United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from _______ to _______
Commission File Number 0-24030
THE PANDA PROJECT, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0323354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
951 Broken Sound Parkway, N.W.
BOCA RATON, FLORIDA 33487
(Address of principal executive offices)
(561) 994-2300
(Registrant's telephone number)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes x No .
Applicable Only to Issuers Involved In Bankruptcy
Proceedings During The Preceding Five Years
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ___ No ___.
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value -21,154,910 shares as of May 14, 1999.
<PAGE>
THE PANDA PROJECT, INC.
Index
Page
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Condensed Balance Sheets -March 31, 1999
and December 31, 1998
Condensed Statements of Operations -Three
months ended March 31, 1999 and March 31, 1998
Condensed Statements of Cash Flows -Three months
ended March 31, 1999 and March 31, 1998
Notes to Condensed Financial Statements -
March 31, 1999
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk
Part II - Other Information
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
The Panda Project, Inc.
Condensed Balance Sheets
March 31, December 31,
1999 1998
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 393,059 $ 60,613
Accounts receivable-trade (net of
allowance of $295,292 at March 31,
1999 and $295,292 at December 31, 1998) 216,283 64,206
Inventory 51,087 47,319
Other receivables 51,257 19,273
Prepaid expenses and other current
assets 73,240 637,947
------------- -------------
Total current assets 784,926 829,358
------------- -------------
Property and equipment, net 1,659,093 1,845,939
Restricted cash 80,000 80,000
Other assets 84,200 82,540
------------- -------------
Total assets $ 2,608,219 $ 2,837,837
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 2,033,062 $ 1,207,662
Notes payable 2,000,000 2,000,000
Accrued expenses and other
current liabilities 560,146 1,356,069
------------- -------------
Total current liabilities 4,593,208 4,563,731
------------- -------------
Stockholders' Deficit:
Preferred stock, $.01 par value,
2,000,000 shares authorized: 1,000
shares designated as Series A, 384 shares
issued and outstanding at March 31,
1999 and 420 shares issued and
outstanding at December 31, 1998 3,415,590 3,967,057
Common Stock, $.01 par value, 50,000,000
shares authorized: 21,154,910 shares
issued and outstanding at March 31,
1999 and 16,744,088 shares issued
and outstanding at December 31, 1998 211,549 167,441
Additional paid-in capital 76,722,980 74,479,857
Accumulated deficit (82,335,108) (80,340,249)
------------ ------------
Total stockholders' deficit (1,984,989) (1,725,894)
------------- -------------
Total liabilities and stockholders'
deficit $ 2,608,219 $ 2,837,837
============= =============
See Notes to Condensed Financial Statements.
<PAGE>
The Panda Project, Inc.
Condensed Statements of Operations (Unaudited)
Three Months Ended
March 31,
1999 1998
------------- -------------
Revenues:
Product sales $ 313,456 $ 125,754
Licensing fees 500,000 -
Contract research and
development revenues - 18,416
------------- -------------
Net revenues $ 813,456 $ 144,170
Costs and expenses:
Cost of sales 118,422 160,406
Research and development 380,740 1,004,833
Selling, general and administrative 1,221,705 1,987,582
Amortization of debt
issuance costs/accrued penalties 1,125,000 808,514
------------- -------------
Total costs and expenses 2,845,869 3,961,335
------------- -------------
Operating loss (2,032,413) (3,817,165)
Other income 37,554 6,132
------------- -------------
Net loss $ (1,994,859) $ (3,811,033)
============= =============
Dividends and amortization of
beneficial conversion feature related
to convertible preferred stock (54,067) (178,438)
============= =============
Net loss applicable to
common stock (2,048,926) (3,989,471)
============= =============
Basic and diluted loss
per common share $ (0.10) $ (0.33)
============= =============
Weighted average shares
outstanding 19,644,149 12,220,803
============= =============
See Notes to Condensed Financial Statements.
<PAGE>
The Panda Project, Inc.
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
1999 1998
------------- -------------
Net cash used in operating activities (603,707) (2,871,347)
Cash flows from investing activities:
Additions to property and equipment - (452,660)
Dispositions of property and equipment 20,980 -
------------- -------------
Net cash provided by (used in)
investing activities 20,980 (452,660)
Cash flows from financing activities:
Proceeds from issuance of
convertible preferred stock - 6,000,000
Proceeds from issuance of common stock 915,173 25,705
Proceeds from issuance of notes payable - 1,000,000
Repayment of notes payable - (2,000,000)
Payments of convertible preferred stock - -
issuance costs - (193,013)
------------- -------------
Net cash provided by financing
activities 915,173 4,832,692
------------- -------------
Net increase in cash and cash
equivalents 332,446 1,508,685
------------- -------------
Cash and cash equivalents at
beginning of period 60,613 619,683
------------- -------------
Cash and cash equivalents at end
of period $ 393,059 $ 2,128,368
============= =============
See Notes to Condensed Financial Statements.
<PAGE>
The Panda Project, Inc.
Notes to Condensed Financial Statements
March 31, 1999
1. Basis of Presentation
The accompanying condensed financial statements of The Panda Project,
Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles on a basis consistent in all material
respects with those applied in the Annual Report on Form 10-K for the
twelve months ended December 31, 1998. The interim financial
information is unaudited, but reflects all normal and recurring
adjustments which are, in the opinion of management, necessary to
provide a fair statement of results of operations for the interim
periods presented. The interim financial statements should be read in
connection with the financial statements in the Annual Report on Form
10-K for the twelve months ended December 31, 1998.
2. Inventory
The inventory as of March 31, 1999 is comprised of the Company's VSPA
raw materials and finished goods of $26,087 and the net realizable
value of the Systems inventory of $25,000 (net of reserves of
$1,613,250). The inventory as of December 31, 1998, is comprised of
the Company's VSPA raw materials and finished goods of $22,319 and the
net realizable value of the systems inventory of $25,000 (net of
reserves of $1,778,837).
Product sales for the quarter ended March 31, 1999 includes
approximately $104,000 related to the sale of Systems inventory.
These sales had no related cost of sales as inventory items with
original cost $165,586 were reserved as of December 31, 1998.
3. Notes Payable
The Company has outstanding loans from Helix in the aggregate
principal amount of $2,000,000. Such loans bear interest at an annual
rate equal to the prime rate of interest payable by the Royal Bank of
Canada plus 2%, are secured by the Company's intellectual property and
were due and payable on February 15, 1999. As of May 15, 1999, this
principal amount due Helix has not been repaid and is in default. The
inability of the Company to repay the Helix loans when due may have a
material adverse effect on the Company, including possible loss of
rights to its intellectual property through foreclosure which would
cause the Company to cease its operations. In connection with the
Helix loans, the Company has issued to Helix warrants to purchase an
aggregate of 2,850,000 shares of Common Stock at exercise prices
ranging from $1.63 to $2.125 per share (collectively, the "Helix
Warrants"). The Helix Warrants have expiration dates ranging from
December 19, 1999 to August 7, 2000. These warrants have been valued
at an aggregate of approximately $4,324,000 and have been recognized
as debt issuance costs and were fully amortized as of February 15,
1999. This accounting treatment has no impact on the Company's cash
balance. As of April 30, 1999, Helix and its affiliates hold
approximately 5.7% of the Company's outstanding Common Stock (not
including shares issuable upon exercise of warrants).
On May 14, 1999, the Company, Helix and Silicon Bandwidth, Inc.
("SBI") entered into an agreement whereas upon the closing of the
acquisition of certain assets of the Company by SBI, SBI will pay
$1,000,000 to Helix. In consideration of such payment, and the
issuance of 1,000,000 shares of Panda common stock to Helix, Helix
releases 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. (See exhibit 2.3)
4. Common Stock
In January 1999, the Company received approximately $415,000 from the
exercise of warrants to purchase 553,333 shares of the Company's
common stock related to the 1996 private placement. In February 1999,
the Company received $1,000,000 from Samtec, Inc. which includes a
non-refundable upfront license fee related to VSPA and, a purchase of
666,667 shares of the Company's common stock.
5. Convertible Preferred Stock
On February 11, 1998, the Company issued 600 shares of its Series A
Convertible Preferred Stock ("Series A Preferred") and Common Stock
Purchase Warrants ("Warrants") to purchase an aggregate of 150,000
shares of common stock for a total purchase price of $6,000,000. The
purchase price was allocated to the Series A Preferred and Warrants
based on their relative fair value. The Warrants, which have a term
of five years and an exercise price, subject to adjustment for stock
splits and similar events, of $6.10 per share, were valued at $411,000
using the Black-Scholes option pricing model. Issuance costs of
approximately $193,000 were deducted on a pro rata basis from the
gross proceeds assigned to the Series A Preferred and the Warrants.
Holders of Series A Preferred are entitled to a dividend of 5% per
annum of the purchase price for the shares, payable either in cash or
as an accrual to the purchase price utilized in computing the number
of shares of Series A Preferred issuable upon conversion. Dividends
payable for the quarter ended March 31, 1999 in the amount of $54,067
have been accrued and added to the purchase price of the Series A
Preferred in lieu of a cash payment. Accrued dividends equal 30
shares of the Company's Series A Preferred stock through March 31,
1999.
Shares of Series A Preferred are convertible into shares of common
stock pursuant to a formula whereby the purchase price of the shares
to be converted plus any such dividends is divided by a conversion
price defined as the lower of (i) $3.50 subject to adjustment in the
event of certain dilutive issuances of securities by the Company or
for stock splits or similar events, or (ii) a percentage of the
average closing bid price of the common stock for the five days
immediately preceding conversion equal to 92%, if conversion occurs in
the period beginning 120 days and ending 180 days after issuance of
the Series A Preferred, or 90%, if conversion occurs after 180 days
from issuance of the Series A Preferred. From July 1, 1998 through
March 31, 1999, 246 shares of Series A Preferred were converted into
an aggregate of 3,650,214 shares of common stock of the Company.
The Company may require that all unconverted shares of Series A
Preferred be converted at any time if the closing bid price of common
stock is equal to or greater than $12.00 per share for a period of
twenty consecutive trading days. In addition, on February 11, 2003,
the Company may, at its option, require the holders to convert the
Series A Preferred shares which remain outstanding on such date (plus
accrued and unpaid dividends) or redeem such shares of Series A
Preferred. In the event certain conditions are met, the Company has
the right to cause the issuance of an additional 400 shares of Series
A Preferred for an aggregate purchase price of $4,000,000. In such
event, the Company would be required to issue Warrants to the
purchasers of Series A Preferred to purchase an additional 100,000
shares of common stock.
Under the terms of the transaction, as modified on July 2, 1998,
without the prior written approval of the holders of 66 2/3% of the
Series A Preferred shares, the Company shall not (1) consolidate or
merge with another corporation or other entity or person, whereby the
shareholders of the Company own in the aggregate less than 50% of the
ultimate parent or surviving entity, (2) transfer all or substantially
all of the Company's assets to another corporation or other entity or
person, or (3) fix a record date for the declaration of a distribution
or dividend, whether payable in cash, securities or assets (other than
shares of common stock).
In addition, a "Triggering Event" shall be deemed to have occurred
under the following circumstances: (1) the Company does not issue
shares of common stock registered for resale for any reason, including
(a) the Company does not have a sufficient number of shares of common
stock authorized and available, (b) is otherwise prohibited by
applicable law or by the rules or regulations of any stock exchange or
interdealer quotation system from issuing such shares (including as a
result of the Series A Exchange Cap discussed below) or (c) fails to
have a sufficient number of shares of common stock registered for
resale under a registration statement, and if such condition remains
unremedied for a period of 30 days, (2) suspension for a period of 30
consecutive days of a registration statement covering shares issuable
upon conversion of Series A Preferred, (3) failure of the Common Stock
to be listed, or suspension of trading in the Company's Common Stock
on the NASDAQ National Market or the NASDAQ SmallCap Market for a
period of five consecutive days, or (4) notice by the Company to any
holder of Series A Preferred of its intention not to comply with
proper requests for conversion of Series A Preferred. After a
Triggering Event, the Company is required to pay the holders $100,000
on the first day of each month until the Triggering Event is remedied.
In the event the Company is unable to issue shares of its common stock
pursuant to a request for conversion for any reason, including,
without limitation, because the Company (1) does not have sufficient
number of shares of Common Stock authorized and available, (2) is
otherwise prohibited by applicable law or by the rules or regulations
of any stock exchange from issuing such shares, or (3) fails to have a
sufficient number of shares of Common Stock registered for resale
under a registration statement, and if such condition remains
unremedied for a period of 30 days, the dividend rate for all shares
of Series A Preferred that cannot be converted into shares of Common
Stock pursuant to such limitations will increase on a formula basis
until such securities have been duly converted.
In connection with this transaction, the Company filed a registration
statement on form S-3 (the "form S-3") with the Securities and
Exchange Commission ("SEC") to effect the registration for resale of
2,000,000 shares of Common Stock issuable upon conversion of the
Series A Preferred and 150,000 shares of common stock issuable upon
exercise of the Warrants, plus an additional number of shares of
Common Stock, not to exceed the Exchange Cap, described below, that
may be usable upon conversion of the Series A Preferred as a result of
antidilution provisions. The Form S-3 has been declared effective by
the Securities and Exchange Commission. As of March 31, 1999,
3,650,214 shares of Common Stock issued upon conversion of Series A
Preferred had been sold pursuant to the Form S-3.
The beneficial conversion feature associated with the Series A
Preferred shares has been recognized and allocated to additional paid-
in capital. The amount of the beneficial conversion feature of
approximately $510,000 was calculated using the most favorable
conversion rate as defined by the terms of the Series A Preferred
stock and is being amortized over a period of six months. The amount
of amortization ($54,067 and $178,438 for the first quarter of 1999
and 1998, respectively) is reflected, along with accrued dividends, as
an increase to net loss applicable to common stock in the Statement of
Operations. The accounting for this transaction has no effect on
cash.
On May 14, 1999 the Company entered into an Exchange Agreement with
the Series A Preferred Stock Holders ("Holders") to exchange their
preferred shares for the Company's common shares at an exchange rate
of $.261. In connection with this agreement the Company issued an
additional 171 shares of Series A Preferred stock to the Holders in
payment for penalties owed to such holders. The Holders hereby agree
to waive all penalties owed by the Company. Additionally, in
consideration of the Exchange Agreement the Holders have agreed to
enter into a voting agreement in favor of the Company's sale of its
intellectual property portfolio and certain fixed assets related to
the interconnect and semiconductor business. (See exhibit 2.4)
6. August Private Placement
In August 1998, the Company completed the sale of 2,254,602 shares of
its Common Stock in a private placement to accredited investors with
gross proceeds of $3,675,000 (the "Private Placement"). Expenses of
the Private Placement were approximately $230,000. In addition to
the shares of Common Stock purchased by each investor in the Private
Placement, such investor received a warrant (the "Private Placement
Warrants") to purchase an equal number of shares of Common Stock (the
"Private Placement Warrant Shares"), subject to adjustment for stock
splits and similar events, at an exercise price of $2.55 per share.
The Private Placement Warrants have a term of five years expiring
August 13, 2003. Issuance of the Private Placement Warrant Shares
requires the approval of the Company's shareholders.
Under the terms of the Securities Purchase Agreement relating to the
Private Placement, if on either the six-month or the one-year
anniversary of the date of closing of the Private Placement (each
"Anniversary Date"), the average closing bid price of the Common Stock
for the twenty-trading day period ending on the trading day
immediately prior to the applicable Anniversary Date (the "Anniversary
Price") is less than the Closing Price ($2.0375), or the prior
Anniversary Price in the event the six-month Anniversary Price is less
than the Closing Price, respectively, the Company is required to issue
a number of shares of Common Stock within ten days after the
Anniversary Date equal to the product of ( i ) (x) the difference
between the Closing Price (or if the measurement date is the one-year
Anniversary Date, the six-month Anniversary Price if the six-month
Anniversary Price is less than the Closing Price) and the applicable
Anniversary Price, multiplied by .85, multiplied by (y) the number of
shares of Common Stock purchased by the investors in the Private
Placement and not sold or assigned to non-affiliated third parties,
divided by (ii) (x) the applicable Anniversary Price multiplied by (y)
.85. The shares issuable pursuant to this formula are referred to as
the "Fill-Up Shares". Issuance of the Fill-Up Shares pursuant to
these provisions requires the approval of the Company's shareholders.
In the event ( i ) the Common Stock is delisted or suspended from
trading on NASDAQ, (ii) the Fill-Up Shares or the Private Placement
Warrant Shares are not issuable or are not listed with NASDAQ. Or
(iii) the Company fails to issue Fill-Up Shares as required, then the
Company shall pay to the initial investors $100,000 for each full 30-
day period that the condition continues. The Company has calculated
that 4,441,828 shares of the Company' common stock will be issued
under the Fill-up.
The Company has filed a registration statement with respect to the
shares of Common Stock issuable in the Private Placement. Such
registration statement has not yet been declared effective.
7. Commitments and Contingent Matters
The Company is involved in various lawsuits from time to time of the
type routinely encountered in the ordinary course of business.
Management aggressively defends these lawsuits and believes that the
ultimate outcome of these lawsuits will not have a material adverse
impact on the Company's financial statements. Following are
litigation matters that management considers to be material in nature
such that disclosure is appropriate.
On October 16, 1998, a complaint was filed against the Company in the
United States District Court for the Southern District of New York by
Promethean Investment Group, L.L. C. The complaint alleges breach of
contract by the Company for failing to proceed with a financing
transaction and seeks damages in an unspecified amount in excess of
$270,000 or a declaration that the Company is required to proceed with
the financing transaction. The Company has filed an answer to the
complaint and the outcome is both immeasurable and undeterminable.
There can be no assurance that the Company will be successful in
defending this litigation.
On December 11, 1998, the Company and Joseph A. Sarubbi ("Sarubbi")
entered into a settlement agreement (the "Settlement Agreement")
relating to litigation in which Sarubbi obtained a judgment against
the Company in the amount of $1,227,041. Under the Settlement
Agreement, the Company 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 the
Company's common stock which have been delivered to Sarubbi by the
Company. The Company has issued and registered 1,775,000 shares for
Sarubbi pursuant to the S-2 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 the Company'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. Any further legal action taken by Mr. Sarubbi may be
material to the Company.
8. Subsequent Events
On May 14, 1999 the Company entered into an agreement with Silicon
Bandwidth, Inc. ("SBI") to sell its intellectual property portfolio as
well as the fixed assets related to its interconnect and semiconductor
business. As part of the sale , The Company has restructured its
outstanding loans with Helix that have been in default since February
15, 1999. SBI will assume such Helix loans upon closing.
Additionally, the Company has entered into an agreement with the
Convertible Preferred A Holders for conversion of the outstanding
preferred shares into 21,333,333 common shares at a fixed price of
$.261. The restructuring of both agreements is partially contingent upon the
closing of the sale to SBI. The transaction is subject to customary
closing conditions, including the approval of the Company's
shareholders. Helix and the Convertible Preferred A Holders have
entered into a Voting Agreement with SBI and such holders own
approximately 50.2% of the shares outstanding which is a sufficient number
of shares to assure the approval of the transaction by the
Company's shareholders. The Company will receive a 10% ownership
interest in SBI which will initially be capitalized with $6,000,000.
(See exhibits 2.1, 2.2, 2.3 and 2.4).
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview:
Statements in this Report on Form 10-Q, that are not statements of
historical fact, are to be regarded as forward-looking statements
which are based on information available to the Company as of the date
hereof and involve a number of risks and uncertainties. Among the
important factors that could cause actual results to differ materially
from those indicated by such forward-looking statements are delays in
product development, competitive pressures, general economic
conditions, risks of intellectual property and other litigation, and
the factors detailed below under "Certain Factors That May Affect
Future Results" or elsewhere herein or set forth from time to time in
the Company's periodic reports and registration statements filed with
the Securities and Exchange Commission.
The Company is a technology company engaged in the design,
development, manufacture, licensing and sale of interconnect solutions
to generate greater throughput from silicon to board to system. These
technologies are embodied in VSPA, a three-dimensional semiconductor
package, and the Compass Connector, a board-to-board interconnect
solution (collectively the "Technology Products"). VSPA has received
JEDEC JC-11 Committee designation and has passed Mil Std. 883. In
addition, in September 1998, the Compass Connector received Bellcore
approval.
In September 1998, the Company 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, the Company elected to exit its Systems
business entirely. The Company continues to focus its efforts on the
Technology Products.
The Company has received firm purchase commitments of approximately $900,000 for
prototype, pre-production and production orders of its Technology Products from
Veridicom, EG&G, SEEQ Technologies Incorporated, Motorola, Kaiser Aerospace &
Electronics, Honeywell, Tamarack Microelectronics Inc., Lucent Technology, SAA
Dynamics and National Semiconductor. The Company 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 the Company that the VSPA parts have passed Mil Std. 883
level of qualification for their specific application
Results of Operations -Quarter March 31, 1999 and 1998
Net revenues increased during the quarter ended March 31, 1999 ("First
Quarter of 1999") to approximately $813,000 as compared to $144,000
for the quarter ended March 31, 1998 ("First Quarter of 1998"). VSPA
Product sales for The First Quarter of 1998 were approximately
$209,000 for prototype, pre-production and production orders, $104,000
for sale of Systems inventory and a significant portion of the
Company's revenue, related to a one time $500,000 licensing fee from
Samtec, Inc.. The System inventory sales had no related cost of sales
as inventory items with original cost $165,586 were reserved as
of December 31, 1998.
Cost of goods sold of approximately $118,000 is comprised of raw material
purchases related to the VSPA and Compass connector sales for the First quarter
of 1999. Comparatively, approximately $160,000 is comprised of raw material
costs related to Archistrat Computer sales for the First quarter of 1998. The
Company refocused its efforts toward the Rock City line of computers introduced
during the Second quarters of 1998. However, in September 1998, the Company
streamlined operations related to the Systems business including both Archistrat
and Rock City products and in November 1998, the Company ceased all operations
related to the Systems business.
Research and development ("R&D") expenses decreased to approximately
$381,000 for the First Quarter of 1999 as compared to approximately
$1,005,000 for the First Quarter of 1998. This decrease is primarily
due to ceasing operations relating to Systems activity and the
completion of the cooperative development agreement with the U.S.
government. R&D for the First Quarter of 1999 was attributable to new
custom VSPA designs for specific customer applications and the
refinement of the existing VSPA Flex automation machines.
Consistent with management's focus on decreasing fixed costs, selling,
general and administrative ("SG&A") expenses decreased for the First
Quarter 1999 to $1,200,000 compared to $ 1,988,000 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 to ceasing
operations related to Systems activity and the need to reduce on going
operational costs. Payroll and related expenses decreased
approximately $623,000 from the quarter ended March 1999 as compared
to the quarter ended March 1998.
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 $525,000. The
valuation of the warrants and related amortization expense, represents
a non-cash transaction. Additionally $600,000 of penalties related to
the Series A Preferred Convertible transaction and the 1998 common
stock private placement were accrued as of the first quarter of 1999.
There were no such penalties as of the first quarter of 1998.
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
related to the issuance of the Series A Preferred Stock have been
added to the net loss. Both amounts represent non-cash transactions.
Basic and diluted loss per share has been calculated on the basis of
net loss applicable to common stock.
YEAR 2000 READINESS
Like many other companies, Year 2000 computer issues create certain
risks for the Company. If our financial, operational and information
systems do not correctly recognize the process date information beyond
the year 1999, it could have a significant adverse impact on the
Company's ability to process information, which could create
significant potential liability for the Company. To address potential
Year 2000 issues with its internal systems, we have evaluated these
systems. The initial assessment indicated that certain internal
systems should be upgraded or replaced as part of a solution to the
Year 2000 problem. The costs incurred to date related to these
programs have not been material. The estimated cost to be incurred by
us in the future is not expected to exceed $20,000. These estimates
do not include potential costs related to any customer or other claims
or the cost of internal software and hardware replaced in the normal
course of business. These estimates are based on our current
assessment of the projects and may change as the project progresses.
The Company believes that its potential liability related to its products for
Year 2000 compliance is not expected to exceed $5,000. The Systems products
Rock City, 5R, and 5S are year 2000 compliant. The 4S may not, depending on the
operating system used, make the transition automatically. Specifically, 4S
systems using the Pentium 100 and Pentium 166 Intel processors. Once the
systems are assisted by changing the date and time in the Bios, then the system
is year 2000 compliant. The Company estimates that approximately 100 4S
computers with this potential problem were sold. The Semiconductor and
interconnect products are sold as components as opposed to completed products
and therefore there is no liability associated with the year 2000 issue.
We are also working with key suppliers of products and services to
monitor their progress toward Year 2000 compliance. The failure of a
major supplier to become Year 2000 compliant on a timely basis could
have a material adverse affect on our business, financial condition
and operating results.
We have begun internal discussions concerning contingency planning to
address potential problem areas with internal systems and with
suppliers and other third parties. We expect assessment, remediation
and contingency planning activities to continue throughout the year
1999 with the goal of resolving all material internal and external
systems and third-party issues. While the Company has not completed
its detail plans with regards to this uncertainty, management
believes, based on discussions with vendors of its major business
applications and Year 2000 Compliance certificates received from the
related software developers, that the financial impact of making the
required systems changes, if any, will not be material to the
Company's financial position, results of operations or cash flows.
We deem "Year 2000 Compliant" to mean software that can individually,
and in combination with all other systems, products or processes with
which the software is designed to interface, continue to operate
successfully (both in functionality and performance in all material
respects) over the transition into the twenty-first century when used
in accordance with the documentation relating to such software. Year
2000 Compliance includes being able to, before, on and after January
1, 2000, substantially conform to the following:
- - - use logic pertaining to dates which allow users to identify
and/or use the century portion of any date fields without special
processing;
- - - respond to all date elements and date input to resolve any
ambiguity as to century in a disclosed, defined and pre-
determined manner; and
- - - provide date information in ways which are unambiguous as to
century.
This may be achieved by permitting or requiring the century to be
specified or where the date element is represented without a century,
the correct century be unambiguous for all manipulations involving
that element.
Liquidity and Capital Resources
- -------------------------------
During February 1998, the Company completed a private placement of
$6.0 million of Series A Preferred Stock and received net proceeds of
approximately $5.8 million. The shares of preferred stock are
convertible into common stock at the lower of $3.50 per share (in
accordance with the revised terms effective July 2, 1998) or a
floating conversion price. Through March 31, 1998, 216 shares of
preferred stock were converted into an aggregate of 3,650,214 shares
of the Company's common stock. As of March 31, 1999, 384 preferred
shares are outstanding including dividends.
The Company may require that all unconverted shares of Series A
Preferred Stock be converted at any time if the closing bid price of
the Company's common stock is equal to or greater than $12.00 per
share for a period of twenty consecutive trading days. In addition,
on February 11, 2003, the Company may, at its option, require the
holders to convert the Series A Preferred shares which remain
outstanding on such date (plus accrued and unpaid dividends) or redeem
such shares of Series A Preferred Stock. The terms of the Series A
Preferred Stock, as revised on July 2, 1998, provide that upon the
occurrence of certain Triggering Events, as defined, the Company may
be required to pay the holders $100,000 per month until such time that
the Triggering Event has been remedied. Any requirement that the
Company pay such amounts could have a material adverse impact on the
Company in the event the Triggering Event causing such payment is not
remedied on a timely basis. On December 16, 1998, a triggering event
occurred related to the delisting of the Company's common stock from
the Nasdaq National Market to the OTC Bulletin Board. As of April 14,
1999, no payments have been made to the Holders. The Company has
reached an agreement with the Series A Preferred Holders in connection
with the Triggering Event and has agreed to issue an additional 171
Preferred A shares as defined in the exchange agreement. (See exhibit 2.4).
On August 14, 1998, the Company 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. Upon exercise of
certain warrants, the investors may elect to receive a reduced number
of shares of common stock in lieu of tendering the warrant exercise
price in cash. The warrants have a term of five years. The Company is
required to issue approximately 4,400,000 additional shares associated
with the fill-up provision.
During May, June and July 1998, the Company borrowed an aggregate of
$2 million from Helix PEI Inc. ("Helix"). The loans are secured by
the Company's intellectual property and were due August 7, 1998.
During August 1998, Helix agreed to extend the maturity date of all
the outstanding loans payable to February 15, 1999, from their
original due date in August 1998, in exchange for the issuance of a
warrant to purchase up to 2,000,000 shares of the Company's common
stock at an exercise price equal to the fair market value of the
Company's common stock at the date of issuance ($2.125). The loans
bear interest at the Royal Bank of Canada prime rate plus 2 percentage
points per annum (9.40% at March 31, 1999) payable monthly. The
warrant has a term of two years. The Company is currently in default
on the Helix Loans since the Company did not repay the loan in
February 1999.
On May 14, 1999, the Company, Helix and Silicon Bandwidth, Inc.
("SBI") entered into an agreement whereas upon the closing of the
acquisition of certain assets of the Company by SBI, SBI will pay
$1,000,000 to Helix. In consideration of such payment, and the
issuance of 1,000,000 shares of Panda common stock to Helix, Helix
releases 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. (See exhibit 2.3)
On December 15, 1998, the Company reduced the exercise price of
certain common stock purchase warrants if the warrant holders
accelerate the expiration date of their warrants from July 11, 2001 to
January 5, 1999. The exercise price was reduced from $11.00 to $0.75
per share. In January 1999, warrants representing 553,333 shares were
exercised at this reduced price, and the Company received net proceeds
of $415,000 upon such exercise. In February 1999,
the Company received $1,000,000 from Samtec, Inc. which includes a
non-refundable upfront license fee related to VSPA and, a purchase of
666,667 shares of the Company's common stock.
In the first quarter 1998, the Company's payables were segmented into the
following categories: operational, professional, Systems and Technology.
Payables in the first quarter 1999 of approximately $2,000,000 as compared to
the first quarter 1998 of approximately $1,600,000 increased or decreased as
follows: Operation 18.3% versus 13%, professional fees 48.4% versus 20.7%,
System 10.8% versus 53.9%, and Technology 22.5% versus 12.4%, respectively.
Accounts receivables (net of the allowance for doubtful accounts for all System
related receivables) related to the first quarter of 1999 of approximately
$51,000 represent Technology related receivables whereas accounts receivables
related to the first quarter 1998 of approximately $141,000 are approximately
95% related to Computer Systems. These trends are consistent with the Company s
decision to concentrate its efforts on the semiconductor and interconnect
product lines.
SBI has agreed to loan the Company $500,000 for ongoing operational expenses
pursuant to the letter of intent entered into by and between SBI and the
Company. (See Exhibit 2.1). Additionally, the Company has settled certain
obligations through the issuance of common stock. In the event that the SBI
transaction does not close, the Company will seek additional financing from
other alternatives. The Company does not anticipate any additional liquidity
from the letter of intent, which expired May 1999, entered into by and between
the Company and Roundstone. Since the Company's current working capital is
insufficient to operate the Company, in the event that the Company cannot seek
additional financing, it will be forced to cease operations.
The Company has entered into an agreement with Silicon Bandwidth, Inc.
to sell its intellectual property portfolio as well as the fixed
assets related to its interconnect and semiconductor business. As part
of the sale , The Panda Project, Inc. has restructured its outstanding
loans with Helix that have been in default since February 15, 1999.
Silicon Bandwidth, Inc. will assume such Helix loans upon closing.
Additionally, the Company has entered into an agreement with the
Convertible Preferred A Holders for conversion of the outstanding
preferred shares into 21,333,333 common shares at a fixed price of
$.261. The restructuring of both agreements is partially contingent upon the
closing of the sale to Silicon Bandwidth, Inc. The transaction is
subject to customary closing conditions, including the approval of the
Company' shareholders. Helix, and the Convertible Preferred A Holders have
entered into a Voting Agreement with Silicon Bandwidth, Inc. and
such holders own sufficient shares, approximately 50.2%, to assure the
approval of the transaction by the Company's shareholders. The Company will
receive a 10% ownership interest in Silicon Bandwidth, Inc. which will
initially be capitalized with $6,000,000. (See exhibits 2.1, 2.2, 2.3 and 2.4)
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
We have incurred losses in each year since our inception in 1992. As
of December 31, 1998, we had an accumulated deficit of approximately
$80 million. We expect to continue to experience substantial losses
for the next few years until the Company is able to generate
sufficient revenues to support its operations. We are unable to
predict the extent of any future losses or the time required to
achieve profitability.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
We require substantial working capital to fund our business. We have
had significant operating losses and negative cash flow from
operations since inception and expect to continue to do so for the
foreseeable future. We have depended upon proceeds of sales of our
securities to fund our operations since our inception. Our capital
requirements depend on several factors, including the rate of market
acceptance of our products, the ability to expand our client base, the
growth of sales and marketing, and other factors. If capital
requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. If additional
funds are raised through the issuance of equity securities, the
percentage ownership of the shareholders of the Company will be
reduced, shareholders may experience additional dilution, or such
equity securities may have rights, preferences or privileges senior to
those of the holders of the Common Stock. Additional financing for
the Company may not be available when needed on favorable terms or it
may not be available at all. We may be unable to develop or enhance
our products, take advantage of future opportunities or respond to
competitive pressures without additional funding. These limitations
placed on the Company due to our inability to secure additional
funding could have a material adverse affect the Company's business,
financial condition and operating results.
POTENTIAL FOR DILUTION; REGISTRATION RIGHTS; OUTSTANDING OPTIONS AND
WARRANTS
As of March 31, 1999, the Company had issued 3,650,215 shares of
Common Stock upon conversion of 216 shares of the Series A-3
Convertible Preferred Stock ("Series A Preferred"); 384 shares of
Series A Preferred remain outstanding. The Company has entered into
the Exchange Agreement which sets the exchange price at $.216.
Inclusive of the Preferred A shares and the Preferred A penalty
shares, potentially 21,264,368 additional common shares of the Company
would be outstanding.
In connection with a private placement completed on August 14, 1998,
the Company agreed to register for sale 2,346,626 shares of Common
Stock and 2,346,626 shares of Common Stock issuable upon exercise of
Common Stock Purchase Warrants. The Company's failure to register
such Common Stock within 90 days of such sale could subject the
Company to penalty payments to these investors. As of March 31, 1999,
the registration statement relating to these shares of Common Stock
had not been declared effective and the Company could be subject to
such penalty payments. The Company also agreed that in the event of
decreases in the average closing bid price of the Common Stock for the
twenty trading days immediately preceding the six-month and/or one-
year anniversaries of the closing of the private placement, the
Company would, with shareholder approval, issue to investors in the
private placement a number of Fill-Up Shares. These Fill-Up Shares
would in effect cause the investors to have acquired the number of
shares of Common Stock which they would have purchased had the
purchase price paid by investors in the private placement as of the
closing date been the same as the twenty-day average closing bid price
of the Common Stock as of such anniversary dates. The number of Fill-
Up Shares to be issued could be substantial if the market price of the
Common Stock decreases significantly. Such an increase in the amount
of Common Stock in the public market could reduce the market price of
the Common Stock and possibly result in a change in control of the
Company. As of March 31, 1999, no Fill-Up Shares had been issued. If
Fill-Up Shares had been issued, the number of Fill-Up Shares which the
Company would have been required to issue on March 31, 1999, totaled
approximately 4,400,000. In the event (I) the Common Stock is
delisted or suspended from trading on NASDAQ, (ii) the Fill-Up Shares
and shares issuable upon exercise of the Private Placement Warrants
are not issuable or are not listed with NASDAQ or (iii) the Company
fails to issue Fill-Up Shares as required, then the Company shall pay
to the initial investors in the private placement $100,000 for each
full 30-day period that the condition continues. As of March 31,
1999, no such required payments have been made.
On December 15, 1998, the Company reduced the exercise price of
certain common stock purchase warrants if the warrant holders
accelerate the expiration date of their warrants from July 11, 2001 to
January 5, 1999. The exercise price was reduced from $11.00 to $0.75.
Prior to January 5, 1999, warrants representing 553,333 shares were
exercised at this reduced price, and the Company received net proceeds
of approximately $415,000 upon such exercise.
The Company has reserved 7,366,738 shares of Common Stock, including
150,000 shares subject to warrants issued in connection with the sale
of the Series A Preferred, 2,346,626 shares subject to the Private
Placement Warrants and 2,850,000 shares subject to the Helix Warrants,
for issuance upon the exercise of warrants. In the event the 400
additional shares of Series A Preferred described above are issued,
the Company would be required to issue Warrants to purchase an
additional 100,000 shares of Common Stock. In addition, the Company
has reserved 745,100 shares of Common Stock for issuance to employees,
officers, directors and consultants under its 1995 Employee Stock
Incentive Plan, 1993 Performance Incentive Plan and Non-Employee
Director Stock Option Plan. The price which the Company may receive
for the Common Stock issuable upon exercise of such warrants and
options will, in all likelihood, be less than the market price of the
Common Stock at the time of such exercise. Consequently, for the life
of such warrants and options, the holders thereof may have been given,
at nominal cost, the opportunity to profit from a rise in the market
price of the Common Stock. The exercise of all of the previously
mentioned securities may also adversely affect the terms under which
the Company could obtain additional equity capital. If a significant
number of these securities is exercised, the resulting increase in the
amount of the Common Stock in the public market may reduce the market
price of the Common Stock.
OUTSTANDING INDEBTEDNESS
The Company has outstanding loans from Helix in the aggregate
principal amount of $2,000,000. Such loans bear interest at an annual
rate equal to the prime rate of interest payable by the Royal Bank of
Canada plus 2%, are secured by the Company's intellectual property and
were due and payable on February 15, 1999. As of April 14, 1999, this
principal amount due Helix has not been repaid and is in default. The
inability of the Company to repay the Helix loans when due may have a
material adverse effect on the Company, including possible loss of
rights to its intellectual property through foreclosure which would
cause the Company to cease its operations. In connection with the
Helix loans, the Company has issued to Helix warrants to purchase an
aggregate of 2,850,000 shares of Common Stock at exercise prices
ranging from $1.63 to $2.125 per share (collectively, the "Helix
Warrants"). The Helix Warrants have expiration dates ranging from
December 19, 1999 to August 7, 2000. These warrants have been valued
at an aggregate of approximately $4,324,000. A total of $4,324,000
has been charged to amortization expense for these warrants through
February 15, 1999. This accounting treatment has no impact on the
Company's cash balance. As of March 30, 1999, Helix and its
affiliates hold approximately 5.7% of the Company's outstanding Common
Stock (not including shares issuable upon exercise of warrants).
On May 14, 1999, the Company, Helix and Silicon Bandwidth, Inc.
("SBI") entered into an agreement whereas upon the closing of the
acquisition of certain assets of the Company by SBI, SBI will pay
$1,000,000 to Helix. In consideration of such payment, and the
issuance of 1,000,000 shares of Panda common stock to Helix, Helix
releases 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. (See exhibit 2.3)
UNCERTAINTY OF MARKET ACCEPTANCE
The products and technologies currently being sold or developed by the
Company utilize newly developed designs. We believe that our existing
and proposed technology and products represent significant
advancements in semiconductor packaging technology. Demand for the
Company's existing and proposed products, however, is subject to a
high degree of uncertainty. Such high degrees of uncertainty are
typical in the case of newly developed products. Achieving marketing
acceptance for the Company's technology and existing and proposed
products will require substantial marketing efforts and expenditure of
significant funds to educate potential purchasers as to the
distinctive characteristics and anticipated benefits of the Company's
proposed products and technologies. Potential purchasers may be
inhibited from doing business with the Company due to their commitment
to their existing products. In addition, many potential purchasers
may be reluctant to use the Company's products and technologies until
a sufficient number of other potential purchasers have already
committed to do so. We have hired sales and marketing personnel for
VSPA semiconductor package and Compass Connector products. The
Company's marketing efforts may not be successful. If we are unable
to market our products successfully, our business, financial condition
and operating results will be materially adversely affected.
UNCERTAINTY OF PRODUCT AND TECHNOLOGY DEVELOPMENT; TECHNOLOGICAL
FACTORS; DEPENDENCE ON THIRD-PARTY PRODUCT DESIGN CHANGES
The Company's success will depend in part upon its products and
technology meeting acceptable cost and performance criteria, and upon
timely introduction of our products and technology into the
marketplace. There can be no assurance (1) that the Company's
products and technology will satisfactorily perform the functions for
which they are designed, (2) that they will meet applicable price or
performance objectives or (3) that unanticipated technical or other
problems will not occur which would result in increased costs or
material delays in their development or commercialization. In
addition, technology as complex as that which will be incorporated
into the Company's proposed products may contain errors which become
apparent subsequent to widespread commercial use. Remedying such
errors could delay the Company's plans and cause it to incur
additional costs which would have a material adverse effect on the
Company.
COMPETITION
The Company operates in markets that are subject to intense
competitive pressures that could affect prices or demand for the
Company's products and services. The effect of competition on prices
and demand may result in reduced profit margins and/or loss of market
opportunity. Certain competitors of the Company dominate their
industries and have the financial resources to enable them to
withstand substantial price competition or downturns in the market for
semiconductor packages, related technologies and/or computers. The
Company faces the possibility (1) that we will not be able to compete
successfully, (2) that our competitors or future competitors will
develop technologies or products that render the Company's products
and technology obsolete or less marketable or (3) that we will not be
able to successfully enhance our products or technology or adapt them
satisfactorily.
DEPENDENCE ON MANUFACTURERS AND SUPPLIERS; LACK OF MANUFACTURING
EXPERIENCE AND CAPABILITY
The Company has developed the ability to manufacture the VSPA
semiconductor package. We have also made arrangements with third-
party manufacturers to produce certain versions of the VSPA
semiconductor package. Despite these existing production
arrangements, the Company may not be able to produce sufficient
quantities of VSPA to meet demand. Any inability to meet the demand
for our products would have a material adverse effect on the Company's
business, financial conditions and operating results.
The Company has an arrangement with LG Cable to supply the Compass V
Connector and VSPA parts for Veridicom. The Company anticipates that
it will be able to obtain Compass V Connectors and VSPA parts from LG
Cable & Machinery Ltd. under this arrangement. The Company also has
an arrangement with PBE for the VSPA 360 and 240. If the supply of
such component is not delivered in quantities sufficient to meet the
customer demand, our business, financial condition and operating
results will be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL
Because of the specialized technical nature of our business, we are
highly dependent upon qualified scientific, technical and managerial
personnel. The competition for qualified personnel in the technology
field is intense. We may not be able to attract and retain the
qualified personnel necessary for the development of our business.
The loss of the services of existing personnel, as well as the failure
to recruit additional key scientific, technical and managerial
personnel in a timely manner, would be detrimental to our research and
development programs and to our business. The Company may not be able
to continue to hire additional qualified personnel or retain such
necessary personnel. The failure to attract and retain the necessary
personnel could materially adversely affect our business, financial
condition and operating results. We maintain "key man" life insurance
on Mr. Crane's life in the amount of $2,000,000.
INTELLECTUAL PROPERTY
Trademarks, patents, copyrights, trade secrets and other intellectual
property are critical to our success, and we rely on trademark, trade
secret protection and confidentiality and/or license agreements with
our employees, clients, partners and others to protect our proprietary
rights. We seek to protect our proprietary position by, among other
methods, filing United States and foreign patent applications related
to our proprietary technology, inventions and improvements that are
important to the development of our business. Proprietary rights
relating to our technologies will be protected from unauthorized use
by third parties only to the extent that they are covered by valid and
enforceable patents or copyrights or are effectively maintained as
trade secrets. As of March 31, 1999, the Company had obtained 18
United States patents and an aggregate of 41 foreign patents pending.
We currently have a total of 18 patent applications pending in the
United States and 29 foreign patent applications. Pending patent
applications may not result in patents being issued. In addition, the
laws of some foreign countries do not protect our intellectual
property rights to the same extent as do the laws of the United
States. The patent position of high technology companies involves
complex legal and factual questions and, therefore, we cannot predict
their validity and enforceability with certainty. Even if issued, our
patent applications may be challenged, invalidated, held unenforceable
or circumvented. Further, rights granted under future patents may not
provide proprietary protection or competitive advantages to us against
competitors with similar technology. Others may independently develop
similar technologies or duplicate technologies developed by us.
Effective trademark and trade secret protection may not be available
in every country in which our products and services are made available
online. The steps we have taken to protect our proprietary rights may
not be adequate, and third parties may infringe upon or misappropriate
our trade secrets, trademarks, trade dress and similar proprietary
rights. Others may independently develop substantially equivalent
intellectual property. Any significant failure to protect our
intellectual property in a meaningful manner could materially
adversely affect our business, financial condition and operating
results. In addition, litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets
or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and
diversion of management and technical resources, which could
materially adversely affect our business, financial condition and
operating results.
DEPENDENCE ON THE CRANE-PANDA LICENSING AGREEMENT; POTENTIAL CONFLICTS
OF INTEREST
Under a license agreement entered into in January 1996 between the
Company and Mr. Crane (the "Crane-Panda License"), Mr. Crane has
granted the Company the nonexclusive right to utilize the Compass
Connector, a key component in the commercialization of the Company's
Computer Systems and the development and commercialization of Compass
PGA. The Crane-Panda License was executed in connection with the
conversion to a nonexclusive license of the 3M License described below
and supersedes an earlier license agreement between Mr. Crane and the
Company relating to the Compass Connector. Under the Crane-Panda
License, the Company is required to pay Mr. Crane a royalty on any
sales of Compass Connectors as discrete parts in the amount of 5% of
the net sales price for the first five years of the term of the
agreement, 2.5% of the net sales price for the next five years of the
term of the agreement and 2% of the net sales price thereafter,
provided that no royalty is payable until aggregate net sales of the
Compass Connector as discrete parts exceed $100,000. The royalty rate
will be reduced after the fifth anniversary of the agreement if no
patent remains in effect with respect to the Compass Connector. No
royalty is payable on sales of the Compass Connector as incorporated
in the Computer Systems or other computer system or assembly. The
Company may grant sublicenses under the Crane-Panda License, but only
for the use of products as incorporated in the Computer Systems or
other computer system or assembly. No sales requiring the payment of
royalties to Mr. Crane under the Crane-Panda License have occurred to
date. The Crane-Panda License obligates the Company to maintain
proprietary information relating to the Compass Connector on a
confidential basis, notify Mr. Crane of any evidence of infringement
with respect to the Compass Connector and related technology, and
cooperate with Mr. Crane to contest any such infringement. In the
event that the Company becomes bankrupt or insolvent or defaults in
any of its material obligations under the Crane-Panda License and
fails to cure any such defaults within specified cure periods, Mr.
Crane may terminate the Crane-Panda License. The Company is
substantially dependent upon the Crane-Panda License. The termination
of the agreement under any circumstances would materially adversely
affect the Company's business, financial condition and operating
results. The actions of the Company with respect to the Crane-Panda
License must be authorized by a majority of the Company's independent
directors, and the Company and Mr. Crane would be represented by
separate counsel in the event of a dispute concerning the Crane-Panda
License. Despite these procedural safeguards, a conflict of interest
may arise with respect to the Crane-Panda License and such conflict
may not be resolved in a manner favorable to the Company. In
addition, Mr. Crane retains ownership of the Compass Connector
technology, and has the right to grant licenses to or otherwise
transfer rights to the Compass Connector technology to third parties.
In September 1992, Mr. Crane granted an exclusive license (the "3M
License") to Minnesota Mining and Manufacturing Co. ("3M") to develop,
manufacture, use and sell the Compass Connector other than as part of
a computer system. In February 1996, Mr. Crane and 3M agreed to
convert the 3M License to a nonexclusive license. In certain
circumstances, the 3M License provides for the payment of a royalty to
Mr. Crane. As of the date of this prospectus, Mr. Crane had received
no such payments.
DELISTING FROM NASDAQ NATIONAL MARKET; "PENNY STOCK" REGULATIONS
The Company was delisted from the NASDAQ National Market, effective
December 16, 1998, due to its inability to sustain compliance with the
Net Tangible Asset requirement of $4 million and because the Company
was not currently in compliance with the minimum bid price of $1.00
per share. On December 17, 1998, the Company began trading on the
NASD OTC Electronic Bulletin Board system or in what is commonly
referred to as the "pink sheets." As a result, an investor may find it
more difficult to dispose of the Company's securities or to obtain
accurate quotations as to the price of, such securities. In addition,
delisting may affect our ability to issue additional securities or to
secure additional financing.
The Company's delisting on the NASDAQ National Market will cause
trading in the Common Stock to be subject to additional rules under
the Exchange Act. These rules require additional disclosure by
broker-dealers in connection with any trades involving a stock defined
as a penny stock. A 'penny stock' is defined to include any over-the-
counter equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. The rules require the delivery,
prior to any transaction in a penny stock, of a disclosure schedule
prescribed by the Commission relating to the penny stock market,
subject to certain exemptions. In addition, such regulations impose
various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions,
the broker-dealer must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from
effecting transactions in the Common Stock, which could severely limit
the market liquidity of the Common Stock and the ability of purchasers
in this offering to sell the Common Stock in the secondary market.
NEGATIVE EFFECT OF FUTURE SALES OF STOCK ON MARKET PRICE AND ABILITY
TO RAISE CAPITAL
Future sales of substantial amounts of Common Stock in the public
market after this offering or the perception that such sales could
occur could materially adversely affect the market price on the Common
Stock and our future ability to raise capital through the sale of
equity securities. Virtually all of the outstanding Common Stock is
freely tradable in the public markets without restriction, subject in
some cases to the volume limitations imposed by Rule 144 under the
Securities Act.
RISK OF INTERNATIONAL SALES
Conducting business outside of the United States is subject to certain
risks, including:
- -- changes in regulatory requirements and tariffs;
- -- reduced protection of intellectual property rights;
- -- difficulties in distribution;
- -- the burden of complying with a variety of foreign laws; and
- -- political or economic constraints on international trade or
instability.
In addition, all of our international sales are currently priced in
U.S. dollars, but future sales or licensing of our products or
technologies outside the United States may be subject to the risks
associated with fluctuations in currency exchange rates.
ANTI-TAKEOVER STATUTES
Certain provisions of our Amended and Restated Articles of
Incorporation and Florida law could make a merger, tender offer or
proxy context involving the Company more difficult, even if such
events could be beneficial to the interests of the shareholders. Such
provisions could limit the price that certain investors might be
willing to pay in the future for shares of the common stock.
GENERAL
Because of factors discussed above and other factors, past financial
performance should not be considered an indicator of future
performance. Investors should not use historical trends to anticipate
future results and should be aware that the Company's financial
condition may be subject to wide fluctuations in response to quarter-
to-quarter variations in operating results, general conditions in the
semiconductor packaging and computer industries, changes in earnings
estimates and recommendations by analysts and other events.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards (FAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." FAS No. 133 establishes standards for accounting
and reporting for derivative instruments, and conforms the
requirements for treatment of different types of hedging activities.
This statement is effective for all fixed quarters of years beginning
after June 1999. Management does not expect this standard to have a
significant impact on the Company's operations.
In 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities." SOP 98-5 provides guidance on
accounting for start-up costs and organization costs, which must be
expensed as incurred. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1998.
Management does not expect this Statement to have a material impact on
the Company's financial statements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's major market risk exposure is subject to changing
interest rates. The Company's policy is to manage interest rate risk
through the use of floating rate debt instruments. The Company has
loans with an unrelated lender totaling two million at March 31, 1999.
The interest rate on these loans is the Royal Canadian prime rate plus
2%. An immediate increase of 10% in interest rates would not be
material.
Part II -Other Information
Item 1. Legal Proceedings
On October 16, 1998, a complaint was filed against the Company in the
United States District Court for the Southern District of New York by
Promethean Investment Group, L.L. C. The complaint alleges breach of
contract by the Company for failing to proceed with a financing
transaction and seeks damages in an unspecified amount in excess of
$270,000 or a declaration that the Company is required to proceed with
the financing transaction. The Company has not yet filed an answer to
the complaint and the outcome is both immeasurable and undeterminable.
There can be no assurance that the Company will be successful in
defending this litigation.
On December 11, 1998, the Company and Joseph A. Sarubbi ("Sarubbi")
entered into a settlement agreement (the "Settlement Agreement")
relating to litigation in which Sarubbi obtained a judgment against
the Company in the amount of $1,227,041. Under the Settlement
Agreement, the Company 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 the
Company's common stock which have been delivered to Sarubbi by the
Company. The Company has registered 1,775,000 shares for Sarubbi
pursuant to the S-2 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 the Company'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. Any further legal action taken by Mr. Sarubbi
may be material to the Company.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
The Company has outstanding loans from Helix in the aggregate
principal amount of $2,000,000. Such loans bear interest at an annual
rate equal to the prime rate of interest payable by the Royal Bank of
Canada plus 2%, are secured by the Company's intellectual property and
were due and payable on February 15, 1999. As of May 15, 1999, this
principal amount due Helix has not been repaid and is in default. The
inability of the Company to repay the Helix loans when due may have a
material adverse effect on the Company, including possible loss of
rights to its intellectual property through foreclosure which would
cause the Company to cease its operations. In connection with the
Helix loans, the Company has issued to Helix warrants to purchase an
aggregate of 2,850,000 shares of Common Stock at exercise prices
ranging from $1.63 to $2.125 per share (collectively, the "Helix
Warrants"). The Helix Warrants have expiration dates ranging from
December 19, 1999 to August 7, 2000. These warrants have been valued
at an aggregate of approximately $4,324,000. A total of $4,324,000
has been charged to amortization expense for these warrants through
February 15, 1999. This accounting treatment has no impact on the
Company's cash balance. As of April 30, 1999, Helix and its
affiliates hold approximately 5.7% of the Company's outstanding Common
Stock (not including shares issuable upon exercise of warrants).
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) See the Exhibit Index included immediately preceding the
Exhibits to this report, which is incorporated herein by reference.
(b) Reports on Form 8-K:
The Company has filed the following reports on Form 8-K `since
January 1, 1999:
January 4, 1999 The Panda Project, Inc. (the "Company") has
engaged Grant Thornton LLP as the Company's
independent accountants to audit the Company's
financial statements. The engagement is
effective as of January 4, 1999.
May 18, 1999 The Panda Project, Inc. has entered into an
agreement with Silicon Bandwidth, Inc. to sell
its intellectual property portfolio as well as
the fixed assets related to its interconnect and
semiconductor business.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE PANDA PROJECT, INC.
Date: September 8, 1999
By: /s/ MELISSA F. CRANE
-------------------------------
Melissa F. Crane
Acting Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Description of Exhibit
- ---------- -------------------------------
2.1 Letter of Intent by Silicon Bandwidth, Inc. (Filed as exhibit 2.1 to
the Company's 8-K dated May 18, 1999).*
2.2 Voting Agreement. (Filed as exhibit 2.2 to the Company's 8-K dated May
18, 1999).*
2.3 Agreement between Helix (PEI), Inc., The Panda Project, Inc. and
Silicon Bandwidth, Inc. (Filed as exhibit 2.3 to the Company's 8-K dated May
18, 1999).*
2.4 The Exchange Agreement between Panda Project inc. and the Convertible
Preferred A Holders. (Filed as exhibit 2.4 to the Company's 8-K dated May 18,
1999).*
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on November 3, 1997) *
3.1 Fourth Articles of Amendment of Amended and Restated
Articles of Incorporation (filed as Exhibit 4.1 to the Company's Form
8-K filed on February 23, 1998) *
3.1 Fifth Articles of Amendment of Amended and Restated
Articles of Incorporation (filed as Exhibit 3.1 to the Company's
Quarterly Report of Form 10-Q for the period ended March 31, 1998) *
3.1 Sixth Articles of Amendment of Amended and Restated
Articles of Incorporation (filed as Exhibit 3.2 to the Company's
amended Quarterly Report of Form 10-Q for the period ended March 31,
1998 filed on July 2, 1998) *
3.1 Seventh Articles of Amendment of Amended and Restated
Articles of Incorporation (filed as Exhibit 3.5 to Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1998) *
3.6 Amended and Restated By-Laws of the Company (filed as
Exhibit 3.2 to the Company's Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on November 3, 1997) *
27 Financial Data Schedule
________________
* Incorporated herein by reference
<TABLE>
<S> <C>
[ARTICLE] 5
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] MAR-31-1999
[CASH] 393,059
[SECURITIES] 0
[RECEIVABLES] 216,283
[ALLOWANCES] 0
[INVENTORY] 51,087
[CURRENT-ASSETS] 784,926
[PP&E] 1,659,093
[DEPRECIATION] 193,814
[TOTAL-ASSETS] 2,608,219
[CURRENT-LIABILITIES] 4,593,208
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 0
[OTHER-SE] 0
[TOTAL-LIABILITY-AND-EQUITY](1,984,989)
[SALES] 313,456
[TOTAL-REVENUES] 813,456
[CGS] 118,422
[TOTAL-COSTS] 118,422
[OTHER-EXPENSES] 2,727,477
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 559,572
[INCOME-PRETAX] (1,994,859)
[INCOME-TAX] 0
[INCOME-CONTINUING] (2,048,926)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (2,048,926)
[EPS-BASIC] (.10)
[EPS-DILUTED] (.10)
</TABLE>
