As filed with the Securities and Exchange Commission on July 20, 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).
[x] 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
---------------------------------------------------------------
[ ] 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
, 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 11:00 a.m. (Eastern time) on Friday, __________ ___, 1999 at
______________________. 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 September 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 an Annual committee of its board of directors that
the consideration SBI will deliver to Panda for the operating assets
in the proposed transaction is in the best interest of Panda.
Panda is also seeking your vote to elect a new director to serve
on Panda's Board of Directors and 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 75,000,000. 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.
--------------------------
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 _________________, 1999
The Panda Project, Inc. ("Panda") will hold an annual meeting of
its shareholders (the "Annual Meeting") on _______________, _____
__.m. Eastern time, at ______________________________ for the
following purposes:
1. 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.
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 75,000,000.
3. To ratify the selection by the Board of Directors of Grant
Thornton LLP as independent accountants for the current fiscal year.
4. To consider and vote on a proposal (the "Proposed Sale")
to approve an Asset Purchase Agreement, dated as of July 19, 1999 (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.
5. To transact such other business as may properly come
before the Annual Meeting.
Panda has fixed the close of business on July ___, 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 and the Amendment to the Articles
requires the affirmative vote of a majority of the outstanding shares
of Panda Common Stock entitled to vote at the Annual Meeting. 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.
Please sign and promptly return the proxy card in the enclosed
envelope, whether or not you expect to attend the Panda Annual
Meeting. Shareholders will be admitted to the meeting upon
presentation of proof of ownership. For shareholders who own stock
held by banks, brokers, or investment plans, examples of proof of
ownership would include a 1999 brokerage statement or a letter from
the bank or broker.
The ______ is accessible to all shareholders.
By Order of the Board of Directors,
/s/Melissa F. Crane
Secretary
Boca Raton, Florida
July , 1999
TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING
STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .
PANDA'S ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . .
Proposal 1: Election of Directors . . . . . . . . . . . . . .
Proposal 2: Amendment to Articles of
Incorporation to Increase Authorized Shares . . . . . . . .
Proposal 3: Ratification of Appointment
of Independent Certified Public Accountants . . . . . . . .
Proposal 4: Proposed Sale of Substantially
All of Panda's Assets . .. . . . . . . . . . . . . . . . . .
VOTING SECURITIES OF PANDA . . . . . . . . . . . . . . . . . . . . .
Times and Places; Quorum; Votes Required
for Approval . . . . . . . . . . . . . . . . . . . . . . . .
Intentions and Agreements to Vote . . . . . . . . . . . . . . .
No Dissenters' Rights . . . . . . . . . . . . . . . . . . . . .
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . .
THE PROPOSED SALE . . . . . . . . . . . . . . . . . . . . . . . . .
Panda . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds; Plans for Future Operations . . . . . . . . .
Background of the Proposed Sale . . . . . . . . . . . . . . . .
Panda's Reasons for the Proposed Sale;
Recommendation of the Board of Directors . . . . . . . . . .
Recommendation of the Special Committee . . . . . . . . . . . .
Absence of Financial Advisor . . . . . . . . . . . . . . . . .
Interests of Certain Persons in the Proposed Sale . . . . . . .
Transition Planning . . . . . . . . . . . . . . . . . . . . . .
Changes in Shareholder Rights after the Proposed Sale . . . . .
Accounting Treatment; Material Federal
Income Tax Consequences . . . . . . . . . . . . . . . . . .
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . .
Expenses and Other Fees . . . . . . . . . . . . . . . . . . . .
RISKS AND CONSIDERATIONS RELATED TO
THE PROPOSED SALE . . . . . . . . . . . . . . . . . . . . . . . .
Holding Company Structure . . . . . . . . . . . . . . . . . . .
Unregistered Stock; Absence of a Public
Trading Market . . . . . . . . . . . . . . . . . . . . . . .
Absence of an Operating History . . . . . . . . . . . . . . . .
No Dividends on SBI Common Stock . . . . . . . . . . . . . . .
Minority Interest; No Voting Power . . . . . . . . . . . . . .
Remaining Panda Assets Have Limited Value . . . . . . . . . . .
No Reporting Requirements . . . . . . . . . . . . . . . . . . .
THE ASSET PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . .
Terms of the Asset Purchase Agreement . . . . . . . . . . . . .
Operating Assets Being Sold and Liabilities
and Obligations Assumed . . . . . . . . . . . . . . . . . .
Consideration Price . . . . . . . . . . . . . . . . . . . . . .
Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conditions to Closing . . . . . . . . . . . . . . . . . . . .
Representations and Warranties . . . . . . . . . . . . . . . .
Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indemnification . . . . . . . . . . . . . . . . . . . . . . . .
Termination and Waiver . . . . . . . . . . . . . . . . . . . .
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . .
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . .
MARKET FOR PANDA'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS . .
INFORMATION REGARDING PANDA . . . . . . . . . . . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . .
Change in Fiscal Year End . . . . . . . . . . . . . . . . . . .
Results of Operations . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . .
Year 2000 Issues . . . . . . . . . . . . . . . . . . . . . . .
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDER LIST . . . . . . . . . . . . . . . . . . . . . . . . . .
WHERE YOU CAN FIND MORE INFORMATION . . . . . . . . . . . . . . . .
Annex A: Asset Purchase Agreement
Annex B: Text of Amendment to Panda's Articles of Incorporation
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement contains or incorporates by reference
statements that constitute forward-looking information within the
meaning of the Private Securities Litigation Reform Act of 1995. 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 __________, 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
__________, 1999 at ______ _.m. Eastern time, at___________________,
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 ____________, 1999.
The matters to be considered and voted upon at the Annual Meeting
will be:
1. 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.
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 75,000,000.
3. 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.
4. A proposal (the "Proposed Sale") to approve an Asset
Purchase Agreement, dated as of July 13, 1999 (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.
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.
The description of the proposal 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.
PANDA'S ANNUAL MEETING
PROPOSAL 1:
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
four. 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 I director William E. Ahearn, one Class II director John
Friedline and one Class III 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 I
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 I 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 I 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 II and Class III directors, whose terms of office will
continue after the Annual Meeting until the 2000 and 2001 annual
meetings, respectively.
Nominee for Class I Director
William E. Ahearn, age 61, has been a Director since March 1999.
Since 1998, Mr. Ahearn has been a Vice President of Systems and
Technology with NeST Technologies. From 1996 until late 1998, Mr.
Ahearn was the Vice President of Systems, and later served as the
Chief Scientist. Mr. Ahearn was also a visiting scholar in the multi
media lab at MIT and previously with IBM and AMP Inc.
The Board of Directors recommends that shareholders vote "FOR"
the nominee for director.
Class II Director
John Friedline, age 58, has been a Director since June 1999.
Since 1996, he has been an independent management consultant primarily
in the multi media arena. Prior to 1996, Mr. Friedline was employed
by AMP Inc. and Director of Marketing for IBM Europe.
Class III Director
Stanford W. Crane, Jr., age 48, has served as President, Chief
Executive Officer and Chairman of the Board of Directors of Panda
since its inception in April 1992. Mr. Crane is married to Melissa F.
Crane.
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 Mr. Wooder served on the Audit Committee of the
Board of Directors until their resignation in March 1999, 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 comprise 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. The Board has not
replaced those members.
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 10,000
shares of 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 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 Common Stock under the
Director Plan at an exercise price of $3.81 per share. At the Annual
Meeting, an additional option to purchase 10,000 shares of 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.
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 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 proposed to be included in Panda's 1995 Employee
Stock Incentive Plan as a means of preserving flexibility in
structuring executive officer compensation.
Comparative Stock Performance
The graph below compares cumulative total stockholder return on
Panda's Common Stock during the period from May 17, 1994 (the date on
which Panda's Common Stock was first registered under the Securities
Exchange Act of 1934) through December 31, 1998 with the cumulative
total return over the same period of MicroCap 1000. Measurement
points are December 31, 1996, December 31, 1997 and December 31, 1998.
COMPARATIVE STOCKHOLDER RETURNS
The Panda Project, Inc., Nasdaq Computer Index and Peer Group*
(Performance results from 5/17/94 through 12/31/97)
[GRAPH]
Compensation and Stock Option Committee Interlocks and Insider
Participation
The members of the Compensation and Stock Option Committee are
Rao R. Tummala and Claud L. Gingrich. No member of the Compensation
and Stock Option Committee was at any time during the Transition
Period, fiscal year 1997, or formerly, an officer or employee of Panda
or any subsidiary 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.
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.
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 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 Common Stock
from Panda at a purchase price of $9.00 per share in connection with a
private placement financing and warrants to purchase 1,000 shares of
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 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.
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.
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.
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.
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 75,000,000.
The text of the proposed amendment to the Panda Articles is set
forth on Annex B to this Proxy Statement.
Purposes and Effects
The Board of Directors determined that additional shares of Panda
Common Stock should be authorized to fulfill Panda's obligations under
certain existing agreements and for other corporate purposes. Future
issuances of such shares could have the effect of diluting existing
shareholders.
The Board of Directors recommends a vote FOR approval of the
amendment to the Panda Articles.
PROPOSAL 3:
RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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.
PROPOSAL 4:
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 ________________ on _________,
1999, starting at _______ a.m., Eastern time. The Board of Directors
has fixed the close of business on __________, 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 29,308,885 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 and the Amendment to the Articles.
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
have agreed pursuant to a voting agreement with SBI to vote their
shares of Panda common stock in favor of the Proposed Sale.
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 Proposals. 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 Panda
Proposals, 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.
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 PEI 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 Vantage Point
Venture Partners. The Board of Directors will initially have five
members including the CEO of SBI, three representatives of Vantage
Point Venture Partners and one outside director. The CEO and the
representatives of Vantage Point Venture Partners will not receive any
additional compensation for serving on the Board of Directors. The
independent Board member 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. 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.
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 the 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.
Use of Proceeds; Plans for Future Operations
Panda intends to hold SBI common stock received in the
transaction 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 the Operating Assets to SBI.
In the event, if ever, that SBI completes an initial public offering
or is acquired, the Board of Directors will consider whether it is
appropriate 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 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 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.
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.
Panda's management contacted over 35 companies and venture
capital firms 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 Vantage Point Venture Partners ("Vantage"). An executive of
Vantage had previously served as a consultant to Panda and was
familiar with its operations. 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 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 an Asset Purchase Agreement and
recommended 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.
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. 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 June 11, 1999, Panda received a "bridge" loan
of $300,000 from SBI to enable it to continue operations. Pursuant to
this loan, SBI was granted a security interest in substantially all of
the assets of Panda.
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 $300,000 "bridge" loan
extended by SBI to Panda on June 11, 1999.
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.
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. 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:
- 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 the Special Committee of the Board of
Directors 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.
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.
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 (the "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 Mr. Tummala resigned as members of
the Board of Directors due to, among other things, the time demands
involved in the Board of Directors agenda.
At a meeting of the Board of Directors on March 18, 1999, William
Ahearn was elected as a member of the Board of Directors and appointed
as the sole member of the Special Committee.
The Special Committee concluded that the Proposed Sale was in the
best interest of Panda and its shareholders. The Special Committee
recommended to the Board of Directors that Panda enter into the
Proposed Sale. The Special Committee based its recommendation on a
number of factors affecting Panda. Panda's poor financial condition
and Panda's inability to raise additional capital to funds its
operations were the primary factors in its recommendation. Panda has
sought a purchaser for its assets for a considerable period of time.
In arriving at its recommendation, the Special Committee, 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
the Special Committee 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; (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 the
Special Committee by Panda; and (viii) performed such other analyses
and reviews as the Special Committee deemed necessary and appropriate.
In preparing its recommendation, the Special Committee relied on
the accuracy and completeness of all information that was publicly
available, supplied or communicated to the Special Committee by or on
behalf of Panda and the Special Committee has not assumed any
responsibility to independently verify the same. The Special
Committee assumed that the financial forecasts provided to it 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.
The Special Committee reviewed the asset listing of Panda to
determine the approximate purchase value of the assets. The Special
Committee determined that the assets being sold included all the
operating assets of Panda. In its analysis, the Special Committee has
assumed that the highest and best use of the assets is in their
continued use in a business enterprise.
In connection with rendering its recommendation, the Special
Committee will be paid a fee of $8,000. Panda has also agreed to
reimburse the Special Committee for its reasonable out-of-pocket
expenses, including the costs of legal counsel the Special Committee
retained to assist in the recommendation process. No portion of the
Special Committee's fee is contingent upon the successful completion
of the Proposed Sale. In addition, Panda has agreed to indemnify the
Special Committee and its employees, directors, officers, control
persons, affiliates and agents against certain liabilities incurred in
connection with its services, including liabilities under federal
securities laws.
Absence of Financial Advisor
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 and the Special
Committee.
Interests of Certain Persons in the Proposed Sale
It is Panda's understanding that SBI has begun discussions with
members of Panda's management concerning their possible employment
with SBI after the Proposed Sale is completed. 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. Panda has received no information about the terms of any
potential employment or consulting agreements between these
individuals and SBI.
During 1998, Panda entered into an agreement with Matt Ocko
whereby Mr. Ocko would provide assistance to Panda in connection with
seeking a corporate partnering transaction or a sale of Panda. In
connection with that agreement, Panda granted to Mr. Ocko a warrant
convertible into 2% of Panda capital stock upon the completion of a
successful transaction. SBI has agreed to assume Panda's obligations
under this warrant, and upon completion of the transaction set forth
herein, Mr. Ocko will receive 2% of SBI's outstanding capital stock in
exchange for his warrant.
Transition Planning
Melissa F. Crane, Acting Chief Financial Officer of Panda, and
Alan Salzman, an employee of Vantage Point, respectively, jointly
shall be 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 Effective Time, Ms. Crane and Mr. Salzman jointly shall (i)
examine various alternatives regarding the manner in which to best
organize and manage the businesses of SBI and Panda after the
Effective Time and (ii) coordinate policies and strategies with
respect to regulatory authorities and bodies, in all cases subject to
applicable law.
Changes in Shareholder Rights after the Proposed Sale
Following the completion of the Proposed Sale, Panda's
shareholders will retain their 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.
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. In view of the
fact that Panda is selling its Operating Assets for less than book
value, management does not expect Panda will be liable for any state
or federal income tax as a result of the sale. Any gain would be
offset by Panda's operating loss carry-forward and any loss will add
to Panda's loss carry-forwards.
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, any amount
allocated to a covenant not to compete, 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.
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.
THE DISCUSSION SET FORTH ABOVE OF MATERIAL FEDERAL INCOME TAX
CONSEQUENCES IS INTENDED TO PROVIDE ONLY A GENERAL SUMMARY, AND DOES
NOT PURPORT TO BE A COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED SALE. IN ADDITION,
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.
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. In addition, the
shares of SBI Common Stock are new securities for which there is
currently no public market. 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.
No Dividends on SBI Common Stock
Since Panda's sole 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 Transaction,
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 certain 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 IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF 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:
- 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 (PEI)
Inc., 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 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 on the date that
it is mutually agreed to in writing between Panda and SBI. The
closing, however, must in all events occur before September 30, 1999,
unless this deadline is extended by mutual agreement of the parties.
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;
- 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.
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.
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;
- 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;
- 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;
- 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 September 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.
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 in
excess of $50,000, but in no event greater than $200,000, 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.
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:
- 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 under Section 3.19 of the Asset Purchase Agreement.
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 either Panda or SBI to indemnify the
other is limited to the Purchase Price, and no damage can be recovered
unless the aggregate amount of damages exceeds [$200,000], provided,
however, that once such threshold is met, the full amount of damages,
from the first dollar, can be recovered.
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 September 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.
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 Common Stock beneficially
owned, as of July 12, 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 Common Stock, (ii) each executive officer included in the
Summary Compensation Table and (iii) all executive officers and
directors of Panda as a group.
Name and Address Amount and Nature Percentage of
of Beneficial of Beneficial Outstanding
Owner Ownership (1) Shares Owned (2)
Stanford W Crane, Jr. (3) . . . . 6,860 *
William E. Ahearn . . . . . . . . 0 *
John Friedline. . . . . . . . . . 0 *
Melissa F. Crane (4). . . . . . . 41,000 *
Philippi Investments Ltd. . . . . 2,850,000 9.7%
99 Yorkville Avenue
Suite 210
Toronto, Ontario M5R 3K5 (5)
Joseph A. Sarubbi (6) . . . . . . 2,100,000 7.2%
All executive officers and
directors as a group (3) . . . .
- --------------------
* Less than 1%.
(1) The number of shares of 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 Common Stock which the
individual has the right to acquire within 60 days after January 15,
1998 through the exercise of any stock option or other right. The
inclusion herein of any shares of 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 Common Stock shown as beneficially owned by them.
(2) The number of shares deemed outstanding includes 29,323,476
shares outstanding as of July 12, 1999 plus any shares subject to
options held by the person in question that are currently exercisable
within 60 days after July 12, 1999.
(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.
(6) Includes 2,100,000 shares issued pursuant to the Settlement
Agreement. See "Legal Proceedings."
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.
STATEMENT OF OPERATIONS DATA:
<TABLE>
Three Nine
Months Year Months
Ended Ended Ended
March 31, 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 $ 813,456 $ 144,170 $ 822,580 $ 2,246,795 $ 2,091,132 $ 2,382,019 $ 870,658 $ -
Research
and
development
costs 380,740 1,004,833 3,395,577 3,255,335 4,786,838 5,722,717 7,954,924 3,494,260
Selling,
general and
administrative
expenses 1,221,707 1,987,582 9,263,283 6,113,255 10,830,976 13,142,099 15,810,701 3,744,914
Costs
associated
with
asset
impairments 125,038 1,471,025 2,056,025
Net loss (1,994,859) (3,811,033) (17,474,696) (8,949,652) (17,217,703) (20,874,101) (23,894,426) (6,931,346)
Basic and
diluted
loss
per share ($0.10) ($0.33) ($1.33) ($0.78) ($1.79) ($2.15) ($3.07) ($1.25)
Weighted
average
shares
outstanding 19,644,149 12,220,803 13,732,936 11,541,811 9,605,280 9,723,801 7,786,426 5,531,941
</TABLE>
<TABLE>
Balance Sheet
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
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.
</TABLE>
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 Common Stock. The
following table sets forth the range of high and low closing sale
prices for the 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 of Panda's common stock on the OTC
Electronic Bulletin Board on July 12, 1999 was $0.156 per share. As
of July 12, 1999, there were approximately 285 holders of record of
Panda's common stock ("Common Stock"). This number does not include
beneficial owners of the 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 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 in the event Panda declares a
dividend (other than a dividend payable in Common Stock).
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. In
addition, in September 1998, the Compass Connector received Bellcore
approval.
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 firm purchase commitments for prototype, pre-production
and production orders of its Technology Products from Veridicom,
Motorola, Kaiser Aerospace & Electronics, Honeywell and National
Semiconductor. Panda anticipates that these purchase commitments will
result in increased revenues. However, there can be no assurance that
such anticipated revenues will materialize. 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:
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.
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.
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.
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 July 1, 1999, Panda's revenue backlog amounted to
approximately $900,000. Panda expects to completely fill the current
backlog within the current fiscal year. As of June 30, 1999, the
backlog consisted of product to be shipped to National and Veridicom
under their respective original purchase orders.
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.
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
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 June 28, 1999 Panda had 18 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 in Boca Raton, Florida. The
total space is approximately 11,230 square feet. This facility has
housed Panda's operations since November 1, 1998. Panda previously
moved from its 27,500 square foot facility and reduced its monthly
rent obligation from $34,000 to $12,894 monthly for a savings of
approximately $21,000 monthly. Panda is currently in default under
this lease and is unable to cure such default under the terms of the
Lease Agreement.
Panda leases two additional facilities 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.
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.
Panda is currently in default under this lease.
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 through June 1999 with a $80,000 Certificate of
Deposit held at the Silicon Valley Bank. Panda anticipates it will
receive the full amount of the Certificate of Deposit in July 1999.
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.
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 not yet filed an answer to the complaint and
the outcome 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. 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 between Joseph A. Sarubbi and The Panda Project, Inc. dated
December 11, 1998. Mr. 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 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.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Fiscal Year End
During September 1997, Panda 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.
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-month period ended December 31, 1998 from $2,247,000 for the
nine-month period ended December 31, 1997. Net revenues were
significantly lower as a result of the completion of the development
agreement with the U.S. Government. Related revenues recorded were
$135,673 for the twelve-month period ending December 31,1998 versus
$973,003 for the nine-month period ending December 31, 1997. Panda
completed all of the milestones set forth in its cooperative
development agreement with the Defense Advanced Research Projects
Agency (DARPA) during April 1998. In September 1998, Panda
streamlined operations related to the System business including both
the Archistrat and Rock City products. In November 1998, Panda 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, Panda also designed the IO-A
architecture that was going to be used in the Rock City line of
computers. Panda 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 increased
to approximately $9,300,000 for the twelve-month period ending
December 31, 1998 from $6,100,000 during the nine months ended
December 31, 1997. However, on a monthly basis comparative spending
on S,G&A increased approximately $97,000 per month. During 1998,
Panda significantly reduced the number of employees resulting in
decreased compensation and benefit cost. These reductions are related
to the streamlining and exiting of the Systems business. Panda would
have experienced further benefits if not for recognized charges
related to a legal settlement (see "Legal Proceedings") of $1,000,000,
and reserved certain receivables associated with the Systems business
in the amount of $285,000.
During the twelve months ending December 31, 1998, Panda
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, Panda recorded a charge of
approximately $125,000. Panda 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, Panda 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 $294,000 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 ta 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 Panda refocused its selling
efforts on certain niche markets. In July 1997, Panda 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, Panda 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. Panda 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, R&D 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 Panda'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 Panda'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, Panda 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 Panda's products), certain
long-lived assets were imparted. As a result, Panda 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, Panda 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.
Three Months Ended March 31, 1999 Compared to the Three Months Ended
March 31, 1998
Net revenues increased during the three months ended March 31,
1999 ("First Quarter of 1999") to approximately $813,000 as compared
to $144,000 for the three months ended March 31, 1998 ("First Quarter
of 1998"). VSPA Product sales for The First Quarter of 1998 were
approximately $313,000 for prototype, pre-production and production
orders. Additionally in the First Quarter of 1999, a significant
portion of Panda's revenue related to one time $500,000 licensing fees
from Samtec, Inc.
R&D expenses decreased to approximately $380,000 for the First
Quarter of 1999 as compared to approximately $1,050,000 for the First
Quarter of 1998. R&D for the First Quarter of 1999 was attributable
to new custom VSPA designs for specific customer applications, the
refinement of the existing VSPA Flex automation machines. Panda
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.
SG&A expenses decreased for the First Quarter 1999 to $1,199,667
compared to $ 1,987,582 for the First Quarter 1998. The average
number of employees has decreased from 70 at March 31, 1998 to 25 full
time employees as of March 31, 1999. The decrease in full-time
employees is directly related ceasing operations related to Systems
activity and the need to reduce on going operational costs. Monthly
payroll decreased to approximately $155,000 per month for March 1999
from $389,000 for March 1998. The departments have been realigned to
accurately reflect current business actively related to the Technology
Products. The departments include Product and Equipment Design,
Application Engineering, Quality Control and Reliability, Production,
Sales & Marketing and Material Management. Management believes that
this department structure can adequately support operations of the
initial commercialization of its Technology Products. Management
believes that additional employees will need to be added with further
commercialization of its Technology Products.
Total debt issuance costs associated with short-term borrowings
from Helix, including the value of the warrants issued in connection
with such borrowings, charged to amortization expense during the
quarter ended March 31, 1999, amounted to approximately $550,000. The
valuation of the warrants and related amortization expense, represents
a non-cash transaction. Additionally approximately $550,000 for
accrued penalties related to the Series A Preferred Convertible
transaction.
For purposes of determining net loss applicable to common stock
for the First Quarter 1999 and the First Quarter 1998, accrued
dividends payable in the amount of approximately $54,000 and $178,000,
respectively, and amortization of the beneficial conversion feature
was approximately $800,000 for the First Quarter 1998 related to the
issuance of the Series A Preferred Stock have been added to the net
loss. Both amounts represent non-cash transactions. Basic and
diluted loss per share has been calculated on the basis of net loss
applicable to common stock.
Liquidity and Capital Resources
During February 1998, Panda 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 July 12, 1999, 243.98 shares of
preferred stock were converted into an aggregate of 4,651,901 shares
of Panda's common stock. As of July 12, 1999, 357 preferred shares
are outstanding.
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, Panda may be required to pay the holders $100,000 per
month until such time that the Triggering Event has been remedied.
Any requirement that Panda pay such amounts could have a material
adverse impact on Panda 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's common
stock from the Nasdaq National Market to the OTC Bulletin Board. As
of April 14, 1999, no payments had been made to the Holders. Panda
has reached an agreement (the "Exchange Agreement") with the Series A
Preferred Holders in connection with the Triggering Event and has
agreed to issue an additional 171 Preferred A shares as defined in the
Exchange Agreement. Upon execution of the Exchange Agreement, Panda
agreed to deliver 171 shares of Series A Preferred Stock to the
Holders in payment for penalties owed to such Holders. The Holders
agreed to waive all penalties owed by Panda to them pursuant to
previously issued Company securities.
On August 14, 1998, Panda completed the sale of 2,254,602 shares
of its Common Stock and warrants in a private placement to accredited
investors with gross proceeds of $3.675 million. The warrants have a
term of five years. Panda issued approximately 4,400,000 additional
shares associated with the fill-up provision.
During May, June and July 1998, Panda borrowed an aggregate of $2
million from Helix PEI Inc. ("Helix"). The loans are secured by
Panda'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's common stock at an exercise
price equal to the fair market value of Panda's common stock at the
date of issuance ($2.125). Panda is currently in default on its
obligations under the Helix Loans. The loans bear interest at the
Royal Bank of Canada prime rate plus 2 percentage points per annum
(9.40% at December 31, 1998) payable monthly. The warrant has a term
of two years.
On May 14, 1999, Panda, Helix and Silicon Bandwidth, Inc. ("SBI")
entered into an agreement wherein upon the closing of the acquisition
of certain assets of Panda 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 will release 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.
Upon the closing of the acquisition of certain assets of Panda by
SBI, SBI will pay $1,000,000 to Helix, with such payment being applied
solely toward principal on the Notes. In consideration of such
payment and the issuance of Panda common stock to Helix pursuant to
that certain letter agreement attached to the agreement, Helix agreed
to forgive and irrevocably release Panda from payment of all accrued
interest on the Notes remaining unpaid as of the date of such payment
of $1,000,000.
Helix agreed that all of the accrued and unpaid interest and
principal amount of each of the Notes will be due and payable in
eleven payments. The first ten payments will be in the amount of
$100,000 each and are due on the first day of each of the first ten
months following the closing. Helix will apply these ten payments
first toward accrued and unpaid interest and then principal on the
Notes. The eleventh and final payment will be in an amount equal to
all unpaid principal and interest outstanding on the Notes and will be
due on the first day of the eleventh month following Closing. Helix
agreed that, as a result, the Notes would no longer be in default.
Interest on the Notes will accrue at a rate of 6% per annum from the
closing until the Notes are repaid. Immediately after execution of
the agreement, Helix agreed to mark each of the Notes as follows:
"This Promissory Note has been modified and amended by that certain
Agreement dated as of May 12, 1999, by and between Payor, Payee and
Silicon Bandwidth, Inc."
On the closing date of the agreement, Helix will release its
security interest in all royalties and fees arising from the use or
license of the Collateral as defined in that certain Intellectual
Property Security Agreement dated as of May 28, 1998 between Helix and
Panda and that certain Intellectual Property Security Agreement dated
as of June 22, 1998 between Helix and Panda. Helix's remaining
security interest in the assets of Panda will be released upon
repayment in full of the Notes pursuant to the terms of the agreement
or any promissory notes replacing, or substituted for, the Notes
provided for in the agreement.
Helix agreed that the obligation to pay the Notes may, at Panda's
option, will be assumed, without recourse to Panda, by SBI. In the
event of such assumption, Helix will cause SBI to issue a new note in
lieu of the Notes, and to return the original of each of the Notes to
Panda, marked "Replaced." Except for any different terms or
conditions provided for in the agreement, Helix and SBI agreed that
such new note will include the same terms and conditions as the Notes,
as modified and amended by the agreement.
In January 1999, Panda received approximately $415,000 from the
exercise of warrants related to the 1996 private placement. In
February 1999, Panda received $1,000,000 from Samtec, Inc. which
includes a non-refundable upfront license fee related to VSPA and, a
purchase of certain shares of Panda's common stock.
Panda's current working capital is insufficient to operate Panda.
Panda has been seeking additional financing, however, in the event
that the Proposed Sale is not consummated and Panda cannot obtain
additional financing it may be forced to cease operations.
Year 2000 Issues
Like many other companies, Year 2000 computer issues create
certain risks for Panda. 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 Panda's ability to process information, which could create
significant potential liability for Panda. 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.
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 Panda 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
Panda'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.
EXPERTS
The financial statements incorporated in this Prospectus 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.
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."
The SEC allows us to "incorporate by reference," which means that
we can disclose important information to you by referring you to
another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this Proxy
Statement, except for any information superseded by information in
this Proxy Statement. This Proxy Statement incorporates by reference
the documents set forth below that we have previously filed with the
SEC. These documents contain important information about our
companies and their finances.
Panda SEC Filing Period
- ---------------- ------
Annual Report on Form 10-K Year ended December 31, 1998
Quarterly Report on Form 10-Q Quarter ended March 31, 1999
Current Reports on Form 8-K Filed on May 18, 1999 and
June 18, 1999
We are also incorporating by reference additional documents that
we file with the SEC between the date of this Proxy Statement and the
dates of the special meetings of our shareholders.
If you are a shareholder, we may have sent you some of the
documents incorporated by reference, but you can obtain any of them
through us or the SEC. You may obtain documents incorporated by
reference without charge by writing or calling the appropriate party
at the following addresses:
The Panda Project, Inc.
951 Broken Sound Parkway
Boca Raton, Florida 33487
If you would like to request documents from us, please do so by
July __, 1999, to receive them before the annual meeting.
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 July , 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.
Annex A
ASSET PURCHASE AGREEMENT
between
SILICON BANDWIDTH, INC.
as Purchaser
and
THE PANDA PROJECT, INC.
as Seller
Dated as of July 19, 1999
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS 1
SECTION 1.01 Certain Defined Terms 1
ARTICLE II PURCHASE AND SALE 7
SECTION 2.01 Assets to Be Sold 7
SECTION 2.02 Assumption and Exclusion of Liabilities 7
SECTION 2.03 Purchase Price; Allocation of Purchase Price 7
SECTION 2.04 Closing 7
SECTION 2.05 Closing Deliveries by Seller 7
SECTION 2.06 Closing Deliveries by Purchaser 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER 8
SECTION 3.01 Organization, Authority and Qualification
of Seller 8
SECTION 3.02 Corporate Condition 9
SECTION 3.03 Reporting Company 9
SECTION 3.04 No Conflict 9
SECTION 3.05 Governmental Consents and Approvals 10
SECTION 3.06 Reference Balance Sheet 10
SECTION 3.07 No Undisclosed Liabilities 10
SECTION 3.08 Receivables 11
SECTION 3.09 Inventories 11
SECTION 3.10 Conduct in the Ordinary Course; Absence of
Certain Changes, Events and Conditions 11
SECTION 3.11 Litigation 11
SECTION 3.12 Compliance with Laws 12
SECTION 3.13 Environmental and Other Permits and
Licenses; Related Matters 12
SECTION 3.14 Contracts 12
SECTION 3.15 Intellectual Property 12
SECTION 3.16 Year 2000 Compliant 14
SECTION 3.17 Assets 15
SECTION 3.18 Customers 15
SECTION 3.19 Suppliers 15
SECTION 3.20 Employee Benefit Matters 15
SECTION 3.21 Labor Matters 16
SECTION 3.22 Taxes 17
SECTION 3.23 Insurance 17
SECTION 3.24 Full Disclosure 17
SECTION 3.25 Brokers 18
SECTION 3.26 Authority Relative to this Agreement and
the Ancillary Agreements 18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER 18
SECTION 4.01 Organization and Authority of Purchaser 18
SECTION 4.02 No Conflict 19
SECTION 4.03 Governmental Consents and Approvals 19
SECTION 4.04 Capitalization 19
SECTION 4.05 Financing Commitments 19
SECTION 4.06 Brokers 19
ARTICLE V ADDITIONAL AGREEMENTS 19
SECTION 5.01 Conduct of Business Prior to the Closing 19
SECTION 5.02 Access to Information 20
SECTION 5.03 Regulatory and Other Authorizations;
Notices and Consents 21
SECTION 5.04 Notice of Developments 21
SECTION 5.05 Use of Intellectual Property 21
SECTION 5.06 Public Announcements 22
SECTION 5.07 Exclusivity 22
SECTION 5.08 Further Action 22
ARTICLE VI EMPLOYEE MATTERS 22
SECTION 6.01 Offer of Employment 22
ARTICLE VII TAX MATTERS 22
SECTION 7.01 Indemnity 22
SECTION 7.02 Conveyance Taxes 23
SECTION 7.03 Miscellaneous 23
ARTICLE VIII CONDITIONS TO CLOSING 23
SECTION 8.01 Conditions to Obligations of Purchaser. 23
SECTION 8.02 Conditions to Obligations of Seller. 26
ARTICLE IX INDEMNIFICATION 26
SECTION 9.01 Survival of Representations and Warranties. 26
SECTION 9.02 Indemnification by Seller 26
SECTION 9.03 Indemnification by Purchaser 27
SECTION 9.04 Indemnification Procedures 28
ARTICLE X TERMINATION AND WAIVER 29
SECTION 10.01 Termination 29
SECTION 10.02 Effect of Termination 30
SECTION 10.03 Waiver 30
ARTICLE XI MISCELLANEOUS 30
SECTION 11.01 Expenses 30
SECTION 11.02 Notices 30
SECTION 11.03 Public Announcements 30
SECTION 11.04 Headings 31
SECTION 11.05 Severability 31
SECTION 11.06 Entire Agreement 31
SECTION 11.07 Assignment 31
SECTION 11.08 No Third Party Beneficiaries 31
SECTION 11.09 Amendment 31
SECTION 11.10 Governing Law 31
SECTION 11.11 Arbitration 32
SECTION 11.12 Counterparts 32
SECTION 11.13 Specific Performance 32
ANNEX A ALLOCATION OF PURCHASE PRICE
ANNEX B KEY EMPLOYEES
EXHIBIT A TERMS OF STOCKHOLDERS' AGREEMENT
DISCLOSURE SCHEDULE
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of July 19, 1999 (as
hereafter amended, modified or supplemented, this "Agreement"),
between Silicon Bandwidth, Inc., a Delaware corporation ("Purchaser")
and the Panda Project, Inc., a Florida corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller owns and operates a semiconductor packaging
and interconnect devices business (collectively, the "Business"); and
WHEREAS, Seller desires to sell to Purchaser, and Purchaser
desires to purchase from Seller, substantially all of the Assets (as
defined below) relating to the Business and in connection therewith
Purchaser is willing to assume certain liabilities of Seller relating
thereto, all upon the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements and covenants hereinafter set forth, and intending
to be legally bound hereby, Purchaser and Seller hereby agree as
follows:
ARTICLE I
DEFINITIONS
Certain Defined Terms. Unless the context otherwise requires,
the following terms, when used in this Agreement, shall have the
respective meanings specified below:
"Acquisition Documents" shall mean this Agreement, the
Ancillary Agreements, and any certificate, Financial Statement,
Interim Financial Statement, report or other document delivered
pursuant to this Agreement or the transactions contemplated hereby.
"Action" shall mean any claim, action, suit, arbitration,
inquiry, proceeding or investigation by or before any Governmental
Authority.
"Affiliate" shall mean, with respect to any specified Person,
any other Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control
with, such specified Person.
"Ancillary Agreements" shall mean the Assumption Agreement and
the Bill of Sale.
"Approvals" shall mean all permits, authorizations, licenses
and other governmental and third party rights and privileges necessary
to operate the Business as currently conducted.
"Assets" shall mean all assets and property used in, or
necessary for the operation of, the Business, including, without
limitation, the Approvals, the Equipment, the Contracts, Intellectual
Property, Inventory, Receivables, Documents and the Intellectual
Property, and the Intellectual Property used in, or necessary for the
operation of, the computer systems business of Seller, but excluding
the Excluded Assets. Assets shall also include the intellectual
property assets of the computer systems business of Seller.
"Assumed Liabilities" shall mean: (a) the trade accounts
payable of Seller outstanding on the Closing Date (up to a maximum
amount of $300,000); (b) specific items included in the accrued
payroll and benefits account of Seller outstanding on the Closing,
which shall not exceed $100,000; (c) specific items included in the
"other current liabilities" listed on Schedule 1 hereto, account of
Seller outstanding on the Closing Date, which shall not exceed
$100,000; (d) the executory liabilities and obligations of Seller to
be performed after the Closing Date under each Contract in effect on
the Closing Date; and (e) up to $2,000,000 of indebtedness of Seller
to Helix (PEI) Inc., effective upon such indebtedness' restructuring
as described in Section 4 of the Voting Agreement (as herein defined).
Any liabilities not specifically listed in the preceding sentence
shall be Excluded Liabilities.
"Assumption Agreement" shall mean the Assumption Agreement to
be executed by Purchaser and Seller on the Closing Date in a form
mutually agreed to by Purchaser and Seller.
"Bill of Sale" shall mean the Bill of Sale and Assignment to
be executed by Seller on the Closing Date substantially in a form
mutually agreed to by Purchaser and Seller.
"Business" shall have the meaning specified in the recitals to
this Agreement.
"Business Day" shall mean any day that is not a Saturday, a
Sunday or other day on which banks are required or authorized by Law
to be closed in The City of New York.
"Closing" shall have the meaning specified in Section 2.04.
"Closing Date" shall have the meaning specified in Section
2.04.
"Code" shall mean the Internal Revenue Code of 1986, as
amended through the date hereof.
"Contracts" shall mean any and all contracts and other rights
used in or necessary for the operation of the Business, including,
without limitation, that certain Consulting Agreement, dated as of
September 30, 1998, as amended as of July 19, 1999, by and between
Archimedes Capital, LLC and Seller, except for contracts which are
Excluded Assets.
"Control" (including the terms "controlled by" and "under
common control with"), with respect to the relationship between or
among two or more Persons, shall mean the possession, directly or
indirectly or as trustee, personal representative or executor, of the
power to direct or cause the direction of the affairs or management of
a Person, whether through the ownership of voting securities, as
trustee, personal representative or executor, by contract or
otherwise, including, without limitation, the ownership, directly or
indirectly, of securities having the power to elect a majority of the
board of directors or similar body governing the affairs of such
Person.
"Disclosure Schedule" shall mean the Disclosure Schedule
attached hereto, dated as of the date hereof, and forming a part of
this Agreement.
"Documents" shall mean all books, records, diskettes or other
electronics media, logos and manuals owned or, to the extent legally
transferable, used by the Business and related to its operations.
"Environment" shall mean surface waters, groundwaters, soil,
subsurface strata and ambient air.
"Environmental Laws" shall mean any Law, now or hereafter in
effect and as amended, and any judicial or administrative
interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to the environment,
health, safety or Hazardous Materials.
"Equipment" shall mean all furniture, fixtures and all
equipment supporting the Business (including remanufacturing
equipment).
"ERISA" shall have the meaning specified in Section 3.20(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Excluded Assets" shall mean cash, accounting software, bank
accounts, minutes books and other corporate documents and tax refunds,
plus those assets (other than assets constituting Intellectual
Property) exclusively used in the computer systems business of Seller
which are not necessary or useful to carry on the Business, as now
conducted or as to be conducted by Purchaser in the future. Excluded
Assets shall also include the assets of Seller's computer systems
business other than the intellectual property assets.
"Excluded Liabilities" shall mean any liabilities of Seller
other than the Assumed Liabilities.
"Exclusivity Period" shall have the meaning specified in
Section 5.07.
"Financial Statements" shall have the meaning specified in
Section 3.02.
"Governmental Authority" shall mean any national, federal,
state, municipal or local or other government, governmental,
regulatory or administrative authority, agency or commission or any
court, tribunal, or judicial or arbitral body.
"Governmental Order" shall mean any order, writ, judgment,
injunction, decree, stipulation, determination or award entered by or
with any Governmental Authority.
"Hazardous Materials" shall mean (a) petroleum and petroleum
products, radioactive materials, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation, transformers or
other equipment that contain polychlorinated biphenyls, and radon gas,
(b) any other chemicals, materials or substances defined as or
included in the definition of "hazardous substances", "hazardous
wastes", "hazardous materials", "extremely hazardous wastes",
"restricted hazardous wastes", "toxic substances" "toxic pollutants",
"contaminants" or "pollutants", or words of similar import, under any
applicable Environmental Law, and (c) any other chemical, material or
substance exposure to which is regulated by any Governmental
Authority.
"Identified Employees" shall have the meaning specified in
Section 6.01.
"Indemnified Party" shall have the meaning specified in
Section 9.04(a).
"Indemnifying Party" shall have the meaning specified in
Section 9.04(a).
"Intellectual Property" shall mean patents, trade and service
marks, designs, drawings, software, tradenames, copyrights, mask
works, applications therefor, licenses thereof, and similar intangible
property.
"Inventory" shall mean all inventory used in connection with
the Business.
"IRS" shall mean the Internal Revenue Service of the United
States.
"Law" shall mean any national, federal, state, municipal or
local or other statute, law, ordinance, regulation, rule, code, order,
other requirement or rule of law.
"Letter of Intent" shall mean that Letter of Intent executed
by the Parties on May 14, 1998.
"Liabilities" shall mean any and all debts, liabilities and
obligations, whether accrued or fixed, absolute or contingent, matured
or unmatured or determined or determinable, including, without
limitation, those arising under any Law (including, without
limitation, any Environmental Law), Action or Governmental Order and
those arising under any contract, agreement, arrangement, commitment
or undertaking.
"License Agreement" shall have the meaning specified in
Section 3.15(b).
"Licensed Intellectual Property" shall mean all Intellectual
Property licensed or sublicensed by Seller from a third party.
"Loss" shall have the meaning specified in Section 9.02(a).
"Material Adverse Effect" shall mean any circumstance, change
in, or effect on, the Business that, individually or in the aggregate
with any other circumstances, changes in, or effects on, the Business
(i) is, or could reasonably be expected to be, materially adverse to
the business, operations, assets or liabilities (including, without
limitation, contingent liabilities), employee relationships, customer
or supplier relationships, results of operations or the condition
(financial or otherwise) or prospects of the Business or (ii) could
materially adversely affect the ability of Purchaser to operate or
conduct the Business in the manner in which it is currently operated
or conducted by Seller.
"Owned Intellectual Property" shall mean all Intellectual
Property in and to which Seller has a right to hold, right, title and
interest.
"Permits" shall have the meaning specified in Section 3.13.
"Person" shall mean any individual, partnership, firm,
corporation, association, trust, unincorporated organization or other
entity, as well as any syndicate or group that would be deemed to be a
person under Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended.
"Plans" shall have the meaning specified in Section 3.20(a).
"Proceeding" shall have the meaning specified in Section 3.01.
"Purchase Price" shall have the meaning specified in Section
2.03.
"Purchaser" shall have the meaning specified in the recitals
to this Agreement.
"Purchaser Common Stock" shall have the meaning specified in
Section 2.03 of this Agreement.
"Receivables" shall mean all accounts receivable of Seller
outstanding as of the Closing Date.
"Reference Balance Sheet" shall have the meaning specified in
Section 3.06.
"Reference Balance Sheet Date" shall mean March 31, 1999 until
Seller delivers the unaudited sheet of the Business as of June 30,
1999 pursuant to Section 3.06 then Reference Balance Sheet Date shall
mean June 30, 1999.
"Regulations" shall mean the Treasury Regulations (including
Temporary Regulations) promulgated by the United States Department of
Treasury with respect to the Code or other federal tax statutes.
"Release" shall mean disposing, discharging, injecting,
spilling, leaking, leaching, dumping, emitting, escaping, emptying,
seeping, placing and the like into or upon any land or water or air or
otherwise entering into the Environment.
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning specified in Section
3.02.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Seller" shall have the meaning specified in the recitals to
this Agreement.
"Software Programs" shall have the meaning specified in
Section 3.15(f).
"Tax" or "Taxes" shall mean any and all taxes, fees, levies,
duties, tariffs, imposts, and other charges of any kind (together with
any and all interest, penalties, loss, damage, liability, expense,
additions to tax and additional amounts or costs incurred or imposed
with respect thereto) imposed by any government or taxing authority,
to the extent Purchaser may be held liable for any such amount or to
the extent any such amount constitutes a lien on the Assets or the
Business.
"Third Party Claims" shall have the meaning specified in
Section 9.04(c).
"Threshold Amount" shall have the meaning specified in Section
9.02(b).
"Transferred Employee" shall have the meaning specified in
Section 6.01.
"U.S. GAAP" shall mean United States generally accepted
accounting principles and practices in effect from time to time
applied consistently throughout the periods involved.
"Voting Agreement" shall mean that certain Voting Agreement
among Purchaser, Seller and certain shareholders of Seller dated May
14, 1999.
ARTICLE II
PURCHASE AND SALE
Section 2.01 Assets to Be Sold. On the terms and subject to the
conditions of this Agreement, Seller shall, on the Closing Date, sell,
convey and assign to Purchaser, free and clear of all claims, liens
and interests except as is provided for herein, all of Seller's right,
title and interest in and to the Assets.
Section 2.02 Assumption and Exclusion of Liabilities (a) On the
terms and subject to the conditions of this Agreement, Purchaser
shall, on the Closing Date, assume only the Assumed Liabilities.
(b) Seller shall retain, and shall be responsible for
paying, performing and discharging when due, and Purchaser shall not
assume or have any responsibility for the Excluded Liabilities.
Purchase Price; Allocation of Purchase Price
Section 2.03 Purchase Price; Allocation of Purchase Price (a) The
aggregate purchase price (the "Purchase Price") for the Assets shall
be (i) shares of common Stock of the Purchaser ("Purchaser Common
Stock") initially representing 10% of the capital stock of Purchaser
on a fully diluted basis (including such shares underlying the options
available for issuance pursuant to Purchaser's stock option plans as
well as the 7,000,000 shares of Series A Preferred Stock of Purchaser
currently outstanding) and (ii) the assumption of the Assumed
Liabilities.
(b) The sum of the Purchase Price and the Assumed
Liabilities shall be allocated among the Assets as of the Closing Date
in accordance with Annex A. Any subsequent adjustments to the sum of
the Purchase Price and Assumed Liabilities shall be reflected in the
allocation hereunder in a manner consistent with Treasury Regulation
1.1060-1T(f). For all Tax purposes, Purchaser and Seller agree to
report the transactions contemplated in this Agreement in a manner
consistent with the terms of this Agreement, including the allocation
under Annex A, and that none of them will take any position
inconsistent therewith in any Tax return, in any refund claim, in any
litigation, or otherwise.
Section 2.04 Closing. Subject to the terms and conditions of this
Agreement, the sale and purchase of the Assets and the assumption of
the Assumed Liabilities contemplated by this Agreement shall take
place at a closing (the "Closing") to be held at the offices of
Brobeck, Phleger & Harrison LLP, Spear Street Tower, One Market, San
Francisco, California at 10:00 A.M. California time on the second
Business Day following the later to occur of the satisfaction or
waiver of all conditions to the obligations of the parties set forth
in Article VIII, or at such other place or at such other time or on
such other date as Seller and Purchaser may mutually agree upon in
writing (the day on which the Closing takes place being the "Closing
Date").
Section 2.05 Closing Deliveries by Seller. At the Closing, Seller
shall deliver or cause to be delivered to Purchaser:
(a) the Bill of Sale, and such other instruments, in form
and substance satisfactory to Purchaser, as may be requested by
Purchaser to transfer the Assets to Purchaser or evidence such
transfer on the public records;
(b) executed counterparts of the Assumption Agreement,
Transition Services Agreement, Sublease Agreement, Supply Agreement
and Stockholders' Agreement;
(c) a receipt for the Purchase Price; and
(d) the opinions, certificates and other documents
required to be delivered pursuant to Section 8.01.
Section 2.06 Closing Deliveries by Purchaser. At the Closing,
Purchaser shall deliver to Seller:
(a) The Purchaser Common Stock payable to Seller pursuant
to Section 2.03;
(b) executed counterparts of the Assumption Agreement,
Transition Services Agreement, Sublease Agreement, Supply Agreement
and Stockholders' Agreement; and
(c) the documents required to be delivered pursuant to
Section 8.02.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF SELLER
As an inducement to Purchaser to enter into this Agreement,
Seller hereby represents and warrants to Purchaser as follows:
Section 3.01 Organization, Authority and Qualification of Seller.
Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Florida and has all necessary
corporate power and authority to enter into this Agreement and the
Ancillary Agreements, to carry out its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and
thereby. Seller is duly licensed or qualified to do business and is
in good standing in each jurisdiction in which the properties owned or
leased by it or the operation of its business makes such licensing or
qualification necessary. The execution and delivery of this Agreement
and the Ancillary Agreements by Seller, the performance by Seller of
its obligations hereunder and thereunder and the consummation by
Seller of the transactions contemplated hereby and thereby have been
duly authorized by all requisite action on the part of Seller and its
shareholders. This Agreement has been, and upon their execution the
Ancillary Agreements and upon shareholder approval will be, duly
executed and delivered by Seller, and (assuming due authorization,
execution and delivery by Purchaser) this Agreement constitutes, and
upon their execution the Ancillary Agreements and upon Shareholder
approval will constitute, legal, valid and binding obligations of
Seller enforceable against Seller in accordance with their respective
terms. Seller is not subject to any pending, threatened or, to its
knowledge, contemplated investigation or administrative or legal
proceeding (a "Proceeding") by the Internal Revenue Service, the
taxing authorities of any state or local jurisdiction, the SEC, the
National Association of Securities Dealers, Inc., the Nasdaq Stock
Market, Inc. or any state securities commission, or any other
governmental entity which has not been disclosed in the SEC Documents
(as defined below). None of the disclosed Proceedings, if any, will
have a Material Adverse Effect upon Seller.
Section 3.02 Corporate Condition. Each report or proxy statement
delivered to the Purchaser is a true and complete copy of such
document as filed by Seller with the SEC. Seller has filed in a
timely manner all documents that Seller was required to file with the
SEC under Sections 13, 14(a) and 15(d) of the Exchange Act during the
twelve (12) months preceding the date of this Agreement. As of their
respective filing dates, all documents filed by Seller with the SEC on
or prior to the date hereof (the "SEC Documents") complied in all
material respects with the requirements of the Exchange Act or the
Securities Act, as applicable. Each of the SEC Documents, as of their
respective dates, did not contain any untrue statement of material
fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The
financial statements of Seller included in the SEC Documents (the
"Financial Statements") comply as to form in all material respects
with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto. Seller's condition
is, in all material respects, as described in the SEC Documents.
Seller's Financial Statements have been prepared in accordance with
generally accepted accounting principles, consistently applied (except
as otherwise permitted by Regulation S-X of the Exchange Act), and
fairly present the financial condition of Seller as of the dates of
the balance sheets included therein and the consolidated results of
its operations and cash flows for the periods then ended. Without
limiting the foregoing, there are no material liabilities, contingent
or actual, that are not disclosed in the SEC Documents (other than
liabilities incurred by Seller in the ordinary course of its business,
consistent with its past practice, after the period covered by the SEC
Documents). Seller has paid all material taxes, which are due, except
for taxes which it reasonably disputes. This Agreement and the SEC
Documents do not contain any untrue statement of a material fact and
do not omit to state any material fact required to be stated therein
or herein necessary to make the statements contained therein or herein
not misleading in the light of the circumstances under which they were
made. No event or circumstance exists relating to Seller which, under
applicable law, requires public disclosure but which has not been so
publicly announced or disclosed.
Section 3.03 Reporting Company. Seller is subject to the reporting
requirements of the Exchange Act, has a class of securities registered
under Section 12 of the Exchange Act, and has filed all reports
required by the Exchange Act since the date Seller first became
subject to such reporting obligations. Seller undertakes to furnish
Purchaser with copies of such reports as may be reasonably requested
by Purchaser prior to the Closing.
Section 3.04 No Conflict. The execution, delivery and performance of
this Agreement and the Ancillary Agreements by Seller do not and will
not (a) violate, conflict with or result in the breach of any
provision of the charter or by-laws (or similar organizational
documents) of Seller, (b) conflict with or violate (or cause an event
which could have a Material Adverse Effect as a result of) any Law or
Governmental Order applicable to Seller or any of its assets,
properties or businesses, including, without limitation, the Assets
and the Business, or (c) except as set forth in Section 3.04 of the
Disclosure Schedule, conflict with, result in any breach of,
constitute a default (or event which with the giving of notice or
lapse of time, or both, would become a default) under, require any
consent under, or give to others any rights of termination, amendment,
acceleration, suspension, revocation or cancellation of, or result in
the creation of any encumbrance on any of the assets or properties of
Seller pursuant to, any note, bond, mortgage or indenture, contract,
agreement, lease, sublease, license, permit, franchise or other
instrument or arrangement to which Seller is a party or by which any
of such assets or properties is bound or affected.
Section 3.05 Governmental Consents and Approvals. The execution,
delivery and performance of this Agreement and each Ancillary
Agreement by Seller do not and will not require any consent, approval,
authorization or other order of, action by, filing with or
notification to, any Governmental Authority, except as described in
Section 3.03 of the Disclosure Schedule.
Section 3.06 Reference Balance Sheet (a) Seller has delivered true
and complete copies of the unaudited balance sheet of the Business as
of March 31, 1999, which shall be replaced within twenty (20) days of
this Agreement by an unaudited balance sheet of the Business as of
June 30, 1999 for which all representations and warranties in this
Agreement related to the "Reference Balance Sheet" shall also be true
and correct. The Reference Balance Sheet (i) was prepared in
accordance with the books of account and other financial records of
Seller, (ii) presents fairly the financial condition and results of
operations of Seller related to the Business as of the date thereof or
for the period covered thereby, (iii) has been prepared in accordance
with U.S. GAAP applied on a basis consistent with the past practices
of Seller and throughout the period involved, and (iv) will include
all adjustments (consisting only of normal recurring accruals) that
are necessary for a fair presentation of the financial condition of
Seller related to the Business and the results of the operations of
Seller related to the Business as of the date thereof for the period
covered thereby.
(b) The books of account and other financial records of
Seller as they relate to the Business: (i) reflect all items of income
and expense and all assets and Liabilities required to be reflected
therein in accordance with U.S. GAAP applied on a basis consistent
with the past practices of Seller and throughout the periods involved,
(ii) are in all material respects complete and correct, and do not
contain or reflect any material inaccuracies or discrepancies, and
(iii) have been maintained in accordance with good business and
accounting practices.
Section 3.07 No Undisclosed Liabilities. There are no Liabilities of
Seller related to the Business other than Liabilities (i) reflected or
reserved against on the Reference Balance Sheet, (ii) disclosed in
Section 3.07 of the Disclosure Schedule, or (iii) incurred since the
date of this Agreement in the ordinary course of business, consistent
with past practice, of Seller related to the Business and which do not
and could not have a Material Adverse Effect. Reserves are reflected
on the Reference Balance Sheet against all Liabilities of Seller
related to the Business, other than Liabilities relating to the
Excluded Liabilities, in amounts that have been established on a basis
consistent with the past practices of Seller related to the Business
and in accordance with U.S. GAAP.
Section 3.08 Receivables. Except to the extent, if any, reserved for
on the Reference Balance Sheet, all Receivables reflected on the
Reference Balance Sheet related to the Business arose from, and the
Receivables existing on the Closing Date related to the Business will
have arisen from, the sale of Inventory or services to Persons not
affiliated with Seller and in the ordinary course of the Business
consistent with past practice and, except as reserved against on the
Reference Balance Sheet, constitute or will constitute, as the case
may be, only valid, undisputed claims of Seller not subject to valid
claims of set-off or other defenses or counterclaims other than normal
cash discounts accrued in the ordinary course of the Business
consistent with past practice.
Section 3.09 Inventories. The Inventories do not consist of obsolete
inventories or items that are damaged or otherwise slow-moving. The
Inventories do not consist of any items held on consignment. Seller
is not under any obligation or liability with respect to accepting
returns of items of Inventory or merchandise in the possession of its
customers. The Inventories are in good and merchantable condition in
all material respects, are suitable and usable for the purposes for
which they are intended and are in a condition such that they can be
sold in the ordinary course of the Business consistent with past
practice.
Section 3.10 Conduct in the Ordinary Course; Absence of Certain
Changes, Events and Conditions. Since the Reference Balance Sheet
Date, except as disclosed in Section 3.10 of the Disclosure Schedule,
the Business has been conducted in the ordinary course and consistent
with past practice. Seller has not permitted or suffered any liens or
encumbrances on the Assets, made any unusual payments, purchases,
transactions, capital expenditures or agreements. As amplification
and not limitation of the foregoing, since the Reference Balance Sheet
Date, Seller has not:
(i) written down or written up (or failed to write
down in accordance with U.S. GAAP consistent with past
practice) the value of any Inventories or Receivables or
revalued any assets of Seller related to the Business other
than in the ordinary course of business consistent with past
practice and in accordance with U.S. GAAP;
(ii) (A) granted any increase, or announced any
increase, in the wages, salaries, compensation, bonuses,
incentives, pension or other benefits payable by Seller related
to the Business to any of its employees, including, without
limitation, any increase or change pursuant to any Plan, or (B)
established or increased or promised to increase any benefits
under any Plan, in either case except as required by Law or any
collective bargaining agreement and involving ordinary
increases consistent with the past practice of Seller related
to the Business; or
(iii) suffered any Material Adverse Effect related to
the Business.
Section 3.11 Litigation. Except as set forth in Section 3.11 of the
Disclosure Schedule, there are no Actions by or against Seller related
to the Business, or affecting any of the Assets or the Business,
pending before any Governmental Authority (or, to the best knowledge
of Seller after due inquiry, threatened to be brought by or before any
Governmental Authority). Except as set forth in Section 3.11 of the
Disclosure Schedule, neither Seller nor any of its assets or
properties, including, without limitation, the Assets, is subject to
any Governmental Order (nor, to the best knowledge of Seller after due
inquiry, are there any such Governmental Orders threatened to be
imposed by any Governmental Authority).
Section 3.12 Compliance with Laws. To the best of Seller's
knowledge, it has conducted and continues to conduct the Business in
accordance with all Laws and Governmental Orders applicable to Seller
or any of its properties or assets, including, without limitation, the
Assets and the Business, and Seller is not in violation of any such
Law or Governmental Order.
Section 3.13 Environmental and Other Permits and Licenses; Related
Matters. Seller currently holds all the health and safety and other
permits, licenses, authorizations, certificates, exemptions and
approvals of Governmental Authorities (collectively, "Permits")
necessary or proper for the current use, occupancy and operation of
the Assets and the conduct of the Business, and all such Permits are
in full force and effect. There is no existing practice, action or
activity of Seller and no existing condition of the Assets and the
Business, which will give rise to any civil or criminal Liability
under, or violate or prevent compliance with, any health or
occupational safety or other applicable Environmental Law. Seller has
not received any notice from any Governmental Authority revoking,
canceling, rescinding, materially modifying or refusing to renew any
Permit or providing written notice of violations under any
Environmental Law related to the Assets or the Business. Seller is in
all respects in compliance with the Permits and the requirements
thereof.
Section 3.14 Contracts. (a) Except as disclosed in Section 3.14(a)
of the Disclosure Schedule, each Contract: (i) is legal, valid and
binding on the respective parties thereto and is in full force and
effect, (ii) is freely and fully assignable to Purchaser without
penalty or other adverse consequences, and (iii) upon consummation of
the transactions contemplated by this Agreement and the Ancillary
Agreements, except to the extent that any consents set forth in
Section 3.04 of the Disclosure Schedule are not obtained, shall
continue in full force and effect without penalty or other adverse
consequence. Seller is not in breach of, or default under, any
Contract.
(b) Except as disclosed in Section 3.14(b) of the
Disclosure Schedule, no other party to any Contract is in breach
thereof or default thereunder.
Section 3.15 Intellectual Property. (a) The Disclosure Schedule
contains a true and complete list of Seller's patents, patent
applications, trademarks, trademark applications, trade names, service
marks, service mark applications, Internet domain names, Internet
domain name applications, copyrights and copyright registrations and
applications and other filings and formal actions made or taken
pursuant to federal, state, local and foreign laws by Seller to
protect its interests in the Intellectual Property.
(b) The Intellectual Property consists solely of items and
rights which are: (i) owned Intellectual Property; (ii) in the public
domain; or (iii) Licensed Intellectual Property, the parties and date
of each such license agreement (each, a "License Agreement") being set
forth on Section 3.15(c) of the Disclosure Schedule. Seller has all
rights in Intellectual Property necessary to carry out Seller's
current activities (and had all rights necessary to carry out its
former activities at the time such activities were being conducted),
including without limitation, to the extent required to carry out such
activities, rights to make, use, reproduce, modify, adopt, create
derivative works based on, translate, distribute (directly and
indirectly), transmit, display and perform publicly, license, rent and
lease and, other than with respect to the Licensed Intellectual
Property, assign and sell, the Intellectual Property.
(c) To the Seller s knowledge, the reproduction,
manufacturing, distribution, licensing, sublicensing, sale or any
other exercise of rights in any Intellectual Property owned by the
Seller, product, work, technology or process as now used or offered or
proposed for use, licensing or sale by Seller does not infringe on any
copyright, trade secret, trademark, service mark, trade name, trade
dress, firm name, Internet domain name, logo, trade dress, mask work
or of any person or the patent of any person. With the exception of
the patents and patent applications listed in Disclosure Schedule B
and the claim set forth in Disclosure Schedule C, no claims (i)
challenging the validity, effectiveness or ownership by Seller of any
of the Intellectual Property, or (ii) to the effect that the use,
distribution, licensing, sublicensing, sale or any other exercise of
rights in any product, work, technology or process as now used or
offered or proposed for use, licensing, sublicensing or sale by Seller
infringes or will infringe on any intellectual property or other
proprietary right of any person have been asserted or, to the
knowledge of Seller, are threatened by any person, nor are there, to
Seller's knowledge, any valid grounds for any bona fide claim of any
such kind. All registered, granted or issued patents, trademarks,
Internet domain names and copyrights held by Seller are enforceable
and subsisting. To the best of Seller's knowledge, , there is no
unauthorized use, infringement or misappropriation of any of the
Intellectual Property owned by the Seller by any third party, employee
or former employee.
(d) With the exception of the patents and patent
applications listed in Disclosure Schedule B, all personnel, including
employees, agents, consultants and contractors, who have contributed
to or participated in the conception and development of the
Intellectual Property owned by the Seller on behalf of Seller (i) have
been a party to a "work-for-hire" arrangement or agreements with
Seller in accordance with applicable national and state law that has
accorded Seller full, effective, exclusive and original ownership of
all tangible and intangible property thereby arising, or (ii) have
executed appropriate instruments of assignment in favor or Seller as
assignee that have conveyed to Seller effective and exclusive
ownership of all tangible and intangible property thereby arising.
(e) Seller is not, nor as a result of the execution or
delivery of this Agreement, or performance of Seller's obligations
hereunder, will Seller be, in violation of any license, sublicense,
agreement or instrument to which Seller is a party or otherwise bound,
nor will execution or delivery of this Agreement, or performance of
Seller's obligations hereunder, cause the diminution, termination or
forfeiture of any Intellectual Property.
(f) Section 3.15(f) of the Disclosure Schedule contains a
true and complete list of all of Seller's software programs (the
"Software Programs"). Seller owns full and unencumbered right and
good, valid and marketable title to such Software Programs free and
clear of all mortgages, pledges, liens, security interests,
conditional sales agreements, encumbrances or charges of any kind.
(g) The source code and system documentation relating to
the Software Programs (i) have at all times been maintained in strict
confidence, (ii) have been disclosed by Seller only to employees who
have a "need to know" the contents thereof in connection with the
performance of their duties to Seller and who have executed the
nondisclosure agreements referred to in Section 3.15, and (iii) have
not been disclosed to any third party.
Section 3.16 Year 2000 Compliant. (or, as the context may require,
"Year 2000 Compliance") means that any particular hardware or software
will: (i) process date data from at least the years 1900 through 2101,
or involving date information from more than one century, without
error, interruption, malfunction, corruption, ceasing to function,
generating incorrect data or otherwise producing incorrect results or
adversely impacting current or future operations; (ii) maintain
functionality with respect to the introduction, processing and output
of records containing dates falling on or after January 1, 2000; and
(iii) support numeric and date transitions from the twentieth century
to the twenty-first century, and back (including, without limitation,
all calculations, aging, reporting, printing, displays, reversals,
disaster and vital records recoveries) without error, interruption,
malfunction, corruption, ceasing to function, generating incorrect
data or otherwise producing incorrect results or adversely impacting
current or future operations.
(a) Except as set forth in Section 3.16(a)(i) of the
Disclosure Schedule, all of Seller s products and services (including
products sold to date, products currently being sold or future
products), both individually and when operating in conjunction with
all other systems, products or services with which they are designed
to interface (assuming such other systems, products or services are
Year 2000 Compliant), and all computer software and hardware
(including, without limitation, microcode, firmware, system and
application programs, files, databases, computer services and
microcontrollers, including those embedded in computer and noncomputer
equipment) contained in Seller's products or services (including
products and services sold to date, products and services currently
being sold or future products and services) are Year 2000 Compliant.
(b) All of Seller's internal computer systems are, both
individually and in conjunction with all other systems with which they
interface (assuming such other systems, products or services are Year
2000 Compliant), Year 2000 Compliant.
(c) Seller has made inquiries of its key suppliers of
services and products and, to its knowledge, Seller is not relying on
the products or services of any third party whose systems, products or
services are not Year 2000 Compliant.
(d) Except as set forth in Section 3.16(a)(ii), Seller does
not have any material expenses or other material liabilities
associated with securing Year 2000 Compliance, or making contingency
arrangements to address Year 2000 Compliance issues, with respect to
Seller's products or services (including products and services sold to
date, products and services currently being sold or future products
and services), internal computer systems (to the knowledge of Seller)
or the computer systems of Seller's key suppliers or customers.
(e) Seller has not made any representations or warranties
specifically relating to the ability of any product or service sold,
licensed, rendered, or otherwise provided by Seller in the conduct of
its business to be Year 2000 Compliant.
Section 3.17 Assets. (a) Except as disclosed in Section 3.17(a) of
the Disclosure Schedule, Seller owns, leases or has the legal right to
use all the Assets and has good and marketable title to, or, in the
case of leased or subleased Assets, valid and subsisting leasehold
interests in, all the Assets, free and clear of all encumbrances.
(b) The Assets constitute all the properties, assets and
rights forming a part of, used, held or intended to be used in, and
all such properties, assets and rights as are necessary in the conduct
of, the Business.
(c) Except as set forth in Sections 3.15(b), 3.16(b),
3.17(a) or 3.17(c) of the Disclosure Schedule, Seller has the complete
and unrestricted power and unqualified right to sell, assign,
transfer, convey and deliver the Assets to Purchaser without penalty
or other adverse consequences.
Section 3.18 Customers. Seller has not received any notice, written
or otherwise, from any significant customer (defined for purposes of
this Section 3.18 to be a customer who has purchased $25,000 of
products produced by the Business, in the aggregate, in any twelve
(12) month period in any of the last three (3) fiscal years) of Seller
has ceased, or will cease, to use the products of Seller produced by
the Business or has substantially reduced, or will substantially
reduce, the use of such products at any time.
Section 3.19 Suppliers. Seller has not received any notice, written
or otherwise, that any significant supplier will not sell raw
materials, supplies, merchandise and other goods related to the
Business to Seller at any time after the Closing Date on terms and
conditions similar to those imposed on current sales to the Business,
subject only to general and customary price increases.
Section 3.20 Employee Benefit Matters. (a) Plans and Material
Documents. Section 3.20(a) of the Disclosure Schedule lists all
employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) and all
bonus, stock option, stock purchase, restricted stock, incentive,
deferred compensation, retiree medical or life insurance, supplemental
retirement, severance or other benefit plans, programs or
arrangements, and all employment, termination, severance or other
contracts or agreements, whether legally enforceable or not, to which
Seller is a party with respect to the Business, with respect to which
Seller has any obligation or which are maintained, contributed to or
sponsored by Seller for the benefit of any current or former employee,
officer or director of Seller with respect to the Business
(collectively, "Plans").
(b) Absence of Certain Liabilities and Events. There has
been no prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) with respect to any Plan. Seller
has not incurred any liability for any excise tax arising under
Section 4971, 4972, 4980 or 4980B of the Code and to the best of
Seller's knowledge no fact or event exists which could give rise to
any such liability. Seller has not incurred any liability under,
arising out of or by operation of Title IV of ERISA (other than
liability for premiums to the Pension Benefit Guaranty Corporation
arising in the ordinary course), including, without limitation, any
liability in connection with (i) the termination or reorganization of
any employee benefit plan subject to Title IV of ERISA, or (ii) the
withdrawal from any Multiemployer Plan or Multiple Employer Plan, and
no fact or event exists which could give rise to any such liability.
No complete or partial termination has occurred within the five years
preceding the date hereof with respect to any Plan. No reportable
event (within the meaning of Section 4043 of ERISA) has occurred or is
expected to occur with respect to any Plan subject to Title IV of
ERISA. No Plan had an accumulated funding deficiency (within the
meaning of Section 302 of ERISA or Section 412 of the Code), whether
or not waived, as of the most recently ended plan year of such Plan.
Section 3.21 Labor Matters. Except as set forth in Section 3.21 of
the Disclosure Schedule, (a) Seller is not a party to any collective
bargaining agreement or other labor union contract applicable to
persons employed by Seller with respect to the Business, and currently
there are no organizational campaigns, petitions or other unionization
activities seeking recognition of a collective bargaining unit which
could affect the Business; (b) there are no controversies, strikes,
slowdowns or work stoppages pending or, to the best knowledge of
Seller after due inquiry, threatened between Seller and any of the
employees of the Business, and Seller has not experienced any such
controversy, strike, slowdown or work stoppage within the past three
years; (c) Seller has not breached or otherwise failed to comply with
the provisions of any collective bargaining or union contract with
respect to the Business and there are no grievances outstanding
against Seller under any such agreement or contract; (d) there are no
unfair labor practice complaints pending against Seller with respect
to the Business before the National Labor Relations Board or any other
Governmental Authority or any current union representation questions
involving employees of the Business; (e) Seller is currently in
compliance with all applicable Laws relating to the employment of
labor, including those related to wages, hours, collective bargaining,
employee benefits and the payment and withholding of taxes and other
sums as required by the appropriate Governmental Authority with
respect to the Business and has withheld and paid to the appropriate
Governmental Authority or is holding for payment not yet due to such
Governmental Authority all amounts required to be withheld from
employees of the Business and is not liable for any arrears of wages,
taxes, penalties or other sums for failure to comply with any of the
foregoing; (f) Seller has paid in full to all employees of the
Business or adequately accrued for in accordance with U.S. GAAP
consistently applied all wages, salaries, commissions, bonuses,
benefits and other compensation due to or on behalf of such employees;
(g) there is no claim with respect to payment of wages, salary or
overtime pay that has been asserted or is now pending or threatened
before any Governmental Authority with respect to any Persons
currently or formerly employed by Seller in the Business; (h) Seller
is not a party to, or otherwise bound by, any consent decree with, or
citation by, any Governmental Authority relating to employees or
employment practices with respect to the Business; (i) there is no
charge or proceeding with respect to a violation of any occupational
safety or health standards that has been asserted or is now pending or
threatened with respect to the Business; and (j) there is no charge of
discrimination in employment or employment practices, for any reason,
including, without limitation, age, gender, race, religion or other
legally protected category, which has been asserted or is now pending
or threatened before the United States Equal Employment Opportunity
Commission, or any other Governmental Authority in any jurisdiction in
which Seller has employed or currently employs any Person with respect
to the Business.
Section 3.22 Taxes. All returns and reports in respect of Taxes
required to be filed have been timely filed and all Taxes required to
be shown on such returns and reports or otherwise due have been timely
paid. All such returns and reports are true, correct and complete in
all material respects. There are no Tax liens on the Assets or the
Business.
Section 3.23 Insurance. (a) All material assets, properties and
risks of the Business are, and for the past five years have been,
covered by valid and, except for policies that have expired under
their terms in the ordinary course, currently effective insurance
policies or binders of insurance (including, without limitation,
general liability insurance, property insurance and workers'
compensation insurance) issued in favor of Seller, in each case with
responsible insurance companies, in such types and amounts and
covering such risks as are consistent with customary practices and
standards of companies engaged in businesses and operations similar to
those of Seller with respect to the Business.
(b) At no time subsequent to December 31, 1996 has Seller
(i) been denied any insurance or indemnity bond coverage which it has
requested with respect to either the Assets or the Business, (ii) made
any material reduction in the scope or amount of its insurance
coverage with respect to either the Assets or the Business, or
received notice from any of its insurance carriers that any insurance
premiums will be subject to increase in an amount materially
disproportionate to the amount of the increases with respect thereto
(or with respect to similar insurance) in prior years or that any
insurance coverage referred to in Section 3.23(a) will not be
available in the future substantially on the same terms as are now in
effect or (iii) suffered any extraordinary increase in premium for
renewed coverage with respect to either the Assets or the Business.
Since December 31, 1996, no insurance carrier has cancelled, failed to
renew or materially reduced any insurance coverage for Seller with
respect to either the Assets or the Business or given any notice or
other indication of its intention to cancel, not renew or reduce any
such coverage with respect to either the Assets or the Business.
Section 3.24 Full Disclosure. (a) Seller is not aware of any facts
pertaining to Seller or the Business which affect adversely Seller or
the Business or which are likely in the future to affect adversely
Seller or the Business and which have not been disclosed in this
Agreement, the Disclosure Schedule, the Financial Statements, the
Reference Balance Sheet, or otherwise disclosed to Purchaser by Seller
in writing.
(b) No representation or warranty of Seller in this
Agreement, nor any statement or certificate furnished or to be
furnished prior to or at the Closing to Purchaser pursuant to this
Agreement, or in connection with the transactions contemplated by this
Agreement, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading.
Section 3.25 Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement or the
Ancillary Agreements based upon arrangements made by or on behalf of
Seller.
Section 3.26 Authority Relative to this Agreement and the Ancillary
Agreements. Seller has all necessary corporate power to and authority
to execute and deliver this Agreement and the Ancillary Agreements, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and
delivery of this Agreement by Seller and the consummation of the
transaction contemplated hereby have been duly and validly authorized
by all necessary corporate action and no other corporate proceedings
on the part of Seller are necessary to authorize this Agreement or to
consummate such transactions (other than the approval and adoption of
this Agreement by a majority of the holders of common stock of Seller
and 66 2/3 per cent of the holders of Series A Preferred Stock of
Seller). Securityholders of Seller holding sufficient shares of
capital stock of Seller to assure all necessary shareholder approvals
of this Agreement, the Ancillary Agreements and the transactions
contemplated hereby and thereby have executed the Voting Agreement.
This Agreement has been duly executed and delivered by Seller and,
assuming due delivery by Purchaser, constitutes the legal, valid and
binding obligation of seller, enforceable against Seller in accordance
with its terms.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PURCHASER
As an inducement to Seller to enter into this Agreement,
Purchaser hereby represents and warrants to Seller as follows:
Section 4.01 Organization and Authority of Purchaser. Purchaser is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all necessary
corporate power and authority to enter into this Agreement and the
Ancillary Agreements, to carry out its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the
Ancillary Agreements by Purchaser, the performance by Purchaser of its
obligations hereunder and thereunder and the consummation by Purchaser
of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of Purchaser. This
Agreement has been, and upon their execution the Ancillary Agreements
will be, duly executed and delivered by Purchaser, and (assuming due
authorization, execution and delivery by Seller) this Agreement
constitutes, and upon their execution the Ancillary Agreements will
constitute, legal, valid and binding obligations of Purchaser,
enforceable against Purchaser in accordance with their respective
terms.
Section 4.02 No Conflict. Except as may result from any facts or
circumstances relating solely to Seller, the execution, delivery and
performance of this Agreement and the Ancillary Agreements by
Purchaser, do not and will not violate, conflict with or result in
the breach of any provision of the Articles of Incorporation or
by-laws (or other organizational documents) of Purchaser, (b) conflict
with or violate any Law or Governmental Order applicable to Purchaser
or (c) conflict with, or result in any breach of, constitute a default
(or an event which with the giving of notice or lapse of time, or
both, would become a default) under, require any consent under, or
give to others any rights of termination, amendment, acceleration,
suspension, revocation or cancellation of, or result in the creation
of any encumbrance on any of the assets or properties of Purchaser
pursuant to, any note, bond, mortgage or indenture, contract,
agreement, lease, sublease, license, permit, franchise or other
instrument or arrangement to which Purchaser is a party or by which
any of such assets or properties is bound or affected, which would
have a material adverse effect on the ability of Purchaser to
consummate the transactions contemplated by this Agreement or by the
Ancillary Agreements.
Section 4.03 Governmental Consents and Approvals. The execution,
delivery and performance of this Agreement and each Ancillary
Agreement to which it is a party by Purchaser do not and will not
require any consent, approval, authorization or other order of, action
by, filing with, or notification to, any Governmental Authority.
Section 4.04 Capitalization. As of the Closing Date, the authorized
capital stock of Purchaser shall consist of 10,000,000 shares of
preferred stock, 7,000,000 of which shall be issued and outstanding,
and 30,000,000 shares of common stock, 1,000,000 of which shall be
issued and outstanding to Seller pursuant to Section 2.03 hereof.
Section 4.05 Financing Commitments. Purchaser has received
irrevocable commitments from investors to provide Purchaser equity
capital of not less than $6,000,000 in cash and commitments, subject
only to the Closing in accordance with the terms and conditions of
this Agreement.
Section 4.06 Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement or the
Ancillary Agreements based upon arrangements made by or on behalf of
Purchaser.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.01 Conduct of Business Prior to the Closing. (a) Seller
covenants and agrees that, between the date hereof and the Closing,
Seller shall not conduct the Business other than in the ordinary
course and consistent with Seller's past practice. Without limiting
the generality of the foregoing, Seller shall (i) continue its
advertising and promotional activities, and pricing and purchasing
policies, in accordance with past practice; (ii) not shorten or
lengthen the customary payment cycles for any of its payables or
receivables; (iii) use its commercially reasonable efforts to (A)
preserve intact its business organization and the business
organization of the Business, (B) keep available to Purchaser the
services of the employees of Seller, (C) continue in full force and
effect without material modification all existing policies or binders
of insurance currently maintained in respect of Seller and the
Business, and (D) preserve its current relationships with its
customers, suppliers and other persons with which it has significant
business relationships; and (iv) not engage in any practice, take any
action, fail to take any action or enter into any transaction which
could cause any representation or warranty of Seller to be untrue or
result in a breach of any covenant made by Seller in this Agreement.
(b) Except as described in Section 5.01(b) of the
Disclosure Schedule, Seller covenants and agrees that, prior to the
Closing, without the prior written consent of Purchaser, Seller will
not do any of the things enumerated in Section 3.08.
Section 5.02 Access to Information. (a) Seller will provide
Purchaser, together with its accountants, counsel and other authorized
representatives, full and complete access during normal business hours
to all properties, books, records, agreements and facilities of Seller
(insofar as the same are relevant to the Business or the Assets),
wherever located, and Seller will make its officers, employees,
attorneys, agents, independent accountants and actuaries available to
discuss with Purchaser and its accountants, counsel and other
authorized representatives such aspects of the business, financial
condition or prospects of the Business and the Assets as Purchaser may
deem necessary or desirable. To the extent that the transactions
contemplated hereby are not consummated, all written information
provided by Seller to Purchaser or its aforementioned representatives
will promptly be returned following Seller's written request to
Purchaser. All material non-public information provided by Seller
will be treated as confidential and will not be disclosed by Purchaser
or its representatives to any third party (other than its accountants,
counsel and authorized representatives and prospective debt and equity
investors for the sole purpose of evaluating the transactions
contemplated herein) without the prior written consent of Seller,
except as required by law or in connection with any civil,
administrative, criminal or other legal proceedings and
investigations.
(b) In order to facilitate the resolution of any claims
made against or incurred by Seller prior to the Closing, for a period
ending on the close of business on the 120th day following the
expiration of the applicable statute of limitations with respect to
Tax liabilities, Purchaser shall (i) retain the books and records of
Seller which are transferred to Purchaser pursuant to this Agreement
relating to periods prior to the Closing in a manner reasonably
consistent with the prior practices of Seller, and (ii) upon
reasonable notice, afford the officers, employees and authorized
agents and representatives of Seller reasonable access (including the
right to make photocopies at Buyer's expense), during normal business
hours, to such books and records.
(c) In order to facilitate the resolution of any claims
made by or against or incurred by Purchaser after the Closing or for
any other reasonable purpose, for a period ending on the close of
business on the 120th day following the expiration of the applicable
statute of limitations with respect to Tax liabilities, Seller shall
retain all books and records of Seller which are not transferred to
Purchaser pursuant to this Agreement and which relate to Seller, its
operations or the Business for periods prior to the Closing and which
shall not otherwise have been delivered to Purchaser, and (ii) upon
reasonable notice, afford the officers, employees and authorized
agents and representatives of Purchaser reasonable access (including
the right to make photocopies at Purchaser's expense), during normal
business hours, to such books and records.
Section 5.03 Regulatory and Other Authorizations; Notices and
Consents. (a) Seller shall use commercially reasonable efforts to
obtain all authorizations, consents, orders and approvals of all
Governmental Authorities and officials, customers, vendors and other
parties who may have or be able to assert legal rights with respect to
this transaction that may be or become necessary for execution and
delivery of this Agreement, and the performance of Seller's
obligations pursuant to, this Agreement and the Ancillary Agreements
and will cooperate fully with Purchaser in promptly seeking to obtain
all such authorizations, consents, orders and approvals.
(b) Seller and Purchaser agree that, in the event any
consent, approval or authorization necessary or desirable to preserve
for the Business or Purchaser any right or benefit under any lease,
license, contract, commitment or other agreement or arrangement to
which Seller is a party is not obtained prior to the Closing, Seller
will, subsequent to the Closing, cooperate with Purchaser in
attempting to obtain such consent, approval or authorization as
promptly thereafter as practicable. If such consent, approval or
authorization cannot be obtained, Seller will use its commercially
reasonable efforts to provide Purchaser with the rights and benefits
of the affected lease, license, contract, commitment or other
agreement or arrangement for the term of such lease, license, contract
or other agreement or arrangement, and, if Seller provides such rights
and benefits, Purchaser shall assume the obligations and burdens
thereunder.
Section 5.04 Notice of Developments. Prior to the Closing, Seller
shall promptly notify Purchaser in writing of (a) all events,
circumstances, facts and occurrences arising subsequent to the date of
this Agreement which could have a Material Adverse Effect on the
Business, and (b) all other material developments affecting the
Assets, Liabilities, business, financial condition, operations,
results of operations, customer or supplier relations, employee
relations or projections of the Business.
Section 5.05 Use of Intellectual Property. Seller shall not use any
of the Intellectual Property after the Closing Date.
Section 5.06 Public Announcements. Seller and Purchaser agree to
cooperate on making, and coordinate the making of, any public
announcements concerning this Agreement, the Ancillary Agreements and
the transactions contemplated hereby and thereby.
Section 5.07 Exclusivity. From the date of execution of this
Agreement until September 30, 1999 (the "Exclusivity Period"), none of
Seller nor any of its respective 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 portion of the Business or the Assets
whether by purchase of assets or otherwise, (ii) disclose any
information not customarily disclosed to any person concerning the
Business or the Assets or afford to any person or entity access to the
properties, books or records of the Business or the Assets, or (iii)
cooperate with any person to make any proposal to purchase all or any
part of the assets of the Business or the Assets (directly or
indirectly) other than inventory or non-essential or excess assets
sold in the ordinary course of business; provided, however, that
nothing contained in this Section 5.08 shall prohibit the board of
directors of Seller (i) form complying with Rule 14d-9 or 14e-2(a)
promulgated under the Exchange Act with regard to a tender of exchange
offer not made in violation of this Section 5.08 or (ii) prior to
receipt of the approval by the shareholders of Seller of this
Agreement and the transaction contemplated hereby from providing
information in connection with, and negotiating, another unsolicited,
bona fide written proposal regarding a competing transaction (a
"Competing Transaction") that (i) the Seller's board of directors
shall have concluded in good faith, after considering applicable state
law, on the basis of a written opinion of independent outside counsel
of nationally recognized reputation, that such action is necessary to
prevent Seller's board of directors from violating its fiduciary
duties to Seller's shareholders under applicable law, (ii) if any cash
consideration is involved, shall not be subject to any financing
contingency, and with respect to Seller's board of directors shall
have determined (based upon the advice of Seller's independent
financial advisors of nationally recognized reputation) in the proper
exercise of its fiduciary duties to Seller's stockholders that the
acquiring party is capable of consummating such Competing Transaction
on the terms proposed, and (iii) Seller's board of directors shall
have determined in the proper exercise of its fiduciary duties to
Seller's stockholders that such Competing Transaction provides greater
value to the shareholders of Seller than the transaction contemplated
hereby (based upon the written opinion of Seller's independent
financial advisors of nationally recognized reputation that such
Competing Transaction is superior from a financial point of view).
Section 5.08 Further Action. Each of the parties hereto shall use
all reasonable efforts to take, or cause to be taken, all appropriate
action, do or cause to be done all things necessary, proper or
advisable under applicable Laws, including obtaining any necessary
consents or approvals from, or making any necessary filings with the
U.S. or any foreign regulatory agencies, and execute and deliver such
documents and other papers, as may be required to carry out the
provisions of this Agreement, cause the conditions to Closing set
forth in Article VIII of this Agreement to be satisfied, and
consummate and make effective the transactions contemplated by this
Agreement.
ARTICLE VI
EMPLOYEE MATTERS
Section 6.01 Offer of Employment. Following the Closing Date
Purchaser shall offer employment to all of the employees of the
Business other than selected individuals to be identified by Purchaser
at least five (5) days prior to the Closing Date (collectively, the
"Identified Employees"). Shares of Purchaser Common Stock equal to
20% of the initial capital stock of Purchaser (computed on a fully
diluted basis including the issuance to Seller and the issuance of
7,000,000 shares of Series A Preferred Stock of Purchaser) will be
reserved for issuance to Purchaser's employees, officers and directors
(specifically including the Identified Employees) upon the exercise of
employee stock options with terms and conditions, including vesting
tied to continued employment by Purchaser, customary to venture
capital backed start-up companies.
ARTICLE VII
TAX MATTERS
Section 7.01 Indemnity. Seller agrees, to indemnify and hold
harmless Purchaser 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: (i) Taxes imposed on Purchaser or the
Business with respect to taxable periods ending on or before the
Closing Date; (ii) with respect to taxable periods beginning before
the Closing Date and ending after the Closing Date, Taxes imposed on
Purchaser or the Business which are allocable, to the portion of such
period ending on the Closing Date; and (iii) Taxes imposed on
Purchaser as a result of any breach of warranty or misrepresentation
under Section 3.19 of this Agreement. Purchaser shall be responsible
for Taxes of the Business for periods after the Closing Date.
Section 7.02 Conveyance Taxes. Seller and Purchaser shall equally
bear all real property transfer or gains, sales, use, transfer, value
added, stock transfer, and stamp taxes, any transfer, recording,
registration, and other fees, and any similar Taxes which become
payable in connection with the transactions contemplated by this
Agreement and the Ancillary Agreements.
Section 7.03 Miscellaneous. (a) Seller and Purchaser agree to treat
all payments made by either to or for the benefit of the other under
this Article VII, under other indemnity provisions of this Agreement
and for any misrepresentations or breach of warranties or covenants,
as adjustments to the Purchase Price or as capital contributions for
Tax purposes and that such treatment shall govern for purposes hereof
except to the extent that the laws of a particular jurisdiction
provide otherwise, in which case such payments shall be made in an
amount sufficient to indemnify the relevant party on an after-tax
basis.
(b) Notwithstanding any provision in this Agreement to the
contrary, the obligations of Seller and Parent to indemnify and hold
harmless Purchaser pursuant to this Article VII, and the
representations and warranties contained in Section 3.19, shall
terminate at the close of business on the 120th day following the
expiration of the applicable statute of limitations with respect to
the Tax liabilities in question (giving effect to any waiver,
mitigation or extension thereof).
(c) For purposes of this Article VII, "Purchaser" and
"Seller", respectively, shall include each member of the affiliated
group of corporations of which it is or becomes a member.
ARTICLE VIII
CONDITIONS TO CLOSING
Section 8.01 Conditions to Obligations of Purchaser. Unless waived
in writing by Purchaser, Purchaser's obligation to consummate the
Acquisition shall be subject to the satisfaction of the following
conditions:
(a) Representations, Warranties and Covenants. The
representations and warranties of Seller and Parent contained in this
Agreement shall have been true and correct when made and shall be true
and correct as of the Closing with the same force and effect as if
made as of the Closing, other than such representations and warranties
as are made as of another date, the covenants and agreements contained
in this Agreement to be complied with by Seller on or before the
Closing shall have been complied with, and Purchaser shall have
received a certificate of Seller to such effect signed by a duly
authorized officer thereof;
(b) No Proceeding or Litigation. No Action shall have been
commenced or threatened by or before any Governmental Authority
against either Seller or Purchaser, seeking to restrain or materially
and adversely alter the transactions contemplated hereby which in the
good faith determination of Purchaser is likely to render it
impossible or unlawful to consummate the transactions contemplated by
this Agreement or otherwise render inadvisable the consummation by
Purchaser of the transactions contemplated by this Agreement;
provided, however, that the provisions of this Section 8.01(b) shall
not apply if Purchaser has solicited or encouraged any such Action;
(c) Resolutions of Seller. Purchaser shall have received a
true and complete copy, certified by the Secretary or an Assistant
Secretary of Seller, of the resolutions duly and validly adopted by
the Board of Directors of Seller evidencing its authorization of the
execution and delivery of this Agreement and the Ancillary Agreements
and the consummation of the transactions contemplated hereby and
thereby;
(d) Legal Opinion. Purchaser shall have received from
Morgan, Lewis & Bockius, LLP, counsel to Seller, an opinion, addressed
to Purchaser and dated the Closing Date, in a form satisfactory to
Purchaser.
(e) Consents and Approvals. Purchaser and Seller shall
have received, each in form and substance reasonably satisfactory to
Purchaser in its sole and absolute discretion, all authorizations,
consents, orders and approvals of all Governmental Authorities and
officials and all third party consents and estoppel certificates which
Purchaser reasonably deems necessary or desirable for the consummation
of the transactions contemplated by this Agreement and the Ancillary
Agreements;
(f) Ancillary Agreements. Seller shall have executed and
delivered to Purchaser each of the Ancillary Agreements to which it is
a party;
(g) Contracts. Purchaser shall have received, each in form
and substance reasonably satisfactory to Purchaser, amendments or
novations of each Contract identified in Section 3.14(a) of the
Disclosure Schedule which Purchaser reasonably deems necessary or
desirable for the consummation of the transactions contemplated by
this Agreement, the Ancillary Agreements and the ongoing operation of
the Business, including, without limitation, all third party consents
required under any Contracts;
(h) No Material Adverse Effect. No circumstance, change
in, or effect on the Business shall have occurred which has a Material
Adverse Effect;
(i) Due Diligence. Completion of, and satisfaction with
the results of, financial, business, technical and legal due diligence
reviews of Seller by the Purchaser;
(j) Approval of Holders of Seller's Common Stock. Seller
shall have solicited and received the approval of the holders of
common stock of Seller necessary to effect the sale of substantially
all of the assets of Seller;
(k) Approval of Holders of Seller's Preferred Stock. If
necessary to consummate the Acquisition, Seller shall have solicited
and received the approval of the holders of 66-2/3% of the shares of
Series A Preferred Stock of Seller;
(l) Approvals. Purchaser shall have received all Approvals
which shall not contain any condition or restriction which materially
impairs Purchaser's ability to use, operate or enjoy the Assets;
(m) No Injunction, Stay, Order. There shall not be in
effect any injunction, stay or restraining order issued by a court of
competent jurisdiction, whether foreign or domestic, staying the
effectiveness of any Approval, and there shall not be any pending
request for such an injunction, stay or restraining order;
(n) Litigation. There shall not be threatened or pending
any suit, action, investigation, inquiry or other proceeding by or
before any court of competent jurisdiction or governmental agency
which, in Purchaser's reasonable judgment, could have a material
adverse effect on Purchaser's ability to acquire, use, operate or
enjoy the Assets;
(o) Deliveries by Seller. Seller shall have delivered to
Purchaser the items set forth in Section 2, satisfactory in form and
substance to Purchaser;
(p) Stockholders' Agreement. Seller shall have delivered
to Purchaser a signed counterpart of a stockholders' agreement
including the terms set forth in Exhibit A hereto and otherwise
satisfactory to Purchaser (the "Stockholders' Agreement");
(q) Bulk Sale. Purchaser shall be satisfied that
applicable bulk sale or similar requirements shall have been complied
with by Seller on a timely basis;
(r) Financial Statements. Purchaser shall have received
the Financial Statements and the Reference Balance Sheet;
(s) Key Employees. All of the employees of Seller prior to
the Closing Date designated by the Purchaser as key employees on Annex
B ("Key Employees") shall have accepted the offer of employment by
Purchaser made pursuant to Section 6.01 above;
(t) Purchaser Satisfaction. Purchaser shall be satisfied
in its sole discretion that Seller is able to sell, convey and assign
to Purchaser, free and clear of all claims, liens and interests except
as is provided for herein, all of Seller's right, title and interest
in and to the Assets; and
(u) Seller Compliance. Seller shall have complied in all
material respects with its covenants and agreements hereunder.
Section 8.02 Conditions to Obligations of Seller. Unless waived in
writing by Seller, Seller's obligation to consummate the transactions
contemplated hereby shall be subject to the satisfaction of the
following conditions:
(a) the conditions set forth above in Section 8.01 (j) and
(k) shall have been satisfied;
(b) Purchaser and its current stockholders shall each have
delivered to Seller a signed counterpart of the Stockholders'
Agreement;
(c) Purchaser shall have been capitalized with equity
capital of not less than $6,000,000 in cash and commitments; and
(d) Purchaser shall have complied in all material respects
with its covenants and agreements hereunder.
ARTICLE IX
INDEMNIFICATION
Section 9.01 Survival of Representations and Warranties. The
representations and warranties of Seller contained in this Agreement
and the Ancillary Agreements, and all statements contained in the
Acquisition Documents, shall survive the Closing until twelve (12)
months thereafter; provided, however, that (a) the representations and
warranties dealing with Tax matters shall survive as provided in
Section 7.03(b), and (b) insofar as any claim is made by Purchaser for
the breach of any representation or warranty of Seller contained
herein, which claim arises out of allegations of personal injury or
property damage suffered by any third party on or prior to the Closing
Date or attributable to products or Inventory sold or shipped, or
activities or omissions that occur, on or prior to the Closing Date,
such representations and warranties shall, for purposes of such claim
by Purchaser, survive until thirty (30) calendar days after the
expiration of the applicable statute of limitations governing such
claims. Neither the period of survival nor the liability of Seller
with respect to Seller's representations and warranties shall be
reduced by any investigation made at any time by or on behalf of
Purchaser. If written notice of a claim has been given prior to the
expiration of the applicable representations and warranties by
Purchaser to Seller, then the relevant representations and warranties
shall survive as to such claim until the claim has been finally
resolved.
Section 9.02 Indemnification by Seller. (a) Indemnifiable Losses.
Subject to Section 9.02(b) and (c) below, Purchaser and its
Affiliates, officers, directors, employees, agents, successors and
assigns shall be indemnified and held harmless by Seller for any and
all Liabilities, losses, damages, claims, costs and expenses,
interest, awards, judgments and penalties actually suffered or
incurred by them (including, without limitation, any Action brought or
otherwise initiated by any of them) (a "Loss"), arising out of or
resulting from the following:
(i) the breach of any representation or warranty made by
Seller contained in the Acquisition Documents;
(ii) the breach of any covenant or agreement by Seller
contained in the Acquisition Documents;
(iii) any and all Losses suffered or incurred by
Purchaser by reason of or in connection with any claim or
cause of action of any third party to the extent arising out
of any action, inaction, event, condition, liability or
obligation of Seller occurring or existing prior to the
Closing; and
(iv) liabilities, whether arising before or after the
Closing Date, that are not expressly assumed by Purchaser
pursuant to this Agreement, including, without limitation the
Excluded Liabilities.
(b) Claims; Threshold Amount. Notwithstanding the
foregoing, Seller shall have no liability with respect to the matters
described in paragraph (a)(i) above unless and until the aggregate
amount of Losses thereunder of which Seller receives written notice
exceeds $50,000 (the "Threshold Amount"). At such time as the
aggregate Losses with respect to matters described in paragraph (a)(i)
exceed the Threshold Amount, Purchaser shall be indemnified to the
full extent of all such Losses (including Losses counted in
determining whether the aggregate Losses equal or exceed the Threshold
Amount); provided, however, that Seller shall be liable for any such
Losses arising out of any intentional or fraudulent breach of any
representation or warranty.
(c) Limits on Indemnification. Notwithstanding anything to
the contrary contained in this Agreement, the maximum amount of
indemnifiable Losses which may be recovered from Seller arising out of
or resulting from the causes enumerated in Section 9.02(a) shall be an
amount equal to $200,000, provided, however, that such limitation
shall not apply to Article VII or Section 3.19.
Section 9.03 Indemnification by Purchaser. Seller and each of its
Affiliates, officers, directors, employees, agents, successors and
assigns shall be indemnified and held harmless by Purchaser for any
and all Losses out of or resulting from:
(i) a breach of any representation, warranty,
covenant or agreement of Purchaser contained in this Agreement
which has not been expressly waived by Seller in writing;
(ii) any claim, suit, action or proceeding to the
extent the same pertains to the ownership, organization,
operation or conduct of the Business on or after the Closing;
and
(iii) all liabilities, obligations, responsibilities
and Losses, attributable to Assumed Liabilities which were not
in existence on the Closing Date.
Section 9.04 Indemnification Procedures. (a) For purposes of this
Section 9.04, "Indemnified Party" shall mean (i) each of Purchaser and
its Affiliates, officers, directors, employees, agents, successors and
assigns, when being indemnified by Seller pursuant to Section 9.02,
and (ii) each of and its Affiliates, officers, directors, employees,
agents, successors and assigns, when being indemnified by Purchaser
pursuant to Section 9.03, and "Indemnifying Party" shall mean (x)
Seller when indemnifying Purchaser and its Affiliates, officers,
directors, employees, agents, successors and assigns pursuant to
Section 9.02, and (y) Purchaser when indemnifying Seller and its
Affiliates, officers, directors, employers, agents, successors and
assigns pursuant to Section 9.03.
(b) A Indemnified Party shall give the Indemnifying Party
notice of any matter which an Indemnified Party has determined has
given or could give rise to a right of indemnification under this
Agreement, within sixty (60) days of such determination, stating the
amount of the Loss, if known, and method of computation thereof, a
brief description of the facts upon which such claim is based and
containing a reference to the provisions of this Agreement in respect
of which such right of indemnification is claimed or arises. If,
after the amount of the claim is specified by the Indemnified Person,
the Indemnifying Party objects to any such claim, it may give written
notice to the Indemnified Person within thirty (30) days of the later
of receipt of the Indemnified Person's notice of claim or the
specification by the Indemnified Person of the amount of the claim,
advising the Indemnified Person of its objection. If no such notice
is timely received from the Indemnifying Party by the Indemnified
Person, the Indemnified Person will be entitled to payment from the
Indemnifying Party in the amount of the Loss arising out of the claim
specified in its notice of claim. If the Indemnifying Party advises
the Indemnified Person within such thirty (30) day period that it
objects to such claim, the Indemnified Person and the Indemnifying
Party shall promptly meet and use their best efforts to settle the
dispute in writing. If the Indemnified Person and the Indemnifying
Party are unable to reach agreement within thirty (30) days after the
Indemnifying Party objects to the claim, then the disputed portion of
the claim shall be submitted to arbitration in accordance with Section
11.11. If the arbitrator shall determine that the Indemnified Person
is entitled to indemnification with respect to the dispute submitted,
the Indemnified Person will be entitled to obtain payment from the
Indemnifying Party within thirty (30) days in the amount determined by
the arbitrator.
(c) The obligations and Liabilities of the Indemnifying
Party under this Article IX with respect to Losses arising from claims
of any third party which are subject to the indemnification provided
for in this Article IX ("Third Party Claims") shall be governed by and
contingent upon the following additional terms and conditions: if an
Indemnified Party shall receive notice of any Third Party Claim, the
Indemnified Party shall give the Indemnifying Party notice of such
Third Party Claim within thirty (30) days of the receipt by the
Indemnified Party of such notice; provided, however, that the failure
to provide such notice shall not release the Indemnifying Party from
any of its obligations under this Article IX except to the extent the
Indemnifying Party is materially prejudiced by such failure and shall
not relieve the Indemnifying Party from any other obligation or
Liability that it may have to any Indemnified Party otherwise than
under this Article IX. If the Indemnifying Party acknowledges in
writing its obligation to indemnify the Indemnified Party hereunder
against any Losses that may result from such Third Party Claim, then
the Indemnifying Party shall be entitled to assume and control the
defense of such Third Party Claim at its expense and through counsel
of its choice if it gives notice of its intention to do so to the
Indemnified Party within five (5) days of the receipt of such notice
from the Indemnified Party; provided, however, that if there exists or
is reasonably likely to exist a conflict of interest that would make
it inappropriate in the judgment of the Indemnified Party, in its
reasonable discretion, for the same counsel to represent both the
Indemnified Party and the Indemnifying Party, then the Indemnified
Party shall be entitled to retain its own counsel, in each
jurisdiction for which the Indemnified Party determines counsel is
required, at the expense of the Indemnifying Party. In the event the
Indemnifying Party exercises the right to undertake any such defense
against any such Third Party Claim as provided above, the Indemnified
Party shall cooperate with the Indemnifying Party in such defense and
make available to the Indemnifying Party at the Indemnifying Party's
expense, all witnesses, pertinent records, materials and information
in the Indemnified Party's possession or under the Indemnified Party s
control relating thereto as is reasonably required by the Indemnifying
Party. Similarly, in the event the Indemnified Party is, directly or
indirectly, conducting the defense against any such Third Party Claim,
the Indemnifying Party shall cooperate with the Indemnified Party in
such defense and make available to the Indemnified Party, at the
Indemnifying Party's expense, all such witnesses, records, materials
and information in the Indemnifying Party's possession or under the
Indemnifying Party's control relating thereto as is reasonably
required by the Indemnified Party. No such Third Party Claim may be
settled by the Indemnifying Party without the prior written consent of
the Indemnified Party.
(d) To the extent that the Indemnifying Parties'
undertakings set forth in this Article IX may be unenforceable, the
Indemnifying Parties shall be obligated, jointly and severally, to
contribute the maximum amount that it is permitted to contribute under
applicable Law to the payment and satisfaction of all Losses incurred
by the Indemnified Parties.
ARTICLE X
TERMINATION AND WAIVER
Section 10.01 Termination. This Agreement may be terminated at any
time prior to the Closing:
(a) by Purchaser if, between the date hereof and the time
scheduled for the Closing an event or condition occurs that has
resulted in or that Purchaser reasonably believes may result in a
Material Adverse Effect;
(b) by either Seller or Purchaser if the Closing shall not
have occurred by October 31, 1999; provided, however, that the right
to terminate this Agreement under this Section 10.01(b) shall not be
available to any party whose failure to fulfill any obligation under
this Agreement shall have been the cause of, or shall have resulted
in, the failure of the Closing to occur on or prior to such date;
(c) by either Purchaser or Seller in the event that any
Governmental Authority shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting
the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and
nonappealable; or
(d) by the mutual written consent of Seller and Purchaser.
Section 10.02 Effect of Termination. In the event of termination of
this Agreement as provided in Section 10.01, this Agreement shall
forthwith become void and there shall be no liability on the part of
either party hereto except (i) as set forth in Section 11.01 and (ii)
that nothing herein shall relieve either party from liability for any
willful breach of this Agreement.
Section 10.03 Waiver. Either party to this Agreement may (a) extend
the time for the performance of any of the obligations or other acts
of the other party, (b) waive any inaccuracies in the representations
and warranties of the other party contained herein or in any document
delivered by the other party pursuant hereto, or (c) waive compliance
with any of the agreements or conditions of the other party contained
herein. Any such extension or waiver shall be valid only if set forth
in an instrument in writing signed by the party to be bound thereby.
Any waiver of any term or condition shall not be construed as a waiver
of any subsequent breach or a subsequent waiver of the same term or
condition, or a waiver of any other term or condition, of this
Agreement. The failure of any party to assert any of its rights
hereunder shall not constitute a waiver of any of such rights.
ARTICLE XI
MISCELLANEOUS
Section 11.01 Expenses. Except as otherwise specified in this
Agreement, all costs and expenses, including, without limitation, fees
and disbursements of counsel, financial advisors and accountants,
incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such costs
and expenses, whether or not the Closing shall have occurred.
Section 11.02 Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given
or made (and shall be deemed to have been duly given or made upon
receipt) by delivery in person, or by courier service, cable,
telecopy, telegram, or registered or certified mail (postage prepaid,
return receipt requested) to the respective parties hereto at their
addresses set forth on the signature pages to this Agreement (or at
such other address for a party hereto as shall be specified in a
notice given in accordance with this Section 11.02).
Section 11.03 Public Announcements. No party to this Agreement shall
make, or cause to be made, any press release or public announcement in
respect of this Agreement or the transactions contemplated hereby or
otherwise communicate with any news media without the prior written
consent of the other party and the parties shall cooperate as to the
timing and contents of any such press release or public announcement.
Section 11.04 Headings. The descriptive headings contained in this
Agreement are for convenience of reference only and shall not affect
in any way the meaning, construction or interpretation of this
Agreement.
Section 11.05 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any
Law or public policy, all other terms and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is
not affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner
in order that the transactions contemplated hereby are consummated as
originally contemplated to the greatest extent possible.
Section 11.06 Entire Agreement. This Agreement (including the
Annexes, Exhibits and Disclosure Schedule) constitutes the entire
agreement of the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements (including the Letter of
Intent), representations, undertakings and understandings, both
written and oral, between Seller and Purchaser with respect to the
subject matter hereof.
Section 11.07 Assignment. This Agreement may not be assigned by
operation of Law or otherwise without the express written consent of
Seller and Purchaser (which consent may be granted or withheld in the
sole discretion of Seller and Purchaser); provided, however, that
Purchaser may assign this Agreement to an Affiliate of Purchaser
without the consent of Seller and without diminishing Purchaser's
obligations hereunder.
Section 11.08 No Third Party Beneficiaries. This Agreement shall be
binding upon and inure solely to the benefit of the parties hereto and
their permitted assigns and nothing herein, express or implied, is
intended to or shall confer upon any other Person, including, without
limitation, any union or any employee or former employee of Seller,
any legal or equitable right, benefit or remedy of any nature
whatsoever, including, without limitation, any rights of employment
for any specified period, under or by reason of this Agreement.
Section 11.09 Amendment. This Agreement may not be amended, modified
or supplemented except (a) by an instrument in writing signed by, or
on behalf of, Seller and Purchaser or (b) by a waiver in accordance
with Section 10.03.
Section 11.10 Governing Law. IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE
OBLIGATIONS OF EACH PARTY ARISING HEREUNDER SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK APPLICABLE TO CONTRACTS EXECUTED IN AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF
REGARDING CONFLICT OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA.
Section 11.11 Arbitration. The parties shall submit any dispute
concerning this interpretation of or the enforcement of rights and
duties under this Agreement to final and binding arbitration pursuant
to the American Arbitration Association. At the request of any party,
the arbitrators, attorneys, parties to the arbitration, witnesses,
experts, court reports, or other persons present at the arbitration
shall agree in writing to maintain the strict confidentiality of the
arbitration proceedings. Arbitration shall be conducted by a single,
neutral arbitrator, appointed in accordance with the Commercial
Arbitration Rules of the American Arbitration Association in the City
of [San Francisco, California]. The award of the arbitrator(s) shall
be enforceable according to the applicable provisions of the
[California] Code of Civil Procedure. The arbitrator(s) may award
damages and/or permanent injunctive relief, but in no event shall the
arbitrator(s) have the authority to award punitive or exemplary
damages. Notwithstanding the foregoing, a party may apply to a court
of competent jurisdiction for relief in the form of a temporary
restraining order or preliminary injunction, or other provisional
remedy pending final determination of a claim through arbitration in
accordance with the paragraph. If proper notice of any hearing has
been given, the arbitrator(s) will have full power to proceed to take
evidence or to perform any other acts necessary to arbitrate the
matter in the absence of any party who fails to appear.
Section 11.12 Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the
same agreement.
Section 11.13 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this
Agreement was not performed in accordance with the terms hereof and
that the parties shall be entitled to specific performance of the
terms hereof, in addition to any other remedy at Law or equity,
without the necessity of demonstrating the inadequacy of money
damages.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, Seller and Purchaser have caused this
Agreement to be executed as of the date first written above by their
respective officers thereunto duly authorized.
THE PANDA PROJECT, INC.
By /s/ Stanford W. Crane, Jr.
----------------------------
Name: Stanford W. Crane, Jr.
Title: President
951 Broken Sound Parkway
Boca Raton, FL 33487
Telephone: (561) 994-2300
Telecopy: (561) 994-0191
By /s/ Alan E. Salzman
-----------------------------
Name: Alan E. Salzman
Title: Chairman
1001 Bayhill Drive, Suite 140
San Bruno, CA 94066
Telephone: (650) 866-3100
Telecopy: (650) 869-6078
Annex B
Text of Proposed Amendment to Panda's Articles of Incorporation
The Articles of Incorporation of this corporation are to be
amended as follows:
The first sentence of Article III is amended in its entirety to
read as follows:
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 77,000,000 shares,
consisting of (i) 75,000,000 shares of Common Stock, $.01 par value
(the "Common Stock"), and (ii) 2,000,000 shares of Preferred Stock,
$.01 par value ("Preferred Stock").
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
The undersigned hereby appoints __________, ___________ and
___________, and each of them acting alone, with the power to
appoint his or her substitute, proxy to represent the undersigned
and vote as designated below all of the shares of Common Stock of
The Panda Project, Inc. (the "Company") held of record by the
undersigned on _________, 1999, at the Annual Meeting of
Shareholders to be held on ___________, 1999 and at any
adjournment thereof.
1. Election of William E. Ahearn to serve on the Company's
Board of Directors until the 2002 Annual Meeting and until his
successor is duly elected and qualified.
[ ] FOR the nominee [ ] WITHHOLD AUTHORITY to vote
for the nominee
2. Approval of an amendment to the Company's Articles of
Incorporation to increase the authorized shares of the Company's
common stock, par value $.01 per share, from 50,000,000 to
75,000,000.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
3. Approval of Grant Thornton LLP as independent accountants
for the current fiscal year.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
4. Approval of the Asset Purchase Agreement, dated as of July
19, 1999, between the Company and Silicon Bandwidth, Inc. and
related transactions for the sale of substantially all of the
operating assets of the Company.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
5. In his or her discretion, the proxy is authorized to vote
upon such other business as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED "FOR" THE DIRECTOR NOMINEE AND
"FOR" PROPOSALS 2, 3 AND 4.
Dated:
---------------------------
---------------------------
Signature
---------------------------
Signature if held jointly
Please sign exactly as name
appears to the left. When
shares are held by joint
tenants, both should sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If
a corporation, please sign in
full corporate name by
President or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
