 1, 1998. The facility is approximately 11,230 square feet with
monthly rent of approximately $10,322 escalating to $12,547 beginning in
November 2002. The lease terminates on October 21, 2003.
Panda leases two additional facilities at 1101 Holland Drive in Boca
Raton, Florida totaling approximately 7,200 square feet and uses these
facilities for Panda's machining operations, the production of the
automated machines for producing VSPA parts and current VSPA production.
The leases for these two facilities total approximately $5,000 in
monthly rental payments. There is no long-term lease for these
facilities. The Company rents the property on a month-to-month basis.
Panda also leases 10,547 square feet in Fremont, California and uses
this facility for sales & marketing and application engineering. The
lease is for a term of five years with monthly rental fees of
approximately $22,000 escalating to approximately $24,000 in 2003.
In addition to the facility in Fremont, Panda also leases a facility
in San Jose, California, which was previously used to house Panda's
Advanced Design Group, manufacturing administrative personnel and
certain sales personnel. The lease term is through December 1999 and
calls for monthly lease payments of $4,746. Effective August 1, 1997,
Panda entered into a sublease agreement with a term ending in December
1999 and which called for monthly sublease payments to Panda of
approximately $4,800.
Panda has terminated its lease in Hayward, California for 50,000
square feet, the original lease agreement had a term of 5 years with
monthly rental fees of approximately $18,000. Panda was required to
secure lease payments with an $80,000 Certificate of Deposit held at the
Silicon Valley Bank through July 16, 2002. On July 16, 2000, the
guaranty limit will be reduced to $40,000 provided no event of default
has occurred by the current tenant.
Panda believes that its properties are generally in good condition,
are well maintained and are generally suitable and adequate to carry on
Panda's current business.
On July 18, 1999, a complaint was filed against the Company in
Palm Beach County, Florida. The complaint alleges breach of contract by
the Company for non-monetary default of its lease agreement for the
premises at 951 Broken Sound Parkway, Boca Raton, Florida. The alleged
default was that the Company was insolvent and had, by entering into the
Asset Purchase Agreement with SBI, essentially subleased the leased
premises without the landlord's consent. Panda denies it is in default
under the lease. Panda denies that the transaction has yet taken place.
Liberty seeks acceleration of future rent payments in the amount of
approximately $809,000. The Company has 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 and the outcome to this litigation could have
a material adverse effect if the Company is unsuccessful.
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LEGAL PROCEEDINGS
On October 16, 1998, a complaint was filed against Panda 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 Panda for failing to proceed with a financing transaction
and seeks damages in an unspecified amount in excess of $270,000 or a
declaration that Panda is required to proceed with the financing
transaction. Panda has filed an answer to the complaint. At the
present time, the outcome of this litigation is both immeasurable and
undeterminable. There can be no assurance that Panda will be successful
in defending this litigation.
On December 11, 1998, Panda and Joseph A. Sarubbi ("Sarubbi")
entered into a settlement agreement (the "Settlement Agreement")
relating to litigation in which Sarubbi has obtained a judgment against
Panda in the amount of $1,227,041. Sarubbi entered into a consulting
agreement with Panda in 1992. Sarubbi also later served as a director
and general manager of Panda. Under this consulting arrangement,
Sarubbi received 91,000 options to purchase shares of Panda Common
Stock. Sarubbi also served as a director of Panda in 1995 and 1996. In
1996, Sarubbi notified Panda of his desire to exercise all of his
options and to sell all of the Panda Common Stock received upon the
exercise of such options. A Florida district court held Panda liable
for certain losses Sarubbi alleged he incurred in connection with the
sale of his Panda Common Stock and for fees for his previous service as
director. The court granted a judgment of $1,227,041 in favor of
Sarubbi. Under the Settlement Agreement, Panda has agreed to pay
Sarubbi total consideration worth $1,000,000 of which $240,000 has been
paid in cash in December 1998 and the remainder is to be satisfied upon
the sale of shares of Panda's Common Stock which have been delivered to
Sarubbi by Panda. Panda has registered 1,775,000 shares for Sarubbi
pursuant to a registration statement, declared effective on February 5,
1999. The parties have agreed to petition the Florida Court of Appeals
for the Fourth District to dismiss the litigation within five business
days after Panda's obligations in the Settlement Agreement have been
completed. If such obligations are not completed, the judgment will
remain in effect. This settlement amount was recorded as a charge
against Company earnings for the quarter ended December 31, 1998. On
April 14, 1999, Panda received a Notice of Default on the Settlement
Agreement. Sarubbi claimed that his inability to sell the stock that he
received in the settlement creates a breach under the Settlement
Agreement. Panda believes that it is in full compliance with the
Settlement Agreement and that no breach exists. On June 25, 1999, the
Settlement Agreement was amended to allow Panda to extend its time to
satisfy its obligations under the Settlement Agreement (the "Amended
Settlement Agreement"). Under the Amended Settlement Agreement, the
Company issued Sarubbi 2,100,000 shares of Panda Common Stock in the
second quarter of 1999 and such shares were recorded as an expense to
S,G&A at the closing price of $0.156 totaling $327,600. Panda also
agreed to issue Sarubbi an additional 3,750,000 shares upon the increase
in the number of shares of Panda Common Stock authorized under Panda's
Articles of Incorporation. Panda will have 90 days to register such
shares of Panda Common Stock with the Securities and Exchange Commission
after the approval of the authorization of such shares. $375,000 has
been recorded in Panda's financial statements for the additional
3,750,000 shares of Panda Common Stock. In the event that the increase
in the number of authorized shares of Panda common stock is not approved
pursuant to Proposal 2, Panda will be obligated to pay Sarubbi
$1,502,041, which is equal to the amount of the judgement entered in
favor of Sarubbi plus attorneys' fees, less the value of any cash or
stock received by Sarubbi pursuant to the Settlement Agreement or the
Ammended Settlement Agreement. The Amended Settlement Agreement imposed
a deadline of September 1, 1999 for satisfaction of Panda's obligation
to register the 2,100,000 shares of Panda Common Stock with the
Securities and Exchange Commission. Panda has not satisfied its
obligations under the Amended Settlement Agreement but has not received
a notice of default. Any further legal action taken by Sarubbi may be
material to the Company.
On July 18, 1999, a complaint was filed against the Company in Palm
Beach County, Florida by Liberty Property Limited Partnership
("Liberty"). The complaint alleges breach of contract by the Company
for non-monetary default of its lease agreement for the premises at 951
Broken Sound Parkway, Boca Raton, Florida. The alleged default was that
the Company was insolvent and had, by entering into the Asset Purchase
Agreement with SBI, essentially subleased the leased premises without
the landlord's consent. Liberty seeks acceleration of future rent
payments in the amount of approximately $809,000. The Company has 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 and the outcome to this
litigation could have a material adverse effect if the Company is
unsuccessful.
Panda from time to time is involved in disputes that may lead to
litigation in the future. Panda cannot determine the impact of those
potential lawsuits at the current time. The disputes are not expected
to be material.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Fiscal Year End
During September 1997, the Company decided to change its fiscal year
from April 1 through March 31 to January 1 through December 31. For
discussion and analysis purposes, the twelve months ended December 31,
1998 are compared to the audited nine months ended December 31, 1997 and
the audited nine months ended December 31, 1997 are compared to the
unaudited nine months ended December 31, 1996.
Results of Operations
Twelve Months Ended December 31, 1998 Compared to Nine Months Ended
December 31, 1997
Net revenues decreased to approximately $823,000 during the twelve
months ended December 31, 1998 from $2,247,000 for the nine months ended
December 31, 1997. Net revenues for the respective periods include
approximately $184,000 and $924,000 of net sales of Archistrat
Computers, $100,000 and $350,000 of licensing fees, and approximately
$136,000 and $973,000 of revenues associated with a cooperative
development agreement with the U.S. government. Also, the Company
realized approximately $170,000 of net revenues from the introduction of
the Rock City line of computers and approximately $232,000 from the sale
of VSPA and Compass semiconductor packages. The Company completed all
of the milestones set forth in its cooperative development agreement
with the Defense Advanced Research Projects Agency (DARPA) during April
1998. The objective to the DARPA program was to develop a family of
VSPA semiconductor packages and process technologies, including a
variety of multi-chip modules, and to define the infrastructure to
manufacture these packages on a high volume, low cost basis. The DARPA
Agreement was not intended to directly generate sales for the VSPA
product. The grant was for development of volume manufacturing
capabilities and applications with semiconductors. The US government
has a non-exclusive non-transferable royalty fee fully paid license to
use, duplicate or dispose for governmental purposes any data, technology
and inventions, whether patented or not, made or developed under the
DARPA Agreement. They are prohibited from giving the technology to any
third party for commercial uses. The decrease in revenue related to the
Archistrat Computers is directly related to the Company's refocused
efforts toward the Rock City line of computers introduced during the
second quarter of 1998. In September 1998, the Company streamlined
operations related to the Systems business including both Archistrat and
Rock City products. In November 1998, the Company ceased all operations
related to the Systems business.
Research and development ("R&D") expenses increased to approximately
$3,400,000 for the twelve month period ending December 31,1998 as
compared to approximately $3,300,000 for the nine month period ending
December 31,1997. However on a monthly basis comparative spending on
R&D decreased approximately $83,000 per month. R&D efforts in 1998 were
focused on new custom VSPA designs for specific customer applications,
the refinement of the existing VSPA Flex automation. In addition, the
Company also designed the IO-A architecture that was going to be used in
the Rock City line of computers. 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.
Selling, general and administrative ("S,G&A") expenses increases to
approximately $9,300,000 for the twelve months ended December 31, 1998
from $6,100,000 for the nine months ended December 31, 1997. The
increase of approximately $3,200,000 is primarily related to a
$1,000,000 charge related to a legal settlement (see "Legal
Proceedings"), approximately $253,000 related to the relocation of the
Company's corporate headquarters in November 1998, and approximately
$285,000 charge to reserve certain receivables associated with the
Systems business. After the effect of these charges totaling
approximately $1,600,000 and annualizing S,G&A for the nine months ended
December 31, 1997 (approximately $8,100,000) for comparative purposes,
S,G&A actually decreased approximately $433,000. The decrease in SG&A
is primarily related with management's decision to streamline
operations. During 1998, the Company reduced its number of employees
resulting in savings of approximately $211,000 related to employee
compensation, benefits and travel, $620,000 reduction related to
consulting agreements and an increase of $245,000 in advertising and
marketing expenses related to the introduction of the Rock City line of
computers in the first and second quarters of 1998.
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During the twelve months ending December 31, 1998, the Company
determined that, due to various events and changes in circumstances
associated with exiting the Systems Business, certain long-lived assets
were impaired. As a result, the Company recorded a charge of
approximately $125,000. The Company also recorded an inventory write
down of approximately $1,178,836 related to its decision to exit its
Systems business in November 1998.
During the twelve months ended December 31, 1998, the Company
recorded interest expense of approximately $3,881,000 representing the
amortization of the debt issuance and interest costs related to the
Helix loans. This is a significant increase from approximately $955,000
recorded for the nine month period ending December 31, 1997. This
expense represents a non-cash charge.
Nine Months Ended December 31, 1997 Compared to Nine Months Ended
December 31, 1996
Net revenues increased to approximately $2,247,000 during the nine
months ended December 31, 1997 from $2,091,000 for the nine month period
ended December 31, 1996. Net revenues for the respective periods
include approximately $924,000 and $1,422,000 of net sales of Archistrat
Computers, $350,000 and $100,000 of licensing fees, and approximately
$973,000 and $569,000 of revenues associated with a cooperative
development agreement with the U.S. government. Computer systems
revenues of approximately $924,000 were recorded during the nine months
ended December 31, 1996 as a result of a barter transaction with a
software developer. Other sales of Archistrat computers increased 85%
during the nine months ended December 31, 1997 compared to the same
period of 1996 as the Company refocused its selling efforts on certain
niche markets. In July 1997, the Company entered into a second
licensing agreement with LG Cable whereby LG was granted a license with
respect to a semiconductor package product. In connection with this
agreement, the Company was entitled to a non-refundable license fee of
$250,000 that became immediately vested upon signing the agreement and
has been recorded as revenue during the nine months ended December 31,
1997. The Company accomplished a majority of the milestones set forth
in its cooperative development agreement with the Defense Advanced
Research Projects Agency (DARPA) during the nine months ended December
31, 1997 which accounts for the 71% increase in the related revenue
compared to the same period of 1996. Revenues associated with this
agreement will be limited during 1998 as the agreement near its end.
During the nine months ended December 31, 1997 as compared to the
same period of the prior year, research and development expenses
decreased 32% from approximately $4.8 million to $3.3 million.
Development activities associated with Archistrat 4s server were
substantially completed during the period ended December 31, 1996 which
resulted in the overall decrease. Spending related to the design and
development of automated manufacturing equipment for the Company's VSPA
product line as well as various new Archistrat computer systems
increased during the nine months ended December 31, 1997 as compared to
the same period of the prior year.
S,G&A expenses decreased approximately $4.7 million or 44% to $6.1
million during the nine months ended December 31, 1997 as compared to
$10.8 million during the comparable period of 1996. The most
significant changes were in the following categories: compensation and
benefits decreased approximately $3.1 million resulting from a decrease
in the average employee head count from approximately 118 during the
nine months ended December 31, 1996 to approximately 60 for the same
period of the current year; legal fees decreased 48% or $580,000 as a
result of management's efforts to reduce such costs; office rent expense
decreased approximately $440,000 resulting from certain lease
termination costs incurred during 1996; sales and marketing expenses
were reduced approximately $700,000 as a result of streamlining certain
of the Company's advertising and promotional campaigns, as well as the
reduction of product marketing expenses associated with the barter
agreement entered into in the prior fiscal year.
During the nine months ended December 31, 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 imparted. As a result, the Company
recorded a charge of approximately $1.5 million. No such charges were
deemed necessary during the nine months ended December 31, 1997. During
the nine months ended December 31, 1997, the Company recorded interest
expenses of approximately $900,000 representing the beneficial
conversion feature associated with the convertible debentures issued in
April 1997. This expense represents a non-cash charge with no net
effect on total shareholders' equity.
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Quarter and Six Months Ended June 30, 1999 and 1998
Net revenues decreased during the quarter ended June 30, 1999
("Second Quarter of 1999") to approximately $90,000 as compared to
approximately $313,000 for the quarter ended June 30, 1998 ("Second
Quarter of 1998"). VSPA product sales for the Second Quarter of 1999
were approximately $83,000 for prototype, pre-production and production
orders and approximately $7,000 for the sale of systems inventory. The
net revenue decrease for the quarter was attributable to the cessation
of operations of the computer systems business including Rock City
products.
Net revenues for the six months ended June 30, 1999 were
approximately $904,000 compared to approximately $458,000 for the same
period last year. VSPA product sales for the six months ended June 30,
1999 were approximately $292,000 for prototype, pre-production and
production orders, approximately $112,000 for the sale of systems
inventory, and a significant portion of the Company's revenue related to
a one-time $500,000 licensing fee from Samtec Inc.
For the six months ended June 30, 1999, Cost of Goods Sold of
approximately $201,000 is comprised of raw material purchases related to
VSPA product sales and approximately $15,000 related to systems
inventory sales. Systems inventory with an original cost of $165,586
were sold with no related Cost of Sales as those inventory items were
reserved as of December 31, 1998. Comparatively, approximately $195,000
is comprised of raw material costs related to Archistrat computer sales
in the same period of 1998. The Company refocused its efforts toward
the Rock City line of computers introduced during the second quarter of
1998. However, in September 1998 the Company streamlined operations
related to the Systems business including both Archistrat and Rock City
products, and in November 1998 the Company ceased all operations related
to the Systems business.
R&D expenses decreased to approximately $191,000 for the Second
Quarter of 1999 as compared to approximately $1,023,000 for the Second
Quarter of 1998. R&D for the first six months of 1999 was approximately
$571,000 attributable to new custom VSPA designs for specific customer
applications and the refinement of the existing VSPA Flex automation
machines. R&D for the first six months of 1998 was $2,028,000. This
decrease is primarily due to ceasing operations relating to Systems
activity, including the Rock City computers, and the completion of the
cooperative development agreement with the US government.
Consistent with management's focus on decreasing fixed costs, SG&A
expenses decreased for the Second Quarter 1999 to approximately
$1,537,000 compared to approximately $2,252,000 for the Second Quarter
of 1998. The average number of employees has decreased from 70 at June
30, 1998 to 20 full time employees as of June 30, 1999. The decrease in
full-time employees is directly related to ceasing operations related to
Systems activity and the need to reduce on going operational costs.
Payroll and related expenses decreased to approximately $465,000 for the
quarter ended June 1999 as compared to $1,134,000 for the quarter ended
June 1998.
For the six months ending June 30,1999 SG&A decreased to
approximately $2,691,000 compared to $4,240,000 for the same period in
1998. The average number of full-time employees decreased to 20 from
70. The decrease in full-time employees is directly related to ceasing
operations related to the systems activity and the need to reduce
operational costs. Payroll and related expenses decreased approximately
$1,293,000 for the six months ended June 30, 1999 compared to the same
period in 1998. In addition, a non-cash charge of $327,600 related to
the issuance of 2,100,000 shares and $375,000 related to the 3,750,000
shares to be issued pursuant to the Sarubbi settlement is recorded in
SG&A.
Total debt issuance costs associated with short-term borrowings
from Helix, including the value of the warrants issued in connection
with such borrowings, charged to amortization expense during the quarter
ended June 30, 1999, amounted to zero, however for the Second Quarter of
1998, $421,000 was charged to amortization expense. For the six months
ending June 30, 1999 approximately $525,000 and for the six months
ending June 30, 1998 approximately $1,200,000 was charged to
amortization expense. The valuation of the warrants and related
amortization expense, represents a non-cash transaction. Additionally,
in the Second Quarter of 1999, 171 Preferred penalty shares at
$1,710,000; pursuant to the Exchange Agreement (Exhibit 2.4), will be
converted at a fixed conversion price of $.261. At today's market prices
of approximately $.15 per share the value of the shares of Panda Common
Stock would be valued at approximately $982,000. The penalty shares
were issued related to the Series A Preferred Convertible transaction
and the 1998 common stock private placement holders of the Series A
Preferred Stock in lieu of any accrued or future penalties. There were
no such penalties as of the first quarter of 1998.
Interest expense increased for the quarter and six months ended
June 30, 1999 to $268,145 and $302,717, respectively, as compared to the
quarter and six months ended June 30, 1998 from $11,477 and $42,597,
respectively. The increase is related to a non-cash charge of $266,000
related to the issuance of 1,000,000 shares of Panda Common Stock to
Helix pursuant to the Helix Agreement dated May 14, 1996.
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For purposes of determining net loss applicable to Panda Common Stock
for the Second Quarter of 1999 and the Second Quarter of 1998, accrued
dividends payable in the amount of approximately $54,000 and $178,000,
respectively, and amortization of the beneficial conversion feature
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 Panda Common Stock.
Liquidity and Capital Resources
During February 1998, the Company completed a private placement of
$6.0 million of Series A Preferred Stock and received net proceeds of
approximately $5.8 million. The shares of preferred stock are
convertible into common stock at the lower of $3.50 per share (in
accordance with the revised terms effective July 2, 1998) or a floating
conversion price. Through June 30, 1998, 271.76 shares of preferred
stock were converted into an aggregate of 4,637,310 shares of Panda
Common Stock. As of June 30, 1999, 529.24 preferred shares are
outstanding including dividends.
The Company may require that all unconverted shares of Series A
Preferred Stock be converted at any time if the closing bid price of
Panda 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
shares of Series A Preferred Stock which remain outstanding on such date
(plus accrued and unpaid dividends) or redeem such shares of Series A
Preferred Stock. The terms of the Series A Preferred Stock, as revised
on July 2, 1998, provide that upon the occurrence of certain Triggering
Events, as defined in the Panda Articles, 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 December 16, 1998, a triggering event occurred related to the
delisting of Panda Common Stock from the Nasdaq National Market to the
OTC Bulletin Board. As of April 14, 1999, no payments have been made to
the Holders. The Company has reached an agreement with the Series A
Preferred shareholders in connection with the Triggering Event and has
agreed to issue an additional 171 Preferred A shares.
On August 14, 1998, the Company completed the sale of 2,254,602
shares of Panda Common Stock and warrants in a private placement to
accredited investors with gross proceeds of $3.675 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.
The Company issued approximately 4,400,000 additional shares associated
with the fill-up provision. The Company is required to issue
approximately 6,000,000 additional shares of Panda Common Stock as of
August 15, 1999 in accordance with the Fill-up provision.
During May, June and July 1998, the Company borrowed an aggregate of
$2 million from Helix PEI Inc. ("Helix"). The loans are secured by the
Company's intellectual property and were due August 7, 1998. During
August 1998, Helix agreed to extend the maturity date of all the
outstanding loans 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 Panda Common Stock at an exercise
price equal to the fair market value of Panda Common Stock at the date
of issuance ($2.125). The loans bear interest at the Royal Bank of
Canada prime rate plus 2 percentage points per annum (9.40% at June 30,
1999) payable monthly. The warrant has a term of two years. The
Company is currently in default on the Helix loans since the Company did
not repay the loan in February 1999.
On May 14, 1999, the Company, Helix and SBI entered into an agreement
whereas upon the closing of the acquisition of certain assets of the
Company by SBI, SBI will pay $1,000,000 to Helix. In consideration of
such payment, and the issuance of 1,000,000 shares of Panda Common Stock
to Helix, Helix released Panda from payment on all accrued interest on
the notes remaining unpaid as of the date of such payment of $1,000,000.
The remaining $1,000,000 and accrued interest will be paid in eleven
payments by SBI to Helix.
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Page 60
On December 15, 1998, the Company reduced the exercise price of
certain common stock purchase warrants if the warrant holders accelerate
the expiration date of their warrants from July 11, 2001 to January 5,
1999. The exercise price was reduced from $11.00 to $0.75 per share. In
January 1999, warrants representing 553,333 shares were exercised at
this reduced price, and the Company received net proceeds of $415,000
upon such exercise. In February 1999, the Company received $1,000,000
from Samtec, Inc. which includes a non-refundable up-front license fee
related to VSPA and a purchase of 666,667 shares of Panda Common Stock.
In the second quarter 1998, the Company's payables were segmented
into the following categories: operational, professional, Systems and
Technology. Payables in the second quarter 1999 of approximately
$1,400,000 as compared to the second quarter 1998 of approximately
$1,500,000 increased or decreased as follows: Operations 14.5% versus
13%, professional fees 67.1% versus 34%, System 11.3% versus 35%, and
Technology 7.0% versus 17%, respectively. Payables related to
operations increased slightly as a result of liquidity and delayed
payments to vendors. Professional fees increased as a result of
increasing legal fees which were not current due to liquidity. The
decrease in payables related to systems was a result of ceasing
operations related to the systems business and the decrease in
technology payables is a result of most vendors requiring advance
payment for goods and services. Accounts receivables (net of the
allowance for doubtful accounts for all System related receivables)
related to the second quarter of 1999 of approximately $45,000 represent
Technology related receivables whereas accounts receivables related to
the second quarter 1998 of approximately $166,000 are approximately 80%
related to Computer Systems.
The Company has been able to obtain short-term financing through
secured promissory notes totaling $925,000 through August 19, 1999,
these funds have allowed the Company to fund certain monthly obligations
as well as certain payables. Additionally, the Company has settled
certain obligations through the issuance of Panda Common Stock. In the
event that the SBI transaction does not close, the Company will seek
additional financing from other alternatives. The Company does not
anticipate any additional liquidity from the letter of intent, which
expired May 1999, entered into by and between the Company and
Roundstone. Since the Company's current working capital is insufficient
to operate the Company, in the event that the Company cannot seek
additional financing, it will be forced to cease operations.
The Company has entered into an agreement with SBI to sell its
intellectual property portfolio as well as the fixed assets related to
its interconnect and semiconductor business. As part of the sale, the
Company has restructured its outstanding loans with Helix that have been
in default since February 15, 1999. SBI will assume such Helix loans
upon closing. Additionally, the Company has entered into an agreement
with the Series A Preferred shareholders for the exchange and conversion
of the outstanding preferred shares into 22,995,919 common shares at a
fixed price of $.261. The restructuring of these agreements is
partially contingent upon the closing of the sale to SBI The transaction
is subject to customary closing conditions, including the approval of
the Company' shareholders. Helix, Sarubbi and the Series A Preferred
shareholders have entered into a Voting Agreement with SBI and such
holders own sufficient shares, approximately 52%, to assure the approval
of the transaction by the Company's shareholders. The Company will
receive a 10% ownership interest in SBI which will initially be
capitalized with $6,000,000.
In June, July, August, and October 1999, the Company entered into
agreements with SBI pursuant to which SBI has loaned the Company
$1,250,000. In connection with the loan, the Company has granted to SBI
a security interest in substantially all of the assets of the Company
pursuant to the Security Agreement, dated October 21, 1999, by and
between the Company and SBI. The loan bears an interest rate of 6% per
annum and is due and payable on December 30, 1999.
Year 2000 Issues
Like many other companies, Year 2000 computer issues create certain
risks for the Company. If our financial, operational and information
systems do not correctly recognize the process date information beyond
the year 1999, it could have a significant adverse impact on the
Company's ability to process information, which could create significant
potential liability for the Company. To address potential Year 2000
issues with its internal systems, we have evaluated these systems. The
initial assessment indicated that certain internal systems should be
upgraded or replaced as part of a solution to the Year 2000 problem.
The costs incurred to date related to these programs have not been
material. The estimated cost to be incurred by us in the future is not
expected to exceed $20,000. These estimates do not include potential
costs related to any customer or other claims or the cost of internal
software and hardware replaced in the normal course of business. These
estimates are based on our current assessment of the projects and may
change as the project progresses.
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The Company believes that its potential liability related to its
products for Year 2000 compliance is not expected to exceed $5,000. The
Systems products Rock City, 5R, and 5S are year 2000 compliant. The 4S
may not, depending on the operating system used, make the transition
automatically. Specifically, 4S systems using the Pentium 100 and
Pentium 166 Intel processors. Once the systems are assisted by changing
the date and time in the Bios, then the system is year 2000 compliant.
The Company estimates that approximately 100 4S computers with this
potential problem were sold. The Semiconductor and interconnect
products are sold as components as opposed to completed products and
therefore there is no liability associated with the year 2000 issue.
We are also working with key suppliers of products and services to
monitor their progress toward Year 2000 compliance. The failure of a
major supplier to become Year 2000 compliant on a timely basis could
have a material adverse affect on our business, financial condition and
operating results.
We have begun internal discussions concerning contingency planning to
address potential problem areas with internal systems and with suppliers
and other third parties. We expect assessment, remediation and
contingency planning activities to continue throughout the year 1999
with the goal of resolving all material internal and external systems
and third-party issues. While the Company has not completed its detail
plans with regards to this uncertainty, management believes, based on
discussions with vendors of its major business applications and Year
2000 Compliance certificates received from the related software
developers, that the financial impact of making the required systems
changes, if any, will not be material to the Company's financial
position, results of operations or cash flows.
We deem "Year 2000 Compliant" to mean software that can individually,
and in combination with all other systems, products or processes with
which the software is designed to interface, continue to operate
successfully (both in functionality and performance in all material
respects) over the transition into the twenty-first century when used in
accordance with the documentation relating to such software. Year 2000
Compliance includes being able to, before, on and after January 1, 2000,
substantially conform to the following:
- use logic pertaining to dates which allow users to identify
and/or use the century portion of any date fields without special
processing;
- respond to all date elements and date input to resolve any
ambiguity as to century in a disclosed, defined and pre-determined
manner; and
- provide date information in ways which are unambiguous as to
century.
This may be achieved by permitting or requiring the century to be
specified or where the date element is represented without a century,
the correct century be unambiguous for all manipulations involving that
element.
Votes Required for Approval of Proposal 3
Approval of Proposal 3 requires that the number of votes cast in
favor or Proposal 3 exceed the number of votes cast against. Votes for
Proposal 3 may be cast in favor of or against the proposal or may
abstain from voting. Abstentions may be specified on the proposal and
will be considered present at the Annual Meeting, but will not be
counted as affirmative votes. In addition, broker non-votes, where
brokers are prohibited from exercising discretionary authority in voting
shares for beneficial owners who have not provided voting instructions,
will not be included in vote totals for Proposal 3, but will be counted
for purposes of determining whether there is a quorum at the Annual
Meeting.
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PROPOSAL 4:
RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
On January 4, 1999, the Board, acting upon the recommendation of the
Audit Committee, voted to replace its independent public accountants,
PricewaterhouseCoopers LLP ("PWC"), which had served as the independent
public accountants of the Company since 1993. On October 21, 1998, PWC
delivered notice it was terminating its client auditor relationship with
the Company. The reports of PWC for the two fiscal years ended March
31, 1997 and 1996 and the transition period ended December 31, 1997 did
not contain any adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting
principles. The opinion, however, did include an explanatory paragraph
expressing substantial doubt about the Company's ability to continue as
a going concern. During the fiscal years ended March 31, 1997 and 1996,
the transition period ended December 31, 1997 and the subsequent interim
period through October 21, 1998 preceding such termination, there were
no disagreements between the Company and PWC on any matter of accounting
principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the
satisfaction of PWC, would have caused it to make a reference to the
subject matter of the disagreements in connection with its report. In
addition, during the fiscal years ended March 31, 1997 and 1996, the
transition period ended December 31, 1997 or the subsequent interim
period through October 21, 1998, there were no "reportable events"
within the meaning of Item 304 of the Securities and Exchange
Commission's Regulation S-K.
The Board of Directors has appointed the firm of Grant Thornton LLP
to continue as independent certified public accountants for Panda for
the fiscal year ending December 31, 1999. Grant Thornton LLP has been
acting as independent certified public accountants of Panda since
January 4, 1999. Unless otherwise indicated, properly executed proxies
will be voted for the ratification of the appointment of Grant Thornton
LLP, independent certified public accountants, to audit the books and
accounts of Panda for the fiscal year ending December 31, 1999.
Representatives of Grant Thornton LLP are expected to be present at
the Annual Meeting, will be given an opportunity to make a statement if
they desire to do so, and will also be available to respond to
appropriate questions from shareholders.
The Board recommends that shareholders vote "FOR" the ratification of
the appointment of Grant Thornton LLP as independent public accountants
for Panda for the fiscal year ending December 31, 1999.
Votes Required for Approval of Proposal 4
Approval of Proposal 4 requires that the number of votes cast in
favor of Proposal 4 exceed the number of votes cast against. Votes for
Proposal 4 may be cast in favor of or against the proposal or may
abstain from voting. Abstentions may be specified on the proposal and
will be considered present at the annual meeting, but will not be
counted as affirmative votes. In addition, broker non-votes, where
brokers are prohibited from exercising discretionary authority in voting
shares for beneficial owners who have not provided voting instructions,
will not be included in vote totals for Proposal 4, but will be counted
for purposes of determining whether there is a quorum at the annual
meeting.
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Page 63
EXPERTS
The financial statements incorporated in this Proxy Statement by
reference to the Annual Report on Form 10-K of The Panda Project, Inc.
for the year ended December 31, 1998 have been so incorporated in
reliance on the report (which contains an explanatory paragraph relating
to The Panda Project, Inc.'s ability to continue as a going concern as
described in Note B of the financial statements) of Grant Thornton LLP
for the year ended December 31, 1998 and the report (which contains an
explanatory paragraph relating to The Panda Project, Inc.'s ability to
continue as a going concern as described in Note 2 to the financial
statements) as of December 31, 1997 and for the nine-month period ended
December 31, 1997 and for the year ended March 31, 1997 of
PricewaterhouseCoopers LLP. Such financial statements are incorporated
herein by reference in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
SHAREHOLDER PROPOSALS
Panda presently anticipates that its next Annual Meeting of
Shareholders will be held on or about May 15, 2000. Any proposal by a
shareholder intended to be presented at the 2000 Annual Meeting of
Shareholders must be received by Panda at its principal executive
offices not later than March 1, 2000 for inclusion in Panda's Proxy
Statement and form of Proxy relating to that Annual Meeting of
Shareholders.
SHAREHOLDER LIST
A list of shareholders entitled to vote at the Annual Meeting will be
available for inspection by any shareholder for any purpose germane to
the Annual Meeting during ordinary business hours of Panda for a period
of ten days prior to the Annual Meeting at Panda's principal executive
offices.
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WHERE YOU CAN FIND MORE INFORMATION
Panda files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the
public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov."
You should rely only on the information contained or incorporated by
reference in this Proxy Statement to vote on the Proposed Sale. We have
not authorized anyone to provide you with information that is different
from what is contained in this Proxy Statement. This Proxy Statement is
dated October 20, 1999. You should not assume that the information
contained in this Proxy Statement is accurate as of any date other than
such date, and neither the mailing of this Proxy Statement to
shareholders nor the issuance of SBI common stock in the Proposed Sale
shall create any implication to the contrary.
By Order of the Board of Directors,
/s/ Melissa F. Crane
Secretary
