As filed with the Securities and Exchange Commission on September 21, 1999
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
The Panda Project, Inc.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-
6(i)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[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
-------------------------------------------------------------
[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date filed:
<PAGE>
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
September 29, 1999
----------------------
ANNUAL MEETING OF SHAREHOLDERS
YOUR VOTE IS VERY IMPORTANT
----------------------
To the Shareholders of The Panda Project, Inc.
On behalf of the Board of Directors of The Panda Project, Inc., a
Florida corporation ("Panda" or the "Company"), I cordially invite you to
attend an Annual Meeting of the shareholders of Panda, to be held at 10:00
a.m. (Eastern time) on Friday, October 29, 1999 at the Hilton Hotel, 100
Fairway Drive, Deerfield Beach, Florida 33441. As previously announced,
Panda has entered into an agreement (the "Asset Purchase Agreement") to
sell substantially all of its operating assets to Silicon Bandwidth, Inc.,
a Delaware corporation ("SBI"). The terms of the proposed sale are
described more fully in the enclosed Proxy Statement, and a copy of the
Asset Purchase Agreement is attached as Annex A to the Proxy Statement.
Panda entered into this Asset Purchase Agreement, and the Board of
Directors is recommending that Panda's shareholders approve the proposed
sale, because the Board is of the view that Panda will not be able to
generate sufficient revenues and resulting gross profits to cover its
fixed costs in order to continue its operations in the future. The Board
believes that this reason, coupled with Panda's continued negative cash
flow and the general decline of its financial condition, suggest that the
interests of Panda shareholders would be better served if Panda pursues
the sale of substantially all of its operating assets to SBI. The sale of
substantially all of Panda's operating assets, if approved by the
shareholders, will help Panda minimize its negative cash flow and allow it
to continue to exist as a public "holding" corporation. If approved by
the shareholders, the sale will take place on a date mutually agreed upon
by Panda and SBI, but in no event later than December 30, 1999, unless
extended by the parties.
Panda will receive 10% of SBI's capital stock in exchange for Panda's
operating assets. As part of the closing conditions to the Proposed Sale,
SBI will assist Panda in eliminating certain outstanding obligations.
Panda's shareholders will not receive any dividend or other form of
payment or distribution as a result of the completion of the sale of the
operating assets to SBI. The ownership of Panda's common stock by the
shareholders will not be affected by the sale, and Panda will continue to
be subject to the reporting requirements of the Securities Exchange Act of
1934. Panda expects that its common stock will continue to trade on the
OTC Bulletin Board. However, Panda will not have any control over
whether, or to what extent, a trading market will exist following
completion of the sale to SBI.
If the proposed sale to SBI is not approved by Panda shareholders,
Panda anticipates that its negative cash flow will continue indefinitely
and that it will likely be unable to continue as a going concern. As
such, if the proposed sale to SBI is not approved by Panda shareholders,
Panda intends to continue its search for another purchaser of its
operating assets.
We cannot complete the sale to SBI without the approval of Panda's
shareholders. We have therefore scheduled an Annual Meeting of Panda's
shareholders to consider and vote upon the proposed sale of Panda's
operating assets to SBI. A majority of the issued and outstanding shares
of Panda's Common Stock must vote in favor of the proposal for the sale to
SBI to be completed.
<PAGE>
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED, AND RECOMMENDS
THAT YOU VOTE "FOR," THE PROPOSED SALE OF SUBSTANTIALLY ALL OF PANDA'S
OPERATING ASSETS TO SBI. In arriving at its recommendation, the Board of
Directors has given careful consideration to a number of factors which are
described in the enclosed Proxy Statement, including a recommendation of a
special committee of its board of directors that the consideration SBI
will deliver to Panda for Panda's operating assets in the proposed
transaction is in the best interest of Panda.
Panda is also seeking your vote to (1) elect a new director to
serve on Panda's Board of Directors, (2) amend its Articles of
Incorporation (the "Amendment to the Articles") to increase the number of
authorized shares of its common stock from 50,000,000 to 85,000,000 and
(3) ratify the selection by Panda's Board of Directors of Grant Thornton
LLP as independent accountants for the current fiscal year. This increase
in the number of authorized but unissued shares is necessary to fulfill
Panda's obligations under certain existing agreements.
Whether or not you plan to attend the Annual Meeting, please take the
time to vote by completing and mailing the enclosed proxy card to us.
Sending in your proxy will not prevent you from voting in person at the
Annual Meeting, but will assure that your vote is counted if you are
unable to attend the Annual Meeting. If you sign, date and mail your proxy
card to us without indicating how you wish to vote on the proposed sale to
SBI, your proxy will be counted as a vote in favor of the adoption of the
Asset Purchase Agreement and approval of the proposed sale. If you fail to
return your proxy card, the effect will be the same as a vote against the
adoption of the Asset Purchase Agreement and against the approval of the
proposed sale.
The enclosed Proxy Statement provides you with detailed information
about (1) the proposed sale of Panda's operating assets to SBI, (2)
Panda's plans following the completion of the sale and (3) the Amendment
to the Articles. We encourage you to read the entire Proxy Statement,
including the Annexes, and consider the information carefully prior to
casting your vote.
/s/ Stanford W. Crane, Jr.
-------------------------
Stanford W. Crane, Jr.
President and Chief Executive Officer
<PAGE>
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 29, 1999
The Panda Project, Inc. ("Panda") will hold an annual meeting of
its shareholders (the "Annual Meeting") on October 29, 1999, 10:00 a.m.
Eastern time, at the Hilton Hotel, 100 Fairway Drive, Deerfield Beach,
Florida 33441 for the following purposes:
1. To consider and vote on a proposal (the "Proposed Sale") to
approve an Asset Purchase Agreement, dated as of July 19, 1999, as amended
(the "Asset Purchase Agreement"), between Panda and Silicon Bandwidth,
Inc., a Delaware corporation ("SBI"), as amended, and related transactions
for the sale of substantially all the operating assets of Panda.
2. To consider and vote upon a proposal to amend Panda's
Articles of Incorporation (the "Amendment to the Articles") to increase
the authorized shares of its common stock, par value $.01 per share (the
"Panda Common Stock"), from 50,000,000 to 85,000,000.
3. To elect a director to serve on Panda's Board of Directors
until the 2002 Annual Meeting and until his successor is duly elected and
qualified.
4. To ratify the selection by the Board of Directors of Grant
Thornton LLP as independent accountants for the current fiscal year.
5. To transact such other business as may properly come before the
Annual Meeting.
Panda has fixed the close of business on September 29, 1999 as the
Record Date for the determination of shareholders entitled to vote at the
Annual Meeting or any adjournment thereof. A list of such shareholders
will be available for inspection by shareholders of record during business
hours at Panda's principal place of business in Boca Raton, Florida for
ten days prior to the date of the Annual Meeting, and will also be
available at the Annual Meeting.
Approval of the Proposed Sale requires the affirmative vote of a
majority of the outstanding shares of Panda Common Stock entitled to vote
at the Annual Meeting. Approval of the other proposals requires that the
number of votes cast in favor of these proposals at the Annual Meeting
exceed those votes cast against. Failure to return a properly executed
proxy card or to vote at the Annual Meeting will have the same effect as a
vote against the Proposed Sale.
The Board of Directors unanimously recommends that shareholders
vote to approve the Proposed Sale, which is described in detail in the
accompanying Proxy Statement, and other proposals.
Please sign and promptly return the proxy card in the enclosed
envelope, whether or not you expect to attend the Panda Annual Meeting.
By Order of the Board of Directors,
/s/ Melissa F. Crane
Secretary
Boca Raton, Florida
September 29, 1999
<PAGE>
TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING STATEMENTS 1
PANDA'S ANNUAL MEETING 3
Proposal 1: Proposed Sale of Substantially
All of Panda's Assets 3
VOTING SECURITIES OF PANDA 3
Times and Places; Quorum; Votes Required
for Approval 3
Intentions and Agreements to Vote 3
No Dissenters' Rights 4
Proxies 5
Votes Required for Approval of Proposal 1 5
THE PROPOSED SALE 6
Panda 6
SBI 6
VantagePoint Venture Partners 7
Use of Proceeds 7
Background of the Proposed Sale 7
Panda's Reasons for the Proposed Sale;
Recommendation of the Board of Directors 8
Recommendation of the Special Committee 10
Absence of Financial Advisor 11
Approval of the Panda Series A
Preferred Shareholders 11
Interests of Certain Persons in the Proposed
Sale 12
Transition Planning 12
Changes in Shareholder Rights after the
Proposed Sale 12
Continued Operations of the Company 12
Accounting Treatment; Material Federal
Income Tax Consequences 13
Regulatory Approvals 13
RISKS AND CONSIDERATIONS RELATED TO
THE PROPOSED SALE 13
Holding Company Structure 13
Unregistered Stock; Absence of a Public
Trading Market 14
Absence of an Operating History 14
Absence of a Financial Advisor 14
No Dividends on SBI Common Stock 14
Minority Interest; No Voting Power 14
Remaining Panda Assets Have Limited Value 15
No Reporting Requirements 15
THE ASSET PURCHASE AGREEMENT 15
Terms of the Asset Purchase Agreement 15
Operating Assets Being Sold and Liabilities
and Obligations Assumed 15
Consideration Price 16
Closing 16
Conditions to Closing 17
Representations and Warranties 18
Covenants 20
Stockholders Agreement 20
Indemnification 21
Termination and Waiver 21
UNAUDITED PRO FORMA
FINANCIAL INFORMATION 22
PROPOSAL 2: AMENDMENT TO
ARTICLES OF INCORPORATION TO
INCREASE AUTHORIZED SHARES 29
Votes Required for Approval of Proposal 2 31
PROPOSAL 3: ELECTION OF DIRECTORS 32
SUMMARY COMPENSATION 38
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT 42
Recent Panda Securities Issuance 43
SELECTED FINANCIAL DATA 45
MARKET FOR PANDA'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 46
INFORMATION REGARDING PANDA 47
Business 47
Properties 53
Legal Proceedings 53
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 55
Change in Fiscal Year End 55
Results of Operations 55
Liquidity and Capital Resources 58
Year 2000 Issues 59
Votes Required for Approval of Proposal 3 60
PROPOSAL 4: RATIFICATION OF
APPOINTMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS 61
Votes Required for Approval of Proposal 4 61
EXPERTS 62
SHAREHOLDER PROPOSALS 62
SHAREHOLDER LIST 62
WHERE YOU CAN FIND MORE INFORMATION 62
<PAGE>
Page 1
Annex A: Asset Purchase Agreement
Annex B: Text of Amendment to Panda's Articles of Incorporation
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements regarding Panda's future financial condition,
results of operations, cash flows, financing plans, business strategy,
projected costs and capital expenditures, operations after the proposed
sale of substantially all of Panda's operating assets and words such as
"anticipate," "estimate," "expect," "project," "intend," and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks, uncertainties and assumptions.
All of these forward-looking statements are based on estimates and
assumptions made by Panda's management which, although believed by Panda's
management to be reasonable, are inherently uncertain. Stockholders are
cautioned that such forward-looking statements are not guarantees of
future performance or results and involve risks and uncertainties and that
actual results or developments may differ materially from the
forward-looking statements as a result of various considerations,
including the considerations described in this Proxy Statement.
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
----------------------
Proxy Statement
for Annual Meeting of Shareholders
to be held October 29, 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 October 29,
1999 at 10:00 a.m. Eastern time, at the Hilton Hotel, 100 Fairway Drive,
Deerfield Beach, Florida 33441, and at any adjournment or postponement
thereof for the purposes stated in the attached Notice of Annual Meeting
of the Shareholders. This Proxy Statement, the Notice of Annual Meeting
of Shareholders and the accompanying form of Proxy are first being mailed
to shareholders on or about October 1, 1999. Panda also will mail with
this Proxy Statement its Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 and its Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
The matters to be considered and voted upon at the Annual Meeting will
be:
1. A proposal (the "Proposed Sale") to approve an Asset Purchase
Agreement, dated as of July 19, 1999, as amended (the "Asset Purchase
Agreement"), between Panda and Silicon Bandwidth, Inc., a Delaware
corporation ("SBI"), and related transactions for the sale of
substantially all the operating assets of Panda.
2. A proposal to amend Panda's Articles of Incorporation (the
"Amendment to the Articles") to increase the authorized shares of its
common stock, par value $.01 per share (the "Panda Common Stock"), from
50,000,000 to 85,000,000.
3. A proposal to elect a director to serve on Panda's Board of
Directors until the 2002 Annual Meeting and until his successor is duly
elected and qualified.
4. A proposal to ratify the selection by the Board of Directors
of Grant Thornton LLP as independent certified public accountants for the
current fiscal year.
5. Such other business as may properly come before the Annual
Meeting.
<PAGE>
Page 2
A copy of the Asset Purchase Agreement is attached as Annex A to this
Proxy Statement.
The description of the proposals set forth above is intended only
as a summary and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement.
<PAGE>
Page 3
PANDA'S ANNUAL MEETING
PROPOSAL 1:
PROPOSED SALE OF SUBSTANTIALLY ALL OF PANDA'S ASSETS
VOTING SECURITIES OF PANDA
Times and Places; Quorum; Votes Required for Approval
The Annual Meeting will be held at the Hilton Hotel, 100 Fairway
Drive, Deerfield Beach, Florida 33441, on October 29, 1999, starting at
10:00 a.m. Eastern time. The Board of Directors has fixed the close of
business on September 29, 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.
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,
who in the aggregate will own approximately 52% of Panda Common Stock on
the Record Date, have agreed pursuant to a settlement agreement with Panda
and a voting agreement (the "Voting Agreement") with SBI to vote their
shares of Panda Common Stock in favor of the Proposed Sale. Shareholders
who are a party to the Voting Agreement include GAM Arbitrage Fund L.P.,
AGR Halifax Fund L.P., Leonardo L.P., Ramius Fund L.P., Raphael L.P.,
Helix (PEI) Inc. and AG Super Fund L.P. Listed below are the parties to
the Voting Agreement and the number of shares of Panda Common Stock they
agreed to vote:
GAM Arbitrage Fund L.P. 601,719
AGR Halifax Fund L.P. 13,049,461
Leonardo L.P. 7,403,497
Ramius Fund L.P. 273,325
Raphael L.P. 1,082,689
Helix (PEI) Inc. 1,000,000
AG Super Fund L.P. 585,228
All of these entities are holders of Series A Preferred Stock
except for Helix (PEI) Inc., which is Panda's largest creditor. Joseph A.
Sarubbi also agreed to vote his 2,100,000 shares in favor of the Proposed
Sale pursuant to the Amended Settlement Agreement (as defined herein). He
has delivered an irrevocable proxy to Panda voting in favor of the
Proposed Sale.
The Series A Preferred shareholders agreed to enter into the
Voting Agreement pursuant to the Exchange Agreement (as defined herein) to
induce SBI to consummate the Proposed Sale. Helix (PEI) Inc. agreed to
enter into the Voting Agreement to induce SBI to consummate the Proposed
Sale and to assume Panda's obligations to Helix (PEI) Inc.
<PAGE>
Page 4
The Voting Agreement and the Amended Settlement Agreement provide
that Panda shareholders party thereto vote their shares of Panda Common
Stock in favor of the approval of the Proposed Sale and any matter that
could reasonably be expected to facilitate the Proposed Sale and against
approval of any proposal for any recapitalization, merger, sale of assets
or other business combination (other than the Proposed Sale) between Panda
and any person or entity other than SBI (an "Opposing Proposal"). The
Voting Agreement also provides that, prior to the Record Date for the
Panda Annual Meeting relating to the Proposed Sale, holders of Share
Equivalents will exercise or convert such number of Share Equivalents, as
the case may be, into capital stock of Panda, pro rata in the amount
determined by SBI to be necessary to achieve approval of the Proposed Sale
or rejection of an Opposing Proposal, and vote such shares of Panda Common
Stock as set forth above. "Share Equivalents" are defined in the Voting
Agreement as any securities of Panda convertible into or exercisable for
shares of capital stock of Panda. The Voting Agreement also provides that
Panda shareholders will execute and deliver irrevocable proxies appointing
the board of directors of SBI as their sole and exclusive proxies.
Joseph A. Sarubbi and the parties to the Voting Agreement and
Sarubbi constitute a majority of the outstanding shares of Panda Common
Stock entitled to vote on the proposals that are the subject of this Proxy
Statement. Therefore, absent an extraordinary event, Panda believes that
approval of the proposals is assured.
In addition, the Voting Agreement provides that Panda will enter
into an agreement with Helix, a shareholder and holder of a security
interest in certain assets of Panda, to restructure the indebtedness of
Panda (the "Secured Debt") currently secured by Helix's security interest
in certain assets of Panda (the "Restructuring Agreement"). The
Restructuring Agreement provides that (i) Helix will release its security
interest in all assets of Panda other than its intellectual property
assets and (ii) the terms of the Secured Debt will be modified so that (A)
the Secured Debt accrues interest after the Closing at a rate of 6% per
annum, calculated on a monthly basis, (B) any interest accrued with
respect to the Secured Debt prior to the Closing is forgiven by Helix and
(C) the Secured Debt will be subject to (x) a principal payment obligation
of $1,000,000 immediately after the Closing and (y) principal and interest
payments aggregating $100,000 per month on each of the monthly
anniversaries of the Closing (and such lesser amount on the eleventh
monthly anniversary of the Closing as will satisfy all remaining principal
and interest on the Secured Debt).
Panda entered into the Exchange Agreement, dated May 12, 1999, by
and among Panda and the Panda Series A Preferred shareholders (the
"Exchange Agreement"). Pursuant to the Exchange Agreement, all holders of
Series A Preferred Stock agreed to exchange their Series A Preferred Stock
for shares of Panda Common Stock. In the Exchange Agreement, Panda agreed
to allow the conversion of certain Series A Preferred shares into Panda
Common Stock at a rate of $0.261 and to permit the sale of the Panda
Common Stock. This conversion rate was equal to the conversion rate under
the terms of the Series A Preferred shares. Panda also agreed to issue
penalty shares to the holders of Series A Preferred Stock to satisfy
existing obligations. The holders of Series A Preferred Stock agreed (i)
to enter into a voting agreement to vote their shares of Panda Common
Stock in favor of the Proposed Sale and (ii) not to sell certain amounts
of their Panda Common Stock received pursuant to the Exchange Agreement.
Holders of the Series A Preferred Stock also agreed to release Panda from
all existing obligations to them. No other agreements were entered into
among Panda and the Series A Preferred shareholders to induce them to
exchange their Series A Preferred shares and to vote for the Proposed
Sale.
Since beginning discussions with SBI, Panda has issued 2,100,000
shares of Panda Common Stock to Joseph Sarubbi and 1,000,000 shares of
Panda Common Stock to Helix (PEI), all of which shares are subject to
voting agreements.
No Dissenters' Rights
Holders of Panda Common Stock are not entitled to dissenters' rights
in connection with the Proposed Sale.
<PAGE>
Page 5
Proxies
All shares of Panda Common Stock represented by properly executed
proxies received prior to or at the Annual Meeting, as the case may be,
and not revoked, will be voted in accordance with the instructions
indicated in such proxies. If no instructions are indicated on a properly
executed returned proxy, such proxies will be voted FOR the approval of
the Proposed Sale. A properly executed proxy marked "ABSTAIN," although
counted for purposes of determining whether there is a quorum and for
purposes of determining the aggregate voting power and number of shares
represented and entitled to vote at the applicable Annual Meeting, will
not be voted. Accordingly, since the affirmative vote of a majority of
outstanding shares is required for approval of the Proposed Sale, a proxy
marked "ABSTAIN" will have the effect of a vote against such Proposed
Sale. Shares represented by "broker non-votes" (i.e., shares held by
brokers or nominees which are represented at a meeting but with respect to
which the broker or nominee is not empowered to vote on a particular
proposal) will be counted for purposes of determining whether there is a
quorum at the applicable Annual Meeting. Brokers and nominees are
precluded from exercising their voting discretion with respect to the
approval and adoption of the Proposed Sale and thus, absent specific
instructions from the beneficial owner of such shares, are not empowered
to vote such shares with respect to the approval and adoption of such
proposals. Therefore, since the affirmative vote of a majority of the
aggregate voting power is required for approval of the 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.
Votes Required for Approval of Proposal 1
Approval of Proposal 1 requires the affirmative vote of a majority
of the outstanding shares of Panda Common Stock issued and outstanding as
of the Record Date.
<PAGE>
Page 6
THE PROPOSED SALE
Panda
Panda is a technology company engaged in the development, manufacture
and sale of Panda's proprietary semiconductor packaging and interconnect
devices (the "Technology Products"). Panda also has been engaged in the
design and manufacturing of modular workstations and desk top computers
("Systems"). Due to financial constraints, Panda discontinued all
operations related to the Systems business in December 1998. The features
and design of the Technology Products, many of which are protected by
United States and foreign patents or patent applications, are intended to
address the need for greater bandwidth in electronics products. Panda
believes that its products will satisfy the market's demand for increased
bandwidth in computer, telecommunications, automotive and other
electronics industries by enhancing the performance of new generations of
high speed semiconductors.
SBI
SBI was recently organized as a Delaware corporation for the purpose
of acquiring the intellectual property portfolio and certain fixed assets
related to the interconnect and semiconductor packaging business of
Panda. SBI will initially be capitalized with $6,000,000 of which
$1,000,000 will be paid to Helix upon closing of the transaction. Within
the first year of ongoing operations, SBI anticipates the need for
additional financing which it will seek from the private capital markets.
SBI intends to continue marketing, manufacturing and selling the
technology acquired from Panda. Additionally SBI intends to commercialize
other related technologies for the semiconductor packaging and
interconnect markets.
SBI's strategy is to (i) continue the commercialization of the VSPA
and Compass V technology as well as continuing to design and produce
leading-edge custom packaging solutions; (ii) maintain advanced
manufacturing capabilities through partnerships with LG Cable & Machinery
as well as Possehl Hong Kong Machinery Ltd. and (iii) leverage the scale
and scope of the packaging and interconnect capabilities to provide
Integrated Interface Modules for silicon to system applications.
After the acquisition, SBI will be controlled by VantagePoint
Venture Partners. The board of directors will initially have five members
including the chief executive officer of SBI, three representatives of
VantagePoint Venture Partners and one outside director. The chief
executive officer and the representatives of VantagePoint Venture Partners
will not receive any additional compensation for serving on the board of
directors. The independent directors will have some level of compensation
for service.
Principal elements of the Company's strategy are set forth below.
Similar forces drive future customer demand for the packaging and
interconnect products acquired by SBI. The electronics industry is
seeking greater "Bandwidth" to increase performance in a variety of
applications. Panda's VSPA and the new Cluster Grid Array address the
semiconductor market for high I/O with thermal requirements as well as new
emerging markets such as System on Chip, Monitor on Chip and Integrated
modules for the telecommunications, medical and computer industries.
VSPA competes very effectively with the enhanced versions of the BGA.
A customer application that currently uses a BGA with a heatsink for
additional thermal dissipation is an ideal candidate for VSPA. Using VSPA
will reduce cost while improving thermal performance. Target customers
include Fabless companies designing all types of Integrated Circuits
("IC") for the telecommunications, graphics chips, and sensor markets.
VSPA is also able to withstand a tremendous amount of environmental stress
including high temperature and the potentially explosive automotive engine
environment. The new Cluster Grid Array ( "CGA") addresses the high I/O
market segment and competes against very expensive LGA, BGA and CCGA.
These problems of these current packages, which include difficulties with
the SMT process and routing, open the door for a robust high density
pluggable chip scale package.
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The interconnect technology includes the Compass V connector which
recently received Bellcore approval. The interconnect has been designed
for use in backplane applications specifically for the telecommunications
industry.
Other technologies developed but never commercialized include
Welltech, a routing technology for printed circuit boards to increase the
amount of traces thereupon without degradation of signal integrity. As
the industry moves to higher I/O, then a new routing technology will be
required. Welltech has never been introduced.
SBI believes that partnering with large companies for high volume
manufacturing will be a key factor in future success and in attracting and
retaining customers. SBI will produce all prototype and preproduction
orders using the acquired VSPA Flex machines. SBI will maintain Panda's
current suppliers in order to facilitate the transition. SBI believes
that there will be no interruption of production to current customers.
SBI believes that by bringing new package designs to market early, its
designs are more likely to enjoy a competitive advantage, which in turn
will allow the Company to obtain higher margins. SBI also seeks to
capture substantial market share and to spur the industry-wide adoption of
its integrated interface solutions in specific market areas. SBI believes
these modules types will comprise some of the highest growth and more
profitable segments of the interconnect and packaging market in coming
years.
VantagePoint Venture Partners
VantagePoint Venture Partners ("Vantage" or "VantagePoint") manages
three private venture capital funds with more than $800 million. The firm
offers a unique blend of venture capital, investment banking, operations,
legal, sales, marketing and advertising experience, combined with deep
expertise in data networking, next-generation communications services, e-
commerce and the Internet.
Use of Proceeds
Panda intends to hold SBI common stock received in the Proposed
Sale for investment purposes. Panda shareholders will not receive any
dividend or other form of payment or distribution as a result of the
completion of the sale of Panda's Assets as defined in the Asset Purchase
Agreement (the "Operating Assets") to SBI. In the event, if ever, that
SBI completes an initial public offering or is acquired, the Board of
Directors intends to dissolve the Company and distribute to the Panda
shareholders either SBI common stock or the proceeds received by Panda if
SBI is acquired. Panda has agreed not to distribute the SBI common stock
to its shareholders so long as SBI remains a private company. The
ownership of Panda's Common Stock by the Panda shareholders will not be
affected by the Proposed Sale, and Panda will continue to be subject to
the reporting requirements of the Securities Exchange Act of 1934. Panda
expects that Panda Common Stock will continue to trade on the OTC Bulletin
Board. However, Panda will not have any control over whether, or to what
extent, a trading market will exist following completion of the Proposed
Sale.
Background of the Proposed Sale
Since 1996, Panda has experienced significant operating losses in
attempts to develop its Technology Products and Systems business. Panda
has lacked additional capital funding for its operations and the Board of
Directors believes Panda has exhausted all resources for such financing.
The financing Panda has received has been dilutive and has had a negative
effect on the price of Panda Common Stock. Other non-operational events
also had a significant effect on Panda's operations. In August 1998,
Panda received a notice from the National Association of Securities
Dealers, Inc. regarding the delisting of Panda Common Stock from the
Nasdaq National Market. In September 1998, Joseph Sarubbi obtained a
judgment against Panda in the amount of $1,227,041.
In September 1998, the Board of Directors determined that Panda would
not be able to generate sufficient revenues and resulting gross profits to
cover its fixed costs in order to continue its operations in the future.
The Board of Directors believed the factors mentioned above, coupled with
Panda's continued negative cash flow and the general decline of its
financial condition, suggested that the interests of Panda's shareholders
would be better served if Panda pursued the sale of substantially all of
its Operating Assets.
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Panda's management contacted over 35 companies and venture capital
firms between March 1997 and May 1999 regarding their interest in
providing capital to Panda, acquiring Panda or acquiring Panda's assets.
None of the parties approached expressed a serious interest in such a
transaction except for VantagePoint Venture Partners ("Vantage").
Archimedes capital LLC ("Archimedes"), an entity controlled by Matthew A.
Ocko, a partner of Vantage, entered into a consulting arrangement with
Panda four months prior to discussions between Vantage and Panda for the
sale of Panda's assets. In February 1999, Vantage indicated it would be
willing to consider an acquisition of Panda, but only if the transaction
was structured as an asset acquisition in which Vantage or an entity
founded by Vantage would assume only certain liabilities of Panda.
In February 1999, Panda defaulted on certain loans from Helix (PEI)
Inc. ("Helix"). Helix possessed a security interest in all of the
intellectual property assets of Panda. Helix communicated to Panda that,
in order to avoid an "Event of Default" under the parties' loan agreement
and resulting foreclosure on Panda's intellectual property assets, either
(i) the Helix loans would need to be repaid in full or (ii) the capital
structure of Panda would need to be restructured in order to modify the
rights of Panda's preferred shareholders. Helix also requested 10% of the
equity of Panda with protection for antidilution.
In light of these developments, the Board of Directors, in a
special meeting held on April 23, 1999, decided to take the course of the
strategy it had originally discussed in its February 1999 meeting by
selling Panda's Operating Assets to SBI, discontinuing Panda's business
operations, and continuing the existence of Panda as a public "holding"
corporation whose principal asset would be the ownership of its interest
in SBI. At the special meeting, the Board of Directors approved the
execution and delivery of a letter of intent with SBI for the sale of
substantially all of Panda's Operating Assets to SBI. The Board of
Directors opted for the Proposed Sale to Vantage because (1) it believed
it was optimizing the return on the value of Panda's assets, (2) Vantage
agreed to assume a significant amount of Panda's liabilities and (3) the
Board of Directors had confidence in Vantage's ability to conclude the
transaction in a timely manner. To determine whether Panda was optimizing
the return on its assets, the Board of Directors reviewed the total
consideration to be received from SBI in comparison to all other viable
offers previously received for Panda and its Operating Assets.
Panda and Vantage commenced preliminary discussions concerning the
Proposed Sale in February 1999. Between February and May 1999, Vantage
and Panda engaged in significant negotiations related to the sale of
Operating Assets. On May 14, 1999, Panda announced it had entered into a
letter of intent with SBI with respect to the sale of substantially all of
its operating assets. During the months of May and June 1999, the parties
exchanged drafts of the Asset Purchase Agreement and negotiated the
remaining terms of the transaction. During the period, Panda furnished
Vantage with requested due diligence materials. On July 15, 1999, the
Board of Directors, which was comprised of Stanford W. Crane, Jr. and
William E. Ahearn, approved the Asset Purchase Agreement. The Asset
Purchase Agreement was executed by SBI and Panda on July 19, 1999.
Other than as discussed above with respect to the negotiations
regarding the Asset Purchase Agreement and related agreements, the only
other material contract, arrangement, understanding, relationship,
negotiation or transaction between SBI and Panda in the last two fiscal
years or in 1999 has been the "bridge" loans extended by SBI to Panda. On
August 17, 1999, July 15, 1999 and June 11, 1999, Panda entered into
agreements with SBI to borrow $325,000, $325,000 and $300,000,
respectively. In connection with these loans, Panda has granted to SBI a
security interest in substantially all of the assets of the Company
pursuant to a security agreement. The loans will bear interest at a rate
of 6% per annum and are due and payable on September 30, 1999. Panda and
SBI have engaged in discussions regarding the forgiveness of loans made by
SBI to Panda. In exchange for the forgiveness by SBI of the loans, Panda
would agree to reduce the capitalization requirements of SBI by the amount
of the loans forgiven.
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.
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Page 9
As discussed above under "Background of the Proposed Sale," since 1996
Panda has had negative cash flow and a consistent decline in its financial
condition. Panda also has had extreme difficulty in securing additional
financing to fund operations. Panda has been forced to enter into several
complex and dilutive financings in order to continue operations. These
financings have adversely affected Panda's stock price.
In response to these critical problems affecting Panda's business
operations, the Board of Directors had instructed Panda's management to
develop and adopt a business strategy which would continue Panda's
existing business operations while simultaneously (i) seeking to minimize
its expenses and (ii) considering and pursuing all potential merger,
acquisition, sales, joint-venture and other combination options. Panda's
management implemented this strategy and sought out appropriate potential
merger and acquisition candidates.
Other interested parties included two parties from Europe and one
party from the United States. All parties expressed interest, however,
were never able to access any substantial capital. The United States
interest came from an individual who could not even produce approximately
$200,000 committed in a prior transaction. SBI was the only legitimate
alternative to provide both capital and a vehicle for Panda shareholders
to obtain a potential return on their investment.
As described above under "Background of the Proposed Sale," the
decision of Panda's Board of Directors to approve the Proposed Sale and
recommend that Panda shareholders vote in favor of the Proposed Sale
followed many months of analyzing Panda's future prospects, discussing the
advantages and disadvantages of merging or disposing of Panda's assets and
exploring sale alternatives. As of February 15, 1999, the Company was in
default of its loan agreement with Helix, although no notice of default
was delivered to Panda by Helix. The Company was unable to repay the
principal due in the amount of $2,000,000 and Helix had the right to
foreclose on the intellectual property. If Helix had foreclosed on the
intellectual property of the Company and sold it to a third party, the
value of the Company's other assets would be severely diminished. As of
March 31, 1999, the Company had assets of $2,608,219 and current
liabilities of $4,593,208. As of March 31, 1999, the deficit was
$1,984,989. The Company asked Helix not to foreclose and allow it
additional time to identify other sources of capital to repay the loan.
Due to the complexity of the Company's capital structure, including the
Helix loans and the Series A convertible preferred, the Company was faced
with few alternatives. The Board calculated that the Panda shareholders
would receive in the transaction (i) a 10% stake in SBI valued at
$600,000, (ii) the ability to assign the $2,000,000 note and interest on
the note and (iii) $500,000 for payable and other accrued expenses
extended to the Company. The value being received by the Panda
shareholders totaled $3,920,000 before additional funds are advanced for
the month of September to continue operations. When SBI expressed
interest in acquiring substantially all of Panda's Operating Assets, the
Board considered whether or not the interests of the Panda shareholders
would be better served if Panda's Operating Assets would be retained and
(i) Panda would instead be dissolved, or (ii) Panda would continue its
business operations. If Panda were to be dissolved, Helix had the ability
to sell Panda's intellectual property assets in a private sale within five
days of the notice of dissolution. The Board concluded that Panda's
prospects for future success have continued to diminish because Panda has
not been able to achieve a self-sustaining level of revenues. The Board
determined that Panda's failure to generate sufficient revenues to warrant
its operations in the future, coupled with Panda's continued negative cash
flow and the general decline of its financial condition, suggest that the
interests of the Panda shareholders would be better served if Panda did
not continue its business operations. In making its recommendation of the
Proposed Sale to Panda's shareholders, the Board considered a number of
factors, including those summarized below:
- 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
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Page 10
- 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.
The positive factors of the SBI transaction were the capital
available from their venture backers would allow Helix to be paid off, and
the shareholders in Panda would have an opportunity to have ownership in a
company with adequate resources to potentially show a return to the
investors. The negative factors were the lack of liquidity for this
ownership stake and the relatively low ownership position of Panda in the
new company. After weighing these factors, the SBI transaction seemed a
far better alternative to liquidation to satisfy the Helix debt.
The main reason the Board of Directors believed that SBI could
succeed with the assets of Panda when Panda could not was that SBI is
funded by a large venture capitalist, VantagePoint Venture Partners, which
gives them access to substantial capital needed to grow the business.
Additionally, VantagePoint Venture Partners has extensive contacts through
its limited partners, and other investments, to assist in commercializing
the acquired Panda technologies in the target marketplace.
Based on these factors, the Board of Directors concluded that the
sale of substantially all of Panda's Operating Assets to SBI would help
minimize these adverse financial conditions and would therefore serve the
interests of the Panda shareholders. The Board of Directors believes this
transaction is fair and in the best interests of all the Panda
shareholders.
If the Proposed Sale is not approved by Panda shareholders, Panda
has insufficient working capital to operate its business and will be
unable to continue as a going concern. Currently, Panda is relying upon
capital borrowed from SBI to continue operations. As such, if the
Proposed Sale is not approved by Panda shareholders, Panda intends to
continue its search for another purchaser of its Operating Assets.
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 Dr. Tummala resigned as members of the Special
Committee and the Board of Directors. Neither Mr. Gingrich nor Dr.
Tummala believed he possessed (i) the expertise to examine the Proposed
Sale or (ii) the time to thoroughly review the Proposed Sale. Dr. Tummala
is an academician who viewed his technical expertise as of little
relevance to the then current situation. Both directors viewed William E.
Ahearn, a former officer of Panda, as much more experienced in matters of
this type because he had experience with nineteen acquisitions while at
AMP Incorporated and was working with another small company on a
capital/sale issue early in 1999. Mr. Gingrich and Dr. Tummala then
decided to elect Mr. Ahearn to the Board and have him lead the activities
of the special committee. At a Board of Directors meeting on May 18,
1999, Mr. Gingrich and Dr. Tummala resigned from the Board of Directors.
Mr. Ahearn was elected as a member of the Board of Directors and
appointed as the sole member of the Special Committee. Mr. Ahearn was a
former IBM executive, MIT Media Scholar, AMP Incorporated executive
instrumental in nineteen acquisitions, as well as a former Vice President
at the Company. Mr. Ahearn was familiar with the Company's products and
business challenges and therefore, was the most qualified person to handle
the duties of the Special Committee as well as negotiations with SBI.
Mr. Ahearn also had discussions with European investment advisor
Sven Josting of Teamwork related to potential investment by European
institutions. Nothing substantive, however, came from those discussions.
Additionally, Mr. Ahearn had extensive discussions with ART Computer of
France, and their representatives related to both licensing the Company's
systems technology and investment in, or purchase of, the Company. Upon
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Page 11
reviewing the financial capability of ART, the Company believed ART would
be unable to produce even the initial $250,000 payment for the license to
the systems business. Mr. Ahearn then decided the proposal of
VantagePoint Venture Partners was the only viable option for the Company.
Mr. Ahearn concluded that the Proposed Sale was in the best
interest of Panda and its shareholders. Mr. Ahearn recommended to the
Board of Directors that Panda enter into the Proposed Sale. Mr. Ahearn
based his recommendation on a number of factors affecting Panda. Panda's
poor financial condition and Panda's inability to raise additional capital
to fund its operations were the primary factors in his recommendation.
Panda has sought a purchaser for its assets for a considerable period of
time. Mr. Ahearn valued the 10% interest in SBI at $600,000. This value
is based on SBI's $6 million initial capitalization. Panda also would
assign the $2,000,000 note of Helix (PEI) Inc. to SBI and receive $500,000
from SBI for payables and other expenses. Mr. Ahearn valued the total
consideration to be received in the Proposed Sale by Panda to be
$3,920,000.
In arriving at his recommendation, Mr. Ahearn, among other things,
(i) reviewed drafts of the Letter of Intent, dated March 17, 1999 and
thereafter, by and between Panda and SBI; (ii) reviewed the Annual Reports
to shareholders and Forms 10-K for the years 1997 and 1998, and the Form
10-Q for March 31, 1999, which were provided to Mr. Ahearn by Panda; (iii)
discussed the future prospects, including financing needs of Panda, with
the management of Panda and its creditors; (iv) reviewed correspondence
between Panda and certain financial institutions, investment banking firms
and venture capital groups regarding the sale of Panda; (v) had
discussions with Vantage and other potential purchasers of Panda's
Operating Assets; (vi) had discussions with Helix and Panda's preferred
shareholders regarding the financial situation of Panda; (vii) reviewed
the asset listing provided to Mr. Ahearn by Panda; and (viii) performed
such other analyses and reviews as he deemed necessary and
appropriate.
In preparing his recommendation, Mr. Ahearn relied on the accuracy
and completeness of all information that was publicly available, supplied
or communicated to him by or on behalf of Panda, and Mr. Ahearn has not
assumed any responsibility to independently verify the same. Mr. Ahearn
assumed that the financial forecasts provided to him were reasonably
prepared on bases reflecting the best currently available estimates and
good faith judgments of the management of Panda as to the future
performance of Panda.
Mr. Ahearn reviewed the asset listing of Panda to determine the
approximate purchase value of the assets. Mr. Ahearn determined that the
assets being sold included all the operating assets of Panda. In his
analysis, Mr. Ahearn has assumed that the highest and best use of the
assets is in their continued use in a business enterprise.
In connection with Mr. Ahearn's time to analyze and evaluate the
Proposed Sale as well as assist in the negotiations with Helix and the
Series A Preferred shareholders, Mr. Ahearn was paid approximately $10,500
including out-of-pocket expenses. Mr. Ahearn retained outside
non-affiliated legal counsel to assist him in the required procedures to
make an independent recommendation. Panda paid his legal fees of $10,000
related to his service on the Special Committee. The Company does not
expect any additional expenses related to the activities of the Special
Committee. No portion of Mr. Ahearn's fee is contingent upon the
successful completion of the Proposed Sale. In addition, Panda has agreed
to indemnify Mr. Ahearn and his agents against certain liabilities
incurred in connection with their services, including liabilities under
federal securities laws.
Absence of Financial Advisor
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. The absence of a financial advisor forces Panda
shareholders to rely solely on the recommendation of the Special Committee
and the Board of Directors. The lack of review by an independent third
party does create the risk that the review of the Proposed Sale by the
Special Committee and the Board of Directors may not consider all relevant
factors that a third party with extensive expertise may consider.
Approval of the Panda Series A Preferred Shareholders
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Page 12
Prior to any transfer of substantially all of the assets of Panda
to another entity, Panda must receive the written approval of the holders
of 66-2/3% of the Panda Series A Preferred Shares.
Interests of Certain Persons in the Proposed Sale
In early September, SBI has engaged in discussions with Stanford W.
Crane, Jr., Panda's Chief Executive Officer, and Melissa F. Crane, Panda's
acting Chief Financing Officer, regarding potential employment
opportunities for these individuals with SBI. If the Proposed Sale is
completed, these individuals may become employees of or consultants to SBI
and may therefore receive compensation for their services to SBI. Panda
has received no information about the terms of any potential employment or
consulting agreements between these individuals and SBI. SBI intends to
hire seven to ten employees from Panda's current workforce, and no
contracts have been executed or agreed to for their employment.
During 1998, Panda entered into a consulting agreement with
Archimedes whereby Archimedes would provide assistance to Panda in
connection with seeking a corporate partnering transaction or a sale of
Panda. Mr. Ocko became a partner of VantagePoint four months after such
agreement was signed. In connection with that agreement, Panda granted to
Archimedes a warrant convertible into 2% of Panda capital stock upon the
completion of a successful transaction. SBI has agreed that upon
completion of the transactions set forth herein, Archimedes will receive
2% of SBI's preferred stock in exchange for this warrant (the "Archimedes
Exchange").
Pursuant to the Asset Purchase Agreement, 20% of SBI capital stock
will be reserved for issuance to SBI's employees, officers and directors
upon the exercise of employee stock options. SBI has not determined (i)
which employees, officers or directors of SBI, including any current
employees of Panda that become employees of SBI, will receive this SBI
capital stock or (ii) the amount they will receive.
A license agreement between Stanford W. Crane, Jr., the President
and Chief Executive Officer of Panda, and Panda (the "Crane-Panda
License") is being transferred to SBI. Any royalties received from SBI by
Mr. Crane under the Crane-Panda License would be at the same rate at which
he currently receives royalties.
Transition Planning
Melissa F. Crane, Acting Chief Financial Officer of Panda, and Alan
Salzman, a partner of VantagePoint, respectively, will be jointly
responsible for coordinating all aspects of transition planning and
implementation relating to the Proposed Sale and the other transactions
contemplated by the Asset Purchase Agreement. Until the consummation of
the Proposed Sale, Ms. Crane and Mr. Salzman jointly will (i) examine
various alternatives regarding the manner in which to best organize and
manage the businesses of SBI and Panda after the consummation of the
Proposed Sale and (ii) coordinate policies and strategies with respect to
regulatory authorities and bodies, in all cases subject to applicable
law.
Changes in Shareholder Rights after the Proposed Sale
Following the completion of the Proposed Sale, Panda's shareholders
will retain their same equity interests in Panda. The completion of the
Proposed Sale will not result in any changes in the rights of Panda's
shareholders. As discussed above, Panda does not intend to distribute any
of the SBI common stock from the sale to Panda shareholders through a
special dividend or similar device.
Continued Operations of the Company
After the consummation of the Proposed Sale, Panda expects to have
the same directors. Jeffrey M. Solomon, a representative of Panda's
largest shareholder, will serve as Panda's President, and Susana Van
Arsdale will serve as Panda's Controller. Ramius Fund L.P. and its
affiliates will be the controlling shareholders of Panda after completion
of the parties' fulfillment of Panda's obligations under the Exchange
Agreement.
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Panda's financial obligations after the Proposed Sale will be
comprised of accounts payable of approximately $1,098,000. Of this
amount, Panda has paid approximately $24,000 of interest expense owed to
Helix (PEI) Inc. through the issuance of 1,000,000 shares during the
second quarter of 1999, approximately $34,000 owed to L.G. Cable will be
deducted from the $100,000 licensing fee due in October 1999 pursuant to
verbal agreement with L.G. Cable and $663,000 related to professional fees
is in the process of being negotiated and settled for less than the amount
owed. Panda owes approximately $300,000 in liquidated damages to
purchasers of Panda Common Stock in the August 1998 Private Placement,
which Panda is negotiating to pay off with 4,500,000 newly authorized
shares of Panda Common Stock. In addition, approximately $162,000 is in
dispute between Panda and various vendors for services which did not meet
specifications or parameters in accordance with purchase orders. The
expense of maintaining Exchange Act requirements is expected to be
approximately $200,000 in the first year and approximately $100,000 in the
subsequent year.
Panda expects to fulfill its obligations to creditors and pay its
expenses related to Exchange Act requirements through future licensing
fees, the sale of remaining assets, the use of returned security deposits
on existing leases and possible capital contributions from existing Panda
shareholders.
Accounting Treatment; Material Federal Income Tax Consequences
The Proposed Sale will be accounted for as a sale, and Panda will
recognize gain or loss on the sale of its Operating Assets to the extent
the portion of the purchase price allocated to such Operating Assets
exceeds or is less than Panda's basis therein.
For federal income tax purposes, when a trade or business is sold,
each asset is treated as sold separately in determining the seller's
income, gain or loss. The purchase price is allocated among the assets
sold using a residual value method in the case of a sale of assets to
which goodwill could be attached. The characterization of income or loss
on property used in a trade or business is generally governed by Section
1231 of the Internal Revenue Code. If the Section 1231 gains exceed the
losses, each gain or loss is a long term capital gain or loss derived from
the sale of a capital asset to the extent the asset has been held for
twelve months or more. If the losses exceed the gains, all gains and
losses are treated as ordinary gains or losses. Any gain attributable to
the sale of inventory and any depreciation recapture, will produce
ordinary income.
Capital gains of a corporation can be used to offset capital losses
only, with no offset against ordinary income. A three year carry-back and
five year carry-forward is available.
The Proposed Sale will not have any federal tax consequences to the
Panda shareholders.
THE FOREGOING DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES WHICH
MAY VARY WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER,
EXCEPT FOR THE DISCUSSION OF TRANSFER TAXES ABOVE, THIS DISCUSSION DOES
NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX
CONSEQUENCES OF THE PROPOSED SALE. THIS DISCUSSION DOES NOT ADDRESS THE
TAX CONSEQUENCES OF ANY TRANSACTION OTHER THAN THE PROPOSED SALE.
Regulatory Approvals
To Panda's knowledge, completion of the Proposed Sale does not require
any regulatory approvals other than the filings in connection with this
Proxy Statement required under Federal securities laws.
RISKS AND CONSIDERATIONS RELATED TO THE PROPOSED SALE
The Panda shareholders need to understand the issues related to the
Proposed Sale which are set forth below. In particular, the Panda
shareholders should be aware of the risks related to the ownership of SBI
common stock, which will be Panda's main asset upon consummation of the
Proposed Sale.
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Holding Company Structure
If the Proposed Sale is approved and consummated, Panda will cease
conducting operations and become a holding company, with its sole
significant asset consisting of a 10% equity interest in SBI's common
stock subject to possible future dilution. Panda will not have a direct
ownership interest in any assets of SBI and will solely be entitled to
those rights that it may have as a shareholder of SBI under Delaware law.
In addition, Panda's right, and the right of Panda's creditors, to
participate in any distribution of the assets of SBI upon SBI's
liquidation or reorganization or otherwise, will necessarily be subject to
the prior claims of creditors of SBI, except to the extent that a
bankruptcy court recognizes Panda's claims as a creditor of SBI.
Unregistered Stock; Absence of a Public Trading Market
The shares of SBI common stock which Panda will receive as part of
the Proposed Sale have not been registered under the Securities Act or any
state securities laws and, unless so registered, may not be offered or
sold except pursuant to an exemption from, or in a transaction not subject
to, the registration requirements of the Securities Act and applicable
state securities law. The shares of SBI common stock are new securities
for which there is currently no public market. In addition, Panda has
agreed not to dispose of the SBI shares for a period of five years. As a
result, Panda's investment in SBI will be illiquid and there can be no
assurance that a public trading market for SBI stock will develop in the
future or, that if developed, such a trading market will be sustained.
Absence of an Operating History
SBI was recently formed and has not yet commenced operations.
Accordingly, SBI has no operating history on which to base an evaluation
of its business prospects. SBI's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies
in their early stage of development. Such risks for SBI include, but are
not limited to, an evolving and unpredictable business model and the
management of growth. To address these risks, SBI must, among other
things, develop high quality "Integrated Interface" products, establish,
maintain and increase its customer base, implement and successfully
execute its business and marketing strategies, develop and upgrade its
technology and transaction-processing systems, respond to competitive
developments, and attract, retain and motivate qualified personnel. There
can be no assurance that the SBI will be successful in addressing such
risks, and the failure to do so could have a material adverse effect on
SBI's business, prospects, financial condition and results of operations.
Absence of a Financial Advisor
Panda did not engage an independent financial advisor to render a
fairness opinion with respect to the Proposed Sale. The absence of a
financial advisor forces shareholders to rely solely on the recommendation
of the Special Committee and the Board of Directors. The lack of review
by an independent third party does create the risk that the review of the
Proposed Sale by the Special Committee and the Board of Directors may not
consider all relevant factors that a third party with extensive expertise
may consider.
No Dividends on SBI Common Stock
Since Panda's primary source of income will be its investment in
SBI, Panda's ability to declare cash dividends in the future will depend
exclusively on SBI's ability to pay cash dividends. Currently, SBI
intends to retain future earnings to finance the development and expansion
of SBI's business and does not anticipate paying any cash or stock
dividends on its common stock in the foreseeable future. The declaration
and payment of any dividends in the future will be determined by the board
of directors of SBI, in its discretion, and will depend on a number of
factors, including SBI's earnings, capital requirements and overall
financial condition.
Minority Interest; No Voting Power
<PAGE>
Page 15
If the Proposed Sale is approved, Panda will own an aggregate of
approximately 10% of the outstanding common stock of SBI. Given this
minority equity position, Panda will not have the ability to influence the
day to day management of SBI. In addition, Panda will not have sufficient
shares of SBI common stock to be able to individually control matters
submitted to a vote of the SBI shareholders.
Remaining Panda Assets Have Limited Value
After the Proposed Sale, Panda's sole significant asset will be its
10% equity stake in SBI's common stock. All of Panda's other remaining
assets will be of limited or no value. As a result, Panda's future
prospects, and the future value of Panda's Common Stock, will depend
almost entirely on the success or failure of SBI.
No Reporting Requirements
Although Panda will continue to be subject to the reporting
requirements of the Exchange Act following the Proposed Sale, SBI has no
reporting obligations under the Exchange Act. As a result, subject to
certain circumstances, SBI will not have an ongoing duty to publicly
disclose material information or developments related to its business,
financial condition or results of operations. In addition, there can be
no assurance that Panda will independently have timely knowledge of such
developments or access to such information. Accordingly, Panda
shareholders may not obtain information on SBI that is directly relevant
to their investment in Panda in a timely manner or at all.
THE ASSET PURCHASE AGREEMENT
Terms of the Asset Purchase Agreement
The following is a brief summary of the material provisions of the
Asset Purchase Agreement. The Asset Purchase Agreement contemplates the
sale of substantially all of Panda's Operating Assets to SBI. THE
DESCRIPTION OF THE ASSET PURCHASE AGREEMENT SET FORTH HEREIN DOES NOT
PURPORT TO BE COMPLETE AND PANDA SHAREHOLDERS SHOULD REVIEW THE ASSET
PURCHASE AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT AS
ANNEX A AND IS INCORPORATED HEREIN BY REFERENCE. YOU ARE URGED TO
CAREFULLY READ THE ASSET PURCHASE AGREEMENT IN ITS ENTIRETY.
Operating Assets Being Sold and Liabilities and Obligations Assumed
Panda has agreed to sell to SBI the following Operating Assets and
rights of Panda relating to Panda's business operations:
- 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
<PAGE>
Page 16
- all of Panda's accounts receivable as of the closing date of the
asset sale transaction.
Those assets (other than assets constituting Intellectual Property)
exclusively used in Panda's computer systems business will not be sold
under the Asset Purchase Agreement.
In addition, SBI has agreed to assume or observe, subsequent to the
closing date of the Proposed Sale, Panda's obligations pursuant to the
contracts that are assigned by Panda to SBI in connection with the sale of
Operating Assets. The obligations to be assumed include the following:
- Panda's trade accounts payable outstanding on the closing date
(up to a maximum amount of $300,000);
- specific items included in Panda's accrued payroll and benefits
account outstanding on the closing date, which will not exceed $100,000;
- specific items included in Panda's "other current liabilities"
account on the closing date, which will not exceed $100,000;
- up to $2,000,000 of Panda's indebtedness to Helix, effective upon
such indebtedness' restructuring as described in the Voting Agreement
among SBI, Panda and certain shareholders of Panda dated May 14, 1999; and
- Panda's obligations under certain agreements assigned by Panda to
SBI.
These liabilities are collectively referred to herein as the "Assumed
Liabilities."
Consideration Price
The aggregate consideration for the Operating Assets will be (i)
shares of SBI's common stock initially representing 10% of SBI's capital
stock on a fully diluted basis and (ii) the assumption of the Assumed
Liabilities. In addition to Panda's initial 10% fully diluted common
equity interest, the capital structure of SBI upon consummation of the
Proposed Sale will be comprised of Vantage's 70% fully diluted preferred
equity interest and a 20% fully diluted pool of common shares reserved for
issuance upon exercise of stock options to be issued to SBI's officers,
directors, employees and consultants. Each of these interests will be
diluted pro rata by the issuance of a 2% fully diluted preferred equity
interest to Archimedes upon completion of the Archimedes Exchange. See
"Interests of Certain Persons in the Proposed Sale." The Vantage
preferred equity interest will be comprised of shares of preferred stock,
the material terms of which include:
- a liquidation preference equal in the aggregate to Vantage's
initial $6,000,000 investment in SBI plus a participation interest along
with SBI's common stock;
- non-cumulative 6% dividends;
- the right to convert on a one-for-one basis (subject to
customary weighted average anti-dilution protection) into shares of SBI
common stock;
- a pro rata right of first refusal on future stock issuances by
SBI; and
- the ability to appoint a majority of the board of directors of
SBI.
In connection with the Asset Purchase Agreement, Panda and SBI will
execute additional agreements to facilitate transfer of Panda's assets
(the "Ancillary Agreements").
<PAGE>
Page 17
Closing
The closing of the Proposed Sale will take place within three
business days of approval of the Proposed Sale by the Panda shareholders.
The closing, however, must in all events occur before December 30,
1999.
Conditions to Closing
Conditions to Obligations of Purchaser
SBI's obligation to consummate the Proposed Sale is subject to the
satisfaction (or waiver) of various conditions, including the following:
- the representations and warranties of Panda contained in the
Asset Purchase Agreement will have been true and correct when made and as
of the closing, and the covenants and agreements in the Asset Purchase
Agreement to be complied with by Panda on or before the closing date have
been complied with;
- no action will have been commenced or threatened against Panda or
SBI that would render inadvisable the consummation by SBI of the
transactions contemplated by the Asset Purchase Agreement, except in the
case where SBI has solicited or encouraged any such transaction;
- SBI and Panda will each have received all authorizations,
consents, orders and approvals which SBI reasonably deems necessary or
desirable for the consummation of the transactions contemplated by the
Asset Purchase Agreement and the Ancillary Agreements;
- SBI will have received amendments or novations of the contracts
identified in the Asset Purchase Agreement;
- no circumstance, change in or effect on Panda's operations will
have occurred which has a material adverse effect on the Operating Assets;
- the approval of the number of Panda's shareholders necessary to
effect the Asset Purchase Agreement, including preferred shareholders;
- the receipt by purchaser of all permits, authorizations, licenses
and other governmental and third party rights and privileges necessary to
operate the Business as currently conducted (collectively, "Approvals");
- the delivery by Panda to SBI of a signed counterpart of a
stockholders' agreement as set out in the Asset Purchase Agreement;
- SBI's satisfaction that Panda is able to sell, convey and assign
to SBI, free and clear of all claims, liens and interests except as
provided in the Asset Purchase Agreement, title and interest in the
Operating Assets;
- Panda's compliance in all material respects with its covenants
and agreements under the Asset Purchase Agreement;
- the absence of any injunction, stay or restraining order staying
the effectiveness of any Approval; and
- the absence of any threatened or pending suit, action,
investigation, inquiry or other proceeding which could have a material
adverse effect on SBI's ability to acquire, use, operate or enjoy the
Operating Assets of Panda.
Panda has executed the contract amendments and novations required
for Closing. No governmental approvals are required for the consummation
of the Proposed Sale.
Conditions to Obligations of Seller
<PAGE>
Page 18
Panda's obligation to consummate the Proposed Sale will be subject to
the satisfaction (or waiver) of various conditions, including the
following:
- the Asset Purchase Agreement will have been approved and adopted
by the requisite vote of the Panda shareholders;
- the representations and warranties of SBI contained in the Asset
Purchase Agreement will have been true and correct when made and as of the
closing, and the covenants and agreements in the Asset Purchase Agreement
to be complied with by SBI on or before the closing date have been
complied with;
- the delivery by SBI to Panda of a signed counterpart of a
stockholders' agreement as set out in the Asset Purchase Agreement;
- SBI will be capitalized with equity capital of not less than
$6,000,000 in cash and commitments; and
- SBI's compliance in all material respects with its covenants and
agreements under the Asset Purchase Agreement.
SBI has been sufficiently capitalized to satisfy that condition for
Closing.
Representations and Warranties
The Asset Purchase Agreement contains various representations and
warranties customary for transactions of this type, including
representations and warranties of Panda relating to, among other things:
- the due organization, valid existence, and good standing of Panda
and similar corporate matters;
- the authorization, execution, delivery, and enforceability of the
Asset Purchase Agreement;
- 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;
<PAGE>
Page 19
- 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;
<PAGE>
Page 20
- the absence of any broker's or finder's fees; and
- the absence of conflicts under SBI's charter or by-laws, required
consents or approvals, and violations of any instrument, law, or
governmental order.
Covenants
In the Asset Purchase Agreement, Panda has agreed to the following
covenants:
- between the date of the Asset Purchase Agreement and the closing
date, Panda will not conduct its operations relating to the Operating
Assets other than in the ordinary course and consistent with Panda's past
practice;
- Panda will provide SBI full and complete access to all
facilities, relevant documents and personnel;
- Panda will use commercially reasonable efforts to obtain all
authorizations, consents, orders, and approvals that may be or become
necessary for execution and delivery of the Asset Purchase Agreement and
the Ancillary Agreements;
- prior to the closing, Panda will promptly notify SBI of all
events, circumstances, facts and occurrences arising subsequent to the
date of the Asset Purchase Agreement which could have a material effect on
its operations;
- Panda will not use any of the Intellectual Property after the
closing date of the Proposed Sale;
- Panda and SBI agree to cooperate and coordinate the making of any
public announcements concerning the Asset Purchase Agreement and the
Ancillary Agreements; and
- from the date of the execution of the Asset Purchase Agreement
until December 30, 1999, except as required pursuant to any fiduciary
duty, neither Panda nor any of its directors, officers, agents or
representatives will (i) solicit, encourage, initiate or participate in
any negotiations or discussions with respect to any offer or proposal to
acquire all or any part of its operations or assets whether by purchase of
assets or otherwise, (ii) disclose any information not customarily
disclosed to any person concerning its operations or the Assets or afford
to any person or entity access to the properties, books or records of its
operations or the assets or (iii) cooperate with any person to make any
proposal to purchase all or any part of the assets of its operations or
the assets (directly or indirectly) other than inventory or non-essential
or excess assets sold in the ordinary course of business.
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.
<PAGE>
Page 21
Indemnification
The representations, warranties, covenants, agreements and
obligations contained in the Asset Purchase Agreement, or in any document
or instrument executed and delivered in connection with that agreement,
will survive the closing of the Proposed Sale for a period of one year.
In addition, the Asset Purchase Agreement requires Panda to indemnify and
hold harmless SBI, its successors and assigns from, for and against any
loss, damage, liability, injury or deficiency which results from the
inaccuracy of any representation or the breach of any warranty made by
Panda in that agreement or the failure of Panda duly to perform or observe
any term, provision, covenant, agreement or condition of the Asset
Purchase Agreement relating to the period prior to the closing date (other
than with respect to the liabilities that SBI will assume). In addition,
the Asset Purchase Agreement requires Panda to indemnify and hold harmless
SBI, its successors and assigns from, for and against any loss damage,
liability, injury or deficiency that results from the transport or
arranged transport or disposal of any hazardous materials to any location
which is listed or proposed for listing on any federal or state list of
sites requiring investigation or remediation. The right of
indemnification for any of the environmental problems does not apply to
any post-acquisition activities. Panda does not have knowledge of any
current environmental liability.
The Asset Purchase Agreement also requires SBI to indemnify and
hold harmless Panda, its successors and assigns from, for and against any
loss, damage, liability or deficiency which results from the inaccuracy of
any representation or the breach of any warranty made by SBI or any
failure of SBI duly to perform or observe any term, provision, covenant,
agreement or condition of the Asset Purchase Agreement. The liability of
Panda to indemnify SBI is limited to $200,000 (the "Indemnification
Limit"), and no damage can be recovered unless the aggregate amount of
damages exceeds $50,000, provided, however, that once such threshold is
met, the full amount of damages, from the first dollar, can be recovered.
Panda agrees to indemnify and hold harmless SBI against the following
taxes and against any loss, damage, liability or expense, including
reasonable fees for attorneys and other outside consultants, incurred in
contesting or otherwise in connection with any such taxes:
- taxes imposed on SBI with respect to taxable periods ending on or
before the closing date;
- with respect to taxable periods beginning before the closing date
and ending after the closing date, taxes imposed on SBI or the operations
of Panda which are allocable to the portion of such period ending on the
closing date; and
- taxes imposed as a result of any breach of warranty or
misrepresentation of the Asset Purchase Agreement.
Indemnification obligations resulting from tax liabilities or
employee benefit liabilities are not subject to the Indemnification
Limit.
The Asset Purchase Agreement imposes specific procedures, terms and
conditions on any party seeking indemnification under the Asset Purchase
Agreement, including, without limitation, notice requirements, defense of
claim procedures and settlement conditions.
Termination and Waiver
The Asset Purchase Agreement may be terminated at any time prior to
the closing:
- by SBI, if between the date of the Asset Purchase Agreement and
the time scheduled for closing an event or condition occurs that has
resulted in or SBI reasonably believes may result in a material adverse
effect;
- by either Panda or SBI if the closing will not have occurred by
December 30, 1999, provided that such a right will not be available to any
party who causes the failure of the closing to occur on or prior to such
date;
<PAGE>
Page 22
- by either Panda or SBI in the event that any governmental
authority will have issued an order, decree, or ruling or taken any other
action restraining, enjoining or otherwise prohibiting the transactions
contemplated by the Asset Purchase Agreement and such order, decree,
ruling or other action will have become final and nonappealable; or
- by the mutual written consent of Panda and SBI.
Pursuant to Section 5.07 of the Asset Purchase Agreement, Panda's Board
of Directors can negotiate a competing transaction consistent with its
fiduciary obligations if Panda receives a superior proposal to SBI's
proposal.
To the extent material provisions or conditions of the Asset
Purchase Agreement are waived or amended or the termination date is
extended, Panda will amend the Proxy Statement and resolicit proxies.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Financial Information gives
effect to the consummation of Panda's sale of substantially all of its
operating assets to SBI as if it had been consummated: (i) on June 30,
1999, in the case of the Unaudited Pro Forma Balance Sheet; and (ii) on
April 1, 1996, the first day of Panda's fiscal year, in the case of the
Unaudited Pro Forma Statements of Operations for the fiscal year ended
March 31, 1997, the nine months ended December 31, 1997, and the fiscal
year ended December 31, 1998.
The following Unaudited Pro Forma Financial Information is
presented for illustrative purposes only and does not purport to be
indicative of the Company's actual financial position or results of
operations as of the date hereof, or as of or for any other future date,
and is not necessarily indicative of what the Company's actual financial
position or results of operations would have been had the Proposed Sale
been consummated on the above-referenced dates, nor does it give effect to
(i) any transactions other than the Proposed Sale and those described in
the Notes to the Unaudited Pro Forma Financial Information or (ii) Panda's
results of operations since June 30, 1999.
The following Unaudited Pro Forma Financial Information is based
upon the historical financial data of Panda and should be read in
conjunction with the information appearing in "The Asset Purchase
Agreement," "Selected Historical Financial Data" and other financial data
included in or incorporated by reference in this Proxy Statement. In the
preparation of the following Unaudited Pro Forma Financial Information, it
has been assumed that Panda's 10% interest in SBI is valued at $600,000
based upon the initial $6,000,000 capitalization of SBI.
The Unaudited Pro Forma Balance Sheet at June 30, 1999, is based
upon Panda's financial position at June 30, 1999. The Unaudited Pro Forma
Statement of Operations for the six months ended June 30, 1999 is based
upon Panda's results of operations for the six months ended June 30, 1999.
The Unaudited Pro Forma Statements of Operations for the fiscal year ended
March 31, 1997, the nine months ended December 31, 1997 and the fiscal
year ended December 31, 1998, is based on Panda's results of operations
for those periods.
<PAGE>
Page 23
<TABLE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BALANCE SHEET
June 30, 1999
<CAPTION>
6/30/99 Pro Forma 6/30/99
Historical Adjustment As Adjusted
----------- ----------- ------------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 106,625 $ - $ 106,625
Accounts receivable
(net of allowance
of $295,292 45,387 (45,387)(1) -
Inventory 38,634 (38,634)(1) -
Other receivables 34,481 (34,481)(1) -
Prepaid expenses and
other current assets 87,940 (87,940)(1) -
----------- ----------- -----------
Total current assets 313,067 (206,442) 106,625
Property and equipment, net 1,467,967 (1,467,967)(1) -
Restricted cash 80,000 - 80,000
Debt issuance costs, net
Other assets 83,739 - 83,739
Investment in SBI - 600,000(1) 600,000
----------- ----------- ------------
Total assets $ 1,944,773 $(1,074,409) $ 870,364
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 1,398,458 $ (300,000)(1)$ 1,098,458
Notes payable B Helix 2,000,000 (2,000,000)(1) -
Notes payable B SBI 300,000 - 300,000
Other current liabilities 884,547 (2,608)(1) 398,349
(100,000)(1)
(383,500)(5)
----------- ----------- ------------
Total current liabilities 4,583,005 (2,786,108) 1,796,897
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, $.01 par
value, 2,000,000 shares
authorized; 529 shares issued
and outstanding 4,867,945 - 4,867,945
Common stock, $.01 par value,
50,000,000 shares authorized;
29,683,834 shares issued
and outstanding 296,838 - 296,838
Additional paid-in capital 77,508,622 - 77,508,622
383,500(5)
Accumulated deficit (85,311,637) 1,328,199(1) (83,599,938)
----------- ----------- ------------
Total stockholders'
equity (deficit) (2,638,232) 1,711,699 (926,533)
----------- ----------- ------------
Total liabilities
and stockholders'
equity (deficit) $ 1,944,773 $(1,074,409) $ 870,364
=========== =========== ============
</TABLE>
<PAGE>
Page 24
<TABLE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1999
<CAPTION>
Six Months Six Months
Ended Ended
6/30/99 Pro Forma 6/30/99
Historical Adjustment As Adjusted
----------- ----------- ------------
<S> <C> <C> <C>
Revenues
Product sales $ 403,740 $ (403,740)(2) $ -
Licensing fees 500,000 (500,000)(2) -
Contract research and
development revenues - - -
Net revenues 903,740 (903,740) -
Other expenses
Cost of sales 194,121 (194,121)(2) -
Research and development 571,664 (571,664)(2) -
Selling, general and
administrative 2,618,348 (2,618,348)(2) -
Amortization of debt
issuance 208,453(6) 208,453
costs/ accrued
penalties 2,551,542 (2,551,542)(2) -
Cost associated with
asset impairments - - -
----------- ----------- ------------
Total operating
expenses 5,935,675 (5,727,222) 208,453
----------- ----------- ------------
Operating loss (5,031,935) 4,823,482 (208,453)
Interest expense - (9,000)(4) (9,000)
Interest income - - -
Other income 60,547 (60,547)(2) -
----------- ----------- ------------
Net loss from
operations (4,971,388) 4,753,935 (217,453)
Dividends and
amortization of
beneficial
conversion feature
related to convertible
preferred stock (54,067) - (54,067)
----------- ----------- ------------
Net loss applicable
to common stock (5,025,455) 4,753,935 (271,520)
4,753,935
Net loss from
discontinued
operations - (4,753,935)(3) -
----------- ----------- ------------
Net loss $(5,025,455) $ 4,753,935 $ (271,520)
=========== =========== ============
Basic and diluted
loss per share $ (.23) $ (.01)
=========== ===========
Weighted average
shares outstanding 21,989,513 21,989,513
=========== ===========
</TABLE>
<PAGE>
Page 25
<TABLE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Twelve Months Ended December 31, 1998
<CAPTION>
Twelve Twelve
Months Ended Months Ended
12/31/98 Pro Forma 12/31/98
Historical Adjustment As Adjusted
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Product sales $ 586,907 $ (586,907)(2)$ -
Licensing fees 100,000 (100,000)(2) -
Contract research and
development revenues 135,673 (135,673)(2) -
Net revenues 822,580 (822,580) -
Other expenses
Cost of sales 1,739,418 (1,739,418)(2) -
Research and development 3,395,577 (3,395,577)(2) -
416,906 416,906
Selling, general and
administrative 9,263,283 (9,263,283)(2) -
Cost associated with asset (6)
impairments 125,038 (125,038)(2) -
------------ ------------ ------------
Total operating
expenses 14,523,316 (14,106,410) 416,906
Operating loss (13,700,736) 13,283,830 (416,906)
Interest expense (3,881,406) 3,881,406(2) -
(18,000)(4) (18,000)
Interest income 72,345 (72,345)(2) -
Other income 35,101 (35,101)(2) -
------------ ------------ ------------
Net loss from
operations (17,474,696) 17,039,790 (434,906)
Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock (741,886) - (741,886)
------------ ------------ ------------
Net loss applicable
to common stock (18,216,582) 17,039,790 (1,176,792)
17,039,790
Net loss from discontinued
operations - (17,039,790)(3) -
------------ ------------ ------------
Net loss $(18,216,582) $ 17,456,696 $ (1,176,792)
============ ============ ============
Basic and diluted
loss per share $ (1.33) $ (.09)
============ ============
Weighted average shares
outstanding 13,732,936 13,732,936
============ ============
</TABLE>
<PAGE>
Page 26
<TABLE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Nine Months Ended December 31, 1997
<CAPTION>
Nine Months Nine Months
Ended Ended
12/31/97 Pro Forma 12/31/97
Historical Adjustment As Adjusted
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Product sales $ 923,792 $ (923,792)(2)$ -
Licensing fees 350,000 (350,000)(2) -
Contract research and
development revenues 973,003 (973,003)(2) -
------------ ------------ ------------
Net revenues 2,246,795 (2,246,795) -
Other expenses
Cost of sales 1,028,577 (1,028,577)(2) -
Research and development 3,255,335 (3,255,335)(2) -
Selling, general and
administrative 6,113,255 (6,113,255)(2) -
Cost associated with asset 312,680(6) 312,680
impairments - - -
------------ ------------ ------------
Total operating expenses 10,397,167 (10,084,487) 312,680
------------ ------------ ------------
Operating loss (8,150,372) 7,837,692 (312,680)
Interest expense (955,014) 955,014(2) -
(18,000)(4) (18,000)
Interest income 144,449 (144,449)(2) -
Other income 11,285 (11,285)(2) -
------------ ------------ ------------
Net loss from operations (8,949,652) 8,618,972 (330,680)
Dividends and amortization
of beneficial conversion
feature related to convertible
preferred stock - - -
------------ ------------ ------------
Net loss applicable
to common stock (8,949,652) 8,618,972 (330,680)
8,618,972
Net loss from discontinued
operations - (8,618,972)(3) -
------------ ------------ ------------
Net loss $ (8,949,652) $ 8,618,972 $ (330,680)
============ ============ ============
Basic and diluted
loss per share $ (.78) $ (.03)
============ ============
Weighted average
shares outstanding 11,541,811 11,541,811
============ ============
</TABLE>
<PAGE>
Page 27
<TABLE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Twelve Months Ended March 31, 1997
<CAPTION>
Twelve Twelve
Months Ended Months Ended
3/31/97 Pro Forma 3/31/97
Historical Adjustment As Adjusted
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Product sales $ 1,547,896 $ (1,547,896)(2)$ -
Licensing fees 100,000 (100,000)(2) -
Contract research and
development revenues 734,123 (734,123)(2) -
------------ ------------ ------------
Net revenues 2,382,019 (2,382,019) -
Other expenses
Cost of sales 2,762,936 (2,762,936)(2) -
Research and development 5,722,717 (5,722,717)(2) -
Selling, general and
administrative 13,142,099 (13,142,099)(2) -
Cost associated with asset 416,906 (6) 416,906
impairments 2,056,025 (2,056,025)(2) -
------------ ------------ ------------
Total operating
expenses 23,683,777 (23,266,871) (416,906)
------------ ------------ ------------
Operating loss (21,301,758) 20,884,852 (416,906)
Interest expense - (18,000)(4) (18,000)
Interest income 427,657 (427,657)(2) -
Other income - - -
------------ ------------ ------------
Net loss from
operations (20,874,101) 20,439,195 (434,906)
Dividends and amortization
of beneficial conversion
feature related to convertible
preferred stock - - -
------------ ------------ ------------
Net loss applicable
to common stock (20,874,101) 20,439,195 (434,906)
20,439,195
Net loss from discontinued
operations - (20,439,195)(3) -
------------ ------------ ------------
Net loss $(20,874,101) $ 20,856,101 $ (434,906)
============ ============ ============
Basic and diluted
loss per share $ (2.15) $ (.04)
============ ============
Weighted average shares
outstanding 9,723,801 9,723,801
============ ============
</TABLE>
<PAGE>
Page 28
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) To reflect the sale of certain assets to and the assumptions of
certain liabilities by SBI under the capital asset purchase agreement. As
a result of the proposed sale, the Panda Project will recognize a gain of
$1,328,199, which was not presented herein.
(2) To reclassify the operating loss to discontinued operations as a
result of the proposed sale of the operating business per Accounting
Principles Board Opinion No. 30.
(3) To eliminate the loss as a result of the sale of the proposed sale
of the business as if it had occurred at the beginning of the period.
(4) To reflect interest on the new $300,000 SBI bridge loan at the 6%
annual interest rate as per the promissory note.
(5) To reflect elimination of accrued penalties on Class A Preferred
Stock and certain common stock penalties in the amount of $383,500.
The Company had previously accrued certain penalties under the Class A
preferred Stock agreement, but under the new exchange agreement executed
in connection with the SBI purchase agreement, the preferred shareholders
waived the penalties due both for the Class A Preferred Stock as well as
their share of the accrued common stock penalties totaling $383,500.
(6) To reflect estimated legal fees, accounting fees and other general
and administrative costs including payroll and rent to be incurred as a
result of the sale. Estimated operating costs for the 12 month-period,
nine-month period, and the six month period are $416,906, $312,680, and
$208,453; respectively.
<PAGE>
Page 29
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 85,000,000.
The text of the proposed amendment to the Panda Articles is set forth
on Annex B to this Proxy Statement.
Additional Shares Necessary to Meet Current Commitments
The Board of Directors determined that additional shares of Panda
Common Stock (the "Additional Shares") should be authorized to fulfill
Panda's obligations under certain commitments and obligations that, if not
fulfilled, threaten Panda's solvency.
Sarubbi is entitled to 3,750,000 shares of Panda Common Stock to
fulfill Panda's obligation under the Amended Settlement Agreement after
the Panda Shareholders approve Proposal 2. See "Legal Proceedings." In
the event the Panda shareholders do not approve this Proposal 2, Panda
will be in breach of the Amended Settlement Agreement due to a lack of
authorized shares to fulfill this obligation, which will materially affect
Panda.
Panda has issued pro rata 171 shares of Series A Preferred Stock to
the current holders of Series A Preferred Stock pursuant to the Exchange
Agreement. In exchange for the penalty shares, the holders of Series A
Preferred Stock agreed to waive all penalties owed by Panda. Panda does
not have shares of common stock available in the event of conversion of
the Series A Preferred Stock. These penalties are approximately
$1,000,000 in the aggregate.
Panda is obligated to issue Fill-Up Shares in satisfaction of its
obligations under the August 1998 Private Placement. Upon approval of
Proposal 2, Panda will issue approximately 6,000,000 Fill-Up Shares pf
Panda Common Stock to fulfill remaining obligations under the Fill-Up
provisions.
There were 50,000,000 authorized shares of Panda Common Stock, with
29,698,425 shares outstanding as of September 17, 1999. Panda anticipates
that there will be approximately 49,961,106 shares of Panda Common Stock
outstanding as of the Record Date for the Annual Meeting. After the
Record Date, there will be 38,894 authorized shares of Panda Common Stock
reserved for issuance pursuant to options, warrants, contractual
commitments or other arrangements. As of September 17, Panda has
commitments to issue 41,275,760 additional shares of Panda Common Stock,
including 22,995,919 shares pursuant to the Exchange Agreement, as
follows:
Purpose for which Number of
Shares are Reserved Reserved Shares
------------------------ --------------------
Employee Stock Option Plans 815,900
Warrants:
1996 Equity Transaction 112,500
1998 Equity Transaction 2,223,928
Helix (PEI) Inc. 2,850,000
Convertible Preferred
Transaction in February 1998 120,000
<PAGE>
Page 30
Fees related to Convertible
Debenture in August 1997 70,096
Warrants issued related to
Investor Relation Services 225,000
Contractual Agreements:
Joseph A. Sarubbi Amendment
to Settlement Agreement
dated December 1998 3,750,000
Fill-Up Shares pursuant to the
1998 Security Agreement (approx.) 6,000,000
Other:
Potential penalty shares in lieu of
liquidating damages related to
1998 Equity Transaction upon
issuance of new authorized shares 4,500,000
Of the Panda Common Stock reserved for issuance, it is highly
unlikely that 3,500,000 options and warrants would be issued due to
exercise prices that range from $0.75 to $44.25 within the given time
criteria pursuant to the respective option and warrant agreements. There
are no authorized and unissued shares of Panda Common Stock that are not
currently reserved for any specific use and available for future
issuances. If Proposal 2 is approved, there will be 14,410,364 such
authorized and unissued shares of Panda Common Stock that are not reserved
for any specific use and available for future issuances.
Additional Authorized Shares Requested
Having the Additional Shares available for issuance in the future
would give the Company greater flexibility by allowing shares to be issued
without incurring the delay and expense of a special stockholders'
meeting. Except as described in this Proxy Statement, the Company has no
other definitive plans or comments to issue the Additional Shares. The
Additional Shares, together with other authorized and unissued shares of
Panda Common Stock, generally would be available for issuance without the
requirement for further stockholder approval, unless action is required by
applicable law or Panda's governing documents.
Shareholders of Panda do not have any pre-emptive or similar rights
to subscribe for or purchase any additional shares of Panda Common Stock
that may be issued in the future, and therefore future issuances of Panda
Common Stock may, depending on the circumstances, have a dilutive effect
on the earnings and equity per share, voting power and other interests of
the existing shareholders of Panda.
The increase in the authorized number of shares of Panda Common
Stock also could be viewed as having anti-takeover effects. Although the
Board of Directors has no current plans to do so, shares of Panda Common
Stock could be issued in various transactions that would make a change in
control of the Company more difficult or dilute stock ownership of a
person seeking to obtain control.
The availability of this defensive strategy to the Company could
discourage unsolicited takeover attempts, thereby limiting the opportunity
for the Company's shareholders to realize a higher price for their shares
than is generally available in the public markets. The Company is not
aware of any effort to accumulate shares of Panda Common Stock or obtain
control of the Company by a tender offer, proxy contest or otherwise, and
the Company has no present intention to use the Additional Shares for
anti-takeover purposes.
The Board of Directors recommends a vote FOR approval of the amendment
to the Panda Articles.
<PAGE>
Page 31
Votes Required for Approval of Proposal 2
Approval of Proposal 2 requires that the number of votes cast in
favor of Proposal 2 exceed the number of votes cast against. Votes for
Proposal 2 may be cast in favor of or against the proposal or may abstain
from voting. Abstentions may be specified on the proposal and will be
considered present at the Annual Meeting, but will not be counted as
affirmative votes. In addition, broker non-votes, where brokers are
prohibited from exercising discretionary authority in voting shares for
beneficial owners who have not provided voting instructions, will not be
included in vote totals for Proposal 2, but will be counted for purposes
of determining whether there is a quorum at the Annual Meeting.
<PAGE>
Page 32
PROPOSAL 3:
ELECTION OF DIRECTORS
Panda's Articles of Incorporation provide that the Board of
Directors shall consist of not less than three nor more than nine members,
the exact number of directors to be fixed by the Board of Directors. The
Board of Directors has set the number of directors at three. The Board of
Directors has three classes, each of whose members serve for a staggered
three-year term. Currently, the Board consists of one Class I director
William E. Ahearn, one Class II director John T. 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, was elected to the Board of Directors in
November 1998. Mr. Ahearn joined Panda in March of 1996 and served as
President of the Archistrat Systems division from April 1996 to December
1996. He served as Vice President of Technology at Panda from January
1997 to September 1997 and as Vice President and Chief Scientist from
September 1997 to November 1998. From 1993 to 1996, he was Director of
Multimedia Products at AMP Incorporated. AMP is a manufacturer of
electronic components. From 1964 to 1993, Mr. Ahearn served in a variety
of positions at International Business Machines Corporation ("IBM"),
including Product Manager for Digital Video Interactive and Collaborative
Work Products IBM Europe, Product and Project Manager for Input/Output
Technology Entry Systems and Electro-Optical Technologies at IBM Corporate
Headquarters, and as staff member of IBM's T.J. Watson Research Center.
From 1984 to 1989, Mr. Ahearn was a visiting scholar at the MIT Media
Lab.
The Board of Directors recommends that shareholders vote "FOR" the
nominee for director.
Class II Director
John T. Friedline, age 58, was elected to the Board of Directors in
June 1999. Since 1994, Mr. Friedline has been President and Chief
Executive Officer of Friedline & Associates, Inc., an independent
management consultant primarily in the multi media arena. From 1965 to
1994, Mr. Friedline held various positions at IBM Corp. ("IBM"). From
1965 to 1988, he served in IBM's domestic offices, holding positions that
included National Marketing Manager - PCs and Application Development and
Director - Systems Application Architecture Marketing. From 1988 to 1994,
he served in IBM's European headquarters as Director of its New Business
Solutions Unit. From 1963 to 1965, Mr. Friedline was an engineer at Union
Carbide. He holds a B.S. in Engineering from Bucknell University and an
MBA from the University of Buffalo.
Class III Director
<PAGE>
Page 33
Stanford W. Crane, Jr., age 48, has served as President, Chief
Executive Officer and Chairman of the Board of Directors of the Company
since its inception in April 1992 and, since November 1993, as Senior Vice
President - Product Design and Development. From May 1990 to April 1992,
Mr. Crane was self-employed, principally engaged in the development of the
Compass Connector. From 1984 to April 1990, Mr. Crane was president of
Crane Electronics, Inc., which supplied advanced interconnection
technology for military and commercial products. From 1980 until 1984,
Mr. Crane was an executive at Molex Corporation, a publicly held
corporation manufacturing and selling electronic interconnect devices, and
served from 1982 to 1984 on the Chairman's staff for the Advanced
Development Committee and assisted in marketing and strategic planning for
domestic and international operations. From 1976 to 1980, Mr. Crane
served as a sales executive for AMP Incorporated, a manufacturer of
electronic components.
Board and Committee Meetings
The Board of Directors of Panda held 19 meetings during 1998. The
Board has a standing Audit Committee and a standing Compensation and Stock
Option Committee. The Compensation and Stock Option Committee and the
Audit Committee met several times during 1998 to address Mr. Crane's
contract and employee stock option grants. A contract with Mr. Crane was
not renewed. Additional stock option grants were approved by the Board of
Directors in October 1998. Panda does not have a nominating committee.
During the most recent fiscal year, each director attended at least 75% of
the meetings of the Board and any committee on which such director served.
Mr. Gingrich and James T.A. Wooder, a former director, served on
the Audit Committee of the Board of Directors until their resignation in
March 1999 and November 1998, respectively, the members of which make
recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the results of
the audit engagement, approve professional services provided by the
independent accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of Panda's internal accounting controls. Mr. Ahearn now serves
as the Audit Committee.
Mr. Gingrich and Dr. Tummala comprised the Compensation and Stock
Option Committee of the Board of Directors, which makes recommendations to
the Board regarding the executive and employee compensation programs of
Panda and which administers the 1993 Performance Incentive Plan, the 1995
Employee Stock Incentive Plan and the Nonemployee Director Stock Option
Plan. Mr. Gingrich and Dr. Tummala both have resigned as of March 1999.
The Board has not replaced those members and has decreased the number of
directors to three.
Directors' Compensation
All directors hold office until the next annual meeting of
shareholders and the election and qualification of their successors.
Directors who are not employees and do not otherwise receive compensation
from Panda are entitled to a retainer of $2,000 per month for serving on
the Board of Directors in addition to the reimbursement of reasonable
expenses incurred at any meetings.
In addition, each outside director participates in Panda's
Nonemployee Director Stock Option Plan ("Director Plan"). Under this plan
each outside director receives an option to purchase 4,000 shares of Panda
Common Stock at each annual meeting of shareholders of Panda. Such
options have a per share exercise price equal to the fair market value of
the Panda Common Stock on the date of grant, vest annually in four equal
installments beginning on the first anniversary of grant and, unless
sooner terminated, expire five years from the date of grant. During 1998,
Messrs. Gingrich, Tummala and Wooder each received an option to purchase
4,000 shares of Panda Common Stock under the Director Plan at an exercise
price of $3.81 per share. At the Annual Meeting, an additional option to
purchase 4,000 shares of Panda Common Stock will be granted to each of the
existing directors.
Annual and Long-Term Incentive Compensation
Panda has no formal bonus program for its key employees.
Occasionally, bonus payments may be made to key employees based on the
achievement of agreed upon performance objectives or as a part of the
recruitment process.
<PAGE>
Page 34
Panda's stock option plans are designed to promote the identity of
long-term interests between Panda's employees and its shareholders and to
assist in the retention of executives. The size of option grants is
generally intended by the Committee to reflect the executive's position
with Panda and his or her contributions to Panda. Stock options generally
vest over a four-year period in order to encourage key employees to
continue in the employ of Panda. Stock options are granted at an option
price equal to the fair market value of Panda's Common Stock on the date
of grant; however, Panda reserves the right to grant stock options having
exercise prices less than the fair market value of the Panda Common Stock
on the date of grant, to modify the terms of existing options and to
reprice the options as an incentive for employees to remain with Panda.
Benefits
Panda's executive officers are entitled to receive medical and life
insurance benefits and to participate in Panda's 401(k) Retirement Savings
Plan on the same basis as other full-time employees of Panda.
The amount of perquisites, as determined in accordance with the
rules of the Securities Exchange Commission relating to executive
compensation, did not exceed 10% of salary and bonus for 1998 for any of
the named executive officers.
Summary of Compensation of Chief Executive Officer
For the fiscal year ended December 31, 1998, Mr. Crane, Panda's
President and Chief Executive Officer, received a salary of $150,000.
Compliance with Internal Revenue Code Section 162(m)
Panda does not believe Section 162(m) of the Internal Revenue Code,
which disallows a tax deduction for certain compensation in excess of $1
million, will generally have an effect on Panda. The Compensation
Committee intends to review the potential effect of Section 162(m)
periodically and in the future may decide to structure the performance-
based portion of its executive officer compensation to comply with Section
162(m). The Compensation Committee has approved the per-participant
limitations included in Panda's 1993 Performance Incentive Plan and in
Panda's 1995 Employee Stock Incentive Plan as a means of preserving
flexibility in structuring executive officer compensation.
<PAGE>
Page 35
Company Stock Price Performance
The following graph shows a comparison of cumulative total return
since December 1994 for the Company's stock, the Nasdaq Composite Index
and the Philadelphia Semiconductor Index. The performance graph shows
cumulative percentage increases or decreases in each investment.
[graph provided]
Comparison of Cumulative Return since December 31, 1994*
The Panda Nasdaq Philadelphia
Project, Inc. Composite Index Semiconductor Index
------------- --------------- -------------------
12/31/94 100 100 100
12/31/95 195.51 139.92 143.24
12/31/96 33.15 171.69 171.54
12/31/97 41.01 208.83 188.19
12/31/98 4.21 291.60 250.25
- --------------------
* Assumes $100 invested on December 31, 1994 in each investment. Total
Return assumes reinvestment of dividends.
Compensation and Stock Option Committee Interlocks and Insider
Participation
The members of the Compensation and Stock Option Committee were Rao
R. Tummala and Claud L. Gingrich until March 1999 when they resigned. No
member of the Compensation and Stock Option Committee was at any time
during fiscal year 1998, or formerly, an officer or employee of Panda.
Employment Agreements
Mr. Crane entered into an employment agreement with Panda on November
8, 1993, as amended and restated on February 22, 1994, which expired on
January 1, 1999 (subject to certain termination provisions). Under this
agreement Mr. Crane receives an annual base salary of $150,000. Mr. Crane
is also eligible to receive discretionary bonuses as determined by the
Board of Directors. Furthermore, the agreement provides that Mr. Crane is
<PAGE>
Page 36
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
<PAGE>
Page 37
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 April 1999, Mr. Crane licensed the Compass Connector technology
to Winchester Electronics to develop, manufacture and sell on a non-
exclusive world-wide basis. Winchester Electronics competes in a number
of different market segments and is not currently competing with any
specific product versions offered by Panda.
In October 1993, Panda settled litigation with Jack R. Moore and Gary
Marvel, former officers and promoters of Panda. In connection with the
settlement, the former officers, or their designees, received 197,860
shares of Panda's Common Stock which were being held by an escrow agent
(the "Escrowed Shares") subject to Panda's or its assignee's right to
repurchase them. In February 1994, Panda's rights to purchase the
Escrowed Shares were assigned to Mr. Crane in connection with his
employment agreement. In March 1996, Mr. Crane purchased the Escrowed
Shares for an aggregate purchase price of $312,000.
In July 1996, Mr. Crane purchased 1,000 shares of Panda Common Stock
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 Panda
Common Stock in connection with such purchase having a term of five years
and an exercise price of $11.00 per share.
In October 1996, Panda and Mr. Crane entered into a license agreement
with LG Cable & Machinery Ltd. ("LG") whereby LG was granted a license
with respect to Compass Connector technology owned by Mr. Crane and
certain enhanced Compass Connector technology owned by Panda. The license
granted to LG is non-exclusive except for certain limited exclusive
manufacturing rights with respect to specified Asian countries. The $1
million license fee will be split equally between Mr. Crane and Panda. In
addition, Panda and Mr. Crane are entitled to receive royalties on sales
of the Compass Connector products by LG or its affiliates, which will be
split equally between Mr. Crane and Panda. As of June 30, 1999, Mr. Crane
had received an aggregate of $300,000 in payments under this Agreement.
In August 1997, Panda hired Melissa Crane, wife of Stanford W. Crane,
Jr., as Director of Strategic Business at an annual salary of $100,000 per
year. In September 1997, Ms. Crane was granted an option to purchase
50,000 shares of Panda Common Stock at an exercise price of $6.13 per
share. In November 1997, the Board of Directors elected Ms. Crane Vice
President of Strategic Business and authorized an increase in her annual
salary to $125,000 per year. See "Executive Compensation." In October
1998, the Board of Directors appointed Ms. Crane the Acting Chief
Financial Officer.
With respect to each transaction between Panda and an affiliate of
Panda, a majority of the disinterested members of the Board of Directors
determined that such transactions were on terms at least as fair as had
they been consummated with unrelated third parties.
<PAGE>
Page 38
Continuation of 1993 Performance Incentive Plan and 1995 Employee Stock
Incentive Plan
The 1993 Performance Incentive Plan and the 1995 Employee Stock
Incentive Plan remain in effect pursuant to their existing terms.
Compliance with Section 16(a) of the Exchange Act
Federal securities laws require the Company's directors, certain of
its officers, and person owning beneficially more than ten percent of
Panda's Common Stock to file reports of initial ownership and is required
to disclose into this Proxy Statement any failure of the foregoing persons
to file timely into this Form 10K any failure of the foregoing persons to
file timely those reports during its fiscal year ended December 31, 1998.
To the best of the Company's knowledge, they solely upon a review of
copies of reports furnished to it and written representations that no
other reports were required to report, and greater that then percent
beneficial owners made all such filing timely, except that Mr. Ahearn and
Helix filed their respective Form 4's late on one occasion.
SUMMARY COMPENSATION
The following table sets forth the compensation paid by the Company
for services performed on the Company's behalf during the fiscal year
ended December 31, 1998 with respect to the Company's Chief Executive
Officer and the Company's four other most highly compensated executive
officers as of December 31, 1998 (the "Named Executive Officers").
<TABLE>
SUMMARY COMPENSATION TABLE
-------------------------------------------------
Annual Long-Term
Fiscal Compensation Compensation All Other
Name and Principal Position Period Salary Bonus Options (#) Compensation
- --------------------------- ------ -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Stanford W. Crane, Jr.
President, Chief Executive 1998 $150,000 - - $9,600 (2)
Officer and Chairman of 1997 150,000 100 (1) - 7,613 (9)
the Board 1996 150,000 - - 2,344 (8)
William E. Ahearn
Vice President and 1998 96,666 (5) - - 6,000 (2)
Chief Scientist 1997 143,752 50,100 (11) 70,000 4,800 (2)
1996 8,814 - - -
C. Daryl Hollis
Executive Vice 1998 78,125 (6) - - 6,000 (2)
President, Secretary 1997 93,754 25,100 (10) 70,000 4,800 (2)
Treasurer and Chief 1996 - - - -
Financial Officer
Melissa F. Crane
Vice President of 1998 125,000 25,000 (3) - 5,035 (4)
Strategic Business 1997 66,935 (12) - - -
Roy Lee
Vice President 1998 125,000 - - 3,150 (2)
Engineering 1997
Kevin J. Calhoun
Controller 1998 85,000 (7) - - 1,600 (2)
1997 110,000 - - 17,783 (13)
<PAGE>
Page 39
- --------------------
(1) Holiday bonus.
(2) Car allowance.
(3) $25,000 bonus paid to Ms. Crane in connection with achieving certain performance objectives.
(4) $5,035 commission paid to Ms. Crane in connection with achieving certain performance
objectives and car allowance.
(5) Mr. Ahearn s salary is prorated as he resigned on October 30, 1998.
(6) Mr. Hollis salary is prorated as he resigned on August 14, 1998.
(7) Mr. Calhoun s salary is prorated as he resigned on September 30, 1998.
(8) Mr. Crane's Company contribution to 401(k) Plan.
(9) Consists of car allowance of $4,800 and Company contribution to 401(k) Plan.
(10) $25,000 paid to Mr. Hollis in connection to achieving certain performance objectives and a
$100 holiday bonus.
(11) $50,000 bonus was paid to Mr. Ahearn in connection with achieving certain objectives and a
$100 holiday bonus.
(12) Ms. Crane's salary is prorated due to hire date of August 1997.
(13) Mr. Calhoun was paid a bonus of $17,783 in connection with achieving certain objectives.
</TABLE>
<TABLE>
<PAGE>
Page 40
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Option Grants. The following table summarizes option grants
during the fiscal year ended December 31, 1998 to the Named Executive
Officers:
<CAPTION>
Potential
Realizable
Percent Value at Assumed
of Total Annual Rates of
Options Stock Price
Options Granted to Exercise Appreciation for
Granted Employees Price Expiration Option Term (2)
Name (#) (3) In Period ($/Share) (1) Date 5%($) 10%($)
- ---- ------- ---------- ------------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Stanford W. Crane, Jr - - - - - -
William E. Ahearn 5,000 * 5.25 01/29/08 - -
Daryl Hollis 5,000 * 5.25 01/29/08 - -
Melissa F. Crane 35,000 4.5% 5.25 01/29/08 - -
Roy Lee 5,000 * 5.25 01/29/08 - -
5,000 6.45% 0.78 10/29/08 24,527 62,155
Kevin J. Calhoun 2,500 * 5.25 01/29/08 - -
- --------------------
* represents less than 1%.
(1) Equals fair market value of Panda Common Stock on the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% compounded annually from the date of grant to their expiration date.
Actual gains, if any, on stock option exercises will depend upon the future performance of the Panda
Common Stock and the date on which the options are exercised. The stock options issued at $5.25 would
not be in the money under circumstances stated above.
(3) Options to purchase 20% of shares of Panda Common Stock are exercisable six months from the
date of grant; the remainder become exercisable in equal annual installments on the first, second,
third and fourth anniversaries of grant.
</TABLE>
Option Exercises and Year-End Values. None of the Named Executive
Officers exercised any stock options during the twelve-month period for
the year ended December 31, 1998. The following table summarizes the
value of options held by such persons as of December 31, 1998:
<TABLE>
<PAGE>
Page 41
YEAR-END OPTION VALUES
<CAPTION>
Number of Unexercised Value of Unexercised
Options at December 31, 1998 In-the-Money Options
Year-End (#) December 31, 1998 ($) (1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stanford W. Crane, Jr. - - - -
William E. Ahearn (2) - - - -
C. Daryl Hollis (2) - - - -
Melissa F. Crane 34,000 51,000 - -
Roy Lee 45,000 80,000 - -
Kevin Calhoun (2) - - - -
- --------------------
(1) As of December 31, 1998, the closing sale price of the Company's Common Stock was $.4688 per
share.
(2) Mr. Hollis' and Mr. Ahearn's options expired in November 15,1998 and January 30, 1999
respectively. Mr. Calhoun's options expired December 30,1998.
</TABLE>
<PAGE>
Page 42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below is based on information obtained from the persons
named below with respect to the shares of Panda Common Stock beneficially
owned, as of September 17, 1999 (except as noted below), by (i) each
person known by Panda to be the owner of more than 5% of the outstanding
shares of Panda Common Stock, (ii) each executive officer included in the
Summary Compensation Table and (iii) all executive officers and directors
of Panda as a group.
<TABLE>
<CAPTION>
Amount and Percentage of
Nature of Outstanding
Beneficial Shares
Amount and Ownership upon Owned upon
Name and Address Nature of Percentage of Exchange of Exchange of
of Beneficial Beneficial Outstanding Series A Series A
Owner Ownership (1) Shares Owned (2) Preferred Shares Preferred Shares
- --------------- ------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Stanford W
Crane, Jr. (3) 6,860 * 6,860 *
William E. Ahearn 0 * 0 *
John Friedline 0 * 0 *
Melissa F.
Crane (4) 41,000 * 41,000 *
Helix (PEI) Inc. 3,850,000 7.71% 3,850,000 7.71%
Joseph A.
Sarubbi (6) 2,100,000 4.20% 2,100,000 4.20%
Gam Arbitrage
Fund L.P. (7) 0 * 604,719 1.20%
AGR Halifax
Fund L.P. (7) 0 * 13,577,584 27.17%
Leonardo L.P. (7) 0 * 7,738,249 15.48%
Ramius Fund
L.P. (7) 0 * 375,350 0.75%
Raphael L.P. (7) 0 * 1,150,039 2.30%
AG Super Fund
L.P. (7) 0 * 588,228 1.17%
All executive
officers and
directors as
a group (3) 34,140 * 34,140 *
- --------------------
* Less than 1%.
(1) The number of shares of Panda Common Stock beneficially owned by each
person is determined under the rules of the SEC, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which the individual has sole
or shared voting power or investment power and also any shares of Panda Common Stock
which the individual has the right to acquire within 60 days after September 17,
1999 through the exercise of any stock option or other right. The inclusion herein
of any shares of Panda Common Stock deemed beneficially owned does not constitute an
admission of beneficial ownership of those shares. Unless otherwise indicated, the
persons named in the table have sole voting and investment power with respect to all
shares of Panda Common Stock shown as beneficially owned by them.
(2) The number of shares deemed outstanding includes 29,698,425 shares
outstanding as of September 17, 1999 plus any shares subject to options held by the
person in question that are currently exercisable within 60 days after September 17,
1999.
<PAGE>
Page 43
(3) Includes 6,860 shares held by Mr. Crane jointly with his wife, of which 1,000
shares are issuable upon exercise of a warrant.
(4) Includes 6,860 shares held by Ms. Crane jointly with her husband, of which
1,000 shares are issuable upon exercise of a warrant.
(5) Helix has 2,850,000 shares issuable upon exercise of outstanding warrants
at a price to be adjusted at the closing of the proposed transaction pursuant to a
letter agreement between Panda and Helix. Helix is a wholly owned subsidiary of
Helix Investments (Canada) Inc., which is a venture capital company.
(6) Includes 2,100,000 shares issued pursuant to the Settlement Agreement. See
"Legal Proceedings."
(7) Includes all shares of Panda Common Stock to be received pursuant to the
Exchange Agreement as well as all warrants delivered pursuant to the 1998
Convertible Preferred issuance and the August 1998 Private Placement.
</TABLE>
Shareholders who are a party to agreements whereby they agree to
vote in favor of the Proposed Sale include Joseph A. Sarubbi, GAM
Arbitrage Fund L.P., AGR Halifax Fund L.P., Leonardo L.P., Ramius Fund
L.P., Raphael L.P., Helix (PEI) Inc. and AG Super Fund L.P. These
shareholders will vote approximately 52% of the outstanding Panda Common
Stock in favor of the Proposed Sale.
Recent Panda Securities Issuances
Since January 1998, the Company has issued securities through
private placements, its stock option plan and its 401K plan. Listed below
is a chart of all such securities from January 1, 1998 through June 30,
1999.
<PAGE>
Page 44
<TABLE>
<CAPTION>
Class of Aggregate
Person to Aggregate Underwriting
Shares Registration Fiscal whom Shares Offering Discount or
Shareholder Issued Reason Statement Quarter Were Sold Price Commission
- ----------- ------ ------ ------------ ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock 600 Preferred Stock 7/7/1998 S-3 2nd Quarter Sophisticated $6,000,000 -
Issuance 1998 & Institutional
Investors
Preferred Stock 30 Preferred Stock 7/7/1998 S-3 2nd Quarter - - -
Dividends Financing 1998
Agreement
---
630
===
Common Stock
- ------------
Ballin &
Partners 5,000 Investor Reg S 3rd Quarter Sophisticated $ 18,125 -
Relations 1998 & Institutional
Services Investors
August 1998 2,254,602 Financing Pending S-2 3rd Quarter Sophisticated $3,675,000 $117,500
Equity 1998 & Institutional
Transaction Investors
Samtec, Inc. 666,667 Financing Not 1st Quarter Sophisticated - -
Registered 1999 & Institutional
Investors
Fill-Up Shares 4,441,829 August 1998 Not 2nd Quarter Sophisticated - -
Equity Trans Registered 1999 & Institutional
Agreement Investors
Helix 1,000,000 SBI/Helix/ Not 2nd Quarter Sophisticated $ 266,000 -
Panda Registered 1999 & Institutional
Agreement Investors
ISO Exercise 3,000 Incentive 2/12/98 S-8 1st Quarter Employee $ 12,250 -
Stock Option 1998 Option
Plan Exercise
401K 13,138 401K Plan 2/12/98 S-8 1st Quarter Employee $ 54,382 -
1998 401K Plan
Joseph Sarubbi 3,875,000 Legal 2/3/99 S-2 1st & 2nd Legal $1,087,600 -
Settlement & 7/26/99 Quarters Settlement
Agreement Pending S-2 1999 Agreement
Preferred 4,637,426 Preferred 7/17/98 S-3 Various Sophisticated $2,517,561 -
Stock Stock & Institutional
Conversions Agreement Investors
IIRG 18,462 Investor Exemption 2nd Quarter Sophisticated $ 76,852 -
Relation Section 4(2) 1998 & Institutional
Services of the Investors
Securities
Act of 1933
Warrant 553,333 Warrant 10/28/96 S-3 1st Quarter Sophisticated $ 415,175 -
Exercise Exercise 1999 & Institutional
Agreement Investors
Common Shares
Issued
1/1/98 - ===========
6/30/99 17,468,457
===========
</TABLE>
<PAGE>
Page 45
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>
<CAPTION>
Six Months Ended Year Ended Nine Months Ended
June 30, December 31, December 31, Fiscal Year Ended March 31,
------------------------ ----------- ------------------------ ------------------------------------
1999 1998 1998 1997 1996 1997 1996 1995
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 903,740 $ 457,591 $ 822,580 $ 2,246,795 $ 2,091,132 $ 2,382,019 $ 870,658 -
Research and
development costs 571,664 2,028,520 3,395,577 3,255,335 4,786,838 5,722,717 7,954,924 3,494,260
Selling, general
and administrative
expenses 2,618,348 4,240,244 9,263,283 6,113,255 10,830,976 13,142,099 15,810,701 3,744,914
Costs associated with
asset impairments 25,038 1,471,025 2,056,025
Net loss (5,031,935) (7,435,139) (17,474,696) (8,949,652) (17,217,703) (20,874,101)(23,894,426) (6,931,346)
Basic and diluted loss
per share ($0.23) ($0.65) ($1.33) ($0.78) ($1.79) ($2.15) ($3.07) ($1.25)
Weighted average
shares outstanding 21,989,513 12,230,798 13,732,936 11,541,811 9,605,280 9,723,801 7,786,426 5,531,941
</TABLE>
<TABLE>
Balance Sheet
<CAPTION>
December 31, March 31,
--------------------------- --------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Assets $ 2,837,837 $ 5,713,830 $ 7,337,320 $18,557,681 $10,245,133
Total
Liabilities $ 4,563,731 $ 3,616,126 $ 2,524,445 $ 3,690,090 $ 1,069,810
Accumulated
Deficit (80,340,249) (62,865,553) (53,915,901) (33,041,800) (9,147,374)
Stockholders'
Equity $ (1,725,894) $ 2,097,704 $ 4,812,875 $14,867,591 $ 9,175,323
</TABLE>
Panda computes per share data in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Due to losses from
continuing operations, the effect of stock options and warrants is
antidilutive. Accordingly, Panda's presentation of diluted earnings per share
is the same as that of basic earnings per share.
<PAGE>
Page 46
MARKET FOR PANDA'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Panda's Common Stock had been traded since May 1994 to December 16,
1998 on the Nasdaq National Market under the symbol "PNDA." The stock
currently trades on the OTC Electronic Bulletin Board. Prior to that time,
there was no public market for the Panda Common Stock. The following table
sets forth the range of high and low closing sale prices for the Panda Common
Stock as reported during each of the quarters presented. The quotations set
forth below are inter-dealer quotations, without retail mark-ups, mark-downs
or commissions and do not necessarily represent actual transactions.
Common Stock
----------------
Quarterly Period Ended High Low
- ----------------------------- ------ ------
1999
- ----
June 30, 1999 $ .43 $ .10
March 31, 1999 $ .41 $ .31
1998
- ----
December 31, 1998 $ 1.50 $ .19
September 30, 1998 $ 3.44 $ .19
June 30, 1998 $ 6.25 $ 3.13
March 31, 1998 $ 6.25 $ 3.88
1997
- ----
December 31, 1997 $ 9.38 $ 3.81
September 30, 1997 $ 7.31 $ 2.50
June 30, 1997 $ 6.00 $ 2.63
March 31, 1997 $ 9.25 $ 3.75
The closing bid price on the date immediately prior to the announcement
of the Proposed Sale, May 17, 1999, was $0.20 per share. The closing bid
price of Panda's Common Stock on the OTC Electronic Bulletin Board on
September 17, 1999 was $0.14 per share. As of September 17, 1999, there were
approximately 29,698,425 shares of Panda Common Stock outstanding and 294
holders of record of Panda's Common Stock. This number does not include
beneficial owners of Panda Common Stock whose shares are held in the names of
various dealers, clearing agencies, banks, brokers and other fiduciaries.
Panda has never declared or paid any cash dividends. After the
consummation of the Proposed Sale, Panda intends to invest any income received
as Panda believes appropriate under the circumstances, which may include U.S.
Government Securities and other short-term instruments. Panda currently
intends to retain any future earnings to finance the growth and development of
its business and future operations, and therefore does not anticipate paying
any cash dividends in the foreseeable future.
In addition, in February 1998, Panda issued shares of Series A
Preferred Stock, the terms of which prohibit Panda from paying any dividends
on Panda Common Stock or other shares junior in rank to the Series A Preferred
Stock unless all dividends for all past quarterly periods have been paid or
declared and a sum of cash or amount of shares sufficient for the payment
thereof set apart. Further, the terms of the Series A Preferred Stock allow
for the redemption of any outstanding shares of Series A Preferred Stock in
the event Panda declares a dividend (other than a dividend payable in Panda
Common Stock).
<PAGE>
Page 47
INFORMATION REGARDING PANDA
BUSINESS
Overview
Statements in this Proxy Statement that are not statements of historical
fact are to be regarded as forward-looking statements which are based on
information available to Panda as of the date hereof and involve a number of
risks and uncertainties. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements are delays in product development, competitive pressures, general
economic conditions, risks of intellectual property and other litigation, and
the factors detailed below under "Certain Factors That May Affect Future
Results" or elsewhere herein or set forth from time to time in Panda's
periodic reports and registration statements filed with the SEC.
Panda is a technology company engaged in the design, development,
manufacture, licensing and sale of interconnect solutions to generate greater
throughput from silicon to board to system. These technologies are embodied
in VSPA, a three-dimensional semiconductor package, and the Compass Connector,
a board-to-board interconnect solution (collectively the "Technology
Products"). VSPA has received JEDEC JC-11 Committee designation and has
passed Mil Std. 883. The JEDEC JC-11 Committee is responsible for setting
standards for semiconductor packages. The Company obtained JEDEC designation
in 1997. The JEDEC designation for VSPA is PQFP-B. Semiconductor
manufacturers can obtain relevant mechanical data and specifications regarding
the VSPA product. Military standard 883D is the reliability standard for
electrical and mechanical testing parameters which indicate the level of
future durability and performance for components. In order for VSPA to be
commercially viable, it was necessary to prove its performance by achieving
industry standard levels. In addition, in September 1998, the Compass
Connector received Bellcore approval. Bellcore approval is an important
series of reliability, mechanical and electrical tests for the
telecommunications industry. In order for an interconnect to be used in
commercial applications for the telecommunications industries, most potential
end users will require that the connector be Bellcore approved.
In September 1998, Panda announced a streamlining of operations that
included a significant reduction of operations related to the development of
the Archistrat line of computers and the Rock City line of desktop computers
(collectively the "Systems") and any upgradable mother board development
related to the Systems. Due to further cash constraints in November 1998,
Panda elected to exit its Systems business entirely. Panda continues to focus
its efforts on the Technology Products.
Panda has delivered products for commitments of prototype,
pre-production and production orders of its Technology Products from
Veridicom, Motorola, Kaiser Aerospace & Electronics, Honeywell and National
Semiconductor. Several of these customers have notified Panda that the VSPA
parts have passed Mil Std. 883 level of qualification for their specific
application. See "Semiconductor Packages."
Technology Products
The proliferation of increasingly sophisticated semiconductors for
computer operating systems and other electronic applications, along with the
explosive growth in Internet usage, have created the need for substantially
greater bandwidth in products ranging from the semiconductor to the printed
circuit board. Bandwidth refers to the capacity for transmitting data inside
the electronic device as well as between two or more devices. In recent
years, improvements in the speed at which microprocessors and other integrated
circuits can process data have far outpaced the data transmission capacity of
other electronic components and of the connectors and lines which link the
devices. The resulting bandwidth bottlenecks have effectively negated some of
the improvement in processing speed attributable to the enhanced
microprocessors. The Technology Products include semiconductor packages and
interconnect devices which incorporate designs which Panda believes enable
these products to effectively address the bandwidth bottlenecks. In addition,
these Company products, which are protected by a variety of patents which have
either been issued or for which applications are currently pending, have
significant advantages over currently available products, including:
<PAGE>
Page 48
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.
<PAGE>
Page 49
VSPA is based on a three-dimensional architecture that utilizes multiple
rows of pins that are tiered to achieve a greater density within a smaller
area. The VSPA is scalable in X, Y, and Z axes being either square or
rectangular in shape. By using individual, pre-stamped, pins the VSPA package
does away with a traditional lead frame and many of the labor intensive
molding steps. As a result, it allows leads to be interleaved and arranged in
several tiers. The number of tiers depends upon the target die size and
necessary number of I/O. VSPA can be configured with one to six tiers,
allowing packages up to and over 1,000 pins. This allows the package to
shrink and grow depending on the customer's chip application.
VSPA is also available in both 'cavity down' and 'cavity up' versions.
With VSPA's wide range of I/O's and variable package dimensions, multichip
modules (MCMs) are also possible with the VSPA. This scalability allows
silicon designers considerable flexibility in choosing a VSPA package that
will best suit their specific package requirements.
This minimum lead length yields low package parasitic and inductance by
keeping pins a constant size for each tier and a common part number for each
package size. These parameters remain constant for each package size since
only the frame is scaled to accommodate different die sizes. This cannot be
achieved in PQFP or BGA packages. The electrical characteristics of VSPA
allow it to perform with faster rise times and the ability to support high
performance applications at much higher frequencies. VSPA has tested
resonance free to 3.5GHz with the next generation projected for a 10GHz range.
In 1998, Panda introduced several versions of the VSPA package including
the thermally enhanced and super thermally enhanced versions to address market
demands. Panda shipped pre-production parts of the VSPA TE and submitted
several designs using the VSPA STE.
In January 1998, Panda received its first production order for 1 million
units for a customized version of the VSPA package from Veridicom. As of June
1, 1999, Panda shipped in excess of 115,000 units to Veridicom. Additionally,
Panda has delivered prototype and pre-production parts to Lucent Technologies,
Motorola, EG&G Heimann, Honeywell SSEC, Samsung, SEEQ Technologies, National
Semiconductor, Kaiser Electronics and several other companies. While Panda
believes that production orders may materialize from the initial orders
received, there can be no assurance that any of these activities will result
in sales of the VSPA product.
Compass PGA is a high density PGA semiconductor product primarily designed
to address the high density chipscale segment of the packaging market. The
Compass PGA employs multiple leads and requires less surface area of the PCB
to accommodate the same number of leads in traditional PGA packages.
Additional design and qualification work must be done prior to
commercialization of this product. The Compass PGA can be used with existing
wirebond and FlipChip technologies. Panda believes that densities in excess
of 1,100 can be achieved. In July 1996, Panda received a patent covering the
Compass PGA product.
Interconnect Products. Panda has been granted a license to the Compass
interconnect product by Stanford W. Crane, Jr., its inventor and Company
President and Chief Executive Officer. Panda has produced the Compass II
version in a 152 position right angle female, and 152 position vertical male
connector. Currently Panda purchases and resells the Compass V version from
LG Cable & Machinery ("LG Cable"), part of the LG Group in Korea, and a
licensee of the Compass technology. The Compass V is a 196 position connector
available in both straight and right angle female versions, and vertical male
versions.
Compass V is the most dense interconnect currently in production. On the
edge of a printed circuit board it delivers 146 contacts per linear inch when
used in a double-sided arrangement. This compares with 80 contacts per linear
inch in the most widely used products used in high density applications. LG
Cable contracted for Bellcore testing of the Compass V with Contech, an
independent testing group. The Compass V connector received Bellcore approval
in 1998. Compass uses a patented arrangement of contacts and is actually
capable of delivering over 300 contacts per linear inch on the edge of a
printed circuit board, and over 1100 in a parallel configuration in one square
inch.
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Compass also forms the basic platform for Compass PGA (pin grid array).
Compass PGA utilizes the design of Compass to connect semiconductors in a
pluggable fashion to another substrate, such as a printed circuit board.
Manufacturing
Panda has developed the ability to manufacture the VSPA semiconductor
package at its production facility in Boca Raton, Florida, using two automated
machines designed and built by Panda. The machines have a wide range of
flexibility in terms of the pin count of the VSPA packages it will produce,
and their production capacity ranges from 235,000 parts per month to 290,000
parts per month, depending upon the pin count of the package (i.e., the higher
the pin count, the lower the monthly production capacity). The first machine
became operational in late September 1997 and the second machine, after
undergoing refinements based on data derived from operating the first machine,
became operational in 1998. Although these machines have been designed and
developed by Panda, most of the components from which they are built are
available from multiple suppliers. Panda believes these machines can be
readily replicated to increase manufacturing capacity as demand for VSPA
increases. If Panda is successful in commercializing VSPA, such
commercialization will require Panda to expand its manufacturing capacity for
VSPA parts or enter into additional licensing arrangements, joint ventures or
strategic alliances with respect to the manufacture of VSPA parts. See
"Marketing and Strategic Relationships."
Panda has an arrangement with LG Cable, a unit of Korea-based LG Group and
a licensee of Panda's Compass technology, to acquire the Compass V Connectors
for distribution as discrete parts to customers. Panda believes that this
source of supply is sufficient to meet the demand for Compass V Connectors for
the foreseeable future. If Panda is successful in commercializing the Compass
V Connector for use by third parties, such commercialization may require its
strategic partners to expand their manufacturing capacity for Compass V
Connectors or for Panda to enter into additional licensing arrangements, joint
ventures or strategic alliances with respect to the manufacture of Compass
Connectors. See "Marketing and Strategic Relationships."
Panda has also subcontracted with LG Cable for the manufacturing of the
VSPA 80/1 package for Veridicom. In addition to the single row production
machines Panda added internally, LG has built a fully automated assembly line
with capacity of 350,000 units per month.
In 1998, Panda contracted with Possehl Hong Kong Machinery limited ("PBE")
for the production of the VSPA 360 and 240 products. PBE specializes in
providing leadframe and other raw materials for the semiconductor packaging
market. PBE has 16 factories in 12 countries located in Europe, Asia and the
U.S. The 360 and 240 have the same body size and have an interchangeable
footprint on the PCB. In March 1999, the machine at PBE was being qualified
for production. PBE will be responsible for all VSPA high volume production
for these products.
Marketing and Strategic Relationships. In June 1996, September 1996, July
1997 and January 1999, Panda licensed the VSPA semiconductor packaging
technology to AMP Incorporated, Pantronix Corporation, LG Cable and Samtec,
Inc., respectively. Under the terms of each licensing agreement, the licensee
has been granted worldwide rights to manufacture and sell VSPA. Panda
currently has only received up-front licensing fees and is unable to predict
the amount of sales revenue or royalty revenue, if any, that may be earned in
the future under these agreements.
In October 1996, Panda and Stanford W. Crane, Jr., Panda's President and
Chairman, entered into an agreement with LG Cable, under which LG Cable was
granted a license to the Compass technology. The license granted to LG Cable
is non-exclusive except for certain limited exclusive manufacturing rights
with respect to specified Asian countries. LG Cable has built a production
facility in Korea for production of Compass V, an enhanced version of the
Compass Connector. Based on information supplied to Panda by LG Cable,
production capability of the Compass V reached 250,000 parts per month in
January 1998. Under the terms of the agreement, LG Cable is to pay Panda and
Mr. Crane a royalty based on the sales price of each Compass Connector
produced and sold. See "Patents; Proprietary Information Systems." Such
royalties are to be divided equally between Panda and Mr. Crane.
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.
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Panda markets it products through a direct sales force and a network of
independent sales representatives. At the present time Panda has four
salespeople engaged in the sales and marketing of its VSPA product. Panda is
engaged in recruiting additional personnel for various geographic locations
and positions.
Backlog. As of September, 1999, the Company's revenue backlog amounted
to approximately $966,000. The Company and/or SBI expect to completely fill
the current backlog within the next fiscal year. As of September 14, 1999,
the backlog consisted of product to be shipped to Veridicom under their
respective original purchase orders.
In the first quarter ending March 31, 1998, the Company reported a
backlog of approximately $1,700,000. Of the $1,700,000 reported, $707,500 was
recognized during year ending December 31, 1998. The remaining portion of the
backlog of $992,500 related to one customer was not recognized due to delays
to Veridicom in shipment of their silicon wafers.
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
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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.
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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 at 951 Broken Sound Parkway in Boca
Raton, Florida. This facility has housed Panda's operations since November 1,
1998. The facility is approximately 11,230 square feet with monthly rent of
approximately $10,322 escalating to $12,547 beginning in November 2002. The
lease terminates on October 21, 2003.
Panda leases two additional facilities at 1101 Holland Drive in Boca
Raton, Florida totaling approximately 7,200 square feet and uses these
facilities for Panda's machining operations, the production of the automated
machines for producing VSPA parts and current VSPA production. The leases for
these two facilities total approximately $5,000 in monthly rental payments.
There is no long-term lease for these facilities. The Company rents the
property on a month-to-month basis.
Panda also leases 10,547 square feet in Fremont, California and uses
this facility for sales & marketing and application engineering. The lease is
for a term of five years with monthly rental fees of approximately $22,000
escalating to approximately $24,000 in 2003.
In addition to the facility in Fremont, Panda also leases a facility in
San Jose, California, which was previously used to house Panda's Advanced
Design Group, manufacturing administrative personnel and certain sales
personnel. The lease term is through December 1999 and calls for monthly
lease payments of $4,746. Effective August 1, 1997, Panda entered into a
sublease agreement with a term ending in December 1999 and which called for
monthly sublease payments to Panda of approximately $4,800.
Panda has terminated its lease in Hayward, California for 50,000 square
feet, the original lease agreement had a term of 5 years with monthly rental
fees of approximately $18,000. Panda was required to secure lease payments
with an $80,000 Certificate of Deposit held at the Silicon Valley Bank through
July 16, 2002. On July 16, 2000, the guaranty limit will be reduced to
$40,000 provided no event of default has occurred by the current tenant.
Panda believes that its properties are generally in good condition, are
well maintained and are generally suitable and adequate to carry on Panda's
current business.
On July 18, 1999, a complaint was filed against the Company in Palm
Beach County, Florida. The complaint alleges breach of contract by the
Company for non-monetary default of its lease agreement for the premises at
951 Broken Sound Parkway, Boca Raton, Florida. Liberty seeks acceleration of
future rent payments in the amount of approximately $809,000. The Company has
filed an answer to the complaint and the outcome is both immeasurable and
undeterminable. There can be no assurance that the Company will be successful
in defending this litigation and the outcome to this litigation could have a
material adverse effect if the Company is unsuccessful.
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.
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On December 11, 1998, Panda and Joseph A. Sarubbi ("Sarubbi") entered
into a settlement agreement (the "Settlement Agreement") relating to
litigation in which Sarubbi has obtained a judgment against Panda in the
amount of $1,227,041. Sarubbi entered into a consulting agreement with Panda
in 1992. Sarubbi also later served as a director and general manager of
Panda. Under this consulting arrangement, Sarubbi received 91,000 options to
purchase shares of Panda Common Stock. Sarubbi also served as a director of
Panda in 1995 and 1996. In 1996, Sarubbi notified Panda of his desire to
exercise all of his options and to sell all of the Panda Common Stock received
upon the exercise of such options. A Florida district court held Panda liable
for certain losses Sarubbi alleged he incurred in connection with the sale of
his Panda Common Stock and for fees for his previous service as director. The
court granted a judgment of $1,227,041 in favor of Sarubbi. Under the
Settlement Agreement, Panda has agreed to pay Sarubbi total consideration
worth $1,000,000 of which $240,000 has been paid in cash in December 1998 and
the remainder is to be satisfied upon the sale of shares of Panda's Common
Stock which have been delivered to Sarubbi by Panda. Panda has registered
1,775,000 shares for Sarubbi pursuant to a registration statement, declared
effective on February 5, 1999. The parties have agreed to petition the
Florida Court of Appeals for the Fourth District to dismiss the litigation
within five business days after Panda's obligations in the Settlement
Agreement have been completed. If such obligations are not completed, the
judgment will remain in effect. This settlement amount was recorded as a
charge against Company earnings for the quarter ended December 31, 1998. On
April 14, 1999, Panda received a Notice of Default on the Settlement
Agreement. Sarubbi claimed that his inability to sell the stock that he
received in the settlement creates a breach under the Settlement Agreement.
Panda believes that it is in full compliance with the Settlement Agreement and
that no breach exists. On June 25, 1999, the Settlement Agreement was amended
to allow Panda to extend its time to satisfy its obligations under the
Settlement Agreement (the "Amended Settlement Agreement"). Under the Amended
Settlement Agreement, the Company issued Sarubbi 2,100,000 shares of Panda
Common Stock in the second quarter of 1999 and such shares were recorded as an
expense to S,G&A at the closing price of $0.156 totaling $327,600. Panda also
agreed to issue Sarubbi an additional 3,750,000 shares upon the increase in
the number of shares of Panda Common Stock authorized under Panda's Articles
of Incorporation. Panda will have 90 days to register such shares of Panda
Common Stock with the Securities and Exchange Commission after the approval of
the authorization of such shares. No entry has been recorded in Panda's
financial statements for the additional 3,750,000 shares of Panda Common Stock
because Panda is unable to issue any additional shares of Panda Common Stock
until the issuance of additional shares of Panda Common Stock is authorized
and approved at the Annual Meeting. The Amended Settlement Agreement imposed
a deadline of September 1, 1999 for satisfaction of Panda's obligation to
register the 2,100,000 shares of Panda Common Stock with the Securities and
Exchange Commission. Panda has not satisfied its obligations under the
Amended Settlement Agreement but has not received a notice of default. Any
further legal action taken by Sarubbi may be material to the Company.
On July 18, 1999, a complaint was filed against the Company in Palm
Beach County, Florida by Liberty Property Limited Partnership ("Liberty").
The complaint alleges breach of contract by the Company for non-monetary
default of its lease agreement for the premises at 951 Broken Sound Parkway,
Boca Raton, Florida. Liberty seeks acceleration of future rent payments in
the amount of approximately $809,000. The Company has filed an answer to the
complaint and the outcome is both immeasurable and undeterminable. There can
be no assurance that the Company will be successful in defending this
litigation and the outcome to this litigation could have a material adverse
effect if the Company is unsuccessful.
Panda from time to time is involved in disputes that may lead to
litigation in the future. Panda cannot determine the impact of those
potential lawsuits at the current time. The disputes are not expected to be
material.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Fiscal Year End
During September 1997, the Company decided to change its fiscal year
from April 1 through March 31 to January 1 through December 31. For
discussion and analysis purposes, the twelve months ended December 31, 1998
are compared to the audited nine months ended December 31, 1997 and the
audited nine months ended December 31, 1997 are compared to the unaudited nine
months ended December 31, 1996.
Results of Operations
Twelve Months Ended December 31, 1998 Compared to Nine Months Ended December
31, 1997
Net revenues decreased to approximately $823,000 during the twelve
months ended December 31, 1998 from $2,247,000 for the nine months ended
December 31, 1997. Net revenues for the respective periods include
approximately $184,000 and $924,000 of net sales of Archistrat Computers,
$100,000 and $350,000 of licensing fees, and approximately $136,000 and
$973,000 of revenues associated with a cooperative development agreement with
the U.S. government. Also, the Company realized approximately $170,000 of net
revenues from the introduction of the Rock City line of computers and
approximately $232,000 from the sale of VSPA and Compass semiconductor
packages. The Company completed all of the milestones set forth in its
cooperative development agreement with the Defense Advanced Research Projects
Agency (DARPA) during April 1998. The objective to the DARPA program was to
develop a family of VSPA semiconductor packages and process technologies,
including a variety of multi-chip modules, and to define the infrastructure to
manufacture these packages on a high volume, low cost basis. The decrease in
revenue related to the Archistrat Computers is directly related to the
Company's refocused efforts toward the Rock City line of computers introduced
during the second quarter of 1998. In September 1998, the Company streamlined
operations related to the Systems business including both Archistrat and Rock
City products. In November 1998, the Company ceased all operations related to
the Systems business.
Research and development ("R&D") expenses increased to approximately
$3,400,000 for the twelve month period ending December 31,1998 as compared to
approximately $3,300,000 for the nine month period ending December 31,1997.
However on a monthly basis comparative spending on R&D decreased approximately
$83,000 per month. R&D efforts in 1998 were focused on new custom VSPA
designs for specific customer applications, the refinement of the existing
VSPA Flex automation. In addition, the Company also designed the IO-A
architecture that was going to be used in the Rock City line of computers.
The Company believes that although its level of R&D spending is appropriate to
support current operations, it will need to increase future R&D spending to
enhance further development of VSPA, Compass Connectors, Compass PGA and other
derivative technologies as resources are available. Management is currently
evaluating the appropriate R&D expense relative to the current level of
activity in its Technology Products.
Selling, general and administrative ("S,G&A") expenses increases to
approximately $9,300,000 for the twelve months ended December 31, 1998 from
$6,100,000 for the nine months ended December 31, 1997. The increase of
approximately $3,200,000 is primarily related to a $1,000,000 charge related
to a legal settlement (see "Legal Proceedings"), approximately $253,000
related to the relocation of the Company's corporate headquarters in November
1998, and approximately $285,000 charge to reserve certain receivables
associated with the Systems business. After the effect of these charges
totaling approximately $1,600,000 and annualizing S,G&A for the nine months
ended December 31, 1997 (approximately $8,100,000) for comparative purposes,
S,G&A actually decreased approximately $433,000. The decrease in SG&A is
primarily related with management's decision to streamline operations. During
1998, the Company reduced its number of employees resulting in savings of
approximately $211,000 related to employee compensation, benefits and travel,
$620,000 reduction related to consulting agreements and an increase of
$245,000 in advertising and marketing expenses related to the introduction of
the Rock City line of computers in the first and second quarters of 1998.
During the twelve months ending December 31, 1998, the Company
determined that, due to various events and changes in circumstances associated
with exiting the Systems Business, certain long-lived assets were impaired.
As a result, the Company recorded a charge of approximately $125,000. The
Company also recorded an inventory write down of approximately $1,178,836
related to its decision to exit its Systems business in November 1998.
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During the twelve months ended December 31, 1998, the Company recorded
interest expense of approximately $3,881,000 representing the amortization of
the debt issuance and interest costs related to the Helix loans. This is a
significant increase from approximately $955,000 recorded for the nine month
period ending December 31, 1997. This expense represents a non-cash charge.
Nine Months Ended December 31, 1997 Compared to Nine Months Ended December 31,
1996
Net revenues increased to approximately $2,247,000 during the nine
months ended December 31, 1997 from $2,091,000 for the nine month period ended
December 31, 1996. Net revenues for the respective periods include
approximately $924,000 and $1,422,000 of net sales of Archistrat Computers,
$350,000 and $100,000 of licensing fees, and approximately $973,000 and
$569,000 of revenues associated with a cooperative development agreement with
the U.S. government. Computer systems revenues of approximately $924,000 were
recorded during the nine months ended December 31, 1996 as a result of a
barter transaction with a software developer. Other sales of Archistrat
computers increased 85% during the nine months ended December 31, 1997
compared to the same period of 1996 as the Company refocused its selling
efforts on certain niche markets. In July 1997, the Company entered into a
second licensing agreement with LG Cable whereby LG was granted a license with
respect to a semiconductor package product. In connection with this
agreement, the Company was entitled to a non-refundable license fee of
$250,000 that became immediately vested upon signing the agreement and has
been recorded as revenue during the nine months ended December 31, 1997. The
Company accomplished a majority of the milestones set forth in its cooperative
development agreement with the Defense Advanced Research Projects Agency
(DARPA) during the nine months ended December 31, 1997 which accounts for the
71% increase in the related revenue compared to the same period of 1996.
Revenues associated with this agreement will be limited during 1998 as the
agreement near its end.
During the nine months ended December 31, 1997 as compared to the same
period of the prior year, research and development expenses decreased 32% from
approximately $4.8 million to $3.3 million. Development activities associated
with Archistrat 4s server were substantially completed during the period ended
December 31, 1996 which resulted in the overall decrease. Spending related to
the design and development of automated manufacturing equipment for the
Company's VSPA product line as well as various new Archistrat computer systems
increased during the nine months ended December 31, 1997 as compared to the
same period of the prior year.
S,G&A expenses decreased approximately $4.7 million or 44% to $6.1 million
during the nine months ended December 31, 1997 as compared to $10.8 million
during the comparable period of 1996. The most significant changes were in
the following categories: compensation and benefits decreased approximately
$3.1 million resulting from a decrease in the average employee head count from
approximately 118 during the nine months ended December 31, 1996 to
approximately 60 for the same period of the current year; legal fees decreased
48% or $580,000 as a result of management's efforts to reduce such costs;
office rent expense decreased approximately $440,000 resulting from certain
lease termination costs incurred during 1996; sales and marketing expenses
were reduced approximately $700,000 as a result of streamlining certain of the
Company's advertising and promotional campaigns, as well as the reduction of
product marketing expenses associated with the barter agreement entered into
in the prior fiscal year.
During the nine months ended December 31, 1996, the Company determined
that, due to various events and changes in circumstances (including efforts to
streamline operations and to increase the use of strategic alliances to
manufacture and market the Company's products), certain long-lived assets were
imparted. As a result, the Company recorded a charge of approximately $1.5
million. No such charges were deemed necessary during the nine months ended
December 31, 1997. During the nine months ended December 31, 1997, the
Company recorded interest expenses of approximately $900,000 representing the
beneficial conversion feature associated with the convertible debentures
issued in April 1997. This expense represents a non-cash charge with no net
effect on total shareholders' equity.
Quarter and Six Months Ended June 30, 1999 and 1998
Net revenues decreased during the quarter ended June 30, 1999 ("Second
Quarter of 1999") to approximately $90,000 as compared to approximately
$313,000 for the quarter ended June 30, 1998 ("Second Quarter of 1998"). VSPA
product sales for the Second Quarter of 1999 were approximately $83,000 for
prototype, pre-production and production orders and approximately $7,000 for
the sale of systems inventory. The net revenue decrease for the quarter was
attributable to the cessation of operations of the computer systems business
including Rock City products.
<PAGE>
Page 57
Net revenues for the six months ended June 30, 1999 were approximately
$904,000 compared to approximately $458,000 for the same period last year.
VSPA product sales for the six months ended June 30, 1999 were approximately
$292,000 for prototype, pre-production and production orders, approximately
$11,000 for the sale of systems inventory, and a significant portion of the
Company's revenue related to a one-time $500,000 licensing fee from Samtec
Inc.
For the six months ended June 30, 1999, Cost of Goods Sold of
approximately $201,000 is comprised of raw material purchases related to VSPA
product sales and approximately $15,000 related to systems inventory sales.
Systems inventory with an original cost of $165,586 were sold with no related
Cost of Sales as those inventory items were reserved as of December 31, 1998.
Comparatively, approximately $195,000 is comprised of raw material costs
related to Archistrat computer sales in the same period of 1998. The Company
refocused its efforts toward the Rock City line of computers introduced during
the second quarter of 1998. However, in September 1998 the Company
streamlined operations related to the Systems business including both
Archistrat and Rock City products, and in November 1998 the Company ceased all
operations related to the Systems business.
R&D expenses decreased to approximately $191,000 for the Second Quarter
of 1999 as compared to approximately $1,023,000 for the Second Quarter of
1998. R&D for the first six months of 1999 was approximately $571,000
attributable to new custom VSPA designs for specific customer applications and
the refinement of the existing VSPA Flex automation machines. R&D for the
first six months of 1998 was $2,028,000. This decrease is primarily due to
ceasing operations relating to Systems activity, including the Rock City
computers, and the completion of the cooperative development agreement with
the US government.
Consistent with management's focus on decreasing fixed costs, SG&A
expenses decreased for the Second Quarter 1999 to approximately $1,430,000
compared to approximately $2,252,000 for the Second Quarter of 1998. The
average number of employees has decreased from 70 at June 30, 1998 to 20 full
time employees as of June 30, 1999. The decrease in full-time employees is
directly related to ceasing operations related to Systems activity and the
need to reduce on going operational costs. Payroll and related expenses
decreased to approximately $465,000 for the quarter ended June 1999 as
compared to $1,134,000 for the quarter ended June 1998.
For the six months ending June 30,1999 SG&A decreased to approximately
$2.6 million compared to $4,240,000 for the same period in 1998. The average
number of full-time employees decreased to 20 from 70. The decrease in full-
time employees is directly related to ceasing operations related to the
systems activity and the need to reduce operational costs. Payroll and
related expenses decreased approximately $1,293,000 for the six months ended
June 30, 1999 compared to the same period in 1998. In addition, a non-cash
charge of $327,600 related to the issuance of 2,100,000 shares pursuant to the
Sarubbi settlement is recorded in SG&A as well as a non-cash charge of 266,000
related to the issuance of 1,000,000 shares to Helix.
Total debt issuance costs associated with short-term borrowings from
Helix, including the value of the warrants issued in connection with such
borrowings, charged to amortization expense during the quarter ended June 30,
1999, amounted to zero, however for the Second Quarter of 1998, $421,000 was
charged to amortization expense. For the six months ending June 30, 1999
approximately $525,000 and for the six months ending June 30, 1998
approximately $1,200,000 was charged to amortization expense. The valuation
of the warrants and related amortization expense, represents a non-cash
transaction. Additionally, in the Second Quarter of 1999, 171 Preferred
penalty shares at $1,710,000; pursuant to the Exchange Agreement (Exhibit
2.4), will be converted at a fixed conversion price of $.261. At today's
market prices of approximately $.15 per share the value of the shares of Panda
Common Stock would be valued at approximately $982,000. The penalty shares
were issued related to the Series A Preferred Convertible transaction and the
1998 common stock private placement holders of the Series A Preferred
Convertible in lieu of any accrued or future penalties. There were no such
penalties as of the first quarter of 1998.
For purposes of determining net loss applicable to Panda Common Stock
for the Second Quarter of 1999 and the Second Quarter of 1998, accrued
dividends payable in the amount of approximately $54,000 and $178,000,
respectively, and amortization of the beneficial conversion feature related to
the issuance of the Series A Preferred Stock have been added to the net loss.
Both amounts represent non-cash transactions. Basic and diluted loss per
share has been calculated on the basis of net loss applicable to Panda Common
Stock.
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Liquidity and Capital Resources
During February 1998, the Company completed a private placement of $6.0
million of Series A Preferred Stock and received net proceeds of approximately
$5.8 million. The shares of preferred stock are convertible into common stock
at the lower of $3.50 per share (in accordance with the revised terms
effective July 2, 1998) or a floating conversion price. Through June 30,
1998, 271.76 shares of preferred stock were converted into an aggregate of
4,637,310 shares of Panda Common Stock. As of June 30, 1999, 529.24 preferred
shares are outstanding including dividends.
The Company may require that all unconverted shares of Series A
Preferred Stock be converted at any time if the closing bid price of Panda
Common Stock is equal to or greater than $12.00 per share for a period of
twenty consecutive trading days. In addition, on February 11, 2003, the
Company may, at its option, require the holders to convert the 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 in the Panda
Articles, the Company may be required to pay the holders $100,000 per month
until such time that the Triggering Event has been remedied. Any requirement
that the Company pay such amounts could have a material adverse impact on the
Company in the event the Triggering Event causing such payment is not remedied
on a timely basis. On December 16, 1998, a triggering event occurred related
to the delisting of Panda Common Stock from the Nasdaq National Market to the
OTC Bulletin Board. As of April 14, 1999, no payments have been made to the
Holders. The Company has reached an agreement with the Series A Preferred
Holders in connection with the Triggering Event and has agreed to issue an
additional 171 Preferred A shares.
On August 14, 1998, the Company completed the sale of 2,254,602 shares
of Panda Common Stock and warrants in a private placement to accredited
investors with gross proceeds of $3.675 million. Upon exercise of certain
warrants, the investors may elect to receive a reduced number of shares of
common stock in lieu of tendering the warrant exercise price in cash. The
warrants have a term of five years. The Company issued approximately 4,400,000
additional shares associated with the fill-up provision. The Company is
required to issue approximately 6,000,000 additional shares of Panda Common
Stock as of August 15, 1999 in accordance with the Fill-up provision.
During May, June and July 1998, the Company borrowed an aggregate of
$2 million from Helix PEI Inc. ("Helix"). The loans are secured by the
Company's intellectual property and were due August 7, 1998. During August
1998, Helix agreed to extend the maturity date of all the outstanding loans
payable to February 15, 1999, from their original due date in August 1998, in
exchange for the issuance of a warrant to purchase up to 2,000,000 shares of
Panda Common Stock at an exercise price equal to the fair market value of
Panda Common Stock at the date of issuance ($2.125). The loans bear interest
at the Royal Bank of Canada prime rate plus 2 percentage points per annum
(9.40% at June 30, 1999) payable monthly. The warrant has a term of two
years. The Company is currently in default on the Helix loans since the
Company did not repay the loan in February 1999.
On May 14, 1999, the Company, Helix and SBI entered into an agreement
whereas upon the closing of the acquisition of certain assets of the Company
by SBI, SBI will pay $1,000,000 to Helix. In consideration of such payment,
and the issuance of 1,000,000 shares of Panda Common Stock to Helix, Helix
released Panda from payment on all accrued interest on the notes remaining
unpaid as of the date of such payment of $1,000,000. The remaining $1,000,000
and accrued interest will be paid in eleven payments by SBI to Helix.
On December 15, 1998, the Company reduced the exercise price of
certain common stock purchase warrants if the warrant holders accelerate the
expiration date of their warrants from July 11, 2001 to January 5, 1999. The
exercise price was reduced from $11.00 to $0.75 per share. In January 1999,
warrants representing 553,333 shares were exercised at this reduced price, and
the Company received net proceeds of $415,000 upon such exercise. In February
1999, the Company received $1,000,000 from Samtec, Inc. which includes a non-
refundable up-front license fee related to VSPA and, a purchase of 666,667
shares of Panda Common Stock.
In the second quarter 1998, the Company's payables were segmented into
the following categories: operational, professional, Systems and Technology.
Payables in the second quarter 1999 of approximately $1,400,000 as compared to
the second quarter 1998 of approximately $1,500,000 increased or decreased as
follows: Operations 14.5% versus 13%, professional fees 67.1% versus 34%,
System 11.3% versus 35%, and Technology 7.0% versus 17%, respectively.
Accounts receivables (net of the allowance for doubtful accounts for all
System related receivables) related to the second quarter of 1999 of
approximately $45,000 represent Technology related receivables whereas
accounts receivables related to the second quarter 1998 of approximately
$166,000 are approximately 80% related to Computer Systems.
<PAGE>
Page 59
The Company has been able to obtain short-term financing through
secured promissory notes totaling $925,000 through August 19, 1999, these
funds have allowed the Company to fund certain monthly obligations as well as
certain payables. Additionally, the Company has settled certain obligations
through the issuance of Panda Common Stock. In the event that the SBI
transaction does not close, the Company will seek additional financing from
other alternatives. The Company does not anticipate any additional liquidity
from the letter of intent, which expired May 1999, entered into by and between
the Company and Roundstone. Since the Company's current working capital is
insufficient to operate the Company, in the event that the Company cannot seek
additional financing, it will be forced to cease operations.
The Company has entered into an agreement with SBI to sell its
intellectual property portfolio as well as the fixed assets related to its
interconnect and semiconductor business. As part of the sale, the Company has
restructured its outstanding loans with Helix that have been in default since
February 15, 1999. SBI will assume such Helix loans upon closing.
Additionally, the Company has entered into an agreement with the Series A
Preferred Shareholders for the exchange and conversion of the outstanding
preferred shares into 22,995,919 common shares at a fixed price of $.261. The
restructuring of these agreements is partially contingent upon the closing of
the sale to SBI The transaction is subject to customary closing conditions,
including the approval of the Company' shareholders. Helix, Sarubbi, and the
Series A Preferred Shareholders have entered into a Voting Agreement with SBI
and such holders own sufficient shares, approximately 52%, to assure the
approval of the transaction by the Company's shareholders. The Company will
receive a 10% ownership interest in SBI which will initially be capitalized
with $6,000,000.
In June, July and August, 1999, the Company entered into agreements
with SBI pursuant to which SBI has loaned the Company $950,000. In connection
with the loan, the Company has granted to SBI a security interest in
substantially all of the assets of the Company pursuant to the Security
Agreement, dated August 17, 1999, by and between the Company and SBI. The
loan bears an interest rate of 6% per annum and is due and payable on
September 30, 1999.
Year 2000 Issues
Like many other companies, Year 2000 computer issues create certain risks
for the Company. If our financial, operational and information systems do not
correctly recognize the process date information beyond the year 1999, it
could have a significant adverse impact on the Company's ability to process
information, which could create significant potential liability for the
Company. To address potential Year 2000 issues with its internal systems, we
have evaluated these systems. The initial assessment indicated that certain
internal systems should be upgraded or replaced as part of a solution to the
Year 2000 problem. The costs incurred to date related to these programs have
not been material. The estimated cost to be incurred by us in the future is
not expected to exceed $20,000. These estimates do not include potential
costs related to any customer or other claims or the cost of internal software
and hardware replaced in the normal course of business. These estimates are
based on our current assessment of the projects and may change as the project
progresses.
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.
<PAGE>
Page 60
We have begun internal discussions concerning contingency planning to
address potential problem areas with internal systems and with suppliers and
other third parties. We expect assessment, remediation and contingency
planning activities to continue throughout the year 1999 with the goal of
resolving all material internal and external systems and third-party issues.
While the Company has not completed its detail plans with regards to this
uncertainty, management believes, based on discussions with vendors of its
major business applications and Year 2000 Compliance certificates received
from the related software developers, that the financial impact of making the
required systems changes, if any, will not be material to the Company's
financial position, results of operations or cash flows.
We deem "Year 2000 Compliant" to mean software that can individually, and
in combination with all other systems, products or processes with which the
software is designed to interface, continue to operate successfully (both in
functionality and performance in all material respects) over the transition
into the twenty-first century when used in accordance with the documentation
relating to such software. Year 2000 Compliance includes being able to,
before, on and after January 1, 2000, substantially conform to the following:
- use logic pertaining to dates which allow users to identify and/or
use the century portion of any date fields without special processing;
- respond to all date elements and date input to resolve any ambiguity
as to century in a disclosed, defined and pre-determined manner; and
- provide date information in ways which are unambiguous as to century.
This may be achieved by permitting or requiring the century to be specified or
where the date element is represented without a century, the correct century
be unambiguous for all manipulations involving that element.
Votes Required for Approval of Proposal 3
Approval of Proposal 3 requires that the number of votes cast in favor
or Proposal 3 exceed the number of votes cast against. Votes for Proposal 3
may be cast in favor of or against the proposal or may abstain from voting.
Abstentions may be specified on the proposal and will be considered present at
the Annual Meeting, but will not be counted as affirmative votes. In
addition, broker non-votes, where brokers are prohibited from exercising
discretionary authority in voting shares for beneficial owners who have not
provided voting instructions, will not be included in vote totals for Proposal
3, but will be counted for purposes of determining whether there is a quorum
at the Annual Meeting.
<PAGE>
Page 61
PROPOSAL 4:
RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
On January 4, 1999, the Board, acting upon the recommendation of the
Audit Committee, voted to replace its independent public accountants,
PricewaterhouseCoopers LLP ("PWC"), which had served as the independent public
accountants of the Company since 1993. On October 21, 1998, PWC delivered
notice it was terminating its client auditor relationship with the Company.
The reports of PWC for the two fiscal years ended March 31, 1997 and 1996 and
the transition period ended December 31, 1997 did not contain any adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. The opinion, however, did
include an explanatory paragraph expressing substantial doubt about the
Company's ability to continue as a going concern. During the fiscal years
ended March 31, 1997 and 1996, the transition period ended December 31, 1997
and the subsequent interim period through October 21, 1998 preceding such
termination, there were no disagreements between the Company and PWC on any
matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PWC, would have caused it to make a reference to the subject
matter of the disagreements in connection with its report. In addition,
during the fiscal years ended March 31, 1997 and 1996, the transition period
ended December 31, 1997 or the subsequent interim period through October 21,
1998, there were no "reportable events" within the meaning of Item 304 of the
Securities and Exchange Commission's Regulation S-K.
The Board of Directors has appointed the firm of Grant Thornton LLP to
continue as independent certified public accountants for Panda for the fiscal
year ending December 31, 1999. Grant Thornton LLP has been acting as
independent certified public accountants of Panda since January 4, 1999.
Unless otherwise indicated, properly executed proxies will be voted for the
ratification of the appointment of Grant Thornton LLP, independent certified
public accountants, to audit the books and accounts of Panda for the fiscal
year ending December 31, 1999.
Representatives of Grant Thornton LLP are expected to be present at the
Annual Meeting, will be given an opportunity to make a statement if they
desire to do so, and will also be available to respond to appropriate
questions from shareholders.
The Board recommends that shareholders vote "FOR" the ratification of
the appointment of Grant Thornton LLP as independent public accountants for
Panda for the fiscal year ending December 31, 1999.
Votes Required for Approval of Proposal 4
Approval of Proposal 4 requires that the number of votes cast in favor
of Proposal 4 exceed the number of votes cast against. Votes for Proposal 4
may be cast in favor of or against the proposal or may abstain from voting.
Abstentions may be specified on the proposal and will be considered present at
the annual meeting, but will not be counted as affirmative votes. In
addition, broker non-votes, where brokers are prohibited from exercising
discretionary authority in voting shares for beneficial owners who have not
provided voting instructions, will not be included in vote totals for Proposal
4, but will be counted for purposes of determining whether there is a quorum
at the annual meeting.
EXPERTS
The financial statements incorporated in this Proxy Statement by
reference to the Annual Report on Form 10-K of The Panda Project, Inc. for the
year ended December 31, 1998 have been so incorporated in reliance on the
report (which contains an explanatory paragraph relating to The Panda Project,
Inc.'s ability to continue as a going concern as described in Note B of the
financial statements) of Grant Thornton LLP for the year ended December 31,
1998 and the report (which contains an explanatory paragraph relating to The
Panda Project, Inc.'s ability to continue as a going concern as described in
Note 2 to the financial statements) as of December 31, 1997 and for the nine-
month period ended December 31, 1997 and for the year ended March 31, 1997 of
PricewaterhouseCoopers LLP. Such financial statements are incorporated herein
by reference in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
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Page 62
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 Quarters ended June 30, 1999 and
March 31, 1999
Current Reports on Form 8-K Filed on May 18, 1999, June 18, 1999,
August 17, 1999 and September 9, 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 to the following address:
The Panda Project, Inc.
951 Broken Sound Parkway
Boca Raton, Florida 33487
If you would like to request documents from us, please do so in writing by
October 7, 1999, to receive them before the annual meeting.
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Page 63
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 September
29, 1999. You should not assume that the information contained in this Proxy
Statement is accurate as of any date other than such date, and neither the
mailing of this Proxy Statement to shareholders nor the issuance of SBI common
stock in the Proposed Sale shall create any implication to the contrary.
By Order of the Board of Directors,
/s/ Melissa F. Crane
Secretary
<PAGE>
Annex A
ASSET PURCHASE AGREEMENT
between
SILICON BANDWIDTH, INC.
as Purchaser
and
THE PANDA PROJECT, INC.
as Seller
Dated as of July 19, 1999
(as amended, as of September 15, 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
December 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 3.20.
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 December 30, 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 87,000,000 shares, consisting of
(i) 85,000,000 shares of Common Stock, $.01 par value (the "Common Stock"),
and (ii) 2,000,000 shares of Preferred Stock, $.01 par value ("Preferred
Stock").
