FORM 10-K/SB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-24030
THE PANDA PROJECT, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0323354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
951 Broken Sound Parkway
Boca Raton, Florida 33487
(Address of principal executive offices) (Zip Code)
(561) 994-2300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock held by non affiliates of the
Registrant based on the last sale price for such stock at March 31, 2000.
17,693,394
shares of Common Stock, $.01 par value, outstanding at March 31, 2000.
58,977,980
The Panda Project, Inc.
Form 10-K
Index
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
Signatures
Forward-looking statements in this 10-K, including
statements concerning production and sale of the VSPA product,
are based on information available to the Company as of the
date hereof and involve and 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 litigation, and the risk factors detailed from time
to time herein.
PART I
Item 1. Business
The Panda Project, Inc. ("Panda" or the "Company") a Florida Corporation,
was incorporated in 1992. Since this time Panda has been 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.
On May 14, 1999, Panda announced that it had entered into a Letter of
Intent with Silicon Bandwidth, Inc. ("SBI"), a privately held Delaware
Corporation, with respect to the sale of substantially all of its
intellectual property portfolio and certain fixed assets. 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 subject to
shareholder approval. On July 19, 1999, SBI and Panda executed the Asset
Purchase Agreement.
On February 18, 2000 the Shareholders of Panda approved the transaction
as well as all other items put before them as described in the Company's 14A
dated January 28, 2000. On February 28, 2000, Panda filed an 8-K announcing
that the asset sale to SBI was closed subject to the Stockholder's Agreement
being finalized and the Helix Loan being transferred. The Asset Purchase
Agreement contemplated the sale of substantially all of Panda's operating
assets. All of the originally contemplated assets were transferred to SBI
except for those assets, the real property located in Florida, that were
levied by Mr. Sarubbi in January 2000 as part of the Writ of Execution that
was filed in Palm Beach County Court. On March 15, 2000, the Helix loans in
the aggregate amount of $2,000,000 were transferred to SBI. On March 11,
2000 the Stockholder's Agreement by and between, Panda, SBI, VantagePoint
Venture Partners LLC, Archimedes Capital LLC and the Management
Stockholder's was executed. (see Exhibit 10.28). Since the closing of the
transaction with SBI in February 2000, the sole purpose of the Company is
the ownership of SBI common shares.
In 1999, Panda focused all of its efforts on the VSPA and Compass
technology products collectively the ("Technology Products"). These
technologies are embodied in VSPA, a three-dimensional semiconductor
package, and the Compass Connector, a board-to-board interconnect solution
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.
Since November 1998, Panda elected to exit its Systems business entirely,
when 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, Panda has focused solely on the Technology Products.
Technology Products
The Technology products described below were sold to SBI as part of the
asset sale that occurred in February 2000 (see "Subsequent Event" Section).
Panda has ceased all activity in these products since the closing of the
asset sale to SBI. In 1999, Panda continued to develop its VSPA and Compass
products that address the need for greater bandwidth. (see "Subsequent
Event" Section). With respect to Bandwidth, it is a term that refers to the
capacity for transmitting data inside the electronic device as well as
between two or more devices. In recent years, improvements in the speed at
which microprocessors and other integrated circuits can process data have
far outpaced the data transmission capacity of other electronic components
and of the connectors and lines which link the devices. The resulting
bandwidth bottlenecks have effectively negated some of the improvement in
processing speed attributable to the enhanced microprocessors. The
Technology Products include semiconductor packages and interconnect devices
which incorporate designs which Panda believes enable these products to
effectively address the bandwidth bottlenecks. In addition, these Company
products, which are protected by a variety of patents which have either been
issued or for which applications are currently pending, have significant
advantages over currently available products, including:
Density of Electrical Connections: The Technology Products embody
proprietary geometrics that allow the placement of a greater number of
conductive leads than is possible with conventional designs. This permits
the access and transport of an increased volume of data.
Reduced Size: Due to their higher contact density, the Technology
Products require less surface area and routing layers than is required by
conventional semiconductor packages and interconnect devices to accommodate
the same number of leads. This improves the performance and, lowers the
cost of using the products in electronic applications.
Superior Electrical and Thermal Characteristics: The Technology Products
are designed to provide faster electrical connections while minimizing the
interference (parasitics) which can occur in a high density electrical
environment. The materials, used in the Technology Products, are also
constructed in such a way to dissipate heat better than conventional
designs. Panda believes that its Technology Products will withstand the
rigors of environmentally stressful applications such as automotive and
other high-temperature applications.
Compatibility; Reduced Cost of Manufacture: The Technology Products are
intended to be compatible with existing industry standards. For example,
while one of Panda's semiconductor packages (VSPA) incorporates a
proprietary array of electrical leads, the space (pitch) between the leads,
which is of critical importance in the surface mount manufacturing process,
is no smaller than that of conventional packages such as Plastic Quad Flat
Pack ("PQFP"), and Ball Grid Array packages ("BGA"). In addition, use of
VSPA in an assembly environment, requires only minor modifications to be
compatible with standard die attachment and wire bonding equipment such as
the ESEC 3008 and K&S 8020 wirebonders. Additionally, test sockets for
electrical testing, post assembly, and complete manufacturing procedures are
available for customers. Panda believes that customers housing their silicon
devices in the Technology Products will experience reduced overall
production cost in high volume.
Semiconductor Packages: Semiconductor companies are facing ever
increasing demands for greater lead counts, improved thermal performance,
miniaturization and lower packaging costs in Semiconductor packages. As a
result of the trend in semiconductors, there have been increasing strains on
the packaging. Semiconductor companies have turned to independent packaging
companies for technology development and innovation.
Semiconductor companies are striving to shorten the time to market for new
products. Having a flexible packaging technology, quick turn programs and
capacity available are critical in attracting new customers.
Another trend in the semiconductor market is in the "fabless" segment of
the market. These companies have a core competency in the silicon design
process. This market segment relies solely on independent companies for
their packaging of their semiconductors.
There is a broad range of semiconductor packages available in the market
today for both commodity and custom products. These products are broken
into three categories: Leadframe, BGA and PGA. Samples of leadframe
products include SOIC, QFP and PLCC. These packages generally range from 8
leads to 304 leads. BGA or laminate products include the BGA family of
products like the PBGA, MicroBGA and FlipChip products. These packages
range in lead counts from 8-600. Another market segment are the PGA's which
are pluggable packages which traditionally have been used for microprocessor
applications.
Leadframe products are the most widely recognizable package types in the
marketplace. The chip is encapsulated in a plastic mold compound with metal
leads extending peripherally from the perimeter. Laminate products have
been gaining market acceptance. The BGA uses a laminate, usually plastic or
tape substrate rather than a leadframe substrate. Tiny balls are attached
in an array to the bottom. PGA's are made from plastic or ceramic and have
pins extend perpendicularly from the bottom of the package arranged in
several rows.
Panda had 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 was designed to address the increasing demands on bandwidth from the
silicon to the PCB. VSPA is a low cost surface mount semiconductor package
that provides higher I/O in less space with improved electrical and thermal
performance as compared to other packages on the market today. VSPA, also
called PQFP-B, is registered with JEDEC JC-11 committee under MO-198 and has
passed Military Standard 883D. The qualification testing from the VSPA was
performed by independent companies including ISE/IQL Labs, Inc., Lockheed
Martin and the Georgia Tech Packaging Research Center.
VSPA is based on a three-dimensional architecture that utilizes multiple
rows of pins that are tiered to achieve a greater density within a smaller
area. The VSPA is scalable in X, Y, and Z axes being either square or
rectangular in shape. By using individual pre-stamped pins, the VSPA
package does away with a traditional lead frame and many of the labor
intensive molding steps. As a result, it allows leads to be interleaved and
arranged in several tiers. The number of tiers depends upon the target die
size and necessary number of I/O. VSPA can be configured with one to six
tiers, allowing packages up to and over 1,000 pins. This allows the package
to shrink and grow depending on the customer's chip application.
VSPA is also available in both 'cavity down' and 'cavity up' versions.
With VSPA's wide range of I/O's and variable package dimensions, multichip
modules (MCMs) are also possible with the VSPA. This scalability allows
silicon designers considerable flexibility in choosing a VSPA package that
will best suit their specific package requirements.
This minimum lead length yields low package parasitic and inductance by
keeping pins a constant size for each tier and a common part number for each
package size. These parameters remain constant for each package size since
only the frame is scaled to accommodate different die sizes. This cannot be
achieved in PQFP or BGA packages. The electrical characteristics of VSPA
allow it to perform with faster rise times and the ability to support high
performance applications at much higher frequencies. VSPA has tested
resonance free to 3.5GHz with the next generation projected for a 10GHz
range.
In January 1998, Panda received its first production order for 1 million
units for a customized version of the VSPA package from Veridicom. As of
December 31, 1999, Panda shipped in excess of 200,000 units to Veridicom.
The Compass PGA described below was sold to SBI as part of the asset sale
that occurred in February 2000 (see "Subsequent Event" Section.) The
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. The Compass PGA technology has never been
commercialized.
Interconnect Products: The Compass Connector license granted by Mr. Crane
described below will be transferred to SBI as part of the asset sale that
occurred in February 2000 (see "Subsequent Event" Section). However until
March 2000, Panda had use of the license that had been been granted to the
Compass interconnect product by Stanford W. Crane, Jr., its inventor and the
Company's President and Chief Executive Officer. Currently Panda purchases
and resells the Compass V version from LG Cable & Machinery ("LG Cable"),
part of the LG Group in Korea, and a licensee of the Compass technology.
The Compass V is a 196 position connector available in both straight and
right angle female versions, and vertical male versions.
Compass V is the most dense interconnect currently in production. On the
edge of a printed circuit board it delivers 146 contacts per linear inch
when used in a double-sided arrangement. This compares with 80 contacts per
linear inch in the most widely used products used in high density
applications. LG Cable contracted for Bellcore testing of the Compass V
with Contech, an independent testing group. The Compass V connector received
Bellcore approval in 1998. Compass uses a patented arrangement of contacts
and is actually capable of delivering over 300 contacts per linear inch on
the edge of a printed circuit board, and over 1100 in a parallel
configuration in one square inch.
Compass also forms the basic platform for Compass PGA (pin grid array).
Compass PGA utilizes the design of Compass to connect semiconductors in a
pluggable fashion to another substrate, such as a printed circuit board.
Manufacturing
The manufacturing equipment products described below were sold to SBI as
part of the asset sale that occurred in February 2000 (See "Subsequent
Event" Section). Panda had 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.
Panda had 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. LG's license was
transferred to SBI as part of the asset sale and LG will continue to
manufacture parts for SBI including the Compass Connector and the VSPA.
Panda believes that this source of supply is sufficient to meet the demand
for Compass V Connectors for the foreseeable future. In the future if the
technology is successfully commercialized, 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. It is anticipated that PBE will
continue to manufacture the VSPA product for SBI.
In September 1999, Panda licensed AJU EXIM, a Korean leadframe
manufacturer, the rights to manufacture the VSPA product line. Panda
expects AJU EXIM to become a supplier of VSPA components including pins,
plastic and die attach plates. AJU EXIM's license was transferred to SBI as
part of the asset sale. It is anticipated that AJU EXIM will manufacture
the VSPA pin component and die attach plates for SBI.
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. In October 1999,
Panda terminated its licensing agreement with Pantronix due to non-payment
of the $250,000 fee due on the third anniversary date of the agreement.
Additionally, AMP, Inc. has decided not to transfer the Panda-AMP licensing
agreement and to terminate the licensing agreement. Panda believes it is
entitled to the minimum payment of $250,000 due under the agreement. Under
the terms of the LG and Samtec licensing agreements, the licensee has been
granted worldwide rights to manufacture and sell VSPA. Samtec, AJU EXIM and
LG Cable licensing agreements have been transferred to SBI. Panda has only
received up-front licensing fees to date.
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. The Crane-Panda licensing agreement will be
transferred, subject to the agreement being finalized, to SBI as part of the
asset sale that occurred in February 2000 (See "Subsequent Event" Section).
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. These
relationships are needed for Panda's and SBI'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.
Although in 1999, Panda actively pursued commercialization of these
technologies, it has now ceased all sales, marketing and manufacturing
activity since February 2000.
BACKLOG
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As of December 1999, the Company's revenue backlog amounted to
approximately $812,000. The Company and/or SBI expect to completely fill
the current backlog within the next fiscal year. As of March 31, 2000, the
backlog consisted of product to be shipped to Veridicom under their
respective original purchase orders. The backlog has been transferred as
part of the asset sale and SBI will fulfill all future orders related to the
Technology Products.
The portion of the backlog of $812,000 related to one customer was not
recognized due to delays to Veridicom in shipment of their silicon wafers.
Veridicom uses the VSPA product to house their proprietary silicon. If
Veridicom has delays in shipment of their silicon wafers, then there would
be a delay of ordering additional VSPA packages. It is expected that
Veridicom will continue to order parts for this specific version of their
product and therefore it is expected that the original purchase order will
be fulfilled by Panda prior to the closing of the transaction and by SBI
after closing the transaction.
RESEARCH AND DEVELOPMENT
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The R&D activity described below has ceased since all of the
intellectual Property was sold to SBI as part of the asset sale that
occurred in February 2000 (see "Subsequent Event" Section) 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 1999, Panda spent approximately $907,000
on research and development of technology products. For the year ending
December 31,1998, Panda spent approximately $3,400,000 on research and
development.
Patents And Proprietary Information
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The Patents And Proprietary Information described below were sold to SBI
as part of the asset sale that occurred in February 2000 (see "Subsequent
Event" Section). However, the future success of the technology will depend
partially on SBI's ability to obtain patents, protect trade secrets, and
operate without infringing on the proprietary rights of others. As of
December 31, 1999, Panda had obtained 23 United States patents and an
aggregate of 52 foreign patents. In addition, Panda had pending a total of
14 United States and 30 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.
There can be no assurance that any of the pending patent applications will
ultimately result in an issued patent. Moreover, the patent laws of other
countries may differ from those of the United States as to the patentability
of Panda's products or technology, and the degree of protection afforded by
foreign patents may be different from that in the United States. The failure
by Panda to obtain patents for which applications are currently pending
could have a material adverse effect on Panda's ability to commercialize
successfully its proposed technology and products. Even if Panda is able to
obtain such patents, there can be no assurance that any such patents will
afford Panda commercially significant protection for its technology or
products. In addition, other companies may independently develop equivalent
or superior technologies or products and may obtain patent or similar rights
with respect to them. Although Panda believes that its technology has been
independently developed and that its technology does not infringe on the
patents or violate the proprietary rights of others, there can be no
assurance that any of Panda's technology or products, will not be determined
to infringe upon the patents or proprietary rights of others, or that
patents or proprietary rights of others will not have an adverse effect on
the ability of Panda to do business. If Panda's technology or products were
determined to infringe on the patents, trademarks or proprietary rights of
others, Panda could, under certain circumstances, become liable for damages,
which also could have a material adverse effect on Panda. Moreover, in the
event that Panda's technology or proposed products were deemed to infringe
upon the rights of others, Panda would be required to obtain licenses to
utilize such technology. There can be no assurance that Panda would be able
to obtain such licenses in a timely manner or on acceptable terms and
conditions, and the failure to do so could have a material adverse effect on
Panda. If Panda were unable to obtain such licenses, it could encounter
significant delays in product market introductions while it attempted to
design around the infringed upon patents or rights, or could find the
development, manufacture or sale of products requiring such licenses to be
foreclosed. In addition, patent disputes are common in the computer
industry and there can be no assurance that Panda will have the financial
resources to enforce or defend a patent infringement or proprietary rights
action.
Panda has registered the Archistrat, VSPA and Rock City trademarks with
the U.S. Patent and Trademark Office and has applied for appropriate
trademark, copyright and other legal protection for its product names, logos
and other identifications. There can be no assurance that Panda will not be
precluded by others from using any of such identifications or creating
proprietary rights with respect to them.
The Crane-Panda licensing agreement described below will be transferred,
subject to the agreement being finalized, to SBI as part of the asset sale
that occurred in February 2000 (See "Subsequent Event" Section.) Pursuant to
a license agreement entered into in January 1996 between Panda and Mr. Crane
(the "Crane-Panda License"), Mr. Crane has granted Panda the nonexclusive
right to utilize the Compass Connector, a key component in the
commercialization of Panda's Archistrat Computers and the development and
commercialization of Compass PGA. The Crane-Panda License was executed in
connection with the conversion to a nonexclusive license of the 3M License
described below and supersedes an earlier license agreement between Mr.
Crane and Panda relating to the Compass Connector. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors That May Affect Future Results" and
"--Dependence On The Crane-Panda License Agreement; Potential Conflicts Of
Interest." Under the Crane-Panda License, Panda is required to pay Mr.
Crane a royalty on any sales of Compass Connectors as discrete parts in the
amount of 5% of the net sales price for the first five years of the term of
the agreement, 2.5% of the net sales price for the next five years of the
term of the agreement and 2% of the net sales price thereafter, provided
that no royalty is payable until aggregate net sales of the Compass
Connector as discrete parts exceed $100,000. The royalty rate will be
reduced after the fifth anniversary of the agreement if no patent remains in
effect with respect to the Compass Connector. No royalty is payable on
sales of the Compass Connector as incorporated in the Archistrat Computers
or other computer system or assembly. Panda may grant sublicenses under the
Crane-Panda License, but only for the use of products as incorporated in the
Archistrat Computers or other computer system or assembly. To date, there
have been no sales requiring the payment of royalties to Mr. Crane under the
Crane-Panda License. The Crane-Panda License obligates Panda to maintain
proprietary information relating to the Compass Connector on a confidential
basis, notify Mr. Crane of any evidence of infringement with respect to the
Compass Connector and related technology, and cooperate with Mr. Crane to
contest any such infringement. In the event that Panda becomes bankrupt or
insolvent or defaults in any of its material obligations under the
Crane-Panda License and fails to cure any such defaults within specified
cure periods, Mr. Crane may terminate the Crane-Panda License. Panda is
substantially dependent upon the Crane-Panda License. The termination of
the agreement under any circumstances would have a material adverse effect
on Panda. There can be no assurance that conflicts of interest will not
arise with respect to the Crane-Panda License or that such conflicts will be
resolved in a manner favorable to Panda. In addition, Mr. Crane retains
ownership of the Compass Connector technology, and has the right to grant
licenses to or otherwise transfer rights to the Compass Connector technology
to third parties.
Panda relies on confidentiality and nondisclosure arrangements with its
employees, consultants and others involved with Panda's product and
technological development efforts. There can be no assurance that these
agreements will provide meaningful protection to Panda or that other
companies will not acquire information which Panda considers proprietary.
Moreover, there can be no assurance that other companies will not
independently develop know-how comparable or superior to that of Panda.
COMPETITION
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The technology competes against other semiconductor packages and
interconnect devices from many large corporations. 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 has depended upon third party subcontractors
for volume production as well as, the supply of the individual components,
including the pins and plastic that are an integral part of the VSPA and
Compass Connector.
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
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On December 31, 1999, Panda had 17 full-time employees. Mr. Crane divides
his time between product research, manufacturing, and general management.
Panda considers its relations with its employees to be good. Panda's
employees are not represented by labor unions. The Company plans to retain
only 2 employees after the transition is completed with SBI. The Company
currently has 5 employees.
RECENT DEVELOPMENTS
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Subsequent Events
On May 14, 1999, Panda announced that it had entered into a letter of
intent with Silicon Bandwidth, Inc., a privately held Delaware Corporation,
with respect to the sale of substantially all of its intellectual property
portfolio and certain fixed assets. 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 subject to shareholder
approval. On July 19, 1999, SBI and Panda executed the Asset Purchase
Agreement.
In June, July, August, October, and November 1999, as well as January and
February 2000, Panda entered into loan agreements with SBI to borrow
$2,295,000. These loans have a maturity date of February 24, 2000. As of
March 31, 2000, the principal on these loans has not been repaid. 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 bear interest at a rate of 6% per annum and were due
and payable on February 24, 2000.
On February 18,2000, the Company held its annual meeting of its
shareholders at the Hilton Hotel, 100 Fairway Drive, Deerfield Beach,
Florida 33441, for the following purposes:
1. To consider and vote on a proposal (the "Proposed Sale") to approve
an Asset Purchase Agreement, dated as of July 19, 1999, as amended (the
"Asset Purchase Agreement"), between Panda and Silicon Bandwidth, Inc., a
Delaware corporation ("SBI"), and related transactions for the sale of
substantially all the operating assets of Panda. The results were as
follows: For 58.6%, against .16%, and abstain .01% of the shares
outstanding.
2. To consider and vote upon a proposal to amend Panda's Articles of
Incorporation (the "Amendment to the Articles") to increase the authorized
shares of its common stock, par value $.01 per share (the "Panda Common
Stock"), from 50,000,000 to 100,000,000. The results were as follows: For
74.34%, against .34%, and abstain .01% of the shares outstanding.
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.
The results were as follows: For 74.54%, withhold .14% of the shares
outstanding.
4. To ratify the selection by the Board of Directors of Grant Thornton
LLP as independent accountants for the current fiscal year. For 74.6%,
against .06%, and abstain .03% of the shares outstanding.
On February 18, 2000, the Shareholders of Panda approved the transaction as
well as all other items put before them as described above. On February 28,
2000, Panda filed an 8-K announcing that the asset sale to SBI was closed
subject to the Stockholder's Agreement being finalized and the Helix Loan
being transferred the Asset Purchase Agreement contemplated the sale of
substantially all of Panda's operating assets. All of the originally
contemplated assets were transferred to SBI except for those assets, the
real property located in Florida, that were levied by Mr. Sarubbi in January
2000 as part of the Writ of Execution that was filed in Palm Beach County
Court. On March 15, 2000, the Helix loans in the aggregate amount of
$2,000,000 were transferred to SBI. On March 13, 2000 the Stockholder's
Agreement by and between, Panda, SBI, Vantagepoint Venture Partners LLC,
Archimedes Capital LLC and the Management Stockholders was executed.
The authorized capital stock of SBI is 30,000,000 shares of Common Stock and
10,000,000 shares of Series A Preferred Stock. Of these shares, 1,000,000
shares of Common Stock has been issued to Panda, 2,000,000 additional shares
of Common Stock will be reserved for issuance upon exercise of employee
stock options and 7,000,000 shares of Series A Preferred Stock has been
issued and outstanding. Additionally, the 200,000 of Series A Preferred
stock has been issued to Archimemdes Capital LLC in exchange for
cancellation of the 500,000 Panda warrants previously issued in October
1998. Additionally pursuant to the Asset Purchase Agreement, SBI has been
capitalized with $6 million. (see Exhibit 10.28).
In January 2000, Mr. Sarubbi filed a writ of execution on the Company's
real property held in Florida. Those assets have not been transferred to
SBI. On February 4, 2000, Mr. Sarubbi filed a writ of garnishment on the
Company's funds held at SunTrust Bank and he garnished $43,989.19.
The history of the litigation is as follows: 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 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. In February 2000, Panda issued
3,750,000 shares of the Company's common stock after receiving approval to
increase the amount of authorized shares from 50,000,000 to 100,000,000.
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. 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. Although Panda has not satisfied its obligation to
register the 2,100,000 shares under the Amended Settlement Agreement and has
received a notice of default, beginning in June 2000, Mr. Sarubbi will be
able to sell his shares pursuant to Rule 144. Any further legal action
taken by Sarubbi may be material to the Company. On November 2, 1999, as
stated in Panda's Form 8-K dated November 9, 1999, Sarubbi alleged that the
Company was in default under the Letter Agreement dated June 24, 1999.
Sarubbi demanded payment within 10 days of approximately $505,000 in
exchange for the 2,100,000 shares previously issued as well as the 3,750,000
shares which would be issued upon shareholder approval. Panda is currently
not conducting any business operations other than their ownership of the SBI
shares.
ITEM 2. 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 leased two additional facilities at 1101 Holland Drive in Boca
Raton, Florida totalling approximately 7,200 square feet and used these
facilities for Panda's machining operations. 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. As of March 1, 2000 SBI has assumed the monthly
rental on this property.
Panda also leased 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. As of March 1, 2000 Panda
subleased this facility to SBI.
In addition to the facility in Fremont, Panda also leased 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 was through December 1999 and called 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. As of December
11, 1999 this lease has expired and our tenant has moved out.
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,
except for the facility at 951 Broken Sound Parkway. The air conditioning
systems and ceiling are in disrepair. The other facilities are well
maintained and are generally suitable and adequate to carry on Panda's
current business.
On July 18, 1999, a complaint was filed against the Company in Palm
Beach County, Florida. The complaint alleges breach of contract by the
Company for non-monetary default of its lease agreement for the premises at
951 Broken Sound Parkway, Boca Raton, Florida. The alleged default was that
the Company was insolvent and had, by entering into the Asset Purchase
Agreement with SBI, essentially subleased the leased premises without the
landlord's consent. Panda denies it is in default under the lease. 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.
ITEM 3. LEGAL PROCEEDINGS
On October 16, 1998, a complaint was filed against Panda in the United
States District Court for the Southern District of New York by Promethean
Investment Group, L.L.C. The complaint alleges breach of contract by Panda
for failing to proceed with a financing transaction and seeks damages in an
unspecified amount in excess of $270,000 or a declaration that Panda is
required to proceed with the financing transaction. Panda has filed an
answer to the complaint. At the present time, the outcome of this
litigation is both immeasurable and undeterminable. There can be no
assurance that Panda will be successful in defending this litigation.
On December 11, 1998, Panda and Joseph A. Sarubbi ("Sarubbi") entered
into a settlement agreement (the "Settlement Agreement") relating to
litigation in which Sarubbi has obtained a judgment against Panda in the
amount of $1,227,041. Sarubbi entered into a consulting agreement with
Panda in 1992. Sarubbi also later served as a director and general manager
of Panda. Under this consulting arrangement, Sarubbi received 91,000
options to purchase shares of Panda Common Stock. Sarubbi also served as a
director of Panda in 1995 and 1996. In 1996, Sarubbi notified Panda of his
desire to exercise all of his options and to sell all of the Panda Common
Stock received upon the exercise of such options. A Florida district court
held Panda liable for certain losses Sarubbi alleged he incurred in
connection with the sale of his Panda Common Stock and for fees for his
previous service as director. The court granted a judgment of $1,227,041 in
favor of Sarubbi. Under the Settlement Agreement, Panda has agreed to pay
Sarubbi total consideration worth $1,000,000 of which $240,000 has been paid
in cash in December 1998 and the remainder is to be satisfied upon the sale
of shares of Panda's Common Stock which have been delivered to Sarubbi by
Panda. Panda has registered 1,775,000 shares for Sarubbi pursuant to a
registration statement, declared effective on February 5, 1999. The parties
have agreed to petition the Florida Court of Appeals for the Fourth District
to dismiss the litigation within five business days after Panda's
obligations in the Settlement Agreement have been completed. If such
obligations are not completed, the judgment will remain in effect. This
settlement amount was recorded as a charge against Company earnings for the
quarter ended December 31, 1998. On April 14, 1999, Panda received a Notice
of Default on the Settlement Agreement. Sarubbi claimed that his inability
to sell the stock that he received in the settlement creates a breach under
the Settlement Agreement. Panda believes that it is in full compliance with
the Settlement Agreement and that no breach exists. On June 25, 1999, the
Settlement Agreement was amended to allow Panda to extend its time to
satisfy its obligations under the Settlement Agreement (the "Amended
Settlement Agreement"). Under the Amended Settlement Agreement, the Company
issued Sarubbi 2,100,000 shares of Panda Common Stock in the second quarter
of 1999 and such shares were recorded as an expense to SG&A at the closing
price of $0.156 totalling $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. In
February 2000, the Company issued Mr. Sarubbi the 3,750,000 shares of the
Company's common stock pursuant to the Amended Settlement Agreement. 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. $750,000 has been recorded in Panda's financial statements
for the additional 3,750,000 shares of Panda Common Stock. In the event
that the increase in the number of authorized shares of Panda Common Stock
is not approved pursuant to Proposal 2, Panda will be obligated to pay
Sarubbi $1,502,041, which is equal to the amount of the judgment entered in
favor of Sarubbi plus attorneys' fees, less the value of any cash or stock
received by Sarubbi pursuant to the Settlement Agreement or the Amended
Settlement Agreement. The Amended Settlement Agreement imposed a deadline
of September 1, 1999 for satisfaction of Panda's obligation to register the
2,100,000 shares of Panda Common Stock with the Securities and Exchange
Commission. Panda has not satisfied its obligations under the Amended
Settlement Agreement and has received a notice of default. Any further
legal action taken by Sarubbi may be material to the Company. On November
2, 1999, as stated in Panda's Form 8-K dated November 9, 1999, Sarubbi
alleged that the Company was in default under the Letter Agreement dated
June 24, 1999. Sarubbi demanded payment within 10 days of approximately
$505,000 in exchange for the 2,100,000 shares previously issued as well as
the 3,750,000 shares which would be issued upon shareholder approval. As a
result, Sarubbi may assert remedies that he feels are available to him under
Florida law which may include a writ of execution as well as levying on real
property of Panda held in Florida. In January 2000, Mr. Sarubbi filed a writ
of execution on real property held in Florida. Those assets have not been
transferred to SBI. On February 4, 2000, Mr. Sarubbi filed a writ of
garnishment on the company's funds held at SunTrust Bank and he garnished
$43,989.19.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1999. On February 18,2000, the Company
held its annual meeting of its shareholders at the Hilton Hotel, 100 Fairway
Drive, Deerfield Beach, Florida 33441, for the following purposes:
1. To consider and vote on a proposal (the "Proposed Sale") to approve
an Asset Purchase Agreement, dated as of July 19, 1999, as amended (the
"Asset Purchase Agreement"), between Panda and Silicon Bandwidth, Inc., a
Delaware corporation ("SBI"), and related transactions for the sale of
substantially all the operating assets of Panda. For 58.6%, against .16%,
and abstain .01% of the shares outstanding.
2. To consider and vote upon a proposal to amend Panda's Articles of
Incorporation (the "Amendment to the Articles") to increase the authorized
shares of its common stock, par value $.01 per share (the "Panda Common
Stock"), from 50,000,000 to 100,000,000. For 74.34%, against .34%, and
abstain .01% of the shares outstanding.
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.
For 74.54%, withhold .14% of the shares outstanding.
4. To ratify the selection by the Board of Directors of Grant Thornton
LLP as independent accountants for the current fiscal year. For 74.6%,
against .06%, and abstain .03% of the shares outstanding.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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
- ----
December 31, 1999 $ .125 $ .047
September 30, 1999 $ .19 $ .09
June 30, 1999 $ .41 $ .12
March 31, 1999 $ .97 $ .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
As of December 31, 1999, there were approximately 29,698,426 shares of
Panda Common Stock outstanding and 295 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. On January 20, 2000, upon conversion
of the Series A Preferred stock, there were 49,961,107 shares of Panda
Common Stock held by 294 shareholders of record.
Panda has never declared or paid any cash dividends. 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.
Recent Sales of Unregistered Securities
Set forth below is a description of recent sales of securities by the
Company in transactions which were not registered under the Securities Act
of 1933. Except as noted, the securities sold were shares of Common Stock.
Unless otherwise indicated, all securities were issued by the Company in
reliance upon Section 4(2) of the Securities Act of 1933 as transactions by
an issuer not involving a public offering. All securities were acquired by
the recipients thereof for investment and with no view toward the resale or
distribution thereof. In each instance, offers and sales were made to a
limited number of investors, each purchaser was an accredited investor or a
financially sophisticated investor, the offers and sales were made without
any public solicitation, the certificates bear restrictive legends and
appropriate stop transfer instructions have been given to the transfer
agent. Except as noted, no underwriter was involved in the transactions,
and no commissions were paid. In 1998, the Company issued 2,254,602 common
shares in the August 1998 Private Placement, 2,234,363 shares were issued
pursuant to conversions of the Series A Preferred, and 39,601 additional
shares to investor relation firms and for the employee stock option plan
and incentive stock option plan. There were 12,215,522 shares outstanding at
December 31, 1997. In 1998, the Company issued an additional 4,528,566 to
bring the total outstanding common shares of the Company to 16,744,088. In
1999, the Company issued 12,954,337 shares of Common stock.
Aggregate
Shares Reason for Date of Offering Number of
Shareholder Issued Issuance Issuance Price Investors
- ----------- ------ --------- -------- --------- ---------
DTM 17,500 Legal 2-28-97 $104,825 1
Settlement
Agreement
Dusseldorf 30,918 Underwriters April $192,000 1
Securities 42,667 (2) Fee 1997
Jeffries 27,429 (2) Underwriters April -- 1
& Co. Fee 1997
IIRG 18,462 Investor 10-6-97 $ 86,129 1
Relations
Services
Ballin &
Partners 5,000 Investor 10-6-97 $ 27,450 1
Relations
Services
Helix 442,667 (2) In connection 12-19-97 -- 1
with
debenture
financing
IIRG 18,462 Investor 3-18-98 $ 76,852 1
Relations
Services
Martech 25,000 (2) Investor 7-15-98 -- 1
Relations
Services
Helix 2,850,000 (2) In connection 8-7-98 -- 1
with
debentures
AMT 100,000 (2) Investor 8-15-98 -- 1
Capital Relations
Services
Private 600 (1) Financing 2-11-98 $6,000,000 7
Placement 150,000 (2)
Preferred Stock 30 (1) Preferred Stock 3-31-98, $170,762 7
Dividends Financing 6-30-98,
Agreement 9-30-98
Preferred 4,637,310 Preferred 7-1-98 -- 7
Stock Stock through
Conversions Terms 9-30-99
Ballin &
Partners 5,000 Investor 7-20-98 $18,125 1
Relations
Services
Private 2,254,602 Financing 8-14-98 $3,675,000(3) 9
Placement 2,254,602 (2)
Warrant 553,333 Warrant 1-5-99 $ 415,175 4
Exercise Agreement through
1-29-99
Samtec,
Inc. 666,667 Financing 2-3-99 $ 500,000 1
Fill-Up
Shares 4,441,829 Private 6-29-99 $ 44,418 9
Placement
Helix 1,000,000 SBI/Helix/ 5-18-99 $ 266,000 1
Panda Agreement
Joseph
Sarubbi 2,100,000 Legal Settlement 6-29-99 $1,087,600 1
Agreement
Joseph
Sarubbi 3,750,000 Legal Settlement 2-22-00 $ 750,000 1
Agreement
Fill-Up
Shares 5,266,728 Private 2-22-00 $ 52,667 9
Placement
- -------------------
(1) Preferred Stock.
(2) Warrants.
(3) Aggregate Underwriting Discount of $117,500.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of and for the
twelve months ended December 31, 1999 and 1998 and the nine months ended
December 31, 1997. 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 report. The
following data insofar as it relates to the twelve month periods ended
December 31, 1999 and 1998 and the nine months ended December 31,1997 has
been derived from audited financial statements.
STATEMENT OF OPERATIONS DATA:
Year Ended Nine Months Ended
December 31, December 31,
---------------------- -----------
1999 1998 1997
Net revenues $ 1,337,684 $ 822,580 $2,246,795
Research and
development costs 906,810 3,395,577 3,255,335
Selling, general
and administrative
expenses 4,213,419 9,263,283 6,113,255
Costs associated
with asset
impairments 590,830 125,038 -
Net loss (8,019,299)(17,474,696) (8,949,652)
Basic and diluted
loss per share ($0.31) ($ 1.33) ($.78)
Weighted average
shares
outstanding 25,872,046 13,732,936 11,541,811
Balance Sheet
December 31
--------------------------
1999 1998
----------- -----------
Total Assets $ 973,832 $ 2,837,837
Total Liabilities $ 6,420,267 $ 4,563,731
Accumulated
Deficit (88,359,548) (80,340,249)
Stockholders'
Deficit $(5,446,453) $(1,725,894)
The Company 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, the Company's presentation of diluted earnings
per share is the same as that of basic earnings per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Statements in this Report on Form 10-K, that are not statements of
historical fact, are to be regarded as forward-looking statements which are
based on information available to the Company as of the date hereof and
involve a number of risks and uncertainties. Among the important factors
that could cause actual results to differ materially from those indicated by
such forward-looking statements are delays in product development,
competitive pressures, general economic conditions, risks of intellectual
property and other litigation, and the factors detailed below under "Certain
Factors That May Affect Future Results" or elsewhere herein or set forth
from time to time in the Company's periodic reports and registration
statements filed with the Securities and Exchange Commission.
On July 19, 1999, SBI and Panda executed the Asset Purchase Agreement.
On February 18, 2000, the Shareholders of Panda approved the transaction as
well as all other items put before them as described in the Company's 14A
dated January 28, 2000. On February 28, 2000, Panda filed an 8-K announcing
that the asset sale to SBI was closed subject to the Stockholder's Agreement
being finalized and the Helix Loan being transferred the Asset Purchase
Agreement contemplated the sale of substantially all of Panda's operating
assets. All of the originally contemplated assets were transferred to SBI
except for those assets, the real property located in Florida, that were
levied by Mr. Sarubbi in January 2000 as part of the Writ of Execution that
was filed in Palm Beach County Court. On March 15, 2000, the Helix loans in
the aggregate amount of $2,000,000 were transferred to SBI. On March 11,
2000 the Stockholder's Agreement by and between, Panda, SBI, Vantagepoint
Venture Partners LLC, Archimedes Capital LLC and the Management Stockholders
was executed. (see Exhibit 10.28). The Company is currently not conducting
any business operations. Since the closing of the transaction with SBI in
February 2000, the sole purpose of the Company is the ownership of SBI
common shares.
The Company was a technology company engaged in the design,
development, manufacture, licensing and sale of interconnect solutions to
generate greater throughput from silicon to board to system. These
technologies are embodied in VSPA, a three-dimensional semiconductor
package, and the Compass Connector, a board-to-board interconnect solution
(collectively the "Technology Products"). VSPA has received JEDEC JC-11
Committee designation and has passed Mil Std. 883. In addition, in
September 1998, the Compass Connector received Bellcore approval.
Since November 1998, when Panda elected to exit its Systems business
entirely, and 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, Panda has focused solely on the Technology Products.
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.
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 1999 Compared to Twelve Months Ended
December 31, 1998
Net revenues increased to approximately $1,338,000 during the twelve month
period ended December 31, 1999 from $823,000 for the twelve month period
ended December 31, 1998. Net revenues for the respective periods include
approximately $488,000 and $232,000 of net sales of the VSPA product,
$850,000 and $100,000 of licensing fees. In addition, in 1998, there was
approximately $354,000 of net sales of the Archistrat and Rock City line of
computers and approximately $138,000 of revenue was recorded related to
contract research and development from DARPA which was successfully
completed in April of 1998; there was no such revenue in 1999. In September
1998, the Company streamlined operations related to the System business
including both the Archistrat and Rock City products. In November 1998, the
Company ceased all operations related to the Systems business. In 1999, a
significant portion of the revenue from VSPA product sales was related to
Veridicom shipments.
Research and development (R&D) expenses decreased to approximately $907,000
for the twelve month period ending December 31,1999 as compared to
approximately $3,400,000 for the twelve month period ending December 31,
1998. In 1999, R&D efforts were focused solely on new custom VSPA designs
for specific customer applications and the refinement of the existing VSPA
Flex automation machines. The decrease is primarily due to ceasing
operations related to Systems activity, including the Rock City computers,
and the completion of the cooperative development agreement with the US
Government. As of February 21, 2000, post closing of the SBI transaction,
the Company has ceased all R&D expenditures.
Selling, general and administrative ("S,G&A")expenses decreased to
approximately $4,200,000 for the twelve month period ending December 31,
1999 from $9,300,000 for the twelve months ended December 31, 1998. The
decrease of approximately $5,100,000 was primarily related to the reduction
in expenses related to employee travel and other S,G&A. The decrease in
SG&A is primarily related to management's decision to streamline operations
and drastically cut expenses during 1998 and 1999. During 1999, the savings
of approximately $2,692,000 related to employee compensation, benefits, and
travel, $835,000 reduction related to consulting agreements, $562,000
reduction related to marketing and advertising, $328,000 reduction in
relocation expense, $285,000 reduction in bad debt expense and a $121,000
reduction in professional fees. In addition, a non-cash charge of
$1,076,600 and $1,000,000, respectively related to a legal settlement is
recorded in S,G&A. 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 years ended December 31, 1999 and 1998 the Company determined
that certain long-lived assets were impaired. During 1999 the impairment
occurred when certain machinery was no longer operable. During the year
ended December 31, 1998 the impairment occurred when the Company continued
the downsizing of its operations to streamline operations and to increase
the use of strategic alliances to manufacture and market the Company's
products. As a result, the Company recorded charges totaling approximately
$591,000 and $125,000 during the year ended December 31, 1999 and 1998,
respectively. The Company determined the amount of the asset impairment
charges using various valuation techniques. 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 which was recorded in cost of
sales.
Total debt issuance costs associated with short-term borrowings from Helix
including the value of the warrants issued in connection with such
borrowings of $745,000 was charged to amortization expense in 1999 compared
to $3,395,000 in 1998. The valuation of the warrants and related
amortization expense represents non-cash transactions.
For the year ended December 31, 1999 accrued penalties totaling $1,170,000
related to Series A Preferred convertible transaction and the 1998 common
stock private placement was recorded. The penalty shares were issued related
to 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. In addition, in 1999 and 1998, $637,500
and $100,000 of liquidating damages, respectively related to the remaining
1998 common stock private accrued penalties.
Interest expense increased for the year ended December 31, 1999 to $328,000
as compared to $146,000 for the same period last year. The increase is
related to a non-cash charge of $266,000 related to the issuance of
1,000,000 common shares to Helix pursuant to the Helix Agreement dated May
14, 1999.
Twelve Months Ended December 31, 1998 Compared to Nine Months Ended December
31, 1997
Net revenues decreased to approximately $823,000 during the twelve month
period ended December 31, 1998 from $2,247,000 for the nine month period
ended December 31, 1997. Net revenues 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 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 System business including both
the 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 increased to
approximately $9,300,000 for the twelve month period ending December 31,
1998 from $6,100,000 for the nine months ended December 31, 1997. The
increase of approximately $3,200,000 was 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 SG&A for the nine
months ended December 31, 1997 (approximately $8,100,000) for comparative
purposes, SG&A actually decreased approximately $433,000. The decrease in
SG&A is primarily related to 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.
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.
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 December 31, 1999, 273 shares of preferred stock were converted into
an aggregate of 4,652,017 shares of Panda Common Stock. As of December 31,
1999, 528 preferred shares are outstanding including dividends.
The Company may require that all unconverted shares of Series A
Preferred Stock be converted at any time if the closing bid price of Panda
Common Stock is equal to or greater than $12.00 per share for a period of
twenty consecutive trading days. In addition, on February 11, 2003, the
Company may, at its option, require the holders to convert the shares of
Series A Preferred Stock which remain outstanding on such date (plus accrued
and unpaid dividends) or redeem such shares of Series A Preferred Stock.
The terms of the Series A Preferred Stock, as revised on July 2, 1998,
provide that upon the occurrence of certain Triggering Events, as defined in
the Panda Articles, the Company may be required to pay the holders $100,000
per month until such time that the Triggering Event has been remedied. Any
requirement that the Company pay such amounts could have a material adverse
impact on the Company in the event the Triggering Event causing such payment
is not remedied on a timely basis. On December 16, 1998, a triggering event
occurred related to the delisting of Panda Common Stock from the Nasdaq
National Market to the OTC Bulletin Board. On May 14, 1999, the Company
entered into an Exchange Agreement with the Series A Preferred shareholders
to exchange their preferred shares for shares of Panda Common Stock at an
exchange rate of $.261. In connection with this agreement, the Company
issued an additional 171 shares of Series A Preferred stock to the Series A
Preferred shareholders in payment for penalties owed to such shareholders.
The Series A Preferred shareholders agreed to waive all penalties owed by
the Company. Additionally, in consideration of the Exchange Agreement, the
Series A Preferred shareholders agreed to enter into a voting agreement in
favor of the Company's sale of its intellectual property portfolio and
certain fixed assets related to the interconnect and semiconductor business.
On August 14, 1998, the Company completed the sale of 2,254,602 shares of
the Company's 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.
Additionally in February 2000, the Company issued approximately 5,200,000
additional shares of in accordance with the Fill-up provisions.
During May, June and July 1998, the Company borrowed an aggregate of $2
million from Helix PEI Inc. ("Helix"). The loans were 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 interest due under the
loans in 1999 was paid with stock in lieu of cash. In May 1999, the Company
issued Helix 1,000,000 shares of the Company's common stock. In February
2000, the exercise price of the warrant was reduced to $.15 and the maturity
date was extended to February 2002.
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 July 19, 1999, the Company entered into the Asset Purchase
Agreement with SBI, subject to shareholder approval. On March 15, 2000 the
Company, as part of the asset sale to SBI, transferred the Helix loans to
SBI.
The Company has been able to obtain short-term financing from SBI
through secured promissory notes totaling $2,295,000 through February 2000.
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. 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.
In June, July, August, October and November 1999, and January and
February 2000, the Company entered into agreements with SBI pursuant to
which SBI has loaned the Company $2,295,000. In connection with the loans,
the Company has granted to SBI a security interest in substantially all of
the assets of the Company pursuant to the Security Agreement, dated October
1, 1999, by and between the Company and SBI. The loan bears an interest
rate of 6% per annum and is due and payable on February 24, 2000, pursuant
to Amendment 2 to the Asset Purchase Agreement. As of March 31, 2000 the
principal has not been repaid to SBI.
The Company had entered into an agreement in July 1999 with SBI to sell
its intellectual property portfolio as well as certain 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 assumed such Helix loans on March 15,
2000. Additionally, the Company had 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 Company has received a 10% ownership interest in SBI which
will initially be capitalized with $6,000,000. In January 2000, all the
Series A Preferred shares have been converted into shares of the Company's
common stock pursuant to the exchange agreement.
On February 18, 2000, the Shareholders of Panda approved the
transaction as well as all other items put before them as described in the
Company s 14A dated January 28, 2000 (see "Subsequent Events"). On February
28, 2000, Panda filed an 8-K announcing that the asset sale to SBI was
closed subject to the Stockholder s Agreement being finalized and the Helix
Loan being transferred the Asset Purchase Agreement contemplated the sale of
substantially all of Panda's operating assets. All of the originally
contemplated assets were transferred to SBI except for those assets, the
real property located in Florida, that were levied by Mr. Sarubbi in January
2000 as part of the Writ of Execution that was filed in Palm Beach County
Court. On March 15, 2000, the Helix loans in the aggregate amount of
$2,000,000 were transferred to SBI. On March 13, 2000 the Stockholder's
Agreement by and between, Panda, SBI, Vantagepoint Venture Partners LLC,
Archimedes Capital LLC and the Management Stockholders was executed. (see
Exhibit 10.28)
On December 15, 1998, the Company reduced the exercise price of certain
common stock purchase warrants. If the warrant holders chose to 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 September 1999, the
Company issued a license to AJU EXIM for its VSPA product. AJU EXIM paid a
non-refundable upfront licensing fee of $250,000.
For the year ended 1999, the Company's payables were segmented into the
following categories: operational, professional, Systems and Technology.
Payables for the year ended 1999 of approximately $1,400,000 as compared to
the year ended 1998 of approximately $1,200,000 increased or decreased as
follows: Operations 15% versus 17%, professional fees 91% versus 21%,
System 0% versus 34%, and Technology 2% versus 297%, respectively. Payables
related to operations decreased slightly as a result of negotiated
settlement payments to vendors. Professional fees increased as a result of
increasing legal fees that were not current due to liquidity. The decrease
in payables related to Systems as a result of ceasing operations related to
the Systems business as well as successful negotiations to settle
outstanding accounts. The decrease in technology payables is a result of
our continued focus on technology products, increasing customer interest and
vendors requiring payments on a COD basis. Accounts receivables related to
the year ended 1999 of approximately $68,865 represent Technology related
receivables whereas accounts receivables related to the year ended 1998 of
approximately $64,000 are approximately 80% related to Computer Systems.
YEAR 2000 ISSUES
The Company experienced no disruptions in the operation of its internal
information systems or in the availability of its facilities during its
transition to year 2000. The Company is not aware that any of its vendors
experienced any disruptions during their transitions to year 2000 or that
there have been any year 2000 problems with its material held for sale. The
Company will continue to monitor the transition to year 2000 and will act
promptly to resolve any problems that occur.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
RISK ASSOCIATED WITH OUR FINANCIAL POSITION.
WE ARE DEPENDENT UPON THE TRANSACTION WITH SBI CLOSING AND SUFFICIENT CASH
TO MAINTAIN OPERATIONS.
We require approximately $20,000 monthly to fund the Company's current
operations. The Company is dependent upon receivables being paid in order to
fund operations as well as prepaid deposits being returned. If the Company
does not receive these funds, the Company could be forced to cease
operations and file bankruptcy.
WE HAVE BEEN UNABLE TO RESOLVE THE SARUBBI-PANDA LITIGATION
On December 11, 1998, Panda and Joseph A. Sarubbi ("Sarubbi") entered
into a settlement agreement (the "Settlement Agreement") relating to
litigation in which Sarubbi has obtained a judgment against Panda in the
amount of $1,227,041. Sarubbi entered into a consulting agreement with
Panda in 1992. Sarubbi also later served as a director and general manager
of Panda. Under this consulting arrangement, Sarubbi received 91,000
options to purchase shares of Panda Common Stock. Sarubbi also served as a
director of Panda in 1995 and 1996. In 1996, Sarubbi notified Panda of his
desire to exercise all of his options and to sell all of the Panda Common
Stock received upon the exercise of such options. A Florida district court
held Panda liable for certain losses Sarubbi alleged he incurred in
connection with the sale of his Panda Common Stock and for fees for his
previous service as director. The court granted a judgment of $1,227,041 in
favor of Sarubbi. Under the Settlement Agreement, Panda has agreed to pay
Sarubbi total consideration worth $1,000,000 of which $240,000 has been paid
in cash in December 1998 and the remainder is to be satisfied upon the sale
of shares of Panda's Common Stock which have been delivered to Sarubbi by
Panda. Panda has registered 1,775,000 shares for Sarubbi pursuant to a
registration statement, declared effective on February 5, 1999. The parties
have agreed to petition the Florida Court of Appeals for the Fourth District
to dismiss the litigation within five business days after Panda's
obligations in the Settlement Agreement have been completed. If such
obligations are not completed, the judgment will remain in effect. This
settlement amount was recorded as a charge against Company earnings for the
quarter ended December 31, 1998. On April 14, 1999, Panda received a Notice
of Default on the Settlement Agreement. Sarubbi claimed that his inability
to sell the stock that he received in the settlement creates a breach under
the Settlement Agreement. Panda believes that it is in full compliance with
the Settlement Agreement and that no breach exists. On June 25, 1999, the
Settlement Agreement was amended to allow Panda to extend its time to
satisfy its obligations under the Settlement Agreement (the "Amended
Settlement Agreement"). Under the Amended Settlement Agreement, the Company
issued Sarubbi 2,100,000 shares of Panda Common Stock in the second quarter
of 1999 and such shares were recorded as an expense to S,G&A at the closing
price of $0.156 totaling $327,600. Panda also agreed to issue Sarubbi an
additional 3,750,000 shares upon the increase in the number of shares of
Panda Common Stock authorized under Panda's Articles of Incorporation.
Panda will have 90 days to register such shares of Panda Common Stock with
the Securities and Exchange Commission after the approval of the
authorization of such shares. $750,000 has been recorded in Panda's
financial statements for the additional 3,750,000 shares of Panda Common
Stock. 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. On
November 2,1999, as stated in form 8-K dated November 9,1999 Mr. Sarubbi
alleged that the Company was in default of the Letter Agreement dated June
24, 1999. Mr. Sarubbi demanded payment within 10 days of approximately
$505,000 in exchange for the 2,100,000 shares previously issued as well as,
the 3,750,000 shares which would be issued upon shareholder approval. As a
result, Mr. Sarubbi may assert remedies that he feels are available to him
under Florida law which may include a writ of execution as well as levying
on real property of the Company. In January 2000, Mr. Sarubbi filed a writ
of execution on real property held in Florida. Those assets have not been
transferred to SBI. On February 4, 2000, Mr. Sarubbi filed a writ of
garnishment on the company's funds held at SunTrust Bank and he garnished
$43,989.19.
WE LACK SOURCES OF ADDITIONAL FUNDING.
The Company is expecting to the outstanding account receivable to be paid to
fund ongoing operations. In addition, the auditors report expressed
substantial doubt regarding the Company's ability to continue as a going
concern. We have had significant operating losses and negative cash flow
from operations since inception and expect to continue to do so for the
foreseeable future. We have depended upon proceeds of sales of our
securities to fund our operations since our inception. Panda has been unable
to secure additional sources of capital to fund our business. This continued
inability to secure capital will cause us to be unable to (i) develop or
enhance our products, (ii) take advantage of future opportunities or (iii)
respond to competitive pressures without additional funding. In addition,
Panda s working capital is insufficient to operate Panda. Panda is allegedly
currently in non-monetary default under the lease at 951 Broken Sound
Parkway, Boca Raton, Florida. It is argued that this alleged breach is of
the lease insolvency covenants. In the event Panda cannot obtain additional
financing, Panda may be forced to cease operations.
WE CANNOT REPAY OUTSTANDING INDEBTEDNESS:
Panda had outstanding loans from Helix in the aggregate principal amount of
$2,000,000. The loans bear interest at an annual rate equal to the prime
rate of interest payable by the Royal Bank of Canada plus 2%,are secured by
Panda's intellectual property and were due and payable on February 15, 1999.
On February 18, 2000 the Company, as part of the closing to SBI, the Helix
loans were transferred to SBI.
In June, July, August, October and November 1999, and January and February
2000, the Company entered into agreements with SBI pursuant to which SBI has
loaned the Company $2,295,000. In connection with the loan, the Company has
granted to SBI a security interest in substantially all of the assets of the
Company pursuant to the Security Agreement, dated October 1, 1999, by and
between the Company and SBI. The loan bears an interest rate of 6% per
annum and is due and payable on February 24, 2000 pursuant to Amendment 2 to
The Asset Purchase Agreement. (See Exhibit 4.12) As of March 31, 2000 the
principle has not been repaid to SBI.
BUSINESS FACTORS THAT MAY ADVERSELY AFFECT OUR OPERATIONS AND THE
CLOSING OF THE SBI TRANSACTION.
In February 2000, we sold our intellectual property and certain fixed assets
to SBI. We are dependent upon SBI's successful management of the
commercialization of the products in a competitive industry, as well as the
management of the intellectual property portfolio acquired on behalf of its
stockholders, including but not limited to the Panda Project Inc.
OTHER FACTORS THAT MAY ADVERSELY AFFECT OUR RESULTS
OTHER PENDING LITIGATION MATTERS
WE HAVE TWO OTHER PENDING LITIGATION MATTERS THAT ARE NOT RESOLVED
On October 16, 1998, a complaint was filed against Panda in the United
States District Court for the Southern District of New York by Promethean
Investment Group, L.L.C. The complaint alleges breach of contract by Panda
for failing to proceed with a financing transaction and seeks damages in an
unspecified amount in excess of $270,000 or a declaration that Panda is
required to proceed with the financing transaction. Panda has filed an
answer to the complaint. At the present time, the outcome of this
litigation is both immeasurable and undeterminable. There can be no
assurance that Panda will be successful in defending this litigation.
On 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.
WE CANNOT ENSURE YEAR 2000 COMPLIANCE.
Panda believes those computer systems of Panda and its suppliers are able to
process date information beyond the year 1999. Panda is working to monitor
the progress of its key suppliers to achieve Year 2000 compliance. The
failure of a major supplier to become Year 2000 compliant would materially
adversely affect Panda's business operations.
OTHER FACTORS THAT MAY ADVERSELY AFFECT OUR COMMON STOCK
WE HAVE BEEN DELISTED FROM NASDAQ NATIONAL MARKET.
Panda was delisted from the NASDAQ National Market, effective December 16,
1998, due to its inability to meet the requirements necessary to be listed
on that exchange. On December 17, 1998, Panda began trading on the NASD OTC
Electronic Bulletin Board system or in what is commonly referred to as the
"pink sheets." As a result, an investor may find it more difficult to
dispose of Panda's securities or to obtain accurate quotations as to the
price of, such securities. In addition, delisting may affect our ability to
issue additional securities or to secure additional financing.
WE HAVE EXISTING OBLIGATIONS TO SOME PANDA SECURITYHOLDERS.
Holders of Common Stock received in the August 1998 private placement have
the right to receive $737,500 through December 31, 1999, in penalty payments
from Panda due to unfulfilled obligations. Some of the holders have agreed
to waive this penalty.
ANTI-TAKEOVER STATUTES.
Certain provisions of our Amended and Restated Articles of Incorporation and
Florida law could make a merger, tender offer or proxy context involving
Panda more difficult, even if such events could be beneficial to the
interests of the shareholders. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
common stock. See "DESCRIPTION OF CAPITAL STOCK Florida Law and Certain
Anti-takeover Charter Provisions."
ANTI-TAKEOVER STATUTES
Certain provisions of our Amended and Restated Articles of Incorporation and
Florida law could make a merger, tender offer or proxy context involving the
Company more difficult, even if such events could be beneficial to the
interests of the shareholders. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
common stock.
GENERAL
Because of factors discussed above and other factors, past financial
performance should not be considered an indicator of future performance.
Investors should not use historical trends to anticipate future results and
should be aware that the Company's financial condition may be subject to
wide fluctuations in response to quarter- to-quarter variations in operating
results, general conditions in the semiconductor packaging and computer
industries, changes in earnings estimates and recommendations by analysts
and other events.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
(FAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." FAS No. 133 establishes standards for accounting and reporting
for derivative instruments, and conforms the requirements for treatment of
different types of hedging activities. This statement is effective for all
fiscal years beginning after June 15, 2000. Management does not expect this
standard to have a significant impact on the Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no market risk exposure related to notes payable. The
Company has no floating rate loans.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference
from pages F-1 through F-31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Company filed a Form 8-K on October 28, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages as of March 31, 1999 and business
experience of the executive officers of the Company:
Name Age Position
- ---- --- --------
Stanford W. Crane, Jr. 49 President, Chief Executive Officer
and Chairman of the Board of Directors
Melissa F. Crane 35 Acting Chief Financial Officer
William E. Ahearn 61 Board Member
John T Friedline 58 Board Member
STANFORD W. CRANE, JR. 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.
MELISSA F. CRANE joined the Company in August 1997 and served as
Director, Strategic Business from August 1997 until November 1997. Since
November 1997, she has served as Vice President of Strategic Business of the
Company. In October 1998, the Board of Directors appointed Ms. Crane as the
acting Chief Financial Officer. From September 1995 through July 1997, she
was an independent financial consultant and the principal of Watch Hill
Group, a privately-owned investment banking firm. From 1991 through August
1995, she was a vice president of Prudential Securities, Inc. Ms. Crane is
the spouse of Stanford W. Crane, Jr., Chairman of the Board, President and
Chief Executive Officer of the Company.
WILLIAM E. AHEARN was elected to the Board of Directors in November
1998. Prior to that, from March 1996 he served in various management
positions. From 1993 to 1996, he was Director of Multimedia Products at AMP
Incorporated. 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.
JOHN T. FRIEDLINE, age 58, was appointed to the Board of Directors in
June 1999 by the directors then in office. Since 1994, Mr. Friedline has
been President and Chief Executive Officer of Friedline & Associates, Inc.,
an independent management consultant primarily in the multi media arena.
From 1965 to 1994, Mr. Friedline held various positions at IBM Corp.
("IBM"). From 1965 to 1988, he served in IBM's domestic offices, holding
positions that included National Marketing Manager - PCS and Application
Development and Director - Systems Application Architecture Marketing. From
1988 to 1994, he served in IBM's European headquarters as Director of its
New Business Solutions Unit. From 1963 to 1965, Mr. Friedline was an
engineer at Union Carbide. He holds a B.S. in Engineering from Bucknell
University and an MBA from the University of Buffalo.
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 the
Company's Common Stock to file reports of initial ownership and is required
to disclose into this Form 10K any failure of the foregoing persons to file
timely those reports during its fiscal year ended December 31, 1999. To the
best of the Company's knowledge, it has solely relied upon a review of
copies of reports furnished to it and written representations that no other
reports were required to be filed. Mr. Sarubbi, a beneficial owner of
greater than 10% ownership of the Company's common stock, failed to file his
13D for the issuance of the 3,750,000 shares.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
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, 1999 with respect to the Company's Chief Executive Officer and
the Company's Three other most highly compensated executive officers as of
December 31, 1999 (the "Named Executive Officers"). The Company during 1999
only had three Executive Officers as a result of the decrease in the number
of employees, the pending sale to SBI and the overall financial condition of
the Company. The table sets forth compensation for services performed on
the Company's behalf for the Fiscal year ended December 31, 1999 and 1998.
During September 1997, the Company decided to change its fiscal year from
April 1 through March 31 to January 1 through December 31. The Summary
Compensation Table covers the year ended December 31, 1999, the year ended
December 31, 1998 and the transition period April 1, 1997 through December
31, 1997 (the "Transition Period").
SUMMARY COMPENSATION TABLE
-------------------------------------------------
Name and Annual Long-Term
Principal Fiscal Compensation Compensation All Other
Position Period Salary Bonus Options (#) Compensation
- -------- ------ ------------ ----- ------------ ------------
Stanford W.
Crane, Jr.
President,
Chief
Executive 1999 $150,000 - - $9,600 (2)
Officer 1998 150,000 - - 9,600 (2)
and Chairman Transition
of Period 112,500 283 (1) - 9,600 (2)
the Board 1997 150,000 100 (1) - 7,613 (3)
William E.
Ahearn
Vice President 1999 - - - -
and 1998 96,666(10) - 5,000 6,000 (2)
Chief Transition
Scientist Period 93,750 283 (1) - 5,500 (2)
1997 143,752 50,100 (5) 70,000 4,800 (2)
C. Daryl Hollis 1999 - - - -
Executive Vice 1998 78,125(11) - 5,000 6,000 (2)
President, Transition
Secretary Period 93,750 10,283 (6) 15,000 7,200 (2)
Treasurer 1997 93,754 25,100 (7) 70,000 4,800 (2)
and Chief
Financial
Officer
Melissa F.
Crane
Vice President 1999 125,000 - - 9,600 (2)
of 1998 125,000 25,000 (12) 35,000 5,035 (4)
Strategic Transition
Business Period 41,779(8) 25,155 (9) 50,000 -
1997 - - - -
Roy K. Lee 1999 31,250 (17) - - 1,200 (2)
Vice 1998 125,000 - 55,000 3,150 (2)
President Transition
Engineering Period 93,750 - 30,000 -
1997 54,688 (15) - 40,000 -
Kevin J. Calhoun
Controller 1999 - - - -
1998 85,000 (13) - 2,500 1,650 (2)
Transition
Period 82,500 - 17,500 17,783 (14)
1997 73,334 (16) - 10,000 -
- --------------------
(1) Holiday bonus.
(2) Car allowance.
(3) $25,000 bonus paid to Ms. Crane in connection with achieving certain
performance objectives.
(4) $5,035 commission paid to Ms. Crane in connection with achieving
certain performance objectives and car allowance.
(5) 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 $4,800 and Company contribution to 401(k)
Plan.
(10) Mr. Ahearn's salary is prorated as he resigned on October 30, 1998.
(11) Mr. Hollis' salary is prorated as he resigned on August 14, 1998.
(12) Bonus paid to Ms. Crane is a result of achieving certain performance
incentives.
(13) Mr. Calhoun's salary is prorated as he resigned on September 30, 1998.
(14) Mr. Calhoun was paid a bonus in connection with achieving certain
objectives.
(15) Mr. Lee was hired during fiscal year 1997 and his salary was prorated.
(16) Mr. Calhoun was hired during fiscal year 1997 and his salary was
prorated.
(17) Mr. Lee's salary was prorated as he left the Company in March 1999.
Roy K. Lee left the employment of the Company on March 15, 1999. He had
first joined the Company in 1996. Mr. Lee (age 37) was Vice President of
Engineering and Business Development for the Company. He is a computer
engineering manager specializing in computer architectures including Intel,
Alpha and X86 clones. He is experienced in both hardware and software
aspects of motherboards and modular architectures including Archistrat 4s,
5s, 5r and IO-A. Additionally, Mr. Lee worked with development teams on
multichip module solutions utilizing VSPA semiconductor packaging and
Compass interconnect solutions. Mr. Lee has an MSEE from the University of
Southern California, an MBA from the University of California, Irvine and
has authored articles on computers and software.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Option Grants. There were no options granted for the Fiscal year ended
December 31, 1999.
Option Exercises and Year-End Values. None of the Named Executive
Officers exercised any stock options during the twelve-month period for the
year ended December 31, 1999. The following table summarizes the value of
options held by such persons as of December 31, 1999:
YEAR-END OPTION VALUES
Number of Unexercised Value of Unexercised
Options at December 31, 1999 In-the-Money Options
Year-End (#) December 31, 1999 ($) (1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Stanford W.
Crane, Jr. - - - -
William E.
Ahearn (2) - - - -
C. Daryl
Hollis (2) - - - -
Melissa F.
Crane 44,000 41,000 - -
Roy Lee - - - -
Kevin
Calhoun (2) - - - -
- --------------------
(1) As of December 31, 1999, the closing sale price of the Company's
Common Stock was $.047 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. Mr. Lee's options expired on June 30,1999.
ITEM 12. CERTAIN OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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 and Series A
Preferred Stock beneficially owned, as of March 31, 2000 (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 or the Series A Preferred
Stock, (ii) each executive officer included in the Summary Compensation
Table and (iii) all executive officers and directors of Panda as a group.
All of the shares of Series A Preferred Stock were converted into shares of
the Company's common stock on January 19, 2000.
Amount of Percentage of
Outstanding Outstanding
Nature and Amount of Common Shares Shares Upon
Beneficial Ownership (1) Upon Conversion of
------------------------ Conversion of Series A
Name, Address Common Common Series A Series A Preferred
and Title of Stock Stock Preferred Preferred Shares (2)
Beneficial Shares Warrants Shares Shares
Owner
Shares
- ------------ ------------------------ ----------- -----------
Stanford W.
Crane, Jr. (3) 6,860 1,000 - 7,860 *
William E.
Ahearn - - - - *
John T.
Friedline - - - - *
Melissa F.
Crane (4) 41,860 1,000 0 42,860 *
Helix (PEI)
Inc. 1,000,000 2,850,000 - 3,850,000 11.8%
99 Yorkville Avenue, #218
Toronto, Ontario
Canada M5R 3K5
Joseph A. 5,850,000 0 0 5,850,000 12.0%
Sarubbi
3221 S. Ocean Boulevard
Highland Beach, FL
AGR Halifax
Fund L.P. 1,366,619 528,123 304.9222 13,577,584 32.4%
757 3rd Avenue, 27th Floor
New York, NY 10017
Leonardo L.P. 911,077 334,752 169.4522 7,738,249 21.2%
245 Park Avenue, 26th Floor
New York, NY 10167
All executive
officers and 40,860 1,000 0 41,860 *
directors as
a group
(four
persons) (3)(4)
- --------------------
* 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 December 31, 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) Includes 29,698,425 shares outstanding as of December 31, 1999 plus
any shares subject to options or warrants that are currently exercisable
within 60 days after December 31, 1999 and the number of shares issuable on
exchange of the Series A Preferred Stock.
(3) Includes 6,860 shares held by Mr. Crane jointly with his wife, of
which 1,000 shares are issuable upon exercise of a warrant.
(4) Includes 6,860 shares held by Ms. Crane jointly with her husband, of
which 1,000 shares are issuable upon exercise of a warrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Crane-Panda licensing agreement described below will be transferred,
pending finalization of the agreement, to SBI as part of the asset sale that
occurred in February 2000 (see "Subsequent Event" Section). Upon the
formation of Panda in April 1992, Panda issued 2,283,000 shares of Common
Stock to Mr. Crane in connection with Mr. Crane's agreement to assign and
license to Panda certain technology and products. Such license agreement
(the "Crane-Panda License") was amended in January 1996.
Under the Crane-Panda License, Mr. Crane has granted Panda the
nonexclusive right to utilize the Compass Connector, a key component in the
commercialization of Panda's Archistrat Computers and the development and
commercialization of the Compass PGA product. The Crane-Panda License was
executed in connection with the conversion to a nonexclusive license of the
3M License described below. Under the Crane-Panda License, Panda is
required to pay Mr. Crane a royalty on any sales of Compass Connectors as
discrete parts in the amount of 5% of the net sales price for the first five
years of the term of the agreement, 2.5% of the net sales price for the next
five years of the term of the agreement and 2% of the net sales price
thereafter, provided that no royalty is payable until aggregate net sales of
the Compass Connector as discrete parts exceed $100,000. The royalty rate
will be reduced after the fifth anniversary of the agreement if no patent
remains in effect with respect to the Compass Connector. No royalty is
payable on sales of the Compass Connector as incorporated in the Archistrat
Computers or other computer system or assembly. Panda may grant sublicenses
under the Crane-Panda License, but only for the use of products as
incorporated in the Archistrat Computers or other computer system or
assembly. To date, there have been no sales requiring the payment of
royalties to Mr. Crane under the Crane-Panda License. The Crane-Panda
License obligates Panda to maintain proprietary information relating to the
Compass Connector on a confidential basis, notify Mr. Crane of any evidence
of infringement with respect to the Compass Connector and related
technology, and cooperate with Mr. Crane to contest any such infringement.
In the event that Panda becomes bankrupt or insolvent or defaults in any of
its material obligations under the Crane-Panda License and fails to cure any
such defaults within specified cure periods, Mr. Crane may terminate the
Crane-Panda License. Panda is substantially dependent upon the Crane-Panda
License. The termination of the agreement under any circumstances would
have a material adverse effect on Panda. There can be no assurance that
conflicts of interest will not arise with respect to the Crane-Panda License
or that such conflicts will be resolved in a manner favorable to Panda. In
addition, Mr. Crane retains ownership of the Compass Connector technology,
and has the right to grant licenses to or otherwise transfer rights to the
Compass Connector technology to third parties.
In September 1992, Mr. Crane granted an exclusive license (the "3M
License") to Minnesota Mining and Manufacturing Co. ("3M") to develop,
manufacture, use and sell the Compass Connector other than as part of a
computer system. In February 1996, Mr. Crane and 3M agreed to convert the
3M License to a nonexclusive license. Pursuant to the 3M License, Mr. Crane
is entitled to receive from 3M, in general, a 5% royalty (decreasing to 2.5%
after five years, and to 2% after ten years) on net sales of the Compass
Connector (including sales to Panda). The 3M License provides in certain
circumstances for the payment of a royalty to Mr. Crane. As of December
31, 1999, Mr. Crane had received no such payments.
In April 1999, Mr. Crane licensed the Compass Connector technology to
Winchester Electronics to develop, manufacture and sell on a non- exclusive
world-wide basis. Winchester Electronics competes in a number of different
market segments and is not currently competing with any specific product
versions offered by Panda.
In October 1993, Panda settled litigation with Jack R. Moore and Gary
Marvel, former officers and promoters of Panda. In connection with the
settlement, the former officers, or their designees, received 197,860 shares
of Panda's Common Stock which were being held by an escrow agent (the
"Escrowed Shares") subject to Panda's or its assignee's right to repurchase
them. In February 1994, Panda's rights to purchase the Escrowed Shares were
assigned to Mr. Crane in connection with his employment agreement. In March
1996, Mr. Crane purchased the Escrowed Shares for an aggregate purchase
price of $312,000.
In July 1996, Mr. Crane purchased 1,000 shares of Panda Common Stock at a
purchase price of $9.00 per share in connection with a private placement
financing and warrants to purchase 1,000 shares of Panda Common Stock in
connection with such purchase having a term of five years and an exercise
price of $11.00 per share.
In October 1996, Panda and Mr. Crane entered into a license agreement with
LG Cable & Machinery Ltd. ("LG") whereby LG was granted a license with
respect to Compass Connector technology owned by Mr. Crane and certain
enhanced Compass Connector technology owned by Panda. The license granted
to LG is non-exclusive except for certain limited exclusive manufacturing
rights with respect to specified Asian countries. The $1 million license
fee will be split equally between Mr. Crane and Panda. In addition, Panda
and Mr. Crane are entitled to receive royalties on sales of the Compass
Connector products by LG or its affiliates, which will be split equally
between Mr. Crane and Panda. As of December 31, 1999, Mr. Crane had
received an aggregate of $400,000 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS
REPORT:
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are
listed on the Index to Financial Statements on page F-1 of this report.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts on page
F-30.
All other schedules are omitted as the information
required is inapplicable or the information is presented in the financial
statements or related notes.
(3) EXHIBITS
Exhibit Description of Exhibit
- ------- ----------------------
2.1 Letter of Intent by Silicon Bandwidth, Inc. dated May 18,
1999. (Incorporated herein by reference to exhibit 2.1 to the
Company's 8-K filed on May 18, 1999).
2.2 Voting Agreement. (Incorporated herein by reference to exhibit
2.2 to the Company's 8-K filed on May 18, 1999).
2.3 Agreement between Helix (PEI), Inc., The Panda Project, Inc.
and Silicon Bandwidth, Inc. (Incorporated herein by reference to
exhibit 2.3 to the Company's 8-K filed on May 18, 1999).
2.4 The Exchange Agreement between Panda Project inc. and the
Convertible Preferred A Holders. (Incorporated herein by
reference to exhibit 2.4 to the Company's 8-K filed on May 18,
1999).
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended (incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form
S-3 filed November 3, 1997 (File No. 333-39287) (the "Form
S-3, File No. 333-39287")).
3.2 Amended and Restated By-Laws of the Company (incorporated
herein by reference to Exhibit 3.2 to the Form S-3, File No.
333-39287).
3.3 Fourth Articles of Amendment of Amended Restated Articles of
Incorporation (incorporated herein by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K filed
February 23, 1998).
3.4 Fifth Articles of Amendment of Amended Restated Articles of
Incorporation (incorporated herein by reference to Exhibit 3.1 to
the Company's Quarterly Report of Form 10-Q for the period ended
March 31, 1998).
3.5 Sixth Articles of Amendment of Amended Restated Articles of
Incorporation (incorporated herein by reference to Exhibit 3.2 to
the Company's amended Quarterly Report of Form 10-Q for the
period ended March 31, 1998 filed July 2, 1998).
3.6 Seventh Articles of Amendment of Amended Restated Articles of
Incorporation (incorporated herein by reference to Exhibit 3.5 to
the Registrant's Quarterly Report of Form 10-Q for the period
ended June 30, 1998).
4.1 Warrant Agreement dated May 16, 1994 between the Company and
Whale Securities Co., L.P. (incorporated herein by reference
to Exhibit 4.4 to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (File No. 33-76694-A)
(the "Form SB-2")).
4.2 Form of Warrant issued in Private Placement Financing
(incorporated herein by reference to Exhibit 99.3, filed as
part of the Company's Registration Statement on Form S-3
(File No. 333-14931) (the "Form S-3, File No. 333-14931")).
4.3 Form of SRP Warrant (incorporated herein by reference to
Exhibit 99.4, filed as part of the Form S-3, File No.
333-14931).
4.4 Form of 4% Subordinated Convertible Debentures of the Company
(incorporated herein by reference to Exhibit 4.1, filed as part
of the Registrant's Form 8-K filed April 21, 1997).
4.5 Form of Common Stock Purchase Warrant Issued to Dusseldorf
Securities LTD (incorporated herein by reference to Exhibit
4.2, filed as part of the Registrant's Form 8-K filed April
21, 1997).
4.6 Form of Common Stock Purchase Warrant (incorporated herein
by reference to Exhibit 99.2, filed as part of the
Registrants Form 8-K filed February 11, 1998).
4.7 Form of Common Stock Purchase Securities Agreement
(incorporated herein by reference to Exhibit 10.1 as part of the
Company's quarterly report on Form 10-Q for the quarter ended
June 30, 1998).
4.8 Form of Common Stock Purchase Warrant (incorporated herein by
reference to Exhibit 4.1 as part of the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1998).
4.9 Promissory Note dated June 11, 1999 by and between The
Panda Project, Inc. (the "Company") and Silicon Bandwidth,
Inc. ("SBI"). (incorporated herein by reference to Exhibit 10.1
to the Company's 8-K filed on June 18, 1999).
4.10 Promissory Note dated July 15, 1999 by and between The
Panda Project, Inc. (the "Company") and Silicon Bandwidth,
Inc. ("SBI"). (incorporated herein by reference to Exhibit 2.1
to the Company's 8-K filed on August 11, 1999.
4.11 Promissory Note dated August 17, 1999 by and between The
Panda Project, Inc. (the "Company") and Silcon Bandwidth,
Inc. ("SBI") (incorporated herein by reference to Exhibit 4.11
as part of the Registrant's Quarterly Report on Form 10-Q filed
for the quarter ended September 30, 1999).
4.12 Promissory Note dated October 1, 1999 by and between The
Panda Project, Inc. (the "Company") and Silcon Bandwidth,
Inc. ("SBI") (incorporated herein by reference to Exhibit 4.12
as part of the Registrant's Quarterly Report on Form 8-K dated
October 28, 1999).
4.13 Promissory Note dated November 29, 1999 by and between The
Panda Project, Inc. (the "Company") and Silcon Bandwidth,
Inc. ("SBI")
4.14 Promissory Note dated January 10, 2000 by and between The
Panda Project, Inc. (the "Company") and Silcon Bandwidth,
Inc. ("SBI")
4.15 Promissory Note dated February 8, 2000 by and between The
Panda Project, Inc. (the "Company") and Silcon Bandwidth,
Inc. ("SBI")
10.1 Amended and Restated Employment Agreement between the
Company and Stanford W. Crane, Jr., dated February 22, 1994
(incorporated herein by reference to Exhibit 10.1 filed as
part of the Form SB-2).@
10.2 1993 Performance Incentive Plan, dated December 29, 1993
(incorporated herein by reference to Exhibit 10.6 filed as
part of the Form SB-2).@
10.3 Amended and Restated Nonemployee Director Stock Option
Plan (incorporated herein by reference to Exhibit 99.1
filed as part of the Registrant's Quarterly Report on Form
10-Q filed for the quarter ended September 30, 1997).@
10.4 1995 Employee Stock Incentive Plan, dated November 2, 1995
(incorporated herein by reference to Exhibit 4.4 filed as
part of the Company's Registration Statement on Form S-8
filed with the Securities and Exchange Commission on
November 7, 1995 (Registration No. 33-99058)).@
10.5(a)Lease Agreement between the Company and Fairfax Boca '92
L.P., dated March 2, 1994 (incorporated herein by
reference to Exhibit 10.9(a) filed as part of the Form
SB-2).
10.5(b) Amendment dated April 1, 1995, to Lease Agreement dated
March 2, 1994, between the Company and Fairfax Boca '92,
L.P. (incorporated herein by reference to Exhibit 10.5(b)
filed as part of the Registrant's Form 10-K for the year
ended March 31, 1996).
10.5(c) Amendment dated as of July 1, 1995, to Lease Agreement dated
March 2, 1994, between the Company and Fairfax Boca '92, L.P.
(incorporated herein by reference to Exhibit 10.98 filed as
part of the Registrant's Form 10-KSB for the year ended March
31, 1995 (Commission File No. 0-24030)).
10.5(d) Lease Agreement dated October 24, 1995, between the Company
and Fairfax Boca '92, L.P. (incorporated herein by reference
to Exhibit 10.5(d) filed as part of the Registrant's Annual
Report on Form 10-K for the year ended March 31, 1996 filed on
June 27, 1996).
10.5(e) Fourth Amendment dated as of November 27, 1996, to Lease
Agreement dated October 24, 1995, between the Company and
Fairfax Boca '92, L.P. (incorporated herein by reference to
Exhibit 10.5(e) filed as part of the Registrant's Annual
Report on Form 10-K for the year ended March 31, 1997).
10.5(f) Fifth Amendment dated as of March 13, 1997, to Lease Agreement
dated October 24, 1995, between the Company and Fairfax Boca
'92, L.P. (incorporated herein by reference to Exhibit 10.5(f)
filed as part of the Registrant's Annual Report on Form 10-K
for the year ended March 31, 1997).
10.6 Form of Indemnification Agreement between the Company and its
directors, dated December 29, 1993 (incorporated herein by
reference to Exhibit 10.10 filed as part of the Form SB-2).
10.7 Offshore Securities Subscription Agreement dated April 2, 1997
(incorporated herein by reference to Exhibit 99.1, filed as
part of the Registrant's Form 8-K filed April 21, 1997).
10.8 License Agreement, dated as of August 17, 1996, among Stanford
W. Crane, Jr., the Company and Sun Precision Works, Pvt. Ltd.
(incorporated herein by reference to Exhibit 99.5 filed as
part of the Form S-3, File No. 333-14931).
10.9 Registration Rights Agreement dated February 11, 1998
(incorporated herein by reference to Exhibit 99.2, filed as
part of the Registrant's Form 8-K filed February 11, 1998).
10.10 Warrant dated September 10, 1996 issued by the Company to
Mallory Factor (incorporated herein by reference to Exhibit
99.7 filed as part of the Form S-3, File No. 333-14931).
10.11 License Agreement, dated as of August 18, 1996, between the
Company and Pantronix Corporation (incorporated herein by
reference to Exhibit 99.8 filed as part of the Form S-3, File
No. 333-14931).
10.12 License Agreement, dated as of September 30, 1996, among
Stanford W. Crane, Jr., the Company and LG Cable & Machinery
Ltd. (incorporated herein by reference to Exhibit 99.9 filed
as part of the Form S-3, File No. 333-14931).
10.13 Registration Rights Agreement, dated as of July, 1996, among
the Company and the Purchasers named therein (incorporated
herein by reference to Exhibit 10.1 filed as part of the
Registrant's Quarterly Report on Form 10-Q filed for the
quarter ended June 30, 1996).
10.14 License Agreement dated January 19, 1996 between the Company
and Stanford W. Crane, Jr. (incorporated herein by reference
to Exhibit 10.1 filed as part of the Registrant's Quarterly
Report on Form 10-Q filed on February 14, 1996).
10.15 Agreement dated March 25, 1996, between the Company and
Parametric Technology Corporation. (incorporated herein by
reference to Exhibit 10.15 filed as part of the Registrant's
Annual Report on Form 10-K filed for the fiscal year ended
March 31, 1997).
10.16 License Agreement dated June 7, 1996 among the Company, AMP
Incorporated, The Whitaker Corporation and Connectware Inc.
(incorporated herein by reference to Exhibit 10.16 filed as
part of the Registrant's Annual Report on Form 10-K filed for
the fiscal year ended March 31, 1997).
10.17 Cooperative Agreement, dated October 22, 1996, between the
Company and the United States of America, U.S. Air Force, Air
Force Material Command (incorporated herein by reference to
Exhibit 99.10 filed as part of the Form S-3).
10.18 Reseller Agreement, dated November 1996, between the Company
and Siemens Nixdorf Information Systems, Inc. (incorporated
herein by reference to Exhibit 99.11 filed as part of the Form
S-3).
10.19 License Agreement, executed as of July 15, 1997, between the
Company and LG Cable & Machinery Ltd. (incorporated herein by
reference to Exhibit 10.1 filed as part of the Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended June
30, 1997).
10.20 Standard Industrial Lease Agreement, dated as of July 16,
1997, between the Company and IBG Huntwood Associates
(incorporated herein by reference to Exhibit 10.2 filed as
part of the Registrant's Quarterly Report on Form 10-Q filed
for the quarter ended June 30, 1997).
10.21 Secured Promissory Note dated December 19, 1997 issued to
Helix (PEI) Inc. (incorporated herein by reference to Exhibit
10.1, filed as part of the Registrant's Form 8-K filed January
14, 1998).
10.22 Secured Promissory Note dated January 12, 1998 issued to Helix
(PEI) Inc. (incorporated herein by reference to Exhibit 10.1,
filed as part of the Registrant's Form 8-K filed January 14,
1998).
10.23 Subscription Agreement dated February 11, 1998 with purchasers
of Series A Preferred (incorporated herein by reference to
Exhibit 99.1, filed as part of the Registrant's Form 8-K filed
February 11, 1998).
10.24 Secured Promissory note dated May 28, 1998 issued to Helix
(incorporated herein by reference to Exhibit 10.1 filed as
part of the Registrant's quarterly report on amended Form
10-Q/A for the quarter ended June 30, 1998.
10.25 Registration Rights Agreement, dated as of February 6, 1998
(incorporated herein by reference to Exhibit 99.2 to the
Company's 8-K filed on February 23, 1998).
10.26 Secured Promissory note dated June 28, 1998 issued to Helix
(incorporated herein by reference to Exhibit 10.2 filed as
part of the Registrant's quarterly report on amended Form 10-
Q/A for the quarter ended June 30, 1998.
10.27 Secured Promissory note dated July 17, 1998 issued to Helix
(incorporated herein by reference filed as part of the
Company's 8-K filed on July 30, 1999.)
10.28 Stockholders Agreement dated February 18, 2000 by and among The
Panda Project, Inc., Silicon Bandwidth, Inc., Vantage Point Venture
Partners 1996 L.P., Archimedes Capital LLC and the Management
stockholders.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
@ - Management contracts and compensatory plans and arrangements.
(B) REPORTS ON FORM 8-K:
Date of Filing Items Reported
The Company has filed the following reports on Form 8-K `since
January 1, 1999:
January 4, 1999 The Panda Project, Inc. (the "Company") has
engaged Grant Thornton LLP as the Company's
independent accountants to audit the Company's
financial statements. The engagement is
effective as of January 4, 1999.
May 18, 1999 The Panda Project, Inc. has entered into an
agreement with Silicon Bandwidth, Inc. to sell
its intellectual property portfolio as well as
the fixed assets related to its interconnect and
semiconductor business.
June 18,1999 The Panda Project has entered into a loan agreement
with Silicon Bandwidth, Inc. in the amount of
$300,000 secured by the Company's assets.
August 11, 1999 The Panda Project, Inc. has entered into a Loan
agreement for an additional $325,000 totaling
$625,000 secured by the Company's assets.
September 9, 1999 The Panda Project, Inc. has amended the Asset
Purchase Agreement with Silicon Bandwidth, Inc. to
extend the expiration date from October 31, 1999 to
December 30, 1999.
October 21, 1999 The Panda Project, Inc. has amended the Form 8-K of
September 9, 1999 to include exhibits.
October 28, 1999 Promissory Note dated October 1, 1999 by and
between The Panda Project, Inc. (the "Company") and
Silcon Bandwidth, Inc. ("SBI"). Incorporated
herein by reference to Exhibit 4.12 as part of the
Registrant's Quarterly Report on Form 8-K dated
October 28, 1999.
November 9, 1999 Form 8-K stating that the Company received notice
that Mr. Sarubbi has alleged that the Company is in
default of the Letter Agreement dated June 24,
1999.
December 13, 1999 The Panda Project, Inc. has amended the Form 8K
update of October 21, 1999 to include Exhibit D.
February 28, 2000 The Panda Project, Inc. announced that the asset sale to
Silicon Bandwidth, Inc. was closed subject to the
Stockholder's Agreement being finalized and the Helix
loans being transferred.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE PANDA PROJECT, INC.
___________________________
(Registrant)
Date: April 14, 2000 By: /s/ Stanford W. Crane, Jr.
Chairman of the Board
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
_________________________ April 14, 2000
/s/ Stanford W. Crane, Jr.
President and Chief Executive Officer
Chairman of the Board
(Principal Executive Officer)
__________________________ April 14, 2000
/s/ Melissa F. Crane
Acting Chief Financial Officer
and Secretary (Principal Financial
Accounting Officer)
_________________________ April 14, 2000
/s/ William E. Ahearn
Director
_________________________ April 14, 2000
/s/ John T. Friedline
Director
<PAGE>
The Panda Project, Inc.
Index to the Financial Statements
- -------------------------------------------------------------------
Page
Reports of Independent Certified Public Accountants....... F-2
Financial Statements
Balance Sheets........................................ F-3
Statements of Operations.............................. F-4
Statement of Changes in Stockholders' Deficit......... F-5
Statements of Cash Flows.............................. F-6 to F-7
Notes to Financial Statements......................... F-8 to F-31
<PAGE>
<PAGE>
Page F-2
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
The Panda Project, Inc.
We have audited the accompanying balance sheets of The Panda Project, Inc.
as of December 31, 1999 and 1998, and the related statements of operations,
changes in stockholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Panda Project, Inc.
as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $8,019,299 during the year
ended December 31, 1999, and, as of that date, the Company's current
liabilities exceeded its current assets by $6,053,788 and its total
liabilities exceeded its total assets by $5,446,453 In addition, the Company
has not paid $2,295,000 of notes payable that were due to SBI in February
2000. Furthermore, the Company has been notified that they are in default
of a settlement agreement with Mr. Sarubbi entered into in 1999. These
factors, as discussed in Note B to the financial statements, raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described
in Note B. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
We have also audited Schedule II of The Panda Project, Inc. for the years
ended December 31, 1999 and 1998. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
/s/ Grant Thornton LLP
Grant Thornton LLP
Miami, Florida
April 7, 2000
<PAGE>
Page F-3
The Panda Project, Inc. - Balance Sheets
- ---------------------------------------------------------------------
The Panda Project, Inc.
BALANCE SHEETS
December 31,
ASSETS
1999 1998
Current assets
Cash and cash equivalents $ 180,388 $ 60,613
Accounts receivable (net of allowance
of $5,796 at December 31, 1999 and
$295,292 at December 31, 1998) 68,856 64,206
Inventory 16,007 47,319
Other receivables 15,999 19,273
Prepaid expenses and other current assets 85,249 637,947
----------- -----------
Total current assets 366,499 829,358
Property and equipment, net 442,401 1,845,939
Restricted cash 80,000 80,000
Other assets 84,934 82,540
----------- -----------
Total assets $ 973,834 $ 2,837,837
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable $ 1,242,775 $ 1,207,662
Notes payable 3,575,000 2,000,000
Other current liabilities 1,602,512 1,356,069
----------- -----------
Total current liabilities 6,420,287 4,563,731
Commitments and contingencies - -
Stockholders' (deficit) equity
Preferred Stock, $.01 par value, 2,000,000
shares authorized; 528 and 420 shares
issued and outstanding at
December 31, 1999 and 1998 4,864,137 3,967,057
Common stock, $.01 par value, 50,000,000
shares authorized; 29,698,426 and
16,744,088 shares issued and outstanding
at December 31, 1999 and 1998, respectively 296,986 167,441
Additional paid-in capital 77,751,972 74,479,857
Accumulated deficit (88,359,548) (80,340,249)
----------- -----------
Total stockholders' (deficit) (5,446,453) (1,725,894)
----------- -----------
Total liabilities and stockholders'
(deficit) $ 973,834 $ 2,837,837
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
PAGE F-4
The Panda Project, Inc.
STATEMENTS OF OPERATIONS
Year
Year Ended Ended
December 31, December 31,
1999 1998
------------ ------------
Revenues
Product sales $ 487,683 $ 586,907
Licensing fees 850,000 100,000
Contract research and
development revenues - 135,673
------------ ------------
Net revenues 1,337,683 822,580
Costs and expenses:
Cost of sales 279,619 1,739,418
Research and development 906,810 3,395,577
Selling, general and administrative 4,213,419 9,263,283
Amortization of debt issuance costs/
accrued penalties 3,092,500 3,735,514
Cost associated with asset impairments 590,830 125,038
------------ ------------
Total operating expenses 9,083,178 18,258,830
------------ ------------
Operating loss (7,745,495) (17,436,250)
Interest expense (327,902) (145,892)
Interest income 3,715 72,345
Other income 50,383 35,101
------------ ------------
Net loss $ (8,019,299) $(17,474,696)
============ ============
Dividends and amortization of
beneficial conversion feature
related to convertible
preferred stock (54,067) (741,886)
------------ ------------
Net loss applicable
to common stock $ (8,073,366) $(18,216,582)
============ ============
Basic and diluted loss
per share $ ( .31) $ (1.33)
============ ============
Weighted average
shares outstanding 25,872,046 13,732,936
============ ============
The accompanying notes are an integral part of these statements.
<PAGE>
PAGE F-5
<TABLE>
The Panda Project, Inc.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Year Ended December 31, 1999 and 1998
<CAPTION>
Preferred Common
Stock Stock Addition- Total
--------------------- ------------------ al Paid- Accumul- Stock
Par in ated holders'
Shares Value Shares Value Capital Deficit Deficit
---------- --------- ----------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1997 - - 12,215,522 122,155 64,841,102 (62,865,553) 2,097,704
Preferred Stock
offering, net 600 5,390,399 - - - - 5,390,399
Preferred Stock
dividends - 231,041 - - (231,041) - -
Warrants issued
related to
Preferred stock
offering, net - - - - 396,374 - 396,374
Private
Placement of
common Stock,
net - - 2,254,602 22,546 3,460,635 - 3,483,181
Issuance of
common stock - - 23,462 234 94,742 - 94,976
Warrants issued
related to
debt issuance - - - - 3,920,000 - 3,920,000
Warrants issued
for Services
received - - - - 299,534 - 299,534
Exercise of
stock options - - 3,000 30 12,220 - 12,250
Conversion of
preferred
stock to
common stock (180) (1,654,383) 2,234,363 22,344 1,632,039 - -
Issuance of
common stock
under 401(k)
Plan - - 13,139 132 54,252 - 54,384
Net Loss - - - - - (17,474,696) (17,474,696)
---------- --------- ----------- -------- ----------- ------------ ------------
Balance at
December 31,
1998 420 3,967,057 16,744,088 167,441 74,479,857 (80,340,249) (1,725,894)
Preferred Stock
offering, net 171 1,710,000 - - - - 1,710,000
Preferred Stock
dividends 30 54,067 - - ( 54,067) - -
Issuance of
common stock
related to 98
private
placement
fill-up shares - - 4,441,829 44,418 (44,418) - -
Issuance of
common stock - - 5,541,667 55,417 1,798,183 - 1,853,600
Warrants issued
related to
debt issuance - - - - 220,000 - 200,000
Warrants issued
for Services
received - - - - 99,966 - 99,966
Exercise of
warrants - 553,333 5,533 409,641 - 415,174
Conversion of
preferred
stock to
common stock ( 93) ( 866,987) 2,417,654 24,177 842,810 - -
Net Loss - - - - - ( 8,019,299) ( 8,019,299)
---------- --------- ----------- -------- ----------- ------------ ------------
Balance at
December 31,
1999 528 4,864,137 29,698,571 296,986 77,751,972 (88,359,548) ( 5,446,453)
</TABLE>
<PAGE>
Page F-6
The Panda Project, Inc.- STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating
activities:
Net loss $ (8,019,299) $(17,474,696)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,278,340 4,908,548
Provision for obsolete inventory - 1,178,837
Provision for doubtful accounts - 285,286
Cost associated with asset impairments 590,830 125,038
Fair value of Stock option warrants 99,970 -
Loss on disposal of fixed assets 346,649 -
Issuance of preferred stock 1,710,000 -
Issuance of common stock 266,000 -
Liquidating damages 637,500 -
Warranty reserve write-off 180,000 -
Stock option compensation - 298,130
Changes in operating assets and liabilities
(Increase) in accounts receivable (4,650) (124,641)
Decrease in other receivables 3,274 86,552
Decrease in prepaid expenses and
other current assets 27,697 265,295
Decrease (increase) in inventory 31,313 (260,958)
Decrease in restricted cash - 180,000
Increase in other assets (2,394) (81,244)
Increase (decrease) in accounts payable,
and other current liabilities 401,275 (52,394)
------------ ------------
Net cash used in operating activities (2,453,495) (10,666,247)
Cash flows from investing activities:
Additions to property and equipment (21,081) (331,126)
Proceeds from disposal of property and equipment 104,176 -
------------ ------------
Net cash provided by investing
activities 83,095 (331,126)
Cash flows from financing activities:
Proceeds from issuance of preferred stock - 6,000,000
Payment of costs related to issuance of
preferred stock - (206,486)
Proceeds from issuance of common stock 915,175 161,608
Proceeds from common stock private placement - 3,674,500
Payment of stock issuance costs - (191,319)
Payment of notes payable - (2,000,000)
Proceeds from issuance of notes payable 1,575,000 3,000,000
------------ ------------
Net cash provided by financing
activities 2,490,175 10,438,303
------------ ------------
Net increase (decrease) in cash and cash equivalents 119,775 (559,070)
Cash and cash equivalents at beginning of period 60,613 619,683
------------ ------------
Cash and cash equivalents at end of period $ 180,388 $ 60,613
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ - $ 138,798
============ ============
Taxes paid $ $ -
============ ============
</TABLE>
<PAGE>
Page F-7
Supplemental schedule of non-cash investing and financing activities:
In 1999, the Company paid preferred series A stock holders 171
shares of Series A Preferred stock with a value of $1,710,000 in
preferred stock related to any accrued penalties incurred by the
Company.
In February 2000, the Company repriced and extended the warrants
issued to Helix. As a result, the Company recorded an additional
$220,000 of interest related to the fair market value of the
warrants.
In 1998, the Company issued warrants to Helix (PEI) Inc. in
conjunction with its notes payable. The Company capitalized the
$3,920,000 fair market value of these warrants as part of deferred
issuance costs.
In 1999 the Company issued 1,000,000 shares of the Company's common
stock to Helix for any accrued and future interest related to the
notes payable. A charge of $266,000 was recorded as interest
expense, as a result of issuing this stock.
In 1999 and 1998, approximately 93 and 180 shares of the Company's
convertible preferred stock were converted into 2,417,654 and
2,234,363 shares of the Company's common stock, respectively.
In 1999 and 1998, the Company paid Preferred Stock dividends of
$54,067 and $231,041 in the form of Preferred Stock.
In 2000 and 1999, the Company issued Mr. Sarubbi 3,750,000 and
2,100,000 shares of the Company's common stock. In 1999 non-cash
charges totaling $1,053,599 were recorded.
In 1999, the Company issued 4,441,829 shares of its common stock
related to the 1998 equity private placement "Fill-Up" shares (see
Note L).
The accompanying notes are an integral part of these statements.
<PAGE>
Page F-8
The Panda Project, Inc.
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1998 and 1999
NOTE A - DESCRIPTION OF BUSINESS
The Panda Project, Inc. ("Panda" or the "Company") a Florida Corporation,
was incorporated in 1992. Since this time Panda has been 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.
On May 14, 1999, Panda announced that it had entered into a letter of intent
with Silicon Bandwidth, Inc. ("SBI"), a privately held Delaware Corporation,
with respect to the sale of substantially all of its intellectual property
portfolio and certain fixed assets. 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 subject to shareholder
approval. On July 19, 1999, SBI and Panda executed the Asset Purchase
Agreement.
On February 18, 2000, the Shareholders of Panda approved the transaction as
well as all other items put before them as described in the Company's 14A
dated January 28, 2000. On February 28, 2000, Panda filed an 8-K announcing
that the asset sale to SBI was closed subject to the Stockholder's Agreement
being finalized and the Helix Loan being transferred. The Asset Purchase
Agreement contemplated the sale of substantially all of Panda's operating
assets. All of the originally contemplated assets were transferred to SBI
except for those assets, the real property located in Florida, that were
levied by Mr. Sarubbi in January 2000 as part of the Writ of Execution that
was filed in Palm Beach County Court. On March 15, 2000, the Helix loans in
the aggregate amount of $2,000,000 were transferred to SBI. On March 10,
2000 the Stockholder's Agreement by and between, Panda, SBI, Vantagepoint
Venture Partners LLC, Archimedes Capital LLC and the Management
Stockholders' was executed.
In 1999, Panda focused all of its efforts on the VSPA and Compass technology
products collectively the ("Technology Products").
These technologies are embodied in VSPA, a three-dimensional semiconductor
package, and the Compass Connector, a board-to-board interconnect solution.
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.
<PAGE>
Page 9
Since November 1998, when the Company elected to exit its Systems business
entirely, and 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, the Company has focused solely on the Technology
Products.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. The Company's working
capital is not sufficient to meet its obligations. The Company on February
18, 2000, sold substantially all of its assets and is not currently
conducting any business operations. As a result of the sale of the
Company's assets and operations, the Company is essentially a holding
company for the 10% interest in SBI which the Company received from the
sale. The Company's expenses have been reduced to a minimal level. The
Company plans on paying its minimal expenses through the collection of
receivables and if necessary, from time to time, the Company may request
funds from SBI although their is no obligation and there can be no assurance
that the request will be fulfilled.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain present financing,
and to succeed in its future operations, if any. The financial statements
do not include any adjustments relating to the recoverability and
classification of recorded assets amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to continue
in existence.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
- ----------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at year end and the reported
amounts of revenues and expenses during the year. Actual results could
differ from those estimates.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
<PAGE>
Page F-10
Accounts Receivable
- -------------------
The Company has business activities with both large and small
corporations. The Company has adopted credit policies and standards intended
to accommodate industry growth and inherent risk. Management believes that
credit risks are moderated by the diversity of its customers and geographic
sales areas. The Company performs ongoing credit evaluations of its
customers' financial condition and requires collateral when it deems
necessary. There can be no assurance that the credit quality of the
customers with which the Company transacts business will be stable or that
efforts to diversify receivables will prevent the Company from incurring
material losses.
Inventory
- ----------
Inventory is stated at the lower of cost using a first-in, first- out
basis, or market. Reserves are provided for excess and obsolete inventory.
Property and Equipment
- -----------------------
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, which range from
three to ten years. Maintenance and repair costs are expensed as incurred.
Revenue Recognition
- -------------------
The Company recognizes revenue from product sales at the time of
shipment. Licensing fees are recorded when they are recognized in
accordance with the Licensing Agreements. Contract research and development
revenue are recorded upon the achievement of stated milestones.
Per Share Data
- --------------
The Company's earnings per share is computed in accordance with FAS No.
128 " Earnings Per Share". FAS 128 requires the presentation of both basic
and diluted earnings per share. Due to losses from continuing operations,
the effect of stock options and warrants is antidilutive. Accordingly, the
Company's presentation of diluted earnings per share is the same as that of
basic earnings per share for all periods presented.
Potential common shares in the amount of approximately 31,777,000 and
16,350,000 for the years ended December 31, 1999 and 1998, respectively have
been excluded from the computation of diluted earnings per share as the
effect of their inclusion is antidilutive.
<PAGE>
Page F-11
The exercise price of the warrants to acquire approximately 5,750,000 common
shares range from $2.125 to $11.00. There is potentially substantial
dilution from the convertible preferred stock if it were to be converted
under current market conditions. In January 2000, all of the remaining
Series A Preferred shares were converted into 20,262,681 shares of the
Company's common stock. Additionally, in February 2000, the Company issued
3,750,000 shares of its common stock to Mr. Sarubbi pursuant to the "Amended
Settlement Agreement", and issued the remaining 5,246,727 Fill-Up shares
pursuant to the 1998 private placement.
Income taxes
- ------------
The Company records deferred income taxes using the liability method.
Under the liability method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the financial statement and income tax bases of the Company's assets
and liabilities. An allowance is recorded, based on currently available
information, when it is more likely than not that any or all of a deferred
tax asset will not be realized. The provision for income taxes includes
taxes currently payable, if any, plus the net change during the period
presented in deferred tax assets and liabilities recorded by the Company.
Long-Lived Assets
- -----------------
The Company reviews long-lived assets and reserves for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
New Accounting Pronouncements
- ----------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards
(FAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." FAS No. 133 establishes standards for accounting and reporting
for derivative instruments, and conforms the requirements for treatment of
different types of hedging activities. This statement is effective for all
fiscal years beginning after June 15, 2000. Management does not expect this
standard to have a significant impact on the Company's operations.
<PAGE>
Page F-12
Stock-Based Compensation
- ------------------------
The Company's employee stock option plans are accounted for using the
intrinsic value method. The Company also provides disclosures of certain pro
forma information as if the fair value-based method had been applied in
measuring compensation expense (Note M).
Debt Issuance Costs
- -------------------
Deferred loan costs of approximately $3,920,000 incurred in connection
with debt financing (Note H) are being amortized on a straight-line basis
over the life of the debt. As of December 31, 1999 and 1998, the Company
had $0 and $525,000, respectively, of deferred debt costs net of accumulated
amortization of $0 and $3,395,000, respectively, which is included in
prepaid expenses and other current assets.
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, notes payable,
accounts payable, and accrued compensation and employee benefits
approximates fair value due to the relatively short-term maturity of these
instruments.
NOTE E - RESTRICTED CASH
Restricted cash as of December 31, 1999 and 1998 was $80,000, which was
held in a restricted account to serve as security for a letter of credit
issued to one of the Company's landlords.
NOTE F - INVENTORY
Inventory as of December 31, 1999 is comprised of the Company's VSPA
raw materials and finished goods of $16,007.
As discussed in Note A the Company elected to exit its System business
as of November 1998. This decision, coupled with the rapid technological
development in the computer industry resulted in the recognition of a
write-down of substantially all of its Systems inventory of $1,178,837.
This write-down was recorded as a component of the cost of goods sold. The
inventory as of December 31,1998 is comprised of the Company's VSPA raw
materials and finished goods of $22,319 and the net realizable value of the
Systems inventory of $25,000.
<PAGE>
Page F-13
NOTE G - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Estimated December 31, December 31,
Useful Lives 1999 1998
------------ ----------- ----------
Office furniture and
equipment 3 - 10 years $ 3,126,922 $3,180,103
Machinery and equipment 3 - 5 years 636,368 1,889,458
Trade show booth and exhibit 5 years 420,428 420,428
Motor vehicles 5 years - 54,535
Leasehold improvement 5 years 13,173 13,173
Construction in progress - 281,915
Less: accumulated depreciation (3,754,490) (3,993,673)
----------- ----------
Total property and equipment, net $ 442,401 $1,845,939
=========== ==========
Depreciation expense for the years ended December 31, 1999 and 1998 was
$533,340 and $1,178,427, respectively.
During the years ended December 31, 1999 and 1998 the Company
determined that certain long-lived assets were impaired. During 1999 the
impairment occurred when certain machinery was no longer operable. During
the year ended December 31, 1998 the impairment occurred when the Company
continued the downsizing of its operations to streamline operations and to
increase the use of strategic alliances to manufacture and market the
Company's products. As a result, the Company recorded charges totaling
approximately $591,000 and $125,000 during the years ended December 31, 1999
and 1998, respectively. The Company determined the amount of the asset
impairment charges based on estimates of the fair market value of the
assets.
NOTE H - NOTES PAYABLE
As of December 31, 1998, the Company had outstanding loans from Helix in
the aggregate principal amount of $2,000,000. On May 14, 1999, the Company,
Helix and Silicon Bandwidth, Inc. ("SBI") entered into an agreement ("Helix
Agreement") requiring certain actions upon the closing of the acquisition of
certain assets of the Company by SBI. On March 15, 2000 SBI paid $1,000,000
of this debt on behalf of the Company to Helix. In consideration of such
payment, and the issuance of 1,000,000 shares of the Company's common stock
to Helix, Helix released the Company from payment on all accrued and future
interest on the notes. The remaining $1,000,000 and accrued interest will be
paid in eleven payments by SBI to Helix. In connection with the Helix
loans, the Company has issued to Helix warrants to purchase an aggregate of
2,850,000 shares of Common Stock at exercise prices ranging from $1.63 to
$2.125 per share (collectively, the "Helix Warrants"). The Helix Warrants
have expiration dates ranging from December 19, 1999 to August 7, 2000.
These warrants have been valued at an aggregate of approximately $4,324,000
and have been recognized as debt issuance costs and were fully amortized as
of February 15, 1999. This accounting treatment has no impact on the
Company's cash balance. As of December 31, 1999, Helix and its affiliates
hold approximately 3.4% of the Company's outstanding Common Stock (not
including shares issuable upon exercise of warrants). As of February 18,
2000 the notes were transferred to SBI and the Helix warrants were repriced
to $.20 per share and the expiration date was extended to February 18, 2005.
(see Note T). Due to this repricing and date extension, the Company
adjusted the fair market value of the warrants and recorded $220,000 as
interest expense in 1999.
<PAGE>
Page F-14
In June, July, August, October, and November 1999, as well as January and
February 2000, Panda entered into loan agreements with SBI to borrow $
2,295,000. As of December 31, 1999, the outstanding loan balance was
$1,575,000. In connection with these loans, the Company has granted to SBI a
security interest in substantially all of the assets of the Company pursuant
to a security agreement. The loans bear interest at a rate of 6% per annum
and were due and payable on February 24, 2000. As of March 31, 2000, the
notes in the aggregate of $2,295,000 have not be repaid to SBI.
NOTE I - CONVERTIBLE PREFERRED STOCK
On February 11, 1998, the Company issued 600 shares of its Series A
Convertible Preferred Stock ("Series A Preferred") and Common Stock Purchase
Warrants ("Warrants") to purchase an aggregate of 150,000 shares of common
stock for a total purchase price of $6,000,000. The purchase price was
allocated to the Series A Preferred and Warrants based on their relative
fair value. The Warrants, which have a term of five years and an exercise
price, subject to adjustment for stock splits and similar events, of $6.10
per share, were valued at $411,000 using the Black-Scholes option pricing
model. Issuance costs of approximately $193,000 were deducted on a pro rata
basis from the gross proceeds assigned to the Series A Preferred and the
Warrants. Holders of Series A Preferred are entitled to a dividend of 5% per
annum of the purchase price for the shares, payable either in cash or as an
accrual to the purchase price utilized in computing the number of shares of
Series A Preferred issuable upon conversion. Dividends payable for the
quarter ended March 31, 1999 in the amount of $54,067 and dividends of
$1,231,041 for 1998 have been accrued and added to the purchase price of the
Series A Preferred in lieu of a cash payment. Accrued dividends equal 30
shares of the Company's Series A Preferred stock through March 31, 1999.
Pursuant to the Exchange Agreement with Series A Preferred shareholders in
1999, all rights to dividends after March 31, 1999 have been waived. As of
December 31, 1999, 528 shares of Series A Preferred (including 171 penalty
shares) have not been converted. In January 2000, all of the remaining
outstanding preferred series A shares were converted into 20,262,681 shares
of the Company's common stock (see Note T).
<PAGE>
Page F-15
In connection with this transaction, the Company filed a registration
statement on form S-3 (the "form S-3") with the Securities and Exchange
Commission ("SEC") to effect the registration for resale of 2,000,000 shares
of Common Stock issuable upon conversion of the Series A Preferred and
150,000 shares of common stock issuable upon exercise of the Warrants, plus
an additional number of shares of Common Stock, not to exceed the Exchange
Cap, described below, that may be usable upon conversion of the Series A
Preferred as a result of antidilution provisions. The Form S-3 has been
declared effective by the Securities and Exchange Commission. As of March
31, 1999, 3,650,214 shares of Common Stock issued upon conversion of Series
A Preferred had been sold pursuant to the Form S-3. In the fourth quarter of
1999, the Company chose not to file the required post-effective amendments
and has withdrawn all effective and pending registration statements. As of
December 31, 1999, an additional 987,096 shares of common stock were issued
upon conversion of Series A preferred and have been sold pursuant to Rule
144A.
The beneficial conversion feature associated with the Series A Preferred
shares has been recognized and allocated to additional paid- in capital.
The amount of the beneficial conversion feature of approximately $510,000
was calculated using the most favorable conversion rate as defined by the
terms of the Series A Preferred stock and was fully amortized over a period
of six months during the year ended December 31, 1998.
NOTE J - SETTLEMENT WITH CONTRACT MANUFACTURER
The agreement between the Company and a third-party for the manufacture
and assembly of the Company's computer systems expired in September 1996. A
dispute arose regarding liability for certain inventory allegedly purchased
on behalf of the Company. During February 1998, the Company settled this
dispute by purchasing inventory from the contract manufacturer for $520,000.
NOTE K - OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows:
December 31, December 31,
1999 1998
---------- ----------
Sarubbi Settlement liability (Note R) 750,000 760,000
Provision for warranties 20,000 200,000
Accrual for liquidating damages 737,500 -
Accrual for professional fees - 152,682
Other 95,012 243,387
---------- ----------
$1,602,512 $1,356,069
========== ==========
Included in Accounts Payable at December 31, 1999, is $805,092 related to
professional fees.
<PAGE>
Page F-16
NOTE L - COMMON STOCK
On August 14, 1998, Panda completed an agreement for the sale of 2,346,626
shares of its Common Stock and 2,346,626 shares of Common Stock issuable
upon the exercise of Common Stock Purchase Warrants in a private placement
to accredited investors with gross proceeds of approximately $3.8 million of
which all but $200,000 had been funded as of the date hereof (the "Private
Placement"). Expenses of the Private Placement were approximately $230,000.
In addition to the shares of Common Stock purchased by each investor in the
Private Placement, such investor received a warrant (the "Private Placement
Warrants") to purchase an equal number of shares of Common Stock, subject to
adjustment for stock splits and similar events, at an exercise price of
$2.55 per share. Upon exercise of the Private Placement Warrants, an
investor may elect to receive a reduced number of shares of Common Stock in
lieu of tendering the warrant exercise price in cash. The Private Placement
Warrants have a term of five years expiring August 13, 2003. Issuance of
shares of Common Stock pursuant to exercise of the Private Placement
Warrants requires the approval of Panda's shareholders.
Under the terms of the Securities Purchase Agreement relating to the Private
Placement, if on either the six-month or the one-year anniversary of the
date of closing of the Private Placement (each an "Anniversary Date"), the
average closing bid price of the Common Stock for the twenty-trading day
period ending on the trading day immediately prior to the applicable
Anniversary Date is less than the closing price ($2.0375) or the prior
Anniversary Price in the event the six-month Anniversary Price is less than
the closing price, respectively, Panda is required to issue a number of
shares of Common Stock within ten days after the Anniversary Date, equal to
the product of (i) (x) the difference between the closing price (or if the
measurement date is the one-year Anniversary Date, the six-month Anniversary
Price if the six-month Anniversary Price is less than the closing price) and
the applicable Anniversary Price, multiplied by .85, multiplied by (y) the
number of shares of Common Stock purchased by the investors in the Private
Placement and not sold or assigned to non-affiliated third parties, divided
by (ii)(x) the applicable Anniversary Price multiplied by (y) .85. The
shares issuable pursuant to this formula are referred to as the "Fill-Up
Shares." Issuance of the Fill-up Shares pursuant to these provisions
requires the approval of Panda's shareholders.
At the six month anniversary date, the Company issued 4,441,658 additional
shares of the Company's common stock pursuant to the Fill-Up provision. For
the twelve month anniversary date which was August 15,1999 the Company
issued in January 2000 an additional 5,246,727 shares of the Company's
common stock.
In the event (i) the Common Stock is delisted or suspended from trading on
NASDAQ, (ii) the Fill-Up Shares and shares issuable upon exercise of the
Private Placement Warrants are not issuable or are not listed with NASDAQ,
or (iii) if Panda fails to issue Fill-Up Shares as required, then Panda
shall pay to the initial investors $100,000 for each full 30-day period that
the condition continues. Because the Common Stock has been delisted from
trading on NASDAQ, liabilities under the Fill-Up Share provisions have been
triggered. A portion of this liability has been waived in an agreement by
and between Panda and the holders of the Series A Preferred whereby such
holders have agreed to waive all amounts due.
In January 1999, the Company received approximately $415,000 from the
exercise of warrants to purchase 553,333 shares of the Company's common
stock related to the 1996 private placement. In February 1999, the Company
received $1,000,000 from Samtec, Inc. which includes $500,000 for a
non-refundable upfront license fee related to VSPA and, $500,000 for the
purchase of 666,667 shares of the Company's common stock.
On May 18, 1999, the Company issued 1,000,000 shares of the Company's common
stock to Helix pursuant to the Helix Agreement dated May 14, 1999 (see Note
A). The Company recorded $266,000 in loan interest expense related to the
issuance of the shares to Helix. Additionally, the Company issued Mr.
Sarubbi an additional 2,100,000 shares of the Company's common stock
pursuant to an amendment dated June 24, 1999 to the original settlement
agreement between the Company and Mr. Sarubbi dated December 11, 1998.
$327,600 was recorded in selling, general and administrative expenses in
1999 related to the issuance of the additional 2,100,000 shares of the
Company's common stock and $750,000 was recorded related to the 3,750,000
common shares to be issued upon shareholder approval of additional
authorized shares. On February 2000 the additional 3,750,000 share of the
Company's common stock were issued to Mr. Sarubbi.
NOTE M - EMPLOYEE BENEFIT PLANS
Stock Incentive Plans
- ---------------------
The Company maintains three stock option plans as follows: the 1993
Performance Incentive Plan ("1993 Plan"), the Non-Employee Director Stock
Option Plan ("Director Plan"), and the 1995 Employee Stock Incentive Plan
("1995 Plan"). Under the 1993 Plan and the 1995 Plan both incentive options
and non-qualified options may be granted. In addition, stock appreciation
rights and restricted stock may also be granted under the Plans; however, no
stock appreciation rights or restricted stock have been granted to date.
The exercise price for incentive options under the 1993 Plan, the 1995
Plan and non-qualified options under the Director Plan is the fair market
value of the Company's common stock as of the date of grant. Each stock
option expires ten years from the grant date under the 1993 Plan and the
1995 Plan, and five years under the Director Plan.
<PAGE>
Page F-17
Options granted pursuant to the 1993 Plan cannot be exercised prior to
the expiration of six months from the date of grant while vesting of options
granted under the 1995 Plan is determined at the discretion of the Company's
Stock Option Committee. Options granted under the Director Plan vest 25%
annually beginning on the first anniversary of the grant date. The maximum
number of shares of common stock with respect to which options may be
granted under the 1993 Plan is 5% of the outstanding shares, not to exceed
1,000,000 shares. Under the 1995 Plan and the Director Plan, options to
purchase up to 1,000,000 and 50,000 shares may be granted, respectively. As
of December 31, 1999, there were 660,254, 774,500 and 10,000 shares
available for grant under the 1993 Plan, the 1995 Plan and the Director
Plan, respectively. Because it does not expect to grant these options, the
Company has not reserved any shares for issuance for these options. No
options were granted during 1999, and Panda does not expect to grant options
for the foreseeable future. As of December 31, 1999, there were outstanding
options to purchase 408,500 shares of common stock, for which 585,900 shares
were reserved for issuance. None of the outstanding options were held by a
director of Panda. Melissa Crane holds 44,000 outstanding options which are
currently exercisable, of which 30,000 are exercisable at $6.13 per share
and 14,000 are exercisable at $5.25 per share, and 41,000 options which are
not yet vested, of which 20,000 have an exercise price of $6.13 and 21,000
have an exercise price of $5.25.
In 1999, the Company did not issue any options to outside consultants.
A summary of the Company's stock option activity and related
information is presented below:
Year Ended Year Ended
December 31, December 31,
1999 1998
----------------------- -------------------------
Weighted - Weighted -
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ----- -------- -----
Outstanding,
beginning of year 815,900 4.32 654,450 $7.45
Granted - - 568,500 $2.26
Exercised - - (3,000) $4.08
Forfeited (407,400) 4.43 (404,050) $7.00
-------- ----- -------- -----
Outstanding at
end of year 408,500 4.22 815,900 $4.32
======= ===== ======== =====
Exercisable at
end of year 197,800 257,350
======= ========
<PAGE>
Page F-18
Had compensation expense for the Company's stock option plans been
determined based on the fair value of the underlying common stock at the
grant dates, consistent with Statement of Financial Accounting Standards No.
123, Accounting for Stock Based Compensation, the Company's net loss and
net loss per share would have been as follows:
Year Ended
December 31,
1999 1998
------------ -----------
Net loss:
As reported $ (8,073,366) $(18,216,582)
Pro forma $ (8,073,366) $(18,480,641)
Basic and diluted loss
per share:
As reported $ (.31) $ (1.33)
Pro forma $ (.31) $ (1.35)
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for the year ended December 31, 1999 and 1998,
respectively. Risk-free interest rate 6.2%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common
stock of 119%; and a weighted-average expected life of the option of 4
years.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option pricing
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
<PAGE>
Page F-19
The following tables summarize information about outstanding and
exercisable stock options as of December 31, 1999:
Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted -
Average Weighted- Weighted-
Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (years) Price Shares Price
- ------------ ------- ----------- -------- ------- ---------
$.78 210,600 8.5 years $ .78 79,500 $ .78
$2.75-$3.81 19,100 5.00 years $ 3.63 8,800 $ 3.53
$4.25-$6.13 126,550 6.40 years $ 5.15 80,250 $ 5.51
$7.75-$8.50 28,250 5.60 years $ 8.05 11,250 $ 7.88
$12.50-$14.25 15,000 5.07 years $13.11 13,000 $13.17
$28.25-$44.25 9,000 5.40 years $46.06 5,000 $38.70
------- ---- ----- ------- -----
408,500 7.29 years $ 4.22 197,800 $ 5.09
Employee Savings Plan
- ----------------------
The Company has a defined contribution retirement plan ("Savings Plan")
that qualifies as a deferred salary arrangement under Section 401(k) of the
Internal Revenue Code. Eligibility for participation commences six months
from the date of hire. Under the Plan, participating employees may defer a
portion of their pretax earnings, up to the Internal Revenue Service annual
contribution limit or 15% of pretax earnings. Through September 30, 1996,
the Company matched 75% of employee contributions, up to a maximum of 6% of
the employee's earnings. Contributions are invested at the direction of the
employee in one or more funds. Beginning April 1, 1997, employees were
given the choice to invest their contributions in common stock of the
Company. Employer contributions vest over five years. The employer matching
contribution was discontinued as of October 1, 1996.
NOTE N - COMMON STOCK WARRANTS
For the year ended December 31, 1998, the Company entered into various
consulting agreements. Under these agreements, the Company issued 625,000
warrants ranging in price from $.219 to $2.51 per share. The issuance of
these warrants have been recorded based on the fair market value of the
warrants issued. The Company has determined that the value of these
warrants to be $384,500 which was recorded as S,G&A expense in the statement
of operations for the year ended December 31, 1999 and 1998.
<PAGE>
Page F-20
NOTE O - REVENUE
LG Cable & Machinery Ltd.
- -------------------------
The Crane-Panda licensing agreement will be transferred to SBI as part
of the asset sale that occurred in February 2000 and no further revenue is
expected. In October 1996, the Company and Stanford W. Crane, Jr., the
Company's Chief Executive Officer and founder, entered into a licensing
agreement with LG Cable & Machinery Ltd. ("LG") with respect to the Compass
Connector Technology owned by Mr. Crane and certain enhanced Compass
Connector Technology owned by the Company whereby LG was granted a license,
for a term of ten years or until the expiration of the last to expire of the
patents covered by the agreement, whichever is later. The license granted to
LG is non-exclusive except for certain limited exclusive manufacturing
rights with respect to specified Asian countries. In connection with this
agreement, the Company's portion of the license fee ($500,000) was
immediately vested upon signing the agreement and is payable as follows:
$100,000 within 15 days after execution of the agreement and $100,000 on
each of the first four anniversaries of the agreement. Licensing fee revenue
of $100,000 was recorded during the years ended December 31,1999 and 1998.
No royalties have been received under the agreement as of December 31, 1999.
In July 1997, the Company entered into another licensing agreement with
LG Cable whereby LG Cable was granted a license with respect to a
semiconductor package product owned by the Company, for a term that
continues until the expiration of the last to expire of the patents covered
by the agreement. The license granted to LG is non- exclusive except for
certain limited exclusive manufacturing rights with respect to specified
Asian countries. 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. In addition, the Company is
entitled to receive royalties on sales of the semiconductor package products
by LG Cable or its affiliates. No royalties have been received under the
agreement as of December 31, 1999. The Patents And Proprietary Information
as well as all Licensing Agreements with the exception of the Panda-AMP
agreement were sold to SBI as part of the asset sale that occurred in
February 2000.
Defense Advanced Research Projects Agency
- -----------------------------------------
In October 1996, the Company entered into a cooperative development
agreement with the Defense Advanced Research Projects Agency (DARPA) to
develop the Company's VSPA electronic package whereby the government
contributed approximately $1.8 million to the project over a period of 18
months. The agreement, as amended, required the Company to match the $1.8
million with $2.7 million of development costs associated with the project.
The project was successfully completed in April 1998.
<PAGE>
Page F-21
Revenue was recognized over the term of the cooperative development
agreement based on the achievement of stated milestones. For the year ended
December 31, 1999, there was no revenue recognized for the grant. For the
year ended December 31,1998 the Company recognized revenue related to the
agreement of approximately $136,000. There were no costs associated with
the DARPA Agreement in 1999 or 1998.
Significant Customer and Supplies
- ---------------------------------
No individual customers accounted for more than 10% of total revenue for
the year ended December 31, 1998. Technology sales to one customer accounted
for 61.7% of total revenue for the year ended December 31, 1999. In 1999
one supplier provided the Company with 33% of total products purchased and
no one supplier provided more than 10% of the Company's total products
purchased in 1998.
NOTE P - RELATED PARTY TRANSACTIONS
In January 1996, Mr. Crane entered into a license agreement ("the
Crane/Panda License") with the Company with respect to the Compass Connector
which supersedes the prior agreements between Mr. Crane and the Company with
respect thereto. Pursuant to the Crane/Panda License, the Company continues
to have the right, on a non-exclusive and royalty-free basis, to use and/or
sell the Compass Connector as a component in its computers or other higher
level assemblies or systems. The Company may also sublicense the Compass
Connector technology as part of a license of the Company's proprietary
technology provided that any royalty attributable to such sublicense is to
be shared by the Company and Mr. Crane. In February 1999, subject to final
documentation, this license will be transferred to SBI (see Note T).
In addition, Mr. Crane has granted the Company a non-exclusive license
to sell, lease, or transfer the Compass Connector as loose or discrete
components for specified royalties based on net sales of the Compass
Connectors, commencing when the accumulated net sales of the Compass
Connectors reaches $100,000 (the "Royalty Date"). For the five year period
following the Royalty Date, the Company is obligated to pay to Mr. Crane
royalties equal to 5% of the net sales price of such Compass Connectors,
including any such Compass Connectors sold prior to the Royalty Date. The
royalty decreases to 2.5% after five years and 2.0% after ten years. The
royalty decreases to 1.0% for any period during which no valid patent exists
anywhere with respect to the Compass Connector. The royalty is also subject
to reduction if Mr. Crane grants a third party a license with respect to
Compass Connectors as loose or discrete components at a lower royalty than
that charged to the Company. To date, Mr. Crane has received no royalties
pursuant to the Crane/Panda License.
<PAGE>
Page F-22
In August 1997, the Company hired Melissa Crane, wife of Stanford W.
Crane, Jr., as Director of Strategic Business at an annual salary of
$100,000 per year. In September 1997, Ms. Crane was granted an option to
purchase 50,000 shares of Common Stock of the Company at an exercise price
of $6.13 per share. Such options expire on September 19, 2007. Options to
purchase 10,000 of these shares of Common Stock are exercisable six months
from the date of grant and the remainder become exercisable in equal annual
installments on the first, second, third and fourth anniversaries of grant.
In October 1997, the Board of Directors approved the payment of a bonus of
$25,000 to Ms. Crane in connection with the achievement of certain marketing
objectives. 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. In October 1998, the Board of Directors
appointed Ms. Crane as the acting Chief Financial Officer.
NOTE Q - INCOME TAXES
As a result of tax losses incurred by the Company, no current tax
provision has been recorded for the years ended December 31, 1999 and 1998.
Deferred tax assets and deferred tax liabilities reflect the tax effect
of net operating loss carryforwards and differences between financial
statement carrying amounts and tax bases of assets and liabilities as
follows:
Year Ended December 31,
1999 1998
------------ -----------
Deferred tax assets:
Net operating loss carryforwards $ 34,644,000 $ 34,767,000
Research and development credits 1,069,000 1,221,000
Write down of property and equipment 201,000 523,000
Inventory reserve - 687,000
Allowance for doubtful accounts 2,000 114,000
Accrued penalties 1,317,000 -
Fair value of stock warrants 83,000 -
Other - 125,000
------------ -----------
Gross deferred tax asset 39,316,000 37,437,000
Deferred tax asset valuation
allowance (39,278,000) (37,085,000)
------------ -----------
Net deferred tax asset $ 38,000 $ 352,000
============ ===========
Deferred tax liabilities:
Tax depreciation and amortization
in excess of book $ (38,000) $ (248,000)
Other - (104,000)
------------ -----------
Deferred tax liability $ (38,000) $ (352,000)
============ ===========
Net deferred taxes $ - $ -
============ ===========
<PAGE>
Page F-23
A valuation allowance reducing the asset recognized must be recorded if
it is determined that it is more likely than not that the asset will not be
realized. Because of the uncertainty surrounding realizability of future
benefits due to cumulative losses, a valuation allowance in the full amount
of the net deferred tax asset has been provided for financial reporting
purposes.
At December 31, 1999, the Company has available approximately $97.3
million in net operating loss ("NOL") carryforwards available to offset
future taxable income, if any, for federal and state income tax purposes.
These NOL carryforwards will expire at various times beginning in the year
2009.
At December 31, 1999, unused credit carryforwards for increasing
research activities of approximately $1,069,000 are also available. The
credit carryovers will expire at various times beginning in the year 2010.
Due to the change of control effected by the initial public offering of
the Company's common stock on May 24, 1994, as well as certain stock
offerings, exercise of stock options, warrants, and conversion of preferred
stock into common stock, the amount of future taxable income that can be
offset by the Company's net operating losses incurred prior to the dates of
the stock offerings, as well as the amount of tax liability that can be
offset by research and development credit, may be limited.
NOTE R - COMMITMENTS AND CONTINGENCIES
Operating Leases
- ----------------
The Company leases various facilities and equipment under non-
cancelable operating lease arrangements which expire at various dates
through year 2003. Rent expense under all operating leases was
approximately $508,000 and $831,500, for the years ended December 31, 1999
and 1998, respectively.
Minimum future rental payments under non-cancelable operating leases
with remaining lease terms in excess of one year are as follows:
December 31,
2000 $ 439,024
2001 477,348
2002 460,880
2003 295,564
2004 -
----------
Total minimum future
rental payments $1,672,816
==========
<PAGE>
Page F-24
Litigation
- ----------
On October 16, 1998, a complaint was filed against Panda in the United
States District Court for the Southern District of New York by Promethean
Investment Group, L.L.C. The complaint alleges breach of contract by Panda
for failing to proceed with a financing transaction and seeks damages in an
unspecified amount in excess of $270,000 or a declaration that Panda is
required to proceed with the financing transaction. Panda has filed an
answer to the complaint. At the present time, the outcome of this
litigation is both immeasurable and undeterminable. There can be no
assurance that Panda will be successful in defending this litigation.
On December 11, 1998, Panda and Joseph A. Sarubbi ("Sarubbi") entered
into a settlement agreement (the "Settlement Agreement") relating to
litigation in which Sarubbi has obtained a judgment against Panda in the
amount of $1,227,041. Sarubbi entered into a consulting agreement with
Panda in 1992. Sarubbi also later served as a director and general manager
of Panda. Under this consulting arrangement, Sarubbi received 91,000
options to purchase shares of Panda Common Stock. Sarubbi also served as a
director of Panda in 1995 and 1996. In 1996, Sarubbi notified Panda of his
desire to exercise all of his options and to sell all of the Panda Common
Stock received upon the exercise of such options. A Florida district court
held Panda liable for certain losses Sarubbi alleged he incurred in
connection with the sale of his Panda Common Stock and for fees for his
previous service as director. The court granted a judgment of $1,227,041 in
favor of Sarubbi. Under the Settlement Agreement, Panda has agreed to pay
Sarubbi total consideration worth $1,000,000 of which $240,000 has been paid
in cash in December 1998 and the remainder is to be satisfied upon the sale
of shares of Panda's Common Stock which have been delivered to Sarubbi by
Panda. Panda has registered 1,775,000 shares for Sarubbi pursuant to a
registration statement, declared effective on February 5, 1999. The parties
have agreed to petition the Florida Court of Appeals for the Fourth District
to dismiss the litigation within five business days after Panda's
obligations in the Settlement Agreement have been completed. If such
obligations are not completed, the judgment will remain in effect. This
settlement amount was recorded as a charge against Company earnings for the
quarter ended December 31, 1998. On April 14, 1999, Panda received a Notice
of Default on the Settlement Agreement. Sarubbi claimed that his inability
to sell the stock that he received in the settlement creates a breach under
the Settlement Agreement. Panda believes that it is in full compliance with
the Settlement Agreement and that no breach exists. On June 25, 1999, the
Settlement Agreement was amended to allow Panda to extend its time to
satisfy its obligations under the Settlement Agreement (the "Amended
Settlement Agreement"). Under the Amended Settlement Agreement, the Company
issued Sarubbi 2,100,000 shares of Panda Common Stock in the
<PAGE>
Page F-25
second quarter of 1999 and such shares were recorded as an expense to SG&A
at the closing price of $0.156 totalling $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. $750,000 has been recorded in Panda's
financial statements for the additional 3,750,000 shares of Panda Common
Stock which were issued in February 2000. In the event that the increase in
the number of authorized shares of Panda Common Stock is not approved
pursuant to Proposal 2, Panda will be obligated to pay Sarubbi $1,502,041,
which is equal to the amount of the judgment entered in favor of Sarubbi
plus attorneys' fees, less the value of any cash or stock received by
Sarubbi pursuant to the Settlement Agreement or the Amended Settlement
Agreement. The Amended Settlement Agreement imposed a deadline of September
1, 1999 for satisfaction of Panda's obligation to register the 2,100,000
shares of Panda Common Stock with the Securities and Exchange Commission.
Panda has not satisfied its obligations under the Amended Settlement
Agreement and has received a notice of default. Any further legal action
taken by Sarubbi may be material to the Company. On November 2, 1999, as
stated in Panda's Form 8-K dated November 9, 1999, Sarubbi alleged that the
Company was in default under the Letter Agreement dated June 24, 1999.
Sarubbi demanded payment within 10 days of approximately $505,000 in
exchange for the 2,100,000 shares previously issued as well as the 3,750,000
shares which would be issued upon shareholder approval. As a result,
Sarubbi may assert remedies that he feels are available to him under Florida
law which may include a writ of execution as well as levying on real
property of Panda. In January 2000, Mr. Sarubbi filed a writ of execution
on real property held in Florida. These assets have not been transferred to
SBI. In January 2000, Mr. Sarubbi filed a writ of execution on real property
held in Florida. Those assets have not been transferred to SBI. On
February 4, 2000, Mr. Sarubbi filed a writ of garnishment on the company's
funds held at SunTrust Bank and he garnished $43,989.19.
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.
<PAGE>
Page F-26
NOTE S - BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which changed the way companies report
information about operating segments. With the Company's decision to
discontinue all aspects of the Systems business, the Company has one single
reporting segment. The Company markets and sells its Technologies directly
to end users. The Company's revenues are primarily derived from customers
located in the United States and all of the Company's long lived assets are
located in the United States.
NOTE T - SUBSEQUENT EVENTS
On February 18, 2000, the Shareholders of Panda approved the transaction as
discussed in Note A as well as all other items put before them as described
in the Company's 14A dated January 28, 2000. On February 28, 2000, Panda
filed an 8-K announcing that the asset sale to SBI was closed subject to the
Stockholder's Agreement being finalized and the Helix Loan being transferred
the Asset Purchase Agreement contemplated the sale of substantially all of
Panda's operating assets. All of the originally contemplated assets were
transferred to SBI except for those assets, the real property located in
Florida, that were levied by Mr. Sarubbi in January 2000 as part of the Writ
of Execution that was filed in Palm Beach County Court. On March 15, 2000,
the Helix loans in the aggregate amount of $2,000,000 were transferred to
SBI. On March 13, 2000 the Stockholder's Agreement by and between, Panda,
SBI, Vantagepoint Venture Partners LLC, Archimedes Capital LLC and the
Management Stockholders was executed.
In January 2000, Mr. Sarubbi filed a writ of execution on real property held
in Florida. Those assets have not been transferred to SBI. On February 4,
2000, Mr. Sarubbi filed a writ of garnishment on the company's funds held at
SunTrust Bank. He garnished $43,989.19
<PAGE>
Page F-27
Since January 1, 2000, the Company has issued an additional 29,279,409
shares of the Company's common stock. The series A preferred holders
converted the remaining preferred shares into 20,282,681 shares of the
Company's common stock. The Company issued Mr. Sarubbi, 3,750,000 shares of
common stock pursuant to the "Amended Settlement Agreement" and the
remaining 5,246,727 were issued as Fill-up shares pursuant to the 1998
private placement.
AMP Incorporated has decided not to transfer the Panda-AMP Licensing
Agreement and has chosen to terminate such agreement. Panda believes it is
entitled to the minimum payment of $250,000 due under the agreement.
NOTE U - UNAUDITED PRO FORMA FINANCIAL STATEMENTS.
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 on December 31, 1999, in the case of
the Unaudited Pro Forma Balance Sheet, and on January 1, 1999, in the case
of the Unaudited Pro Forma Statements of Operations for the year ended
December 31, 1999.
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 December 31, 1999.
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 December 31, 1999, is based upon
Panda's financial position at December 31, 1999. The Unaudited Pro Forma
Statement of Operations for the twelve months ended December 31, 1999 is
based upon Panda's results of operations for the twelve months ended
December 31, 1999.
<PAGE>
Page F-28
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BALANCE SHEET
December 31, 1999 Pro Forma
Historical Adjustment As Adjusted
---------- ---------- -----------
Current assets
Cash and cash equivalents $ 180,388 $ - $ 180,388
Accounts receivable (net of
allowance of $5,798) 68,856 (68,856)(1) -
Inventory, net 16,007 (16,007)(1) -
Other receivables 15,999 (15,999)(1) -
Prepaid expenses and other
current assets 85,249 (85,249)(1) -
----------- ---------- -----------
Total current assets 366,499 (186,111) 180,388
Property and equipment, net 442,401 (442,401)(1) -
Restricted cash 80,000 - 80,000
Other assets 84,934 - 84,934
Investment in SBI - 600,000(1) 600,000
----------- ---------- -----------
Total assets $ 973,834 $ ( 28,512) $ 945,322
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities
Accounts payable $ 1,242,775 $ (300,000)(1) $ 942,775
Notes payable 3,575,000 (2,000,000)(1) 1,575,000
Other current liabilities 1,602,512 (100,000)(1) 1,502,512
----------- ----------- -----------
Total current
liabilities 6,420,287 (2,400,000) 4,020,287
Commitments and contingencies - - -
Stockholders' (deficit)
Preferred stock, $.01 par
value, 2,000,000 shares
authorized; 528 historical
and zero, as adjusted,
shares issued and
outstanding 4,864,137 (4,864,137)(6) -
Common stock, $.01 par value,
50,000,000 shares
authorized; 29,698,571
historical and 49,946,515,
as adjusted, shares issued
and outstanding 296,986 202,479 (6) 499,465
Additional paid-in capital 77,751,972 4,661,310 (6) 82,413,282
Accumulated deficit (88,359,548) 2,371,836 (1) (85,987,712)
----------- ---------- -----------
Total stockholders'(deficit) (5,446,453) 2,371,488 (3,074,965)
----------- ---------- -----------
Total liabilities
and stockholders'
(deficit) $ 973,834 $ ( 28,512) $ 945,322
=========== ========== ===========
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
Page F-29
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999 Pro Forma
Historical Adjustment As Adjusted
----------- ---------- -----------
Revenues
Product sales $ 487,683 $ (487,683)(2) $ -
Licensing fees 850,000 (850,000)(2) -
----------- ---------- -----------
Net revenues 1,337,683 (1,337,683) -
Other expenses
Cost of sales 279,619 (279,619)(2) -
Research and development 906,810 (906,810)(2) -
Selling, general and
administrative 4,213,419 (4,213,419)(2) 416,906
416,906 (5)
Amortization of debt
issuance costs/ accrued
penalties 3,092,500 (3,092,500)(2) -
Cost associated with asset
impairments 590,830 (590,830)(2) -
----------- ---------- -----------
Total operating expenses 9,083,178 (8,666,272) 416,906
----------- ---------- -----------
Operating loss (7,745,495) 7,328,589 (416,906)
Interest expense (327,902) (33,759)(4) (361,661)
Interest and other income 54,098 (54,098)(2) -
----------- ---------- -----------
Net loss from operations (8,019,299) 7,240,732 (778,567)
Dividends and amortization
of beneficial conversion
feature related to
convertible preferred stock (54,067) - (54,067)
----------- ---------- -----------
Net loss applicable
to common stock (8,073,366) 7,240,732 (832,634)
Net loss from discontinued
operations - (5,364,783)(2) -
5,364,783 (3)
----------- ---------- -----------
Net loss $(8,073,366) $7,240,732 $ (832,634)
=========== ========== ===========
Basic and diluted loss
per share $ (.31) $ (.03)
=========== ===========
Weighted average shares
outstanding 25,872,046 24,582,521
=========== ===========
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
Page F-30
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, Inc. will recognize a gain
of $2,371,488, 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 $1,575,000 SBI bridge loan at the 6%
annual interest rate as per the promissory note.
(5) 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 are
$416,906.
(6) To reflect the conversion of the Preferred Stock into 20,282,681
shares of common stock. These additional shares of common stock are not
included in the Pro Forma Statements of Operations as the inclusion of these
additional shares would be anti-dilutive.
<PAGE>
Page F-31
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Of Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1998
Allowance for
doubtful accounts $ 10,006 $ 285,286 $ - $ - $ 295,292
=========== ========== ========== ========== ===========
Inventory obsolescence
reserve $ 600,000 $1,178,837 $ - $ - $1,778,837
=========== ========== ========== ========== ===========
Deferred tax asset
valuation allowance $30,113,000 $6,972,000 $ - $ - $37,085,000
=========== ========== ========== ========== ===========
Year ended
December 31, 1999
Allowance for
doubtful accounts $ 295,292 $ , $ - $(289,496) $ 5,796
=========== ========== ========== ========== ===========
Inventory obsolescence
reserve $ 1,778,837 $ , , $ - $(1,778,837) $ , ,
=========== ========== ========== ========== ===========
Deferred tax asset
Valuation allowance $37,085,000 $2,193,000 $ - $ - $39,278,000
=========== ========== ========== ========== ===========
</TABLE>
Exhibit 4.14
PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAWS. IT MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED UNDER CIRCUMSTANCES THAT WOULD RESULT IN A VIOLATION
OF THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 OR SUCH OTHER
LAWS.
AMENDED AND RESTATED SECURED PROMISSORY NOTE
Fremont, California U.S. $1,935,000.00
January 10, 2000
FOR VALUE RECEIVED, the undersigned, THE PANDA PROJECT, INC., a Florida
corporation (the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY TO THE
ORDER OF SILICON BANDWIDTH, INC., a Delaware corporation (the "Lender") the
principal sum of ONE MILLION NINE HUNDRED THIRTY FIVE THOUSAND UNITED STATES
DOLLARS (U.S. $1,935,000) on February 24, 2000 (the "Maturity Date"). This
Amended and Restated Secured Promissory Note replaces the Secured Promissory
Note of the Borrower dated June 14, 1999.
The Borrower further promises to pay interest on the outstanding
principal amount of this Promissory Note (this "Note") from June 14, 1999
until maturity (with respect to $300,000 of the outstanding principal amount
hereof), from July 15, 1999 until maturity (with respect to $325,000 of the
outstanding principal amount hereof), from August 17, 1999 until maturity
(with respect to $325,000 of the outstanding principal amount hereof), from
October 1, 1999 (with respect to $300,000 of the outstanding principal
amount hereof), from November 26, 1999 until maturity (with respect to
$325,000 of the outstanding principal amount hereof), and from the dates
hereof until maturity (with respect to $360,000 of the outstanding principal
amount hereof) at a rate per annum equal at all times to six percent (6%)
per annum. Accrued interest shall be payable on the Maturity Date. In the
event that any amount of principal or interest, or any other amount payable
hereunder, is not paid in full when due (whether at stated maturity, by
acceleration or otherwise), the Borrower shall pay interest on such unpaid
principal, interest or other amount, from the date such amount becomes due
until the date such amount is paid in full, payable on demand, at a rate per
annum equal at all times to ten percent (10%) per annum. All computations
of interest shall be made on the basis of a year of 365 or 366 days, as the
case may be, for the actual number of days (including the first day but
excluding the last day) occurring in the period for which such interest is
payable.
The Note is secured by certain collateral more specifically described in
the Security Agreement dated as of June 14, 1999 between Borrower and Lender
(the "Security Agreement"). Capitalized terms not otherwise defined in this
Note shall have the meanings ascribed to them in the Security Agreement.
All payments hereunder shall be made in lawful money of the United
States of America and in same day or immediately available funds, to the
Lender, at 1001 Bayhill Drive, Suite 100, San Bruno, California 94066, or to
such other office and account of the Lender as it from time to time shall
designate in a written notice to the Borrower.
Whenever any payment hereunder shall be stated to be due, or whenever
any interest payment date or any other date specified hereunder would
otherwise occur, on a day other than a Business Day (as defined below),
then, except as otherwise provided herein, such payment shall be made, and
such interest payment date or other date shall occur, on the next succeeding
Business Day, and such extension of time shall in such case be included in
the computation of payment of interest hereunder. As used herein, "Business
Day" means a day (i) other than Saturday or Sunday, and (ii) which
commercial banks are open for business in New York, New York.
All payments shall be made hereunder unconditionally in full without
deduction, setoff, counterclaim or other defense, including, without
limitation, any deduction or setoff arising out of or in connections with
the Letter of Intent dated as of May 14, 1999 by and between Lender and
Borrower (the "Letter of Intent"), and the Asset Purchase Agreement by and
between Lender and Borrower to be executed pursuant to the Letter of Intent
(the "Asset Purchase Agreement"); provided, however, that no payment
hereunder shall be deemed to be a waiver of any right or claim that the
Borrower may have under such agreements. The Borrower represents and
warrants to the Lender that, to the best of Borrower's knowledge, there is
no claim, defense, counterclaim or set-off which could be asserted by or is
available to the Borrower against the Lender.
The Borrower shall pay all amounts due under this Note free and clear
of, and without reduction for or on account of, any present and future
taxes, levies, imposts, duties, fees, assessments, charges, deductions or
withholdings and all liabilities with respect thereto (collectively,
Taxes"). If any Taxes shall be required by law to be deducted or withheld
from any payment, the Borrower shall increase the amount paid so that the
Lender received when due (and is entitled to retain), after deduction or
withholding for or on account of such Taxes (including deductions or
withholdings applicable to additional sums payable under this paragraph),
the full amount of the payment provided for in this Note.
If the Lender is required by law to make any payment on account of
Taxes, or any liability in respect of any Tax is imposed, levied or assessed
against the Lender, the Borrower shall indemnify the Lender for and against
such payment or liability, together with any incremental taxes, interest or
penalties, and all costs and expenses, payable or incurred in connection
therewith, including Taxes imposed on amounts payable under this paragraph
whether or not such payment or liability was correctly or legally asserted.
A certificate of the Lender as to the amount of any such payment shall, in
the absence of manifest error, be conclusive and binding for all purposes.
Anything herein to the contrary notwithstanding, if during any period
for which interest is computed hereunder, the amount of interest computed on
the basis provided for in this Note, together with all fees, charges and
other payments which are treated as interest under applicable law, as
provided for herein or in any other document executed in connection
herewith, would exceed the amount of such interest computed on the basis of
the Highest Lawful Rate, the Borrower shall not be obligated to pay, and the
Lender shall not be entitled to charge, collect, receive, reserve or take,
interest in excess of the Highest Lawful Rate, and during any such period
the interest payable hereunder shall be computed on the basis of the maximum
non-usurious rate of interest, as in effect from time to time, which may be
charged, contracted for, reserved, received or collected by the Lender in
connection with this Note under applicable law.
Any of the following events which shall occur shall constitute an Event of
Default":
(a) The Borrower shall fail to pay when due any amount of principal or
interest on this note, the Security Agreement or any other Document.
(b) Any representation or warranty by the Borrower under or in connection
with this Note, shall prove to have been incorrect in any material respect
when made or deemed made.
(c) The Borrower shall fail to perform or observe any other term,
covenant or agreement contained in this Note, the Security Agreement or any
other Document on it's part to be performed or observed and any such failure
shall remain unremedied for a period of ten days from the occurrence
thereof.
(d) The Borrower shall fail to make payment when due on any other
indebtedness for money borrowed with an aggregate principal amount
outstanding of $10,000.00 or more, or otherwise fails to perform any
covenant in or otherwise breaches the terms of any instrument relating to
such indebtedness which failure or breach permits the holder of such
indebtedness to accelerate the maturity of such indebtedness.
(e) Any levy upon, seizure or attachment of the Collateral or any part
thereof, or any material impairment in the value of the Collateral or the
priority of the Lenders lien thereof.
(f) The Borrower or any other Person shall challenged the validity of
this Note, or the Security Agreement, or the grant of the security interest
thereunder.
(g) The Borrower shall (i) liquidate, wind-up or dissolve (or suffer any
liquidation, wind-up or dissolution), (ii) suspend it's operations other
than in the ordinary course of business, or (iii) take any corporate action
to authorize any of the actions or events set forth above in this paragraph
(g).
(h) A final judgment or order for payment of money in excess of
$10,000.00 (excluding the settlement of the lawsuit between Borrower and
Promethean LLC for up to $35,000.00) which is not fully covered by third-
party insurance shall be rendered against the Borrower; or any non-monetary
judgment or order shall be rendered against the Borrower which has or would
reasonably be expected to have a material adverse effect upon the
operations, properties, business, or condition (financial or otherwise) of
the Borrower; and in each case there shall be any period of 20 consecutive
days during which a stay of enforcement of such judgment or order, by reason
of a pending appeal or otherwise, shall not be in effect.
(i) The Borrower shall merge with or consolidate into or acquire all or a
substantial part of the assets of another Person or sell, lease, transfer or
otherwise dispose of all or a substantial part of it's assets.
(j) The Borrower shall form any subsidiaries, alter it's capital
structure, declare or pay any dividends or purchase, redeem or retire or
otherwise acquire for value any of it's capital stock not or hereafter
outstanding, return capital to it's shareholders; provided, however, that
the Borrower may, pursuant to the terms and conditions of it's existing
stock option and stock purchase agreements between the Borrower and it's
employees and consultants, issue stock options and repurchase unvested
shares of common stock of the Borrower.
If any Event of Default shall occur, the Lender may (i) by notice to the
Borrower, declare the entire unpaid principal amount of this Note, all
interest accrued and unpaid hereon and all other amounts payable hereunder
to be forthwith due and payable, whereupon all unpaid principal under this
Note, all such accrued interest and all such other amounts shall become due
and payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Borrower, and (ii)
whether or not the actions referred to in clause (i) have been taken,
exercise any or all of the Lender's rights and remedies under the Security
Agreement and proceed to enforce all other rights and remedies available to
the Lender under applicable law.
No amendment or waiver of any provision of this Note, nor any consent to
any departure by the Borrower therefrom, shall in any event be effective
unless the same shall be in writing and signed by the Lender and then such
amendment, waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
All notices and other communications provided for hereunder shall,
unless stated herein, be in writing (including by facsimile) and mailed,
sent or delivered to the respective parties hereto at or to the following
addresses or facsimile numbers (or at or to such other addresses or
facsimile numbers as shall be designated by any party in a written notice to
the other parties hereto):
If to the Lender: Silicon Bandwidth, Inc.
1001 Bayhill Drive, Suite 100
San Bruno, CA 94066
Attn: Chief Executive Officer
Facsimile: (650) 869-6078
If to the Borrower: The Panda Project, Inc.
951 Broken Sound Parkway
Boca Raton, FL 33487
Attn: Chief Executive Officer
Facsimile: (561) 994-0191
All such notices and communications shall be effective (i) if delivered
by hand, upon delivery; (ii) if sent by mail, upon the earlier of the date
of receipt of five Business Days after deposit in the mail, first class (or
air mail, with respect to communications to be sent to or from the United
States), postage prepaid; and (iii) if sent by facsimile, when sent.
No failure on the part of the Lender to exercise, and no delay in
exercise, any right, remedy, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
remedy, power or privilege preclude any other or further exercise thereof or
the exercise of any other right, remedy, power or privilege. The rights and
remedies under this Note are cumulative and not exclusive of any rights,
remedies, powers and privileges that may otherwise be available to the
Lender.
Whenever possible, each provision of this Note shall be interpreted in
such a manner as to be effective and valid under all applicable laws and
regulations. If, however, any provision of this Note shall be prohibited by
or invalid under any such law or regulation in any jurisdiction, it shall,
as to such jurisdiction, be deemed modified to conform to the minimum
requirements of such law or regulation, or, if for any reason it is not
deemed so modified, it shall be ineffective and invalid only to the extent
of such prohibition or invalidity without affecting the remaining provisions
of this Note, or the validity or effectiveness of such provision in any
other jurisdiction.
The Borrower agrees to pay on demand all costs and expenses of the
Lender, and the fees and disbursements of counsel (including the allocated
costs of internal counsel), in connection with (i) any amendments,
modifications or waivers of the terms hereof, (ii) any Event of Default,
(iii) the enforcement or attempted enforcement of, and preservation of any
rights under, this Note, and (iv) any out-of-court workout or other
refinancing or restructuring or in any bankruptcy case, including, without
limitation, any and all losses, costs and expenses sustained by the Lender
as a result of any failure by the Borrower to perform or observe it's
obligations contained herein. In addition, the Borrower, agrees to
indemnify the Lender against and hold it harmless from any and all present
and future stamp, transfer, documentary and other such taxes, levies, fees,
assessments and other charges made by any jurisdiction by reason of the
execution, delivery, performance and enforcement of this Note.
This Note shall be binding upon, inure to the benefit of and be
enforceable by the Borrower, the Lender and their respective successors and
assigns.
The Borrower shall not have the right to assign it's rights and
obligations hereunder or any interest herein without the prior written
consent of the Lender. The Lender may sell, assign, transfer or grant
participation in all or any portion of the Lender's rights and obligations
hereunder. In the event of any such assignment the assignee shall be deemed
the "Lender" for all purpose of this Note and any other documents and
instruments relating hereto with respect to the rights and obligations
assigned to it. The Borrower agrees that in connection with any such grant
or assignment, the Lender may deliver to the prospective participate or
assignee financial statements and other relevant information relating to the
Borrower and it's subsidiaries.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAW OF THE STATE OF DELAWARE.
THE BORROWER AND LENDER HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO
A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF
OR RELATED TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OTHER DOCUMENT AND
THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR
OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER
PARTIES THERETO. THE BORROWER AND LENDER HEREBY AGREE THAT ANY SUCH CLAIM
OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT
IN ANY WAY LIMITING THE FOREGOING, THE BORROWER AND LENDER FURTHER AGREE
THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF
THIS PARAGRAPH AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH
SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS NOTE, THE SECURITY AGREEMENT OR ANY OTHER DOCUMENT OR PROVISION
THEREOF.
IN WITNESS THEREOF, the Borrower has duly executed this Note, as of the
date first above written.
THE PANDA PROJECT, INC.
By: ____________________________________
Title: __________________________________
Exhibit 4.15
PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAWS. IT MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED UNDER CIRCUMSTANCES THAT WOULD RESULT IN A VIOLATION
OF THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 OR SUCH OTHER
LAWS.
AMENDED AND RESTATED SECURED PROMISSORY NOTE
Fremont, California
U.S. $2,295,000.00 February 8, 2000
FOR VALUE RECEIVED, the undersigned, THE PANDA PROJECT, INC., a Florida
corporation (the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY TO THE
ORDER OF SILICON BANDWIDTH, INC., a Delaware corporation (the "Lender") the
principal sum of TWO MILLION TWO HUNDRED NINETY FIVE THOUSAND UNITED STATES
DOLLARS (U.S. $2,295,000) on February 24, 2000 (the "Maturity Date"). This
Amended and Restated Secured Promissory Note replaces the Secured Promissory
Note of the Borrower dated June 14, 1999.
The Borrower further promises to pay interest on the outstanding
principal amount of this Promissory Note (this "Note") from June 14, 1999
until maturity (with respect to $300,000 of the outstanding principal amount
hereof), from July 15, 1999 until maturity (with respect to $325,000 of the
outstanding principal amount hereof), from August 17, 1999 until maturity
(with respect to $325,000 of the outstanding principal amount hereof), from
October 1, 1999 (with respect to $300,000 of the outstanding principal
amount hereof), from November 26, 1999 until maturity (with respect to
$325,000 of the outstanding principal amount hereof), from January 10, 2000
until maturity (with respect to $360,000 of the outstanding principal amount
hereof), and from the dates hereof until maturity (with respect to $360,000
of the outstanding principal amount hereof) at a rate per annum equal at all
times to six percent (6%) per annum. Accrued interest shall be payable on
the Maturity Date. In the event that any amount of principal or interest,
or any other amount payable hereunder, is not paid in full when due (whether
at stated maturity, by acceleration or otherwise), the Borrower shall pay
interest on such unpaid principal, interest or other amount, from the date
such amount becomes due until the date such amount is paid in full, payable
on demand, at a rate per annum equal at all times to ten percent (10%) per
annum. All computations of interest shall be made on the basis of a year of
365 or 366 days, as the case may be, for the actual number of days
(including the first day but excluding the last day) occurring in the period
for which such interest is payable.
The Note is secured by certain collateral more specifically described in
the Security Agreement dated as of June 14, 1999 between Borrower and Lender
(the "Security Agreement"). Capitalized terms not otherwise defined in this
Note shall have the meanings ascribed to them in the Security Agreement.
All payments hereunder shall be made in lawful money of the United
States of America and in same day or immediately available funds, to the
Lender, at 1001 Bayhill Drive, Suite 100, San Bruno, California 94066, or to
such other office and account of the Lender as it from time to time shall
designate in a written notice to the Borrower.
Whenever any payment hereunder shall be stated to be due, or whenever
any interest payment date or any other date specified hereunder would
otherwise occur, on a day other than a Business Day (as defined below),
then, except as otherwise provided herein, such payment shall be made, and
such interest payment date or other date shall occur, on the next succeeding
Business Day, and such extension of time shall in such case be included in
the computation of payment of interest hereunder. As used herein, Business
Day" means a day (i) other than Saturday or Sunday, and (ii) which
commercial banks are open for business in New York, New York.
All payments shall be made hereunder unconditionally in full without
deduction, setoff, counterclaim or other defense, including, without
limitation, any deduction or setoff arising out of or in connections with
the Letter of Intent dated as of May 14, 1999 by and between Lender and
Borrower (the "Letter of Intent"), and the Asset Purchase Agreement by and
between Lender and Borrower to be executed pursuant to the Letter of Intent
(the "Asset Purchase Agreement"); provided, however, that no payment
hereunder shall be deemed to be a waiver of any right or claim that the
Borrower may have under such agreements. The Borrower represents and
warrants to the Lender that, to the best of Borrower's knowledge, there is
no claim, defense, counterclaim or set-off which could be asserted by or is
available to the Borrower against the Lender.
The Borrower shall pay all amounts due under this Note free and clear
of, and without reduction for or on account of, any present and future
taxes, levies, imposts, duties, fees, assessments, charges, deductions or
withholdings and all liabilities with respect thereto (collectively,
"Taxes"). If any Taxes shall be required by law to be deducted or withheld
from any payment, the Borrower shall increase the amount paid so that the
Lender received when due (and is entitled to retain), after deduction or
withholding for or on account of such Taxes (including deductions or
withholdings applicable to additional sums payable under this paragraph),
the full amount of the payment provided for in this Note.
If the Lender is required by law to make any payment on account of
Taxes, or any liability in respect of any Tax is imposed, levied or assessed
against the Lender, the Borrower shall indemnify the Lender for and against
such payment or liability, together with any incremental taxes, interest or
penalties, and all costs and expenses, payable or incurred in connection
therewith, including Taxes imposed on amounts payable under this paragraph
whether or not such payment or liability was correctly or legally asserted.
A certificate of the Lender as to the amount of any such payment shall, in
the absence of manifest error, be conclusive and binding for all purposes.
Anything herein to the contrary notwithstanding, if during any period
for which interest is computed hereunder, the amount of interest computed on
the basis provided for in this Note, together with all fees, charges and
other payments which are treated as interest under applicable law, as
provided for herein or in any other document executed in connection
herewith, would exceed the amount of such interest computed on the basis of
the Highest Lawful Rate, the Borrower shall not be obligated to pay, and the
Lender shall not be entitled to charge, collect, receive, reserve or take,
interest in excess of the Highest Lawful Rate, and during any such period
the interest payable hereunder shall be computed on the basis of the maximum
non-usurious rate of interest, as in effect from time to time, which may be
charged, contracted for, reserved, received or collected by the Lender in
connection with this Note under applicable law.
Any of the following events which shall occur shall constitute an Event of
Default":
(a) The Borrower shall fail to pay when due any amount of principal or
interest on this note, the Security Agreement or any other Document.
(b) Any representation or warranty by the Borrower under or in connection
with this Note, shall prove to have been incorrect in any material respect
when made or deemed made.
(c) The Borrower shall fail to perform or observe any other term,
covenant or agreement contained in this Note, the Security Agreement or any
other Document on it's part to be performed or observed and any such failure
shall remain unremedied for a period of ten days from the occurrence
thereof.
(d) The Borrower shall fail to make payment when due on any other
indebtedness for money borrowed with an aggregate principal amount
outstanding of $10,000.00 or more, or otherwise fails to perform any
covenant in or otherwise breaches the terms of any instrument relating to
such indebtedness which failure or breach permits the holder of such
indebtedness to accelerate the maturity of such indebtedness.
(e) Any levy upon, seizure or attachment of the Collateral or any part
thereof, or any material impairment in the value of the Collateral or the
priority of the Lenders lien thereof.
(f) The Borrower or any other Person shall challenged the validity of
this Note, or the Security Agreement, or the grant of the security interest
thereunder.
(g) The Borrower shall (i) liquidate, wind-up or dissolve (or suffer any
liquidation, wind-up or dissolution), (ii) suspend it's operations other
than in the ordinary course of business, or (iii) take any corporate action
to authorize any of the actions or events set forth above in this paragraph
(g).
(h) A final judgment or order for payment of money in excess of
$10,000.00 (excluding the settlement of the lawsuit between Borrower and
Promethean LLC for up to $35,000.00) which is not fully covered by third-
party insurance shall be rendered against the Borrower; or any non-monetary
judgment or order shall be rendered against the Borrower which has or would
reasonably be expected to have a material adverse effect upon the
operations, properties, business, or condition (financial or otherwise) of
the Borrower; and in each case there shall be any period of 20 consecutive
days during which a stay of enforcement of such judgment or order, by reason
of a pending appeal or otherwise, shall not be in effect.
(i) The Borrower shall merge with or consolidate into or acquire all or a
substantial part of the assets of another Person or sell, lease, transfer or
otherwise dispose of all or a substantial part of it's assets.
(j) The Borrower shall form any subsidiaries, alter it's capital
structure, declare or pay any dividends or purchase, redeem or retire or
otherwise acquire for value any of it's capital stock not or hereafter
outstanding, return capital to it's shareholders; provided, however, that
the Borrower may, pursuant to the terms and conditions of it's existing
stock option and stock purchase agreements between the Borrower and it's
employees and consultants, issue stock options and repurchase unvested
shares of common stock of the Borrower.
If any Event of Default shall occur, the Lender may (i) by notice to
the Borrower, declare the entire unpaid principal amount of this Note, all
interest accrued and unpaid hereon and all other amounts payable hereunder
to be forthwith due and payable, whereupon all unpaid principal under this
Note, all such accrued interest and all such other amounts shall become due
and payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Borrower, and (ii)
whether or not the actions referred to in clause (i) have been taken,
exercise any or all of the Lender's rights and remedies under the Security
Agreement and proceed to enforce all other rights and remedies available to
the Lender under applicable law.
No amendment or waiver of any provision of this Note, nor any consent to
any departure by the Borrower therefrom, shall in any event be effective
unless the same shall be in writing and signed by the Lender and then such
amendment, waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
All notices and other communications provided for hereunder shall,
unless stated herein, be in writing (including by facsimile) and mailed,
sent or delivered to the respective parties hereto at or to the following
addresses or facsimile numbers (or at or to such other addresses or
facsimile numbers as shall be designated by any party in a written notice to
the other parties hereto):
If to the Lender: Silicon Bandwidth, Inc.
1001 Bayhill Drive, Suite 100
San Bruno, CA 94066
Attn: Chief Executive Officer
Facsimile: (650) 869-6078
If to the Borrower: The Panda Project, Inc.
951 Broken Sound Parkway
Boca Raton, FL 33487
Attn: Chief Executive Officer
Facsimile: (561) 994-0191
All such notices and communications shall be effective (i) if delivered
by hand, upon delivery; (ii) if sent by mail, upon the earlier of the date
of receipt of five Business Days after deposit in the mail, first class (or
air mail, with respect to communications to be sent to or from the United
States), postage prepaid; and (iii) if sent by facsimile, when sent.
No failure on the part of the Lender to exercise, and no delay in
exercise, any right, remedy, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
remedy, power or privilege preclude any other or further exercise thereof or
the exercise of any other right, remedy, power or privilege. The rights and
remedies under this Note are cumulative and not exclusive of any rights,
remedies, powers and privileges that may otherwise be available to the
Lender.
Whenever possible, each provision of this Note shall be interpreted in
such a manner as to be effective and valid under all applicable laws and
regulations. If, however, any provision of this Note shall be prohibited by
or invalid under any such law or regulation in any jurisdiction, it shall,
as to such jurisdiction, be deemed modified to conform to the minimum
requirements of such law or regulation, or, if for any reason it is not
deemed so modified, it shall be ineffective and invalid only to the extent
of such prohibition or invalidity without affecting the remaining provisions
of this Note, or the validity or effectiveness of such provision in any
other jurisdiction.
The Borrower agrees to pay on demand all costs and expenses of the
Lender, and the fees and disbursements of counsel (including the allocated
costs of internal counsel), in connection with (i) any amendments,
modifications or waivers of the terms hereof, (ii) any Event of Default,
(iii) the enforcement or attempted enforcement of, and preservation of any
rights under, this Note, and (iv) any out-of-court workout or other
refinancing or restructuring or in any bankruptcy case, including, without
limitation, any and all losses, costs and expenses sustained by the Lender
as a result of any failure by the Borrower to perform or observe it's
obligations contained herein. In addition, the Borrower, agrees to
indemnify the Lender against and hold it harmless from any and all present
and future stamp, transfer, documentary and other such taxes, levies, fees,
assessments and other charges made by any jurisdiction by reason of the
execution, delivery, performance and enforcement of this Note.
This Note shall be binding upon, inure to the benefit of and be
enforceable by the Borrower, the Lender and their respective successors and
assigns.
The Borrower shall not have the right to assign it's rights and
obligations hereunder or any interest herein without the prior written
consent of the Lender. The Lender may sell, assign, transfer or grant
participation in all or any portion of the Lender's rights and obligations
hereunder. In the event of any such assignment the assignee shall be deemed
the "Lender" for all purpose of this Note and any other documents and
instruments relating hereto with respect to the rights and obligations
assigned to it. The Borrower agrees that in connection with any such grant
or assignment, the Lender may deliver to the prospective participate or
assignee financial statements and other relevant information relating to the
Borrower and it's subsidiaries.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAW OF THE STATE OF DELAWARE.
THE BORROWER AND LENDER HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO
A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF
OR RELATED TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OTHER DOCUMENT AND
THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR
OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER
PARTIES THERETO. THE BORROWER AND LENDER HEREBY AGREE THAT ANY SUCH CLAIM
OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT
IN ANY WAY LIMITING THE FOREGOING, THE BORROWER AND LENDER FURTHER AGREE
THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF
THIS PARAGRAPH AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH
SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCABILITY OF
THIS NOTE, THE SECURITY AGREEMENT OR ANY OTHER DOCUMENT OR PROVISION
THEREOF.
IN WITNESS THEREOF, the Borrower has duly executed this Note, as of the
date first above written.
THE PANDA PROJECT, INC.
By: ____________________________________
Title: __________________________________
Exhibit 10.28
STOCKHOLDERS
AGREEMENT
dated as of February 18, 2000
By and Among
THE PANDA PROJECT, INC.,
SILICON BANDWIDTH, INC.,
VANTAGEPOINT VENTURE PARTNERS 1996, L.P.,
ARCHIMEDES CAPITAL LLC
and
THE MANAGEMENT STOCKHOLDERS
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS 1
SECTION 1.01 Certain Defined Terms 1
ARTICLE II SECURITIES LAW 4
SECTION 2.01 Securities Law Matters Affecting Transfer 4
ARTICLE III LEGENDS, ETC. 5
SECTION 3.01 Endorsement of Certificates 5
SECTION 3.02 Improper Transfer 7
ARTICLE IV RESTRICTIONS ON TRANSFER,
FIRST REFUSAL OPTION, DRAG-ALONG RIGHT, REGISTRATION RIGHTS 7
SECTION 4.01 Restrictions on Transfer 7
SECTION 4.02 Right of First Refusal;
Acceptable Third Parties 7
SECTION 4.03 Drag-Along Right 9
SECTION 4.04 Registration Rights 9
ARTICLE V MISCELLANEOUS 16
SECTION 5.01 Stop Order 16
SECTION 5.02 Communications 16
SECTION 5.03 Headings 16
SECTION 5.04 Severability 16
SECTION 5.05 Entire Agreement 17
SECTION 5.06 Counterparts 17
SECTION 5.07 Successors and Assigns 17
SECTION 5.08 Amendment and Modification;
Waiver of Compliance; Termination 17
SECTION 5.09 Recapitalizations, Exchanges Etc.,
Affecting Common Stock 18
SECTION 5.10 Further Assurances 18
SECTION 5.11 Governing Law 18
SCHEDULE 1 - List of Management Stockholders
EXHIBIT A - Certificate of Incorporation
EXHIBIT B - Assumption Agreement
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT, dated as of February 18, 20000 (this "Agreement"),
by and among The Panda Project, Inc., a Florida corporation ("Panda"),
Silicon Bandwidth, Inc. a Delaware corporation ("SBI" or the "Company"),
VantagePoint Venture Partners 1996, L.P., a Delaware limited partnership,
(the "Fund"), Archimedes Capital LLC ("Archimedes"), and certain management
stockholders as set forth on Schedule 1 hereto (the "Management
Stockholders").
PRELIMINARY STATEMENTS:
WHEREAS, Panda and SBI have entered into an Asset Purchase Agreement, dated
as of July 19, 1999, pursuant to which SBI will acquire certain assets of
Panda;
WHEREAS, Fund and Archimedes, on and after the Closing Time, will initially
own 7,251,415 shares of Series A Preferred Stock of the Company;
WHEREAS, the Management Stockholders on and after the Closing Time, will
initially collectively own shares or options to purchase an aggregate of
2,000,000 shares of Common Stock of the Company in such individual amounts
as are specified on Schedule 1 hereto; and
WHEREAS, Panda, Fund, Archimedes and the Management Stockholders desire to
regulate certain matters regarding their relationship as stockholders of the
Company as set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
Certain Defined Terms.
As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to the singular and plural
forms of the terms defined):
"Acceptable Third Party" means a Third Party reasonably acceptable to the
Board of Directors that does not own, manage, operate, control or
participate in the ownership, management, operation or control of any entity
engaged in the semiconductor industry (the "Business") or other line of
business in which the Company engages; provided, however, that the Board may
deem (but shall not be required to deem) a Third Party that holds or is
otherwise interested in any shares or other securities of any entity engaged
in the Business or any other line of business in which the Company engages
as an Acceptable Third Party, so long as the interest of such Third Party
does not entitle such Third Party and its agents and affiliates to more than
five percent (5%) of the voting power in such entity.
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by or under common control with such
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Board of Directors" or "Board" means the Company's board of directors.
"Certificate of Incorporation" means the Certificate of Incorporation of the
Company as in effect on and immediately after the Closing Time and as
thereafter amended, modified, restated and supplemented from time to time.
A copy of such Certificate of Incorporation in the form to be in effect on
and immediately after the Closing Time is attached hereto as Exhibit A.
"Closing Time" means the closing time for the purchase of the assets of
Panda by SBI under the Asset Purchase Agreement referred to in the
Preliminary Statements hereto.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock.
"Company" has the meaning set forth in the Preliminary Statements hereto.
"Company Portion Notice" has the meaning set forth in Section 4.02 hereof.
"Company Purchase Notice" has the meaning set forth in Section 4.02 hereof.
"Conversion Stock" means the Common Stock issued or issuable pursuant to
conversion of the Series A Preferred Stock.
"Demand Request" has the meaning set forth in Section 4.04 hereof.
"Disposition," "Dispose" (and derivative forms thereof) means any sale,
assignment, transfer, pledge (unless, with respect to a proposed pledge, the
Board has determined not to consider such proposed pledge as a
"Disposition"), encumbrance or other disposition of Company securities.
"Drag-Along Right" has the meaning specified it Section 4.03 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Value" means the fair market value per share of the Common Stock or
New Securities as determined in good faith by a majority of the Board of
Directors, or a duly appointed committee thereof and approved by the Board,
or, if the Board or such committee, as the case may be, fails to make or
approve such determination within 30 days after the event giving rise to the
necessity of determining Fair Value, by a financial advisor of recognized
national standing selected by a majority of the Board. The fees and
expenses of such financial advisor shall be borne by the Company. The
determination of Fair Value shall be based on a review of the most recent
audited financial statements of the Company and any other information that
the Board or such financial advisor, as the case may be, considers relevant
to such determination, and shall, in any case, take into account the
restricted nature of the Common Stock, or New Securities, if relevant under
applicable securities laws (if then so restricted), and any other
restrictions or rights of Stockholders hereunder, but shall not, in any
case, take into account any restrictions hereunder applicable only to Common
Stock (or options to purchase Common Stock) held by the Management
Stockholders. The Company shall furnish such financial advisor with any
information such advisor deems reasonably necessary in making such
determination.
"First Refusal Option" has the meaning set forth in Section 4.02 hereof.
"Fund" has the meaning set forth in the Preliminary Statements hereto.
"Fund Investor" means any Person owning capital in Fund.
"Investor Stockholder" means the Fund and Archimedes and their respective
heirs, successors and assigns.
"Management Stockholders" mean the Persons set forth on Schedule 1 hereto.
"Non-Investor Stockholder" means Panda and each Management Stockholder and
each Person that in the future becomes bound by the terms hereof as a
Management Stockholder and their respective heirs, successors and assigns.
"Offer Price" has the meaning set forth in Section 4.02 hereof.
"Offered Shares" has the meaning set forth in Section 4.02 hereof.
"Participating Stockholder" has the meaning set forth in Section 4.04
hereof.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock
company or any other entity or organization, including a government or
political subdivision or any agency or instrumentality thereof.
"Piggyback Registration Right" has the meaning set forth in Section 4.04
hereto.
"Pro Rata Notice" has the meaning set forth in Section 4.02 hereof.
"Public Offering" means a firm commitment underwritten public offering
pursuant to an effective registration statement under the 1933 Act, as
amended, covering the offer and sale of Common Stock to the public involving
an aggregate offering price to the public of not less than $7.00 at a per
share offering price of $35,000,000 or more (as adjusted for any
recapitalizations, stock combinations, stock dividends, stock splits and the
like).
"Related Transferee" means (i) with respect to any Stockholder that is not
an individual, any wholly owned Affiliate of such Stockholder, (ii) with
respect to a Stockholder that is an individual, the parents, spouse or
children of such individual Stockholder (or trust or trusts for their sole
benefit of which trust or trusts such individual Stockholder and or his or
her parents, spouse or children shall be the sole trustee or trustees or
co-trustee or co-trustees with an attorney, trust company or other
fiduciary), (iii) with respect to such individual Stockholder, a corporation
all the shares of which are owned by such individual Stockholder and/or his
or her parents, spouse or children (iv) with respect to an individual
Stockholder, a Person to whom Common Stock has been transferred by operation
of law, by will or by the laws of descent and (v) with respect to Fund only,
the Fund Investors.
"Restricted Period" means the period of time from the Closing Time through
the fifth anniversary of the Closing Time.
"Securities" means the Common Stock and the Series A Preferred Stock.
"Selling Group" has the meaning set forth in Section 4.03 hereof.
"Seller" has the meaning specified in Section 4.02 hereof.
"Seller's Notice" has the meaning set forth in Section 4.02 hereof.
"Series A Preferred Stock" means the Company's Series A Preferred Stock
previously purchased by Fund and Archimedes.
"Stockholder" means Panda, each Management Stockholder, Fund, Archimedes and
each Person that in the future becomes bound by the terms hereof as a
Stockholder and their respective heirs, successors and assigns.
"Third Party" means a Person other than the Company, a Stockholder or a
Stockholder's Related Transferees.
"1933 Act" means the Securities Act of 1933, as amended.
ARTICLE II
SECURITIES LAW
Securities Law Matters Affecting Transfer. Each Stockholder has been
advised and understands that the Securities purchased by it have not been
registered under the 1933 Act. Such Stockholder agrees for the benefit of
the Company that, in addition to other restrictions on the transfer of the
Securities set forth herein, the Securities may not be resold, pledged or
otherwise transferred except (1) to the Company (upon exchange or redemption
thereof or otherwise), (2) if the Company has become subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act and the
Securities are eligible for resale pursuant to Rule 144A under the 1933 Act
("Rule 144A"), to a person whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A, purchasing
for its own account or for the account of a qualified institutional buyer to
whom notice is given that the resale, pledge or other transfer is being made
in reliance on Rule 144A, (3) in an offshore transaction in accordance with
Rule 904 of Regulation S under the 1933 Act, but only in the case of a
transfer that is effected by the delivery to the transferee of definitive
securities registered in its name (or in its nominee's name) on the books
maintained by the Company, (4) pursuant to an exemption from registration in
accordance with Rule 144 under the 1933 Act (if available and upon delivery
of an opinion of counsel satisfactory in form and substance to the Company,
if requested by the Company), (5) pursuant to an effective registration
statement under the 1933 Act, or (6) pursuant to any other exemption from
registration under the 1933 Act, provided an opinion of counsel is furnished
to the company, reasonably satisfactory in form and substance to the
Company, stating that an exemption from the registration requirements of the
1933 Act is available, and in each of (1)-(6) the transfer is in accordance
with any applicable securities laws of any state of the United States. Each
Stockholder acknowledges that the Company is not currently subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act and that
the transfer exemptions listed above in subsections (2) and (4) are
therefore unavailable and will not become available until the Company
becomes subject to such reporting requirements.
ARTICLE III
LEGENDS, ETC.
Endorsement of Certificates.
(a) Legend. Upon the execution of this Agreement, in addition to any
other legend which the Company may deem advisable under the 1933 Act and
certain United States state laws, the certificates representing all
Securities owned by a Stockholder shall be endorsed substantially as
follows:
THIS CERTIFICATE IS SUBJECT TO, AND IS TRANSFERABLE ONLY UPON COMPLIANCE
WITH, THE PROVISIONS OF A STOCKHOLDERS AGREEMENT DATED AS OF FEBRUARY 18,
2000, BY AND AMONG SILICON BANDWIDTH, INC. AND CERTAIN OF ITS STOCKHOLDERS.
A COPY OF THE ABOVE REFERENCED STOCKHOLDERS AGREEMENT IS ON FILE AT THE
OFFICES OF SILICON BANDWIDTH, INC.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THESE
SECURITIES, AGREES FOR THE BENEFIT OF SILICON BANDWIDTH, INC. ("THE
COMPANY") THAT THESE SECURITIES MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY (1) TO THE COMPANY (UPON EXCHANGE OR REDEMPTION THEREOF OR
OTHERWISE), (2) IF THE COMPANY HAS BECOME SUBJECT TO THE REPORTING
REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED AND THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A
UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A, PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES
ACT, BUT ONLY IN THE CASE OF A TRANSFER THAT IS EFFECTED BY THE DELIVERY TO
THE TRANSFEREE OF DEFINITIVE SECURITIES REGISTERED IN ITS NAME (OR IN ITS
NOMINEE'S NAME) ON THE BOOKS MAINTAINED BY THE COMPANY, (4) PURSUANT TO AN
EXEMPTION FROM REGISTRATION IN ACCORDANCE WITH RULE 144 UNDER THE SECURITIES
ACT (IF AVAILABLE AND UPON DELIVERY OF AN OPINION OF COUNSEL SATISFACTORY IN
FORM AND SUBSTANCE TO THE COMPANY, IF REQUESTED BY THE COMPANY), (5)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR
(6) PURSUANT TO ANY OTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT, PROVIDED AN OPINION OF COUNSEL IS FURNISHED TOT HE COMPANY REASONABLY
SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY, STATING THAT AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE, AND
IN EACH OF (1)-(6) THE TRANSFER IS IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES.
SILICON BANDWIDTH, INC. WILL FURNISH WITHOUT CHARGE TO THE HOLDER HEREOF,
UPON REQUEST, THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF THE CLASS OF CAPITAL
STOCK REPRESENTED HEREBY, AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
(b) Legend on After-Acquired Shares. All certificates representing
Securities hereafter issued to or acquired by any of the Stockholders or
their successors hereto shall bear the legends set forth above. The
obligations of each party hereto shall be binding upon each transferee to
whom shares of Common Stock are transferred by any party hereto. Prior to
consummation of any transfer, such party shall cause the transferee to
execute an agreement substantially in the form attached hereto as Exhibit B,
providing that such transferee shall fully comply with the terms of this
Agreement.
Improper Transfer. Any attempt to Dispose of any Securities not in
accordance with this Agreement shall be null and void and neither the issuer
of such Securities nor any transfer agent of such securities shall give any
effect to such attempted transfer or encumbrance in its stock records.
ARTICLE IV
RESTRICTIONS ON TRANSFER, FIRST REFUSAL OPTION,
DRAG-ALONG RIGHT, REGISTRATION RIGHTS
Restrictions on Transfer
(a) General. In addition to the restrictions on transfer of Common
Stock set forth in Article III above and such restrictions contained in the
Company's Certificate of Incorporation, no Non- Investor Stockholder shall
Dispose of any shares of Common Stock during the Restricted Period unless
such Dispositions are (i) to Related Transferees, (ii) made in compliance
with the procedures, and subject to the limitations, set forth in Section
4.03, or (iii) made in compliance with the procedures, and subject to the
limitations, set forth in Section 4.04(a).
Right of First Refusal; Acceptable Third Parties.
(a) Notice of Intended Dispositions. Except for Dispositions to Related
Transferees and Dispositions contemplated by Sections 4.03 and 4.04 hereof,
if at any time any Non- Investor Stockholder (the "Seller") desires to
Dispose of any Securities owned by it, then such Seller shall deliver
written notice of its intention to Dispose (a "Seller's Notice") to the
Company and each other Stockholder, setting forth such Seller's desire to
make such Disposition (which shall be for cash), the prospective transferee,
the number of Securities proposed to be Disposed of (the "Offered Shares"),
the price ("Offer Price") at which such Seller proposes to Dispose of the
Offered Shares, and the other material terms of such Disposition.
(b) First Refusal Right. Upon the receipt of the Seller's Notice, the
Company shall then have the right to purchase at the Offer Price all, or any
portion of, the Offered Shares, and, if the Company has not elected to
purchase any, or has purchased less than all of, the Offered Shires, each
other Stockholder shall then have the right to purchase at the Offer Price a
pro rata share of all, or any portion of the Offered Shares not theretofore
subscribed for by the Company, based on the number of shares of Series A
Preferred Stock (on an as-converted to Common Stock basis) and/or Common
Stock owned by such Stockholders; provided, however, that in the event any
such other Stockholder does not purchase any or all of its pro rata portion
of the remaining Offered Shares, then the remaining Stockholders shall have
the right to purchase an amount of such unpurchased Offered Shares based on
the relative proportions of ownership of Conversion Stock and/or Common
Stock of the Stockholders who elect to purchase such unpurchased Offered
Shares. If the other Stockholders do not subscribe for all of the Offered
Shares, then the Company may subscribe for the balance. The option to
purchase in favor of the Company and the Stockholders granted in this
Section 4.03(b) is referred to herein as the "First Refusal Option."
(c) Exercise of First Refusal Option. The Company's First Refusal
Option shall be exercisable by the delivery of notice to the Seller (the
"Company Purchase Notice") within 45 calendar days from the date of the
Company"s receipt of the Seller's Notice. If the Company does not deliver a
Company Purchase Notice or if the Company elects to purchase fewer than all
of the Offered Shares, then within the 45 calendar day period after the
Company's receipt of the Seller s Notice, the Company shall notify in
writing each other Stockholder of the amount of Offered Shares not
subscribed for by the Company (the "Company Portion Notices"). The other
Stockholders' First Refusal Option shall be exercisable by the delivery of
written notice to the Seller (the "Pro Rata Notice"), with a copy to the
Company, within 45 calendar days of their receipt of the Company Portion
Notice. The Pro Rata Notice shall also specify whether such Stockholder
elects to purchase any Offered Shares in addition to such Stockholder's pro
rata portion of the Offered Shares in the event there is an aggregate
undersubscription for all Offered Shares. Unsubscribed Offered Shares, if
any, shall be apportioned among the Stockholders who elect to purchase such
shares based on such Stockholders' relative proportions of ownership of
Conversion Stock and/or Common Stock. The First Refusal Option of the
Company pursuant to this subsection (c) shall terminate if unexercised 45
calendar days after receipt of the Seller's Notice and the First Refusal
Option of the other Stockholders pursuant to this subsection (c) shall
terminate if unexercised 45 calendar days after delivery of the Company
Portion Notice.
(d) Mandatory Sale. In the event that the Company and/or the
Stockholders exercise their First Refusal Options with respect to the
Offered Shares, then the Seller must sell the Offered Shares to the Company
and such Stockholders, as applicable, within 30 calendar days after the date
of receipt of the Company Purchase Notice or 30 calendar days after the date
of receipt of the last Pro Rata Notice received by the Seller, as
applicable.
(e) Sale Period. If all notices required to be given pursuant to
subsections (a) through (c) above have been duly given and the Company and
the Stockholders shall have determined not to exercise their respective
First Refusal Options, then the Seller shall have the right, for a period of
30 calendar days after expiration of the last applicable option period
specified in subsection (c), to sell to any Acceptable Third Party the
Offered Shares remaining unsold at the Offer price and on the other terms
and provisions set forth in the Seller's Notice.
(f) Notice of Acceptable Third Party. Within 30 calendar days after the
Company's receipt of a Seller's Notice, it shall notify the Seller and the
other Stockholders in writing of whether the proposed transferee of the
Offered Shares is an Acceptable Third Party and, if such proposed transferee
is not an Acceptable Third Party, such notice shall set forth in reasonable
detail the reasons for such determination. If the Company notifies the
Seller that the proposed transferee is not an Acceptable Third Party, then
no Disposition shall be made to such proposed transferee and the First
Refusal Options shall automatically terminate with respect to the Offered
Shares covered by such Seller's Notice.
(g) Closing. Upon the consummation of any purchase by the Company or
other Stockholders hereunder of Offered Shares, the Seller shall deliver
certificates evidencing the Offered Shares sold duly endorsed, or
accompanied by written instruments of transfer, free and clear of any liens
and encumbrances, against delivery of the Offer Price.
(h) Cessation of Rights. Subject to the other provisions of this
Agreement, from and after the time at which the Company or other
Stockholders shall have tendered immediately available funds to the Seller
in payment of the Offer Price for Offered Shares pursuant to the exercise of
the First Refusal Option, all rights (other than the right to receive
payment of the Offer Price with respect to such Offered Shares) of Seller
with respect to the shares of Common Stock for which tender has been made,
including without limitation all voting and dividend rights, shall
permanently cease and terminate, except only the right to receive payment
for such shares of Common Stock, and such Seller shall no longer be
considered the owner of such shares of Common Stock.
Drag-Along Right.
(a) Grant of Drag-Along Right. If Investor Stockholders holding at
least an aggregate of 3,700,000 shares of Series A Preferred Stock
(collectively the "Selling Group"), agree to sell at least an aggregate of
one half of the shares of Series A Preferred Stock owned by the Selling
Group to a Person that is not a wholly owned Affiliate of any member of the
Selling Group in a bona fide arm's length transaction, then each Stockholder
shall, upon the written request of the Selling Group, sell to such Person or
such other transferee as may be designated by the Selling Group all Common
Stock owned by such Stockholder contemporaneously with the sale of such
Series A Preferred Stock by the Selling Group, for the same consideration
and on the same terms as those provided by such Person to the Selling Group
(the "Drag-Along Right");
(b) Exercise of Drag-Along Right. The Drag-Along Right shall be
exercisable by written notice given by the Selling Group to each
Stockholder, containing the price and other material terms of the proposed
sale and the date of the closing of the proposed sale, which date shall not
be less than 20 nor more than 180 calendar days after the date of such
notice.
(c) Mergers, Consolidations, Etc. The Drag-Along Right shall not apply
to any merger or consolidation of the Company with or into another
corporation or a sale of all or substantially all of the assets of the
Company followed by a dissolution, provided that all shares of Common Stock
are treated the same in such transaction.
Registration Rights.
(a) Piggyback Rights. Subject to section 4.04(h), if at any time the
Company determines to file a registration statement under the 1933 Act for a
Public Offering of its Common Stock, the Company shall at such time promptly
give each Investor Stockholder written notice of such determination setting
forth the date on which the Company proposes to file such registration
statement, which date shall be not fewer than 30 nor more than 45 calendar
days from the date of such notice, and advising each Investor Stockholder of
its right to have its Conversion Stock or Common Stock included in such
registration. Upon the written request of any Investor Stockholder received
by the Company no later than 30 calendar days after the date of the
Company's notice, the Company shall use its best efforts to cause to be
registered under the 1933 Act all of the Conversion Stock or Common Stock
that such Investor Stockholder has so requested to be registered (the
"Piggyback Registration Right"). If, in the opinion of the managing
underwriter (or, in the case of a non-underwritten offering, in the good
faith written opinion of the placement agent, or if there is none, the Board
of Directors), the total amount of such securities to be so registered,
including the Conversion Stock or Common Stock, will exceed the maximum
amount of the Company's securities which can be marketed (i) at a price
reasonably related to the then current market value of such securities or
(ii) without otherwise materially and adversely affecting the entire
offering, then the Company shall be entitled to reduce, pro rata based upon
the number of shares of Conversion Stock or Common Stock each Stockholder
has requested to be registered, the number of shares of Conversion Stock or
Common Stock to be so registered. Further, if, in the opinion of the
managing underwriter (or, in the case of a non-underwritten offering, in the
good faith opinion of the placement agent, or if there is none, the Board of
Directors), the inclusion of any or all of the Conversion Stock or Common
Stock owned by any Investor Stockholders in the offering to be registered
will materially and adversely affect the entire offering, then the Company
shall be entitled to completely exclude or reduce, pro rata based upon the
number of shares of Conversion Stock or Common Stock each Investor
Stockholder has requested to be registered, the number of shares of
Conversion Stock or Common Stock owned by each such Investor Stockholder to
be so registered.
(b) Demand Rights. At any time and from time to time, the Fund may make
up to three written requests for registration in accordance with the
provisions of the 1933 Act (each a "Demand Request") of all or part of the
Conversion Stock owned by Fund or the Fund Investors. The Demand Request
shall specify the aggregate number of shares of Conversion Stock owned by
the Fund or the Fund Investors to be registered and shall also specify the
intended method of disposition thereof.
If a Demand Request is for an underwritten offering, Fund shall select a
managing underwriter or underwriters of recognized national standing to
administer the Offering, who shall be reasonably satisfactory to the
Company. The Company shall use its best efforts to cause to be registered
under the 1933 Act all Common Stock requested to be registered in a Demand
Request.
(c) Filings, Etc. Whenever required under Section 4.04(a) or (b) to use
its best efforts to effect the registration of any Common Stock, the Company
shall, as expeditiously as possible:
(i) prepare and file with the Commission a registration statement with
respect to such Common Stock and use its best efforts to cause such
registration statement to become and remain effective for the period of the
distribution contemplated thereby determined as provided in Section
4.04(c)(ix);
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to comply with the provisions of
the 1933 Act with respect to the disposition of all Common Stock covered by
such registration statement;
(iii) furnish to any Investor Stockholders selling pursuant to such
registration statement (a "Participating Stockholder") such number of copies
of the registration statement and the prospectus included therein (including
each preliminary prospectus and any amendments or supplements thereto in
conformity with the requirements of the 1933 Act, and such other documents
and information) as such Participating Stockholders may reasonably request;
(iv) use its best efforts to register or qualify the Common Stock
covered by such registration statement under the securities or blue sky laws
of such jurisdictions within the United States as shall be reasonably
appropriate for the distribution of the Common Stock covered by the
registration statement; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business in or to file a general consent to service of process in any
jurisdiction wherein it would not, but for the requirements of this Section
4.04(c)(iv), be obligated to do so; and provided, further, that the Company
shall not be required to qualify such Common Stock in any jurisdiction in
which the securities regulatory authority requires that any Participating
Stockholder submit any shares of its Common Stock to the terms, provisions
and restrictions of any escrow, lockup or similar agreement or consent to
sell Common Stock in such jurisdiction unless such Participating Stockholder
agrees to do so;
(v) promptly notify each Participating Stockholder, at any time when a
prospectus relating thereto is required to be delivered under the 1933 Act,
of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they were made, and at the request
of any such Participating Stockholder promptly prepare and furnish to such
Participating Stockholder a reasonable number of copies of a supplement to
or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which
they were made;
(vi) furnish, if the method of distribution is by means of an
underwriting, on the date that the shares of Common Stock are delivered to
the underwriters for sale pursuant to such registration, or if such Common
Stock is not being sold through underwriters, on the date that the
registration statement with respect to such shares of Common Stock becomes
effective: (1) a signed opinion, dated such date, of the independent legal
counsel representing the Company for the purpose of such registration,
addressed to the underwriters, if any, and if such Common Stock is not being
sold through underwriters, then to the Participating Stockholders, as to
such matters as such underwriters or such Participating Stockholders, as the
case may be, may reasonably request and as would be customary in such a
transaction; and (2) a letter dated such date, from the independent
certified public accountants of the Company, addressed to the underwriters,
if any, and if such Common Stock is not being sold through underwriters,
then to the Participating Stockholders (i) stating that they are independent
certified public accountants within the meaning of the 1933 Act and that, in
the opinion of such accountants, the financial statements and other
financial data of the Company included in the registration statement or the
prospectus, or any amendment or supplement thereto, comply as to form in all
material respects with the applicable accounting requirements of the 1933
Act and (ii) covering such other financial matters (including information as
to the period ending not more than 5 business days prior to the date of such
letter) with respect to the registration in respect of which such letter is
being given as such underwriters or such participating Stockholders, as the
case may be, may reasonably request and as would be customary in such a
transaction;
(vii) enter into customary agreements (including, if the method of
distribution is by means of an underwriting, an underwriting agreement in
customary form) and take such other actions as are reasonably required in
order to expedite or facilitate the disposition of the Common Stock to be so
included in the registration statement;
(viii) comply with all applicable rules and regulations of the
Commission, and make available to its security holders, as soon as
reasonably practicable, but not later than 15 months after the effective
date of the registration statement, an earnings statement covering the
period of at least 12 months beginning with the first full month after the
effective date of such registration statement, which earnings statements
shall satisfy the provisions of Section 11(a) of the 1933 Act; and
(ix) the period of distribution of Common Stock in a firm commitment
underwritten public offering shall be deemed to extend until each
underwriter has completed the distribution of all shares of Common Stock
purchased by it, and the period of distribution of Common Stock in any other
registration shall be deemed to extend until the earlier of the sale of all
Common Stock covered thereby or one year after the effective date thereof.
(d) Participating Stockholder Information. It shall be a condition
precedent to the obligations of the Company to take any action pursuant to
this Section 4.04 that the Stockholder selling pursuant to such registration
statement (the "Participating Stockholders") shall furnish to the Company
such information regarding themselves, the Conversion Stock or Common Stock
held by them, and the intended method of disposition of such Conversion
Stock or Common Stock as the Company shall reasonably request and as shall
be required in connection with the action to be taken by the Company.
(e) Expenses. All expenses incurred in connection with each
registration pursuant to this Section 4.04, other than underwriters'
discounts and commissions, but including without limitation all
registration, filing and qualification fees, word processing, duplicating,
printers' and accounting fees (including the expenses of any special audits
or "cold comfort" letters), fees of the National Association of Securities
Dealers, Inc., listing fees, messenger and delivery expenses, all fees and
expenses of complying with state securities or blue sky laws and fees and
disbursements of counsel for the Company shall be borne by the Company. The
Participating Stockholders shall bear and pay the underwriting commissions
and discounts applicable to the Conversion Stock or Common Stock offered for
their account pursuant to this Section 4.04 and the fees and expenses of
their counsel.
(f) Reasonable Terms. In connection with any underwritten offering, the
Company shall not be required under this Section 4.04 to include any
Conversion Stock or Common Stock owned by any Stockholder other than on the
terms of the underwriting of such offering that have been reasonably agreed
upon between the Company and the underwriters; provided, that, in any such
underwriting the Company and all Participating Stockholders, subject to the
other provisions hereof, shall be treated substantially similarly.
(g) Indemnities, Etc. In the event any shares of Conversion Stock or
Common Stock are included in a registration statement pursuant to this
Section 4.04:
(i) To the extent permitted by law, the Company shall indemnify and hold
harmless each Participating Stockholder, such Participating Stockholder's
directors and officers, each Person who participates in the registration of
such Conversion Stock or Common Stock, including underwriters (as defined in
the 1933 Act), and each Person, if any, who controls such Participating
Stockholder or participating Person within the meaning of the 1933 Act,
against any losses, claims, damages or liabilities, joint or several, to
which they may become subject under the 1933 Act or otherwise, insofar as
such losses, claims, damages or liabilities (or proceedings in respect
thereof) arise out of or are based on any untrue or alleged untrue statement
of any material fact contained in such registration statement on the
effective date thereof (including any prospectus filed under Rule 424 under
the 1933 Act or any amendments or supplements thereto) or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse each such Participating
Stockholder, such Participating Stockholder's directors and officers, such
participating Person or controlling Person for any legal or other expenses
reasonably incurred by them (but not in excess of expenses incurred in
respect of one counsel for all of them unless there is an actual conflict of
interest between any indemnified parties, in which case indemnified parties
may be represented by separate counsel) in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the indemnity agreement contained in this Section 4.04(g)(i)
shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld);
provided, further, that the Company shall not be liable to any Participating
Stockholder, such Participating Stockholder's directors and officers,
participating Person or controlling Person in any such case for any such
loss, claim, damage, liability or action to the extent that it arises out of
or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in connection with such registration statement,
preliminary prospectus, final prospectus or amendments or supplements
thereto, in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by any such
Participating Stockholder, such Participating Stockholder s directors and
officers, participating Person or controlling Person and concerning such
Person or Persons. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of any such
participating Stockholder, such Participating Stockholder's directors and
officers, participating Person or controlling Person, and shall survive the
transfer of such securities by such Participating Stockholder.
(ii) To the extent permitted by law, each Participating Stockholder,
severally and not jointly, shall indemnify and hold harmless the Company,
each of its directors and officers, each Person, if any, who controls the
Company within the meaning of the 1933 Act, and each agent and any
underwriter for the Company (within the meaning of the 1933 Act) against any
losses, claims, damages or liabilities, joint or several, to which the
Company or any such director, officer, controlling Person, agent or
underwriter may become subject, under the 1933 Act or otherwise, insofar as
such losses, claims, damages or liabilities (or proceedings in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in such registration
statement on the effective date thereof (including any prospectus filed
under Rule 424 under the 1933 Act or any amendments or supplements thereto)
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such registration statement,
preliminary or final prospectus, or amendments or supplements thereto, in
reliance upon and in conformity with written information furnished by or on
behalf of such Participating Stockholder expressly for use in connection
with such registration and concerning such Participating Stockholder; and
each such Participating Stockholder shall reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer,
controlling Person, agent or underwriter (but not in excess of expenses
incurred in respect of one counsel for all of them unless there is an actual
conflict of interest between any indemnified parties, in which case
indemnified parties may be represented by separate counsel) in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
Section 4.04(g)(ii) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of such Participating Stockholder (which consent shall
not be unreasonably withheld).
(iii) Promptly after receipt by an indemnified party under this Section
4.04(g) of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 4.06(g), notify the indemnifying party in writing
of the commencement thereof and the indemnifying party shall have the right
to participate in and assume the defense thereof with counsel selected by
the indemnifying party and reasonably satisfactory to the indemnified party;
provided, however, that an indemnified party shall have the right to retain
its own counsel, with all fees arid expenses thereof to be paid by such
indemnified party, and to be apprised of all progress in any proceeding the
defense of which has been assumed by the indemnifying party. The failure to
notify an indemnifying party promptly of the commencement of any such
action, if and to the extent prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 4.04(g), but the omission so to notify
the indemnifying party will not relieve it of any liability that it may have
to any indemnified party otherwise than under this Section 4.04(g).
(iv) To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party and the indemnified
party, or if such allocation is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the indemnifying party and
indemnified party in connection with the actions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefit of such indemnified party in
connection with the offering shall be measured by multiplying the total net
proceeds received from the offering by a fraction, the numerator being the
total net proceeds received by such indemnified party and the denominator
being the total net proceeds received from the offering. The relative fault
of such indemnifying party and indemnified party shall be determined by
reference to, among other things, whether any action in question, including
any untrue or alleged untrue statement of material fact or omission or
alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified party, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. The amount paid or payable
by a party as a result of the losses, claims, damages or liabilities
referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with any
investigation or proceeding. The parties hereto agree that it would not be
just and equitable if contribution pursuant to this Section 4.04(g)(iv) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section 4.04(g)(iv). No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
(v) The remedies provided for in this Section 4.04(g) are not exclusive
and shall not limit any rights or remedies which may otherwise be available
to any indemnified party at law or in equity.
(h) Private Sale. Notwithstanding any other provisions of this Section
4.04, the Company shall not be required to register the Conversion Stock or
Common Stock of any Stockholder if, in the opinion of counsel to the Company
reasonably satisfactory to the Stockholder (or, if the Stockholder has
engaged an investment banking firm, to such investment banking firm), the
sale or other disposition of such Stockholder's Conversion Stock or Common
Stock, in the manner proposed by such Stockholder (or by such investment
banking firm) may be effected without registering such Conversion Stock or
Common Stock under the 1933 Act.
(i) Blackout. Each Stockholder shall, in connection with any
registration of the Company's securities, upon the request of the Company or
the underwriters managing any underwritten offering of the Company's
securities, agree in writing not to effect any sale, disposition or
distribution, of any Conversion Stock or Common Stock (other than that
included in such registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time
(not to exceed 180 calendar days in the case of an initial public offering
or 90 days in the case of any follow-on offering) from the effective date of
such registration as the Company or the underwriters may specify.
ARTICLE V
MISCELLANEOUS
Stop Order.
Each Stockholder agrees that a stop order shall be placed in the stock
transfer records of the Company against the transfer of Securities in
contravention of this Agreement.
Communications.
All notices and other communications hereunder shall be in writing and shall
be deemed given if personally delivered, telecopied (which is confirmed) or
mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to a Stockholder, to the address set forth in the record books of
the Company.
(b) If to the Company, to
Silicon Bandwidth, Inc.
46539 Fremont Boulevard
Fremont, CA 94538
Attention: Chief Executive Officer
Telecopy No.:
With a copy to:
VantagePoint Venture Partners
1001 Bayhill Drive, Suite 100
San Bruno, CA 94066
Attn: Matt Ocko
Telecopy No.: (650) 869-6078
Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation
of this Agreement.
Severability. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy,
all other conditions 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 materially affected in any
manner 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 to the end that the transactions contemplated hereby are
fulfilled to the greatest extent possible.
Entire Agreement. This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and supersedes
all prior agreements and undertakings, both written and oral, between the
parties hereto with respect to the subject matter hereof.
Counterparts. This Agreement may be executed in two or more 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.
Successors and Assigns. Except as otherwise provided herein, all of the
terms and provisions of this Agreement shall be binding upon, shall inure to
the benefit of and shall be enforceable by the respective successors and
permitted assigns of the parties hereto. No Stockholder may assign any of
its rights hereunder to any Person other than a transferee that has complied
with the applicable requirements hereof in all respects. If any transferee
of any Stockholder shall acquire any shares of Common Stock, in any manner,
whether by operation of law or otherwise, such shares shall be held subject
to all of the terms of this Agreement, and by taking and holding such shares
such Person shall be entitled to receive the benefits of and be conclusively
deemed to have agreed to be bound by and to comply with all of the terms and
provisions of this Agreement.
Amendment and Modification; Waiver of Compliance; Termination.
(a) Amendments. This Agreement may be amended only by a written
instrument duly executed by the holders of at least 50% of the Series A
Preferred Stock and Common Stock, voting together; provided, however, that
any amendment to this Agreement that adversely affects the rights of Fund or
Archimedes without having a corresponding adverse effect on all other
Stockholders shall require the written consent of Fund.
(b) In the event of the amendment or modification of this Agreement in
accordance with its terms, the Stockholders shall cause the Board of
Directors of the Company to meet within 30 calendar days following such
amendment or modification or as soon thereafter as is practicable for the
purpose of adopting any amendment to the Certificate of Incorporation and
Bylaws of the Company that may be required as a result of such amendment or
modification to this Agreement, and, if required, proposing such amendments
to the Stockholders entitled to vote thereon.
(c) No Waivers. Except as otherwise provided in this Agreement, any
failure of any of the parties to comply with any obligation, covenant,
agreement or condition herein may be waived by the party entitled to the
benefits thereof only by a written instrument signed by the party granting
such waiver, but such waiver or failure to insist upon strict compliance
with such obligation, covenant, agreement or conditions shall not operate as
a waiver of, or estoppel with respect to, any subsequent or other failure.
(d) Termination.
(i) Termination as to a Stockholder. Any Stockholder who no longer owns
any Securities (otherwise than by reason of a transfer or transfers in
violation of this Agreement or a transfer or transfers to Related
Transferees) shall automatically and with no further action being required
by any party no longer be a party to this Agreement for any purpose.
(ii) Public Offering. This Agreement (except for Section 4.04
(Registration Rights), and Articles I and V to the extent they apply to
Section 4.04) shall terminate immediately prior to the consummation of a
Public Offering or to the time the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act.
Recapitalizations, Exchanges, Etc. Affecting Common Stock. The provisions
of this Agreement shall apply, to the full extent set forth herein with
respect to Common Stock covered hereby, to any and all shares of capital
stock of the Company which may be issued in respect of, in exchange for, or
in substitution of, Securities covered hereby, and shall be appropriately
adjusted for any stock dividends, splits, reverse splits, combinations,
recapitalizations and the like occurring after the date hereof. Prior to
consummating a Public Offering of Common Stock, the Company shall, if
necessary, (and each Stockholder agrees to vote to) reclassify the Company's
capital to accommodate such Public Offering.
Further Assurances. Each Stockholder agrees to vote its shares upon any
matter arising under this Agreement submitted to a vote of the Stockholders
in a manner so as to implement the terms of this Agreement and to execute
all such resolutions and other documents and to do all such other acts and
things as may be necessary or, in the Board's opinion, advisable to give
effect fully to the terms of this Agreement.
Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this Stockholders
Agreement as of this 18th day of February, 2000.
SILICON BANDWIDTH, INC.
By: ___________________________________
Name:
Title:
THE PANDA PROJECT, INC.
By: ___________________________________
Name:
Title:
VANTAGEPOINT VENTURE PARTNERS 1996, L.P.
By: VantagePoint Associates, L.L.C.,
Its General Partner
By: ___________________________________
Name:__________________________
Title: Managing Member
VANTAGEPOINT VENTURE PARTNERS, L.P.
By: ____________________________________
Name:
Title: Managing Member
ARCHIMEDES CAPITAL LLC
By: ____________________________________
Name:
Title:
MANAGEMENT STOCKHOLDERS
By: ____________________________________
Name:
Title:
By:_____________________________________
Name:
Title:
By: ____________________________________
Name:
Title:
By: ____________________________________
Name:
MANAGEMENT STOCKHOLDER COUNTERPART SIGNATURE PAGE
The undersigned, a holder of Common Stock of Silicon Bandwidth, Inc., hereby
executes this counterpart signature page to the foregoing Stockholders
Agreement, dated as of _____________, 1999, by and among Silicon Bandwidth,
Inc., The Panda Project, Inc., VantagePoint Venture Partners, L.P.,
VantagePoint Associates, L.L.C., Archimedes Capital LLC and the Management
Stockholders, as of the date set forth below, and agrees to be bound by all
of the terms and conditions of the Stockholders Agreement as a Management
Stockholder.
Date:
____________________________________ ________________________________
Name:
_________________________________
Name of Spouse if Joint Tenants:
Address:
STOCKHOLDER COUNTERPART SIGNATURE PAGE
The undersigned, a holder of Series A Preferred Stock or Common Stock
of Silicon Bandwidth, Inc., hereby executes this counterpart signature page
to the foregoing Stockholders Agreement, dated as of ______________, 1999,
by and among Silicon Bandwidth, Inc., The Panda Project, Inc., VantagePoint
Venture Partners, L.P., VantagePoint Associates, L.L.C., Archimedes Capital
LLC and the Management Stockholders, as of the date set forth below, and
agrees to be bound by all of the terms and conditions of the Stockholders
Agreement as a Stockholder.
Date:
____________________________________ ________________________________
Name:
_________________________________
Name of Spouse if Joint Tenants:
Address:
SCHEDULE 1
Management Stockholder
Number of shares granted subject
to options
EXHIBIT A
CERTIFICATE OF INCORPORATION
EXHIBIT B
ASSUMPTION AGREEMENT
ASSUMPTION AGREEMENT, dated as of ___________________________ (this
"Agreement"), by and between_____________________________ (the "Transferor")
and ____________________ (the "Transferee"). Capitalized terms not
otherwise defined herein are used herein as defined in the Stockholders
Agreement, dated as of __________ __, 1999, by and among Silicon Bandwidth,
Inc., The Panda Project, Inc., VantagePoint Venture Partners, L.P.,
VantagePoint Associates, L.L.C., Archimedes Capital LLC and the Management
Stockholders (as defined therein) (the "Stockholders Agreement").
WHEREAS, the Transferor is bound by the Stockholders Agreement;
WHEREAS, the Transferor desires to transfer Securities held by it and
subject to the Stockholders Agreement (the "Transfer Shares") to the
Transferee;
WHEREAS, pursuant to Section 3.02 of the Stockholders Agreement the
Transferee must assume all obligations of the Transferor under the
Stockholders Agreement prior to the completion of the transfer of the
Transfer Shares; and
WHEREAS, the Transferor [is/is a Related Transferee of] [Panda/a Management
Stockholder/Fund/Archimedes/Fund Investor];
NOW THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree for the benefit of the
Stockholders (as defined in the Stockholders Agreement) and the Company as
follows:
1. Assumption. The Transferee hereby agrees to assume all obligations
and receive all benefits of the Transferor under the Stockholders Agreement,
whether or not such obligations have arisen as of the date hereof.
2. Related Transferees. The Transferee and Transferor represent that
the Transferee [is/is not] a Related Transferee of the Transferor. If the
Transferee is such a Related Transferee, the Transferor acknowledges that it
will continue to be bound by the Stockholders Agreement, notwithstanding the
transfer of the Transfer Shares to the Transferee.
3. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions 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 materially
affected in any manner 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 to the end that the transactions
contemplated hereby are fulfilled to the greatest extent possible.
4. Entire Agreement. This Agreement and the Stockholders Agreement
constitute the entire agreement between the parties hereto with respect to
the subject matter hereof and supersede all prior agreements and
undertakings, both written and oral, between the parties hereto with respect
to the subject matter hereof.
5. Counterparts. This Agreement may be executed in two or more
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.
6. Injunctive Relief. The parties hereto acknowledge and agree that a
violation of any of the terms of this Agreement will cause the Stockholders
irreparable injury for which adequate remedy at law is not available.
Therefore, the parties hereto agree that each Stockholder shall be entitled
to an injunction, restraining order or other equitable relief from any court
of competent jurisdiction, restraining any party from committing any
violations of the provisions of this Agreement.
7. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation
of this Agreement.
8. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this Assumption Agreement
on this ______________ day of ___________________, ______.
[Name of Transferor]
By: ___________________________________
Name:
Title:
[Name of Transferee]
By: ____________________________________
Name:
Title:
<TABLE>
<S> <C>
[ARTICLE] 5
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] DEC-31-1999
[CASH] 180,388
[SECURITIES] 0
[RECEIVABLES] 74,652
[ALLOWANCES] (5,796)
[INVENTORY] 16,007
[CURRENT-ASSETS] 366,499
[PP&E] 442,401
[DEPRECIATION] 533,340
[TOTAL-ASSETS] 973,834
[CURRENT-LIABILITIES] 6,420,287
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 4,864,137
[COMMON] 296,986
[OTHER-SE] 0
[TOTAL-LIABILITY-AND-EQUITY] 973,834
[SALES] 487,683
[TOTAL-REVENUES] 1,337,683
[CGS] (279,619)
[TOTAL-COSTS] (9,083,178)
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] (327,902)
[INCOME-PRETAX] (8,019,299)
[INCOME-TAX] 0
[INCOME-CONTINUING] (8,019,299)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (8,019,299)
[EPS-BASIC] (.31)
[EPS-DILUTED] (.31)
</TABLE>
