As filed with the Securities and Exchange Commission on January 5, 2000
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
The Panda Project, Inc.
- ---------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- ---------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction
applies:
------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------
5) Total fee paid:
$200.00
------------------------------------------------------------
[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
1) Amount Previously Paid: _____________________________________
2) Form, Schedule or Registration Statement No.: _______________
3) Filing Party: _______________________________________________
4) Date filed: ________________________________________________
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
ANNUAL MEETING OF SHAREHOLDERS
February 10, 2000
----------------------
YOUR VOTE IS VERY IMPORTANT
----------------------
To the Shareholders of The Panda Project, Inc.
On behalf of the Board of Directors of The Panda Project, Inc.,
a Florida corporation ("Panda" or the "Company"), I cordially invite
you to attend an Annual Meeting of the shareholders of Panda, to be
held at 10:00 a.m. (Eastern time) on Wednesday, February 10, 2000, at
the Hilton Hotel, 100 Fairway Drive, Deerfield Beach, Florida 33441.
As previously announced, Panda has entered into an agreement (the
"Asset Purchase Agreement") to sell substantially all of its operating
assets to Silicon Bandwidth, Inc., a Delaware corporation ("SBI").
The terms of the proposed sale are described more fully in the
enclosed Proxy Statement, and a copy of the Asset Purchase Agreement,
as amended, is attached as Annex A to the Proxy Statement.
Panda entered into this Asset Purchase Agreement, and the Board
of Directors is recommending that Panda's shareholders approve the
proposed sale, because the Board is of the view that Panda will not be
able to generate sufficient revenues and resulting gross profits to
cover its fixed costs in order to continue its operations in the
future. The Board believes that this reason, coupled with Panda's
continued negative cash flow and the general decline of its financial
condition, suggest that the interests of Panda shareholders would be
better served if Panda pursues the sale of substantially all of its
operating assets to SBI. The sale of substantially all of Panda's
operating assets, if approved by the shareholders, will help Panda
minimize its negative cash flow and allow it to continue to exist as a
public "holding" corporation. If approved by the shareholders, the
sale will take place on a date mutually agreed upon by Panda and SBI,
but in no event later than February 24, 2000, unless extended by the
parties.
Panda will receive 10% of SBI's capital stock in exchange for
Panda's operating assets. As part of the closing conditions to the
Proposed Sale, SBI will assist Panda in eliminating certain
outstanding obligations. Panda's shareholders will not receive any
dividend or other form of payment or distribution as a result of the
completion of the sale of the operating assets to SBI. The ownership
of Panda's common stock by the shareholders will not be affected by
the sale, and Panda will continue to be subject to the reporting
requirements of the Securities Exchange Act of 1934. Panda expects
that its common stock will continue to trade on the OTC Bulletin
Board. However, Panda will not have any control over whether, or to
what extent, a trading market will exist following completion of the
sale to SBI.
If the proposed sale to SBI is not approved by Panda shareholders,
Panda anticipates that its negative cash flow will continue
indefinitely and that it will likely be unable to continue as a going
concern. If the sale to SBI is not approved, Helix has the right to
foreclose on the intellectual property and sell it through a private
or public sale, in which case it is unlikely that the Panda
shareholders would receive any value. As such, if the proposed sale
to SBI is not approved by Panda shareholders, Panda intends to try to
find a purchaser of its operating assets, but it is more likely that
the Company will be forced to file bankruptcy.
We cannot complete the sale to SBI without the approval of Panda's
shareholders. We have therefore scheduled an Annual Meeting of
Panda's shareholders to consider and vote upon the proposed sale of
Panda's operating assets to SBI. A majority of the issued and
outstanding shares of Panda's Common Stock must vote in favor of the
proposal for the sale to SBI to be completed.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED, AND RECOMMENDS
THAT YOU VOTE "FOR," THE PROPOSED SALE OF SUBSTANTIALLY ALL OF PANDA'S
OPERATING ASSETS TO SBI. In arriving at its recommendation, the Board
of Directors has given careful consideration to a number of factors
which are described in the enclosed Proxy Statement, including a
recommendation of a special committee of its board of directors that
the consideration SBI will deliver to Panda for Panda's operating
assets in the proposed transaction is in the best interest of Panda.
Panda is also seeking your vote to (1) elect a new director to
serve on Panda's Board of Directors, (2) amend its Articles of
Incorporation (the "Amendment to the Articles") to increase the number
of authorized shares of its common stock from 50,000,000 to
100,000,000 and (3) ratify the selection by Panda's Board of Directors
of Grant Thornton LLP as independent accountants for the current
fiscal year. This increase in the number of authorized but unissued
shares is necessary to fulfill Panda's obligations under certain
existing agreements.
Whether or not you plan to attend the Annual Meeting, please take
the time to vote by completing and mailing the enclosed proxy card to
us. Sending in your proxy will not prevent you from voting in person
at the Annual Meeting, but will assure that your vote is counted if
you are unable to attend the Annual Meeting. If you sign, date and
mail your proxy card to us without indicating how you wish to vote on
the proposed sale to SBI, your proxy will be counted as a vote in
favor of the adoption of the Asset Purchase Agreement and approval of
the proposed sale. If you fail to return your proxy card, the effect
will be the same as a vote against the adoption of the Asset Purchase
Agreement and against the approval of the proposed sale.
The enclosed Proxy Statement provides you with detailed information
about (1) the proposed sale of Panda's operating assets to SBI, (2)
Panda's plans following the completion of the sale and (3) the
Amendment to the Articles. We encourage you to read the entire Proxy
Statement, including the Annexes, and consider the information
carefully prior to casting your vote.
Stanford W. Crane, Jr.
President and Chief Executive Officer
PRELIMINARY COPY CONFIDENTIAL
FOR USE OF THE COMMISSION ONLY
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 10, 2000
The Panda Project, Inc. ("Panda") will hold an annual meeting of
its shareholders (the "Annual Meeting") on February 10, 2000, 10:00
a.m. Eastern time, at the Hilton Hotel, 100 Fairway Drive, Deerfield
Beach, Florida 33441, for the following purposes:
1. To consider and vote on a proposal (the "Proposed Sale") to
approve an Asset Purchase Agreement, dated as of July 19, 1999, as
amended (the "Asset Purchase Agreement"), between Panda and Silicon
Bandwidth, Inc., a Delaware corporation ("SBI"), and related
transactions for the sale of substantially all the operating assets of
Panda.
2. To consider and vote upon a proposal to amend Panda's
Articles of Incorporation (the "Amendment to the Articles") to
increase the authorized shares of its common stock, par value $.01 per
share (the "Panda Common Stock"), from 50,000,000 to 100,000,000.
3. To elect a director to serve on Panda's Board of Directors
until the 2002 Annual Meeting and until his successor is duly elected
and qualified.
4. To ratify the selection by the Board of Directors of Grant
Thornton LLP as independent accountants for the current fiscal year.
5. To transact such other business as may properly come before
the Annual Meeting.
Panda has fixed the close of business on January 10, 2000 as
the Record Date for the determination of shareholders entitled to vote
at the Annual Meeting or any adjournment thereof. A list of such
shareholders will be available for inspection by shareholders of
record during business hours at Panda's principal place of business in
Boca Raton, Florida for ten days prior to the date of the Annual
Meeting, and will also be available at the Annual Meeting.
Approval of the Proposed Sale requires the affirmative vote of a
majority of the outstanding shares of Panda Common Stock entitled to
vote at the Annual Meeting. Approval of the other proposals requires
that the number of votes cast in favor of these proposals at the
Annual Meeting exceed those votes cast against. Failure to return a
properly executed proxy card or to vote at the Annual Meeting will
have the same effect as a vote against the Proposed Sale.
The Board of Directors unanimously recommends that shareholders
vote to approve the Proposed Sale, which is described in detail in the
accompanying Proxy Statement, and the other proposals.
Please sign and promptly return the proxy card in the enclosed
envelope, whether or not you expect to attend the Panda Annual
Meeting.
By Order of the Board of Directors,
Melissa F. Crane
Secretary
Boca Raton, Florida
January 10, 2000
<PAGE>
TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING
STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 1
PANDA'S ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . 3
Proposal 1: Proposed Sale of Substantially
All of Panda's Assets . . . . . . . . . . . . . . . . . 3
VOTING SECURITIES OF PANDA. . . . . . . . . . . . . . . . . . . 3
Times and Places; Quorum; Votes Required
for Approval. . . . . . . . . . . . . . . . . . . . . . . 3
Intentions and Agreements to Vote. . . . . . . . . . . . . 3
No Dissenters' Rights. . . . . . . . . . . . . . . . . . . 5
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 5
Votes Required for Approval of Proposal 1 . . . . . . . . 6
THE PROPOSED SALE . . . . . . . . . . . . . . . . . . . . . . . 6
Panda. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SBI. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
VantagePoint Venture Partners. . . . . . . . . . . . . . . 7
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . 7
Holding Company Structure. . . . . . . . . . . . . . . . . 7
Background of the Proposed Sale. . . . . . . . . . . . . . 8
Panda's Reasons for the Proposed Sale;
Recommendation of the Board of Directors. . . . . . . . 9
Recommendation of the Special Committee. . . . . . . . . . 11
Absence of Financial Advisor . . . . . . . . . . . . . . . 13
Approval of the Panda Series A
Preferred Shareholders. . . . . . . . . . . . . . . . . 13
Interests of Certain Persons in the Proposed
Sale. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Transition Planning. . . . . . . . . . . . . . . . . . . . 13
Changes in Shareholder Rights after the
Proposed Sale . . . . . . . . . . . . . . . . . . . . . 14
Continued Operations of the Company. . . . . . . . . . . . 14
Accounting Treatment; Material Federal
Income Tax Consequences . . . . . . . . . . . . . . . . 14
Regulatory Approvals . . . . . . . . . . . . . . . . . . . 15
RISKS AND CONSIDERATIONS RELATED TO
THE PROPOSED SALE. . . . . . . . . . . . . . . . . . . . . . 15
Holding Company Structure. . . . . . . . . . . . . . . . . 15
Unregistered Stock; Absence of a Public
Trading Market . . . . . . . . . . . . . . . . . . . . 15
Absence of an Operating History. . . . . . . . . . . . . . 15
Absence of a Financial Advisor . . . . . . . . . . . . . . 16
No Dividends on SBI Common Stock . . . . . . . . . . . . . 16
Minority Interest; No Voting Power . . . . . . . . . . . . 16
Remaining Panda Assets Have Limited Value. . . . . . . . . 16
No Reporting Requirements. . . . . . . . . . . . . . . . . 16
THE ASSET PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . 16
Terms of the Asset Purchase Agreement . . . . . . . . . . 16
Operating Assets Being Sold and Liabilities
and Obligations Assumed . . . . . . . . . . . . . . . . 17
Consideration Price . . . . . . . . . . . . . . . . . . . 17
Closing . . . . . . . . . . . . . . . . . . . . . . . . . 18
Conditions to Closing . . . . . . . . . . . . . . . . . . 18
Representations and Warranties . . . . . . . . . . . . . 20
Covenants. . . . . . . . . . . . . . . . . . . . . . . . . 21
Stockholders Agreement . . . . . . . . . . . . . . . . . . 22
Indemnification. . . . . . . . . . . . . . . . . . . . . . 22
Termination and Waiver . . . . . . . . . . . . . . . . . . 23
UNAUDITED PRO FORMA
FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . 24
PROPOSAL 2: AMENDMENT TO
ARTICLES OF INCORPORATION TO
INCREASE AUTHORIZED SHARES. . . . . . . . . . . . . . . . . . 31
Votes Required for Approval of Proposal 2. . . . . . . . . 35
PROPOSAL 3: ELECTION OF DIRECTORS. . . . . . . . . . . . . . . 36
SUMMARY COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 42
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 47
Recent Sales of Unregistered Securities . . . . . . . . . 47
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . .50
MARKET FOR PANDA'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . 51
INFORMATION REGARDING PANDA . . . . . . . . . . . . . . . . . . 52
Business . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Properties. . . . . . . . . . . . . . . . . . .. . . . . . . 58
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 59
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . .. . . . 61
Change in Fiscal Year End . . . . . . . . . . . .. . . . 61
Results of Operations . . . . . . . . . . . . . .. . . . 61
Liquidity and Capital Resources . . . . . . . . .. . . . 64
Year 2000 Issues . . . . . . . . . . . . . . . . . . . . 66
Votes Required for Approval of Proposal 3 . . .. . . . . . 67
PROPOSAL 4: RATIFICATION OF
APPOINTMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . 68
Votes Required for Approval of Proposal 4 . . . . . . . . . . . 68
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
SHAREHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . .69
SHAREHOLDER LIST. . . . . . . . . . . . . . . . . . . . . . . . 69
WHERE YOU CAN FIND MORE
INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 69
FINANCIALS. . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
Annex A: Asset Purchase Agreement, as amended
Annex B: Text of Amendment to Panda's Articles of Incorporation
<PAGE>
Page 1
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements regarding Panda's future financial condition,
results of operations, cash flows, financing plans, business strategy,
projected costs and capital expenditures, operations after the
proposed sale of substantially all of Panda's operating assets and
words such as "anticipate," "estimate," "expect," "project," "intend,"
and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks,
uncertainties and assumptions. All of these forward-looking
statements are based on estimates and assumptions made by Panda's
management which, although believed by Panda's management to be
reasonable, are inherently uncertain. Stockholders are cautioned that
such forward-looking statements are not guarantees of future
performance or results and involve risks and uncertainties and that
actual results or developments may differ materially from the
forward-looking statements as a result of various considerations,
including the considerations described in this Proxy Statement.
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
----------------------
Proxy Statement
for Annual Meeting of Shareholders
to be held February 10, 2000
----------------------
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of The Panda
Project, Inc. ("Panda" or the "Company") for use at the Annual Meeting
of the Shareholders of Panda (the "Annual Meeting") to be held on
February 10, 2000, 10:00 a.m. Eastern time, at the Hilton Hotel, 100
Fairway Drive, Deerfield Beach, Florida 33441, and at any adjournment
or postponement thereof for the purposes stated in the attached Notice
of Annual Meeting of the Shareholders. This Proxy Statement, the
Notice of Annual Meeting of Shareholders and the accompanying form of
Proxy are first being mailed to shareholders on or about January 10,
2000. Panda also will mail with this Proxy Statement, its Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1998, its
Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1999,
and its Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1999.
The matters to be considered and voted upon at the Annual Meeting
will be:
1. A proposal (the "Proposed Sale") to approve an Asset Purchase
Agreement, dated as of July 19, 1999, as amended (the "Asset Purchase
Agreement"), between Panda and Silicon Bandwidth, Inc., a Delaware
corporation ("SBI"), and related transactions for the sale of
substantially all the operating assets of Panda.
2. A proposal to amend Panda's Articles of Incorporation (the
"Amendment to the Articles") to increase the authorized shares of its
common stock, par value $.01 per share (the "Panda Common Stock"),
from 50,000,000 to 100,000,000.
3. A proposal to elect a director to serve on Panda's Board of
Directors until the 2002 Annual Meeting and until his successor is
duly elected and qualified.
4. A proposal to ratify the selection by the Board of Directors
of Grant Thornton LLP as independent certified public accountants for
the current fiscal year.
5. Such other business as may properly come before the Annual
Meeting.
<PAGE>
Page 2
A copy of the Asset Purchase Agreement, as amended, is attached as
Annex A to this Proxy Statement.
The description of the proposals set forth above is intended only
as a summary and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement.
<PAGE>
Page 3
PANDA'S ANNUAL MEETING
PROPOSAL 1:
PROPOSED SALE OF SUBSTANTIALLY ALL OF PANDA'S ASSETS
----------------------------------------------------
VOTING SECURITIES OF PANDA
Times and Places; Quorum; Votes Required for Approval
The Annual Meeting will be held at the Hilton Hotel, 100 Fairway
Drive, Deerfield Beach, Florida 33441, on February 10, 2000, starting
at 10:00 a.m. Eastern time. The Board of Directors has fixed the
close of business on January 10, 2000, as the Panda Record Date.
Only holders of record of shares of Panda Common Stock on the Record
Date are entitled to notice of and to vote at the Annual Meeting. On
the Record Date, there were 29,698,425 shares of Panda Common Stock
outstanding and entitled to vote at the Panda Annual Meeting held by
294 shareholders of record.
Each holder of record, as of the Record Date, of Panda Common Stock
is entitled to cast one vote per share. The presence, in person or by
proxy, of the holders of a majority of the outstanding shares of Panda
Common Stock entitled to vote is necessary to constitute a quorum at
the Annual Meeting. The affirmative vote, in person or by proxy, of
the holders of a majority of the shares of Panda Common Stock
outstanding on the Record Date is required to approve and adopt the
Proposed Sale.
THE MEMBERS OF THE BOARD OF DIRECTORS HAVE UNANIMOUSLY APPROVED THE
PROPOSED SALE (SUBJECT TO SHAREHOLDER APPROVAL) AND RECOMMEND A VOTE
FOR THE ADOPTION AND APPROVAL OF THE PROPOSED SALE.
Intentions and Agreements to Vote
In connection with the Proposed Sale, a majority of shareholders,
who in the aggregate will own approximately 52% of Panda Common Stock
on the Record Date, have agreed pursuant to a settlement agreement
with Panda and a voting agreement (the "Voting Agreement") with SBI to
vote their shares of Panda Common Stock in favor of the Proposed Sale.
Shareholders who are a party to the Voting Agreement include GAM
Arbitrage Fund L.P., AGR Halifax Fund, Ltd., Leonardo L.P., Ramius
Fund, Ltd., Raphael L.P., Helix (PEI) Inc. and AG Super Fund L.P.
Listed below are the parties to the Voting Agreement and the number of
shares of Panda Common Stock they agreed to vote:
Shares to be
Received Upon
Total Conversion Total Number
Shares of the Series of Shares to
Shareholder Currently Held A Preferred Stock be Voted
- ----------- -------------- ----------------- ------------
GAM Arbitrage
Fund L.P. 0 601,719 601,719
AGR Halifax
Fund, Ltd. 1,366,619 11,682,842 13,049,461
Leonardo L.P. 911,077 6,492,420 7,403,497
Ramius
Fund, Ltd. 273,325 0 273,325
Raphael L.P. 182,217 900,472 1,082,689
Helix
(PEI) Inc. 1,000,000 0 1,000,000
AG Super
Fund L.P. 0 585,228 585,228
<PAGE>
Page 4
All of these entities are holders of Series A Preferred Stock
except for Helix (PEI) Inc., which is Panda's largest creditor.
Except for Helix (PEI) Inc., the number of shares to be voted by each
entity includes shares issuable upon conversion of the Series A
Preferred Stock into shares of Common Stock. Joseph A. Sarubbi also
agreed to vote his 2,100,000 shares in favor of the Proposed Sale
pursuant to the Amended Settlement Agreement (as defined herein). He
has delivered an irrevocable proxy to Panda voting in favor of the
Proposed Sale.
The Series A Preferred shareholders agreed to enter into the
Voting Agreement pursuant to the Exchange Agreement (as defined
herein) to induce SBI to consummate the Proposed Sale. Helix (PEI)
Inc. agreed to enter into the Voting Agreement to induce SBI to
consummate the Proposed Sale and to assume Panda's obligations to
Helix (PEI) Inc.
The Voting Agreement and the Amended Settlement Agreement provide
that Panda shareholders party thereto vote their shares of Panda
Common Stock in favor of the approval of the Proposed Sale and any
matter that could reasonably be expected to facilitate the Proposed
Sale and against approval of any proposal for any recapitalization,
merger, sale of assets or other business combination (other than the
Proposed Sale) between Panda and any person or entity other than SBI
(an "Opposing Proposal"). The Voting Agreement also provides that,
prior to the Record Date for the Panda Annual Meeting relating to the
Proposed Sale, holders of Share Equivalents will exercise or convert
such number of Share Equivalents, as the case may be, into capital
stock of Panda, pro rata in the amount determined by SBI to be
necessary to achieve approval of the Proposed Sale or rejection of an
Opposing Proposal, and vote such shares of Panda Common Stock as set
forth above. "Share Equivalents" are defined in the Voting Agreement
as any securities of Panda convertible into or exercisable for shares
of capital stock of Panda. The Voting Agreement also provides that
Panda shareholders will execute and deliver irrevocable proxies
appointing the board of directors of SBI as their sole and exclusive
proxies.
Joseph A. Sarubbi and the parties to the Voting Agreement
constitute a majority of the outstanding shares of Panda Common Stock
entitled to vote on the proposals that are the subject of this Proxy
Statement. Therefore, absent an extraordinary event, Panda believes
that approval of the proposals is assured.
In addition, the Voting Agreement provides that Panda will enter
into an agreement with Helix, a shareholder and holder of a security
interest in certain assets of Panda, to restructure the indebtedness
of Panda (the "Secured Debt") currently secured by Helix's security
interest in certain assets of Panda (the "Restructuring Agreement").
The Restructuring Agreement provides that (i) Helix will release its
security interest in all assets of Panda other than its intellectual
property assets and (ii) the terms of the Secured Debt will be
modified so that (A) the Secured Debt accrues interest after the
Closing at a rate of 6% per annum, calculated on a monthly basis, (B)
any interest accrued with respect to the Secured Debt prior to the
Closing is forgiven by Helix and (C) the Secured Debt will be subject
to (x) a principal payment obligation of $1,000,000 immediately after
the Closing and (y) principal and interest payments aggregating
$100,000 per month on each of the monthly anniversaries of the Closing
(and such lesser amount on the eleventh monthly anniversary of the
Closing as will satisfy all remaining principal and interest on the
Secured Debt).
Panda entered into the Exchange Agreement, dated May 12, 1999,
by and among Panda and the Panda Series A Preferred shareholders (the
"Exchange Agreement"). Pursuant to the Exchange Agreement, all
holders of Series A Preferred Stock agreed to exchange their Series A
Preferred Stock for shares of Panda Common Stock. In the Exchange
Agreement, Panda agreed to allow the conversion of certain shares of
Series A Preferred Stock into Panda Common Stock at a rate of $0.261
and to permit the sale of the Panda Common Stock. This conversion
rate was equal to the conversion rate under the terms of the Series A
Preferred Stock. Panda also agreed to issue penalty shares to the
holders of Series A Preferred Stock at the same exchange rate to
satisfy a covenant in the agreement with the holders requiring Panda
to pay the Holders an aggregate of $100,000 per month during such time
as Panda is not listed on a national securities exchange or NASDAQ.
The total amount of the penalty was $916,500. The holders of Series A
Preferred Stock agreed (i) to enter into a voting agreement to vote
their shares of Panda Common Stock in favor of the Proposed Sale and
(ii) not to sell certain amounts of their Panda Common Stock received
pursuant to the Exchange Agreement. Holders of the Series A Preferred
Stock also agreed to release Panda from all existing obligations to
them. No other agreements were entered into among Panda and the
Series A Preferred shareholders to induce them to exchange their
shares of Series A Preferred Stock and to vote for the Proposed Sale.
<PAGE>
Page 5
Since beginning discussions with SBI, Panda has issued 2,100,000
shares of Panda Common Stock to Joseph Sarubbi and 1,000,000 shares of
Panda Common Stock to Helix, all of which shares are subject to voting
agreements.
No Dissenters' Rights
Holders of Panda Common Stock are not entitled to dissenters'
rights in connection with the Proposed Sale.
Proxies
All shares of Panda Common Stock represented by properly
executed proxies received prior to or at the Annual Meeting, as the
case may be, and not revoked, will be voted in accordance with the
instructions indicated in such proxies. If no instructions are
indicated on a properly executed returned proxy, such proxies will be
voted FOR the approval of the Proposed Sale. A properly executed
proxy marked "ABSTAIN," although counted for purposes of determining
whether there is a quorum and for purposes of determining the
aggregate voting power and number of shares represented and entitled
to vote at the applicable Annual Meeting, will not be voted.
Accordingly, since the affirmative vote of a majority of outstanding
shares is required for approval of the Proposed Sale, a proxy marked
"ABSTAIN" will have the effect of a vote against such Proposed Sale.
Shares represented by "broker non-votes" (i.e., shares held by brokers
or nominees which are represented at a meeting but with respect to
which the broker or nominee is not empowered to vote on a particular
proposal) will be counted for purposes of determining whether there is
a quorum at the applicable Annual Meeting. Brokers and nominees are
precluded from exercising their voting discretion with respect to the
approval and adoption of the Proposed Sale and thus, absent specific
instructions from the beneficial owner of such shares, are not
empowered to vote such shares with respect to the approval and
adoption of such proposals. Therefore, since the affirmative vote of
a majority of the aggregate voting power is required for approval of
the Proposed Sale, a "broker non-vote" with respect to either proposal
will have the effect of a vote against the Proposed Sale.
The Board of Directors is not currently aware of any business to be
acted upon at the Annual Meeting other than as described herein. If,
however, other matters are properly brought before the Annual Meeting,
or any adjournments or postponements thereof, the persons appointed as
proxies will have discretion to vote or act thereon according to their
best judgment. Such adjournment may be for the purpose of soliciting
additional proxies. Shares represented by proxies voting against the
approval and adoption of the Proposed Sale will be voted against a
proposal to adjourn the respective Annual meeting for the purpose of
soliciting additional proxies. Panda does not currently intend to
seek an adjournment of its Meeting.
A shareholder may revoke his or her proxy at any time prior to its
use by delivering to the Secretary of Panda a signed notice of
revocation or a later-dated signed proxy or by attending the Annual
Meeting and voting in person. Attendance at the Annual Meeting will
not in itself constitute the revocation of a proxy.
It is the policy of Panda to keep confidential proxy cards, ballots
and voting tabulations that identify individual shareholders, except
where disclosure is mandated by law and in other limited
circumstances.
The cost of solicitation of proxies will be paid by Panda for Panda
proxies. In addition to solicitation by mail, arrangements will be
made with brokerage houses and other custodians, nominees and
fiduciaries to send proxy material to beneficial owners; and Panda
will, upon request, reimburse them for their reasonable expenses in so
doing. Panda has retained ADP to aid in the solicitation of proxies
and to verify certain records related to the solicitation at a fee of
$8,000 plus expenses. To the extent necessary in order to ensure
sufficient representation at its Annual Meeting, Panda may request by
telephone or telegram the return of proxy cards. The extent to which
this will be necessary depends entirely upon how promptly proxy cards
are returned. Shareholders are urged to send in their proxies without
delay.
<PAGE>
Page 6
Votes Required for Approval of Proposal 1
Approval of Proposal 1 requires the affirmative vote of a majority
of the outstanding shares of Panda Common Stock issued and outstanding
as of the Record Date.
THE PROPOSED SALE
Panda
Panda is a technology company engaged in the development,
manufacture and sale of Panda's proprietary semiconductor packaging
and interconnect devices (the "Technology Products"). Panda also has
been engaged in the design and manufacturing of modular workstations
and desk top computers ("Systems"). Due to financial constraints,
Panda discontinued all operations related to the Systems business in
December 1998. The features and design of the Technology Products,
many of which are protected by United States and foreign patents or
patent applications, are intended to address the need for greater
bandwidth in electronics products. Panda believes that its products
will satisfy the market's demand for increased bandwidth in computer,
telecommunications, automotive and other electronics industries by
enhancing the performance of new generations of high speed
semiconductors.
SBI
SBI was recently organized as a Delaware corporation for the
purpose of acquiring the intellectual property portfolio and certain
fixed assets related to the interconnect and semiconductor packaging
business of Panda. SBI will initially be capitalized with $6,000,000,
of which $1,000,000 will be paid to Helix upon closing of the
transaction. Within the first year of ongoing operations, SBI
anticipates the need for additional financing which it will seek from
the private capital markets. SBI intends to continue marketing,
manufacturing and selling the technology acquired from Panda.
Additionally, SBI intends to commercialize other related technologies
for the semiconductor packaging and interconnect markets.
SBI's strategy is to (i) continue the commercialization of the VSPA
and Compass V technology as well as continuing to design and produce
leading-edge custom packaging solutions; (ii) maintain advanced
manufacturing capabilities through partnerships with LG Cable &
Machinery as well as Possehl Hong Kong Machinery Ltd. and (iii)
leverage the scale and scope of the packaging and interconnect
capabilities to provide Integrated Interface Modules for silicon to
system applications.
After the acquisition, SBI will be controlled by VantagePoint
Venture Partners. The board of directors will initially have five
members including the chief executive officer of SBI, three
representatives of VantagePoint Venture Partners and one outside
director. The chief executive officer and the representatives of
VantagePoint Venture Partners will not receive any additional
compensation for serving on the board of directors. The independent
directors will have some level of compensation for service.
Principal elements of the Company's strategy are set forth below.
Similar forces drive future customer demand for the packaging and
interconnect products acquired by SBI. The electronics industry is
seeking greater "Bandwidth" to increase performance in a variety of
applications. Panda's VSPA and the new Cluster Grid Array address the
semiconductor market for high I/O with thermal requirements as well as
new emerging markets such as System on Chip, Monitor on Chip and
Integrated modules for the telecommunications, medical and computer
industries.
VSPA competes very effectively with the enhanced versions of the
BGA. A customer application that currently uses a BGA with a heatsink
for additional thermal dissipation is an ideal candidate for VSPA.
Using VSPA will reduce cost while improving thermal performance.
Target customers include Fabless companies designing all types of
Integrated Circuits ("IC") for the telecommunications, graphics
chips, and sensor markets. VSPA is also able to withstand a
tremendous amount of environmental stress including high temperature
and the potentially explosive automotive engine environment. The new
Cluster Grid Array ("CGA") addresses the high I/O market segment and
competes against very expensive LGA, BGA and CCGA. These problems of
these current packages, which include difficulties with the SMT
process and routing, open the door for a robust high density pluggable
chip scale package.
The interconnect technology includes the Compass V connector which
recently received Bellcore approval. The interconnect has been
designed for use in backplane applications specifically for the
telecommunications industry.
Page 7
Other technologies developed but never commercialized include
Welltech, a routing technology for printed circuit boards to increase
the amount of traces thereupon without degradation of signal
integrity. As the industry moves to higher I/O, then a new routing
technology will be required. Welltech has never been introduced.
SBI believes that partnering with large companies for high volume
manufacturing will be a key factor in future success and in attracting
and retaining customers. SBI will produce all prototype and
preproduction orders using the acquired VSPA Flex machines. SBI will
maintain Panda's current suppliers in order to facilitate the
transition. SBI believes that there will be no interruption of
production to current customers.
SBI believes that by bringing new package designs to market early,
its designs are more likely to enjoy a competitive advantage, which in
turn will allow the Company to obtain higher margins. SBI also seeks
to capture substantial market share and to spur the industry-wide
adoption of its integrated interface solutions in specific market
areas. SBI believes these modules types will comprise some of the
highest growth and more profitable segments of the interconnect and
packaging market in coming years.
VantagePoint Venture Partners
VantagePoint Venture Partners ("Vantage" or "VantagePoint") manages
three private venture capital funds with more than $800 million. The
firm offers a unique blend of venture capital, investment banking,
operations, legal, sales, marketing and advertising experience,
combined with deep expertise in data networking, next-generation
communications services, e-commerce and the Internet.
Use of Proceeds
Panda intends to hold SBI common stock received in the Proposed
Sale for investment purposes. Panda shareholders will not receive any
dividend or other form of payment or distribution as a result of the
completion of the sale of Panda's Assets as defined in the Asset
Purchase Agreement (the "Operating Assets") to SBI. In the event, if
ever, that SBI completes an initial public offering or is acquired,
the Board of Directors intends to dissolve the Company and distribute
to the Panda shareholders either SBI common stock or the proceeds
received by Panda if SBI is acquired. Panda has agreed not to
distribute the SBI common stock to its shareholders so long as SBI
remains a private company. The ownership of Panda's Common Stock by
the Panda shareholders will not be affected by the Proposed Sale, and
Panda will continue to be subject to the reporting requirements of the
Securities Exchange Act of 1934. Panda expects that Panda Common
Stock will continue to trade on the OTC Bulletin Board. However,
Panda will not have any control over whether, or to what extent, a
trading market will exist following completion of the Proposed Sale.
Holding Company Structure
If the Proposed Sale is approved and consummated, Panda will
cease conducting operations and become a holding company, with its
sole significant asset consisting of a 10% equity interest in SBI's
common stock subject to possible future dilution. Panda will not have
a direct ownership interest in any assets of SBI and will solely be
entitled to those rights that it may have as a shareholder of SBI
under Delaware law. In addition, Panda's right, and the right of
Panda's creditors, to participate in any distribution of the assets of
SBI upon SBI's liquidation or reorganization or otherwise, will
necessarily be subject to the prior claims of creditors of SBI, except
to the extent that a bankruptcy court recognizes Panda's claims as a
creditor of SBI.
<PAGE>
Page 8
If SBI is successful in exploiting the intellectual property it
is acquiring from Panda, SBI expects to have a public offering of its
common stock or be acquired. At that time, Panda expects to liquidate
and distribute the SBI shares or the proceeds received by SBI
stockholders in the acquisition, pro rata to Panda's shareholders.
However, there can be no assurance that SBI will be able to exploit
the intellectual property, whether SBI can effect a public offering or
be acquired, or how long it may be until either of them occurs, if
ever.
The Investment Company Act of 1940 ( the"1940 Act") provides that an
investment company cannot engage in various business activities unless it is
registered under the Act or unless it is incidental to its dissolution. Panda
does not believe the intent of the 1940 Act was to apply to circumstances like
the proposed structure of Panda after closing of the transaction; that is, Panda
holding the SBI shares until such time as it dissolves and distributes the
shares to its shareholders. As a condition of the transaction, Panda has agreed
with SBI not to distribute the SBI shares until SBI's public offering or sale.
Panda's circumstances are similar to those described in LDX Group, Inc. (no
action letter available May 4, 1990). In LDX, the Commission confirmed that it
would not recommend an enforcement action if LDX failed to register under the
1940 Act. By court order, LDX was prohibited from distributing cash and a
minority interest in another company for two years. At that time, LDX had no
operating business. If the transaction with SBI closes, Panda proposes to seek
a no action letter from the Commission. In the event the Commission is unable
to grant the requested no action position, Panda would register under the 1940
Act as an investment company.
In order to dissolve at some undetermined future date, Panda will be obligated
to obtain approval of its shareholders and will conduct another proxy
solicitation at that time. At that time, Panda will be obligated to file
Schedule 13E-3 with the Commission.
Background of the Proposed Sale
Since 1996, Panda has experienced significant operating losses
in attempts to develop its Technology Products and Systems business.
Panda has lacked additional capital funding for its operations and the
Board of Directors believes Panda has exhausted all resources for such
financing. The financing Panda has received has been dilutive and has
had a negative effect on the price of Panda Common Stock. Other non-
operational events also had a significant effect on Panda's
operations. In December 1997, Mr. Webster, founder of Helix, passed
away. His death changed Helix's ability to continue any future long-
term financial participation in Panda. Helix, as an entity, is
liquidating its investment portfolio and anticipates being complete by
December 2000. In August 1998, Panda received a notice from the
National Association of Securities Dealers, Inc. regarding the
delisting of Panda Common Stock from the Nasdaq National Market. In
September 1998, Joseph Sarubbi obtained a judgment against Panda in
the amount of $1,227,041.
In September 1998, the Board of Directors determined that Panda
would not be able to generate sufficient revenues and resulting gross
profits to cover its fixed costs in order to continue its operations
in the future. The Board of Directors believed the factors mentioned
above, coupled with Panda's continued negative cash flow and the
general decline of its financial condition, suggested that the
interests of Panda's shareholders would be better served if Panda
pursued the sale of substantially all of its Operating Assets.
Panda's management contacted over 35 companies and venture
capital firms between March 1997 and May 1999 regarding their interest
in providing capital to Panda, acquiring Panda or acquiring Panda's
assets. None of the parties approached expressed a serious interest
in such a transaction except for VantagePoint Venture Partners.
Archimedes Capital LLC ("Archimedes"), an entity controlled by Matthew
A. Ocko, a partner of Vantage, entered into a consulting arrangement
with Panda four months prior to discussions between Vantage and Panda
for the sale of Panda's assets. Mr. Ocko ceased consulting to Panda
once discussions between Panda and Vantage commenced. In February
1999, Vantage indicated it would be willing to consider an acquisition
of Panda, but only if the transaction was structured as an asset
acquisition in which Vantage or an entity founded by Vantage would
assume only certain liabilities of Panda. In February 1999, Panda
defaulted on certain loans from Helix (PEI) Inc. ("Helix"). Helix
possessed a security interest in all of the intellectual property
assets of Panda. Helix, under the loan documents, has the right to
foreclose on the intellectual property and sell such property through
a private or public sale. It is unlikely under this scenario that
Panda shareholders would receive any value. Without the intellectual
property, the fixed assets have little or no value except as scrap.
The VSPA flex machines cannot be used without access to Panda's
intellectual property. Helix communicated to Panda that, in order to
avoid an "Event of Default" under the parties' loan agreement and
resulting foreclosure on Panda's intellectual property assets, either
(i) the Helix loans would need to be repaid in full or (ii) the
capital structure of Panda would need to be restructured in order to
modify the rights of Panda's preferred shareholders. Helix also
requested 10% of the equity of Panda with protection for antidilution.
In light of these developments, the Board of Directors, in a
special meeting held on April 23, 1999, decided to take the course of
the strategy it had originally discussed in its February 1999 meeting
by selling Panda's Operating Assets to SBI, discontinuing Panda's
business operations, and continuing the existence of Panda as a public
"holding" corporation whose principal asset would be the ownership of
its interest in SBI. At the special meeting, the Board of Directors
approved the execution and delivery of a letter of intent with SBI for
the sale of substantially all of Panda's Operating Assets to SBI. The
Board of Directors opted for the Proposed Sale to Vantage because (1)
it believed it was optimizing the return on the value of Panda's
assets, (2) Vantage agreed to assume a significant amount of Panda's
liabilities and (3) the Board of Directors had confidence in Vantage's
ability to conclude the transaction in a timely manner. To determine
whether Panda was optimizing the return on its assets, the Board of
Directors reviewed the total consideration to be received from SBI in
comparison to all other viable offers previously received for Panda
and its Operating Assets.
<PAGE>
Page 9
Panda and Vantage commenced preliminary discussions concerning
the Proposed Sale in February 1999. Between February and May 1999,
Vantage and Panda engaged in significant negotiations related to the
sale of Operating Assets. There were several financing alternatives
contemplated with the intentions to maximize the return for the
Company's common shareholders and restructure the Helix loans. It was
concluded that the likely liquidation value of the Company's
intellectual property if sold through the method permitted under the
Helix loan documents would yield a lower value than if the
intellectual property was sold in conjunction with certain fixed
assets to manufacture the product as well. It was determined that the
Company had payables in excess of $1,000,000, loans to Helix in the
amount of $2,000,000 and other various on going obligations. The
Company had a negative book value. If the Company were liquidated,
the shareholders would receive nothing for their shares. There have
been studies performed on liquidation values of business assets such
as one by Hite, Owers & Rogers. It was concluded that the sale value
was approximately 50% of the market value of the assets. The Hite,
Owens & Rogers study was not related to, or an evaluation of, Panda's
assets, but is just used as a general reference for the kind of value
Panda might receive if it was forced to liquidate all of its assets in
lieu of selling certain of them to VantagePoint. The 10% offer to
Panda was determined by Vantage Point as a reasonable and fair premium
to pay over the Company's current book value for the intellectual
property and certain fixed assets. On May 14, 1999, Panda announced
it had entered into a letter of intent with SBI with respect to the
sale of substantially all of its operating assets. During the months
of May and June 1999, the parties exchanged drafts of the Asset
Purchase Agreement and negotiated the remaining terms of the
transaction. During the period, Panda furnished Vantage with
requested due diligence materials. On July 15, 1999, the Board of
Directors, which was comprised of Stanford W. Crane, Jr. and William
E. Ahearn, approved the Asset Purchase Agreement. The Asset Purchase
Agreement was executed by SBI and Panda on July 19, 1999.
Other than as discussed above with respect to the negotiations
regarding the Asset Purchase Agreement and related agreements, the
only other material contracts arrangement, understanding,
relationship, negotiation or transaction between SBI and Panda in the
last two fiscal years or in 1999 has been the "bridge" loans extended
by SBI to Panda. On October 1, 1999, August 17, 1999, July 15, 1999
and June 11, 1999, Panda entered into agreements with SBI to borrow
$300,000, $325,000, $325,000 and $300,000, respectively. In
connection with these loans, Panda has granted to SBI a security
interest in substantially all of the assets of the Company pursuant to
a security agreement. The loans will bear interest at a rate of 6%
per annum and are due and payable on February 24, 2000. Panda and SBI
have engaged in discussions regarding the forgiveness of loans made by
SBI to Panda. In exchange for the forgiveness by SBI of the loans,
Panda would agree to reduce the capitalization requirements of SBI by
the amount of the loans forgiven.
Panda's Reasons for the Proposed Sale; Recommendation of the Board of
Directors
THE BOARD OF DIRECTORS OF PANDA HAS UNANIMOUSLY APPROVED THE
PROPOSED SALE AND RECOMMENDS APPROVAL OF THE PROPOSED SALE BY PANDA
SHAREHOLDERS.
As discussed above under "Background of the Proposed Sale," since
1996, Panda has had negative cash flow and a consistent decline in its
financial condition. Panda also has had extreme difficulty in
securing additional financing to fund operations. Panda has been
forced to enter into several complex and dilutive financings in order
to continue operations. These financings have adversely affected
Panda's stock price.
<PAGE>
Page 10
In response to these critical problems affecting Panda's business
operations, the Board of Directors had instructed Panda's management
to develop and adopt a business strategy which would continue Panda's
existing business operations while simultaneously (i) seeking to
minimize its expenses and (ii) considering and pursuing all potential
merger, acquisition, sales, joint-venture and other combination
options. Panda's management implemented this strategy and sought out
appropriate potential merger and acquisition candidates.
Other interested parties included two parties from Europe and one
party from the United States. All parties which expressed interest,
however, were never able to access any substantial capital. The
United States interest came from an individual who could not even
produce approximately $200,000 committed in a prior transaction. SBI
was the only legitimate alternative to provide both capital and a
vehicle for Panda shareholders to obtain a potential return on their
investment.
As described above under "Background of the Proposed Sale," the
decision of Panda's Board of Directors to approve the Proposed Sale
and recommend that Panda shareholders vote in favor of the Proposed
Sale followed many months of analyzing Panda's future prospects,
discussing the advantages and disadvantages of merging or disposing of
Panda's assets and exploring sale alternatives. As of February 15,
1999, the Company was in default of its loan agreement with Helix,
although no notice of default was delivered to Panda by Helix. The
Company was unable to repay the principal due in the amount of
$2,000,000 and Helix had the right to foreclose on the intellectual
property. If Helix had foreclosed on the intellectual property of the
Company and sold it to a third party, the value of the Company's other
assets would be severely diminished. As of March 31, 1999, the
Company had assets of $2,608,219 and current liabilities of
$4,593,208. As of March 31, 1999, the deficit was $1,984,989. The
Company asked Helix not to foreclose and allow it additional time to
identify other sources of capital to repay the loan. Due to the
complexity of the Company's capital structure, including the Helix
loans and the Series A Preferred Stock, the Company was faced with few
alternatives. The Board calculated that the Panda shareholders would
receive in the transaction (i) a 10% stake in SBI valued at $600,000,
(ii) the ability to assign the $2,000,000 note and interest on the
note of approximately $183,000 and (iii) $500,000 for payable and
other accrued expenses extended to the Company. The $600,000
valuation of the 10% stake in SBI is based on SBI's $6 million initial
capitalization. The value of the funds being received by the Panda
shareholders totalled $3,283,000 before including any of the advanced
funds for continuing operations. When SBI expressed interest in
acquiring substantially all of Panda's Operating Assets, the Board
considered whether or not the interests of the Panda shareholders
would be better served if Panda's Operating Assets would be retained
and (i) Panda would instead be dissolved, or (ii) Panda would continue
its business operations. If Panda were to be dissolved, Helix had the
ability to sell Panda's intellectual property assets in a private sale
within five days of the notice of dissolution. The Board concluded
that Panda's prospects for future success have continued to diminish
because Panda has not been able to achieve a self-sustaining level of
revenues. The Board determined that Panda's failure to generate
sufficient revenues to warrant its operations in the future, coupled
with Panda's continued negative cash flow and the general decline of
its financial condition, suggest that the interests of the Panda
shareholders would be better served if Panda did not continue its
business operations. In making its recommendation of the Proposed
Sale to Panda's shareholders, the Board considered a number of
factors, including those summarized below:
- the likelihood of Panda achieving sustained profitability from
its current and planned operations in view of the limited financial
resources available to it;
- the terms of the Asset Purchase Agreement;
- the potential courses of action available to Helix due to
Panda's default under the loan;
- the fact that no firm offers have been received by Panda
involving cash consideration, although various indications of interest
have been expressed by other potential buyers; and
<PAGE>
Page 11
- the recommendation of William E. Ahearn, independent director,
stating that, subject to the matters and limitations set forth
therein, the consideration to be received by Panda in the Proposed
Sale is in the best interests of Panda.
The positive factors of the SBI transaction were that the capital
available from SBI's venture backers would allow Helix to be paid off,
and the shareholders in Panda would have an opportunity to have
ownership in a company with adequate resources to potentially show a
return to the investors. The negative factors were the lack of
liquidity for this ownership stake and the relatively low ownership
position of Panda in the new company. After weighing these factors,
the SBI transaction seemed a far better alternative to liquidation to
satisfy the Helix debt.
The main reason the Board of Directors believed that SBI could
succeed with the assets of Panda when Panda could not was that SBI is
funded by a large venture capitalist, VantagePoint Venture Partners,
which gives them access to substantial capital needed to grow the
business. Additionally, VantagePoint Venture Partners has extensive
contacts through its limited partners, and other investments, to
assist in commercializing the acquired Panda technologies in the
target marketplace.
Based on these factors, the Board of Directors concluded that the
sale of substantially all of Panda's Operating Assets to SBI would
help minimize these adverse financial conditions and would therefore
serve the interests of the Panda shareholders. The Board of Directors
believes this transaction is fair and in the best interests of all the
Panda shareholders.
If the Proposed Sale is not approved by Panda shareholders,
Panda has insufficient working capital to operate its business and
will be unable to continue as a going concern. Currently, Panda is
relying upon capital borrowed from SBI to continue operations. As
such, if the Proposed Sale is not approved by Panda shareholders,
Panda intends to continue its search for another purchaser of its
Operating Assets. The approximate value of the operating assets
assumes that the intellectual property and the fixed assets are not
segregated. The property and equipment was valued on the balance
sheet at $1,171,853 as of the quarter ending September 30, 1999.
However, the value of the property and equipment would be
substantially less, with an approximate salvage value of $150,000, if
the intellectual property was sold separately. Most of the equipment
related to VPSA would not be usable by a third party without a license
to the intellectual property. If the transaction does not close with
SBI, Helix has retained its rights to foreclose on the intellectual
property.
Recommendation of the Special Committee
At a meeting of the Board of Directors on February 25, 1999, the
Board of Directors established a special committee for reviewing and
negotiating the proposal by Vantage to purchase the Operating Assets.
Board members Claud L. Gingrich and Rao R. Tummala were named as the
members of the special committee. On March 18, 1999, Mr. Gingrich and
Dr. Tummala resigned as members of the special committee and the Board
of Directors. Neither Mr. Gingrich nor Dr. Tummala believed he
possessed (i) the expertise to examine the Proposed Sale or (ii) the
time to thoroughly review the Proposed Sale. Dr. Tummala is an
academician who viewed his technical expertise as of little relevance
to the then current situation. Both directors viewed William E.
Ahearn, a former officer of Panda, as much more experienced in matters
of this type because he had experience with nineteen acquisitions
while at AMP Incorporated and was working with another small company
on a capital/sale issue early in 1999. Mr. Gingrich and Dr. Tummala
then decided to elect Mr. Ahearn to the Board and have him conduct the
activities of the special committee. At a Board of Directors meeting
on May 18, 1999, Mr. Gingrich and Dr. Tummala resigned from the Board
of Directors.
Mr. Ahearn was elected as a member of the Board of Directors and
appointed to review and negotiate the Vantage proposal. Mr. Ahearn
was a former IBM executive, MIT Media Scholar, AMP Incorporated
executive instrumental in nineteen acquisitions, as well as a former
Vice President at the Company. Mr. Ahearn was familiar with the
Company's products and business challenges and therefore, was the most
qualified person to handle the negotiations with SBI.
<PAGE>
Page 12
Mr. Ahearn also had discussions with European investment advisor
Sven Josting of Teamwork related to potential investment by European
institutions. Nothing substantive, however, came from those
discussions. Additionally, Mr. Ahearn had extensive discussions with
ART Computer of France, and their representatives related to both
licensing the Company's systems technology and investment in, or
purchase of, the Company. Upon reviewing the financial capability of
ART, the Company believed ART would be unable to produce even the
initial $250,000 payment for the license to the Systems business. Mr.
Ahearn then decided the proposal of VantagePoint Venture Partners was
the only viable option for the Company.
Mr. Ahearn concluded that the Proposed Sale was in the best
interest of Panda and its shareholders. Mr. Ahearn recommended to the
Board of Directors that Panda enter into the Proposed Sale. Mr.
Ahearn based his recommendation on a number of factors affecting
Panda. Panda's poor financial condition and Panda's inability to
raise additional capital to fund its operations were the primary
factors in his recommendation. Panda has sought a purchaser for its
assets for a considerable period of time. In determining a fair value
for the assets, Mr. Ahearn evaluated bids for remaining inventory,
current market prices for used equipment in the machine shop, and
liquidation value for the used furniture and fixtures. He also
evaluated the ability of Panda to restructure its outstanding loans
with Helix to obtain greater future value for the intellectual
property. Mr. Ahearn valued the 10% interest in SBI at $600,000.
This value is based on SBI's $6 million initial capitalization. Panda
also would assign the $2,000,000 note and interest of approximately
$183,000 of Helix (PEI) Inc. to SBI and receive $500,000 from SBI for
payables and other expenses. Mr. Ahearn valued the total
consideration to be received in the Proposed Sale by Panda to be
$3,283,000.
In arriving at his recommendation, Mr. Ahearn, among other things,
(i) reviewed drafts of the Letter of Intent, dated March 17, 1999 and
thereafter, by and between Panda and SBI; (ii) reviewed the Annual
Reports to shareholders and Forms 10-K for the years 1997 and 1998,
and the Form 10-Q for March 31, 1999, which were provided to Mr.
Ahearn by Panda; (iii) discussed the future prospects, including
financing needs of Panda, with the management of Panda and its
creditors; (iv) reviewed correspondence between Panda and certain
financial institutions, investment banking firms and venture capital
groups regarding the sale of Panda; (v) had discussions with Vantage
and other potential purchasers of Panda's Operating Assets; (vi) had
discussions with Helix and Panda's preferred shareholders regarding
the financial situation of Panda; (vii) reviewed the asset listing
provided to Mr. Ahearn by Panda; and (viii) performed such other
analyses and reviews as he deemed necessary and appropriate.
In preparing his recommendation, Mr. Ahearn relied on the accuracy
and completeness of all information that was publicly available,
supplied or communicated to him by or on behalf of Panda, and Mr.
Ahearn has not assumed any responsibility to independently verify the
same. Mr. Ahearn assumed that the financial forecasts provided to him
were reasonably prepared on bases reflecting the best currently
available estimates and good faith judgments of the management of
Panda as to the future performance of Panda.
Mr. Ahearn reviewed the asset listing of Panda to determine the
approximate purchase value of the assets. Mr. Ahearn determined that
the assets being sold included all the operating assets of Panda. In
his analysis, Mr. Ahearn has assumed that the highest and best use of
the assets is in their continued use in a business enterprise.
In connection with Mr. Ahearn's time to analyze and evaluate the
Proposed Sale as well as assist in the negotiations with Helix and the
Series A Preferred shareholders, Mr. Ahearn was paid approximately
$10,500 including out-of-pocket expenses. Mr. Ahearn retained outside
non-affiliated legal counsel to assist him in the required procedures
to make an independent recommendation. Panda paid his legal fees of
$10,000 related to his services. The Company does not expect any
additional expenses related to Mr. Ahearn's services. No portion of
Mr. Ahearn's fee is contingent upon the successful completion of the
Proposed Sale. In addition, Panda has agreed to indemnify Mr. Ahearn
and his agents against certain liabilities incurred in connection with
their services, including liabilities under federal securities laws.
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Absence of Financial Advisor
The Board of Directors did not, and did not consider it
advisable to, engage an independent financial advisor to render a
fairness opinion with respect to the Proposed Sale. The Asset
Purchase Agreement was negotiated at arm's length between Panda and
SBI. Given Panda's limited resources, the Board of Directors did not
believe that it was in the best interest of the Panda shareholders to
incur the cost of a fairness opinion. In addition, the Board of
Directors believed that other factors to be reviewed, such as the
value of the assets, the need for additional capital, the inability to
attract new personnel and the extent of existing liabilities, were
within the competence of the Board of Directors. The absence of a
financial advisor forces Panda shareholders to rely solely on the
recommendation of Mr. Ahearn and the Board of Directors. The lack of
review by an independent third party does create the risk that the
review of the Proposed Sale by Mr. Ahearn and the Board of Directors
may not consider all relevant factors that a third party with
extensive expertise may consider.
Approval of the Panda Series A Preferred Shareholders
Prior to any transfer of substantially all of the assets of Panda
to another entity, Panda must receive the written approval of the
holders of 66-2/3% of the Panda Series A Preferred Stock holders
, if any remain outstanding. However all of the holders of the Series A
Preferred Stock have agreed to convert their shares to common stock prior to the
record date for the meeting. Consequently, it is expected that no approval of
the Preferred Stock will be required.
Interests of Certain Persons in the Proposed Sale
In early September, SBI engaged in discussions with Stanford W.
Crane, Jr., Panda's Chief Executive Officer, and Melissa F. Crane,
Panda's acting Chief Financing Officer, regarding potential employment
opportunities for these individuals with SBI. If the Proposed Sale is
completed, these individuals may become employees of or consultants to
SBI and may therefore receive compensation for their services to SBI.
In particular, during the negotiations, SBI discussed with Stanford
Crane the opportunity to become Chief Technical Officer of SBI.
Although the specific terms and conditions of his employment as Chief
Technical Officer have not been determined, SBI did say that Mr.
Crane's salary would be commensurate with industry standards. No
other specific employment terms or conditions have been offered by
SBI. During the negotiations with SBI, Mr. Ahearn received no
information about the terms of any potential employment or consulting
agreements between these individuals and SBI. SBI intends to hire
seven to ten employees from Panda's current workforce, and no
contracts have been executed or agreed to for their employment.
During 1998, Panda entered into a consulting agreement with
Archimedes whereby Archimedes would provide assistance to Panda in
connection with seeking a corporate partnering transaction or a sale
of Panda. Mr. Ocko became a partner of VantagePoint four months after
such agreement was signed. In connection with that agreement, Panda
granted to Archimedes a warrant convertible into 2% of Panda capital
stock upon the completion of a successful transaction. SBI has agreed
that upon completion of the transactions set forth herein, Archimedes
will receive 2% of SBI's preferred stock in exchange for this warrant
(the "Archimedes Exchange").
Pursuant to the Asset Purchase Agreement, 20% of SBI capital stock
will be reserved for issuance to SBI's employees, officers and
directors upon the exercise of employee stock options. SBI has not
determined (i) which employees, officers or directors of SBI,
including any current employees of Panda that become employees of SBI,
will receive this SBI capital stock or (ii) the amount they will
receive.
A license agreement between Stanford W. Crane, Jr., the President
and Chief Executive Officer of Panda, and Panda (the "Crane-Panda
License") is being transferred to SBI. Any royalties received from
SBI by Mr. Crane under the Crane-Panda License would be at the same
rate at which he currently receives royalties.
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Page 14
Transition Planning
Melissa F. Crane, Acting Chief Financial Officer of Panda, and Alan
Salzman, a partner of VantagePoint, respectively, will be jointly
responsible for coordinating all aspects of transition planning and
implementation relating to the Proposed Sale and the other
transactions contemplated by the Asset Purchase Agreement. Until the
consummation of the Proposed Sale, Ms. Crane and Mr. Salzman jointly
will (i) examine various alternatives regarding the manner in which to
best organize and manage the businesses of SBI and Panda after the
consummation of the Proposed Sale and (ii) coordinate policies and
strategies with respect to regulatory authorities and bodies, in all
cases subject to applicable law.
Changes in Shareholder Rights after the Proposed Sale
Following the completion of the Proposed Sale, Panda's shareholders
will retain their same equity interests in Panda. The completion of
the Proposed Sale will not result in any changes in the rights of
Panda's shareholders. As discussed above, Panda does not intend to
distribute any of the SBI common stock from the sale to Panda
shareholders through a special dividend or similar device.
Continued Operations of the Company
After the consummation of the Proposed Sale, Panda expects to
have the same directors. Director William E. Ahearn has indicated he
will serve as Panda's President, and Susana Van Arsdale will serve as
Panda's Controller. Ms. Van Arsdale has worked for Panda since 1995
as the Accounting Manager and became Panda's Controller in January
1999. Ms. Van Arsdale is a CPA and was previously employed by
PricewaterhouseCoopers L.L.C.
Panda's financial obligations after the Proposed Sale will be
comprised of accounts payable of approximately $883,000. Of this
amount, approximately $34,000 owed to L.G. Cable will be deducted from
the $100,000 licensing fee pursuant to an agreement with L.G. Cable
and $723,000 related to professional fees is in the process of being
negotiated and settled for less than the amount owed. Panda owes
approximately $461,000 in liquidated damages to purchasers of Panda
Common Stock in the August 1998 Private Placement, which Panda is
negotiating to pay off with 4,500,000 newly authorized shares of Panda
Common Stock. In addition, approximately $162,000 is in dispute
between Panda and various vendors for services which did not meet
specifications or parameters in accordance with purchase orders. The
expense of maintaining Exchange Act requirements is expected to be
approximately $200,000 in the first year and approximately $100,000 in
the subsequent year.
Panda expects to fulfill its obligations to creditors and pay
its expenses related to Exchange Act requirements through the sale of
remaining assets and the use of returned security deposits on existing
leases. The assets remaining after the sale will be systems inventory
assets which were reserved as of December 31,1998. The Company
expects to recover approximately $60,000 of security deposits paid on
leases. In addition, $80,000 related to a letter of credit as
security on a terminated lease agreement will be refunded if no event
of default occurs by the new tenant, $40,000 of which will be released
in July 2000 and the remaining $40,000 of which will be released in
July 2002.
Accounting Treatment; Material Federal Income Tax Consequences
The Proposed Sale will be accounted for as a sale, and Panda will
recognize gain or loss on the sale of its Operating Assets to the
extent the portion of the purchase price allocated to such Operating
Assets exceeds or is less than Panda's basis therein. For federal
income tax purposes, when a trade or business is sold, each asset is
treated as sold separately in determining the seller's income, gain or
loss. The purchase price is allocated among the assets sold using a
residual value method in the case of a sale of assets to which
goodwill could be attached. The characterization of income or loss on
property used in a trade or business is generally governed by Section
1231 of the Internal Revenue Code. If the Section 1231 gains exceed
the losses, each gain or loss is a long term capital gain or loss
derived from the sale of a capital asset to the extent the asset has
been held for twelve months or more. If the losses exceed the gains,
all gains and losses are treated as ordinary gains or losses. Any
gain attributable to the sale of inventory and any depreciation
recapture, will produce ordinary income.
Capital gains of a corporation can be used to offset capital losses
only, with no offset against ordinary income. A three year carry-back
and five year carry-forward is available.
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Page 15
The Proposed Sale will not have any federal tax consequences to the
Panda shareholders.
THE FOREGOING DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES WHICH
MAY VARY WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES.
MOREOVER, THIS DISCUSSION DOES NOT ADDRESS ANY NON-INCOME TAX OR ANY
FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE PROPOSED SALE. THIS
DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES OF ANY TRANSACTION
OTHER THAN THE PROPOSED SALE.
Regulatory Approvals
To Panda's knowledge, completion of the Proposed Sale does not
require any regulatory approvals other than the filings in connection
with this Proxy Statement required under Federal securities laws.
RISKS AND CONSIDERATIONS RELATED TO THE PROPOSED SALE
The Panda shareholders need to understand the issues related to the
Proposed Sale which are set forth below. In particular, the Panda
shareholders should be aware of the risks related to the ownership of
SBI common stock, which will be Panda's main asset upon consummation
of the Proposed Sale.
Holding Company Structure
If the Proposed Sale is approved and consummated, Panda will cease
conducting operations and become a holding company, with its sole
significant asset consisting of a 10% equity interest in SBI's common
stock subject to possible future dilution. Panda will not have a
direct ownership interest in any assets of SBI and will solely be
entitled to those rights that it may have as a shareholder of SBI
under Delaware law. In addition, Panda's right, and the right of
Panda's creditors, to participate in any distribution of the assets of
SBI upon SBI's liquidation or reorganization or otherwise, will
necessarily be subject to the prior claims of creditors of SBI, except
to the extent that a bankruptcy court recognizes Panda's claims as a
creditor of SBI.
Unregistered Stock; Absence of a Public Trading Market
The shares of SBI common stock which Panda will receive as part of
the Proposed Sale have not been registered under the Securities Act or
any state securities laws and, unless so registered, may not be
offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the
Securities Act and applicable state securities law. The shares of SBI
common stock are new securities for which there is currently no public
market. In addition, Panda has agreed not to dispose of the SBI
shares for a period of five years. As a result, Panda's investment in
SBI will be illiquid and there can be no assurance that a public
trading market for SBI stock will develop in the future or, that if
developed, such a trading market will be sustained.
Absence of an Operating History
SBI was recently formed and has not yet commenced operations.
Accordingly, SBI has no operating history on which to base an
evaluation of its business prospects. SBI's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. Such
risks for SBI include, but are not limited to, an evolving and
unpredictable business model and the management of growth. To address
these risks, SBI must, among other things, develop high quality
"Integrated Interface" products, establish, maintain and increase its
customer base, implement and successfully execute its business and
marketing strategies, develop and upgrade its technology and
transaction-processing systems, respond to competitive developments,
and attract, retain and motivate qualified personnel. There can be no
assurance that the SBI will be successful in addressing such risks,
and the failure to do so could have a material adverse effect on SBI's
business, prospects, financial condition and results of operations.
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Page 16
Absence of a Financial Advisor
Panda did not engage an independent financial advisor to render
a fairness opinion with respect to the Proposed Sale. The absence of
a financial advisor forces shareholders to rely solely on the
recommendation of Mr. Ahearn and the Board of Directors. The lack of
review by an independent third party does create the risk that the
review of the Proposed Sale by Mr. Ahearn and the Board of Directors
may not consider all relevant factors that a third party with
extensive expertise may consider.
No Dividends on SBI Common Stock
Since Panda's primary source of income will be its investment in
SBI, Panda's ability to declare cash dividends in the future will
depend exclusively on SBI's ability to pay cash dividends. Currently,
SBI intends to retain future earnings to finance the development and
expansion of SBI's business and does not anticipate paying any cash or
stock dividends on its common stock in the foreseeable future. The
declaration and payment of any dividends in the future will be
determined by the board of directors of SBI, in its discretion, and
will depend on a number of factors, including SBI's earnings, capital
requirements and overall financial condition.
Minority Interest; No Voting Power
If the Proposed Sale is approved, Panda will own an aggregate of
approximately 10% of the outstanding common stock of SBI. Given this
minority equity position, Panda will not have the ability to influence
the day to day management of SBI. In addition, Panda will not have
sufficient shares of SBI common stock to be able to individually
control matters submitted to a vote of the SBI shareholders.
Remaining Panda Assets Have Limited Value
After the Proposed Sale, Panda's sole significant asset will be its
10% equity stake in SBI's common stock. All of Panda's other
remaining assets will be of limited or no value. As a result, Panda's
future prospects, and the future value of Panda's Common Stock, will
depend almost entirely on the success or failure of SBI.
No Reporting Requirements
Although Panda will continue to be subject to the reporting
requirements of the Exchange Act following the Proposed Sale, SBI has
no reporting obligations under the Exchange Act. As a result, subject
to certain circumstances, SBI will not have an ongoing duty to
publicly disclose material information or developments related to its
business, financial condition or results of operations. In addition,
there can be no assurance that Panda will independently have timely
knowledge of such developments or access to such information.
Accordingly, Panda shareholders may not obtain information on SBI that
is directly relevant to their investment in Panda in a timely manner
or at all.
THE ASSET PURCHASE AGREEMENT
Terms of the Asset Purchase Agreement
The following is a brief summary of the material provisions of
the Asset Purchase Agreement. The Asset Purchase Agreement
contemplates the sale of substantially all of Panda's Operating Assets
to SBI. THE DESCRIPTION OF THE ASSET PURCHASE AGREEMENT SET FORTH
HEREIN DOES NOT PURPORT TO BE COMPLETE; HOWEVER, ALL MATERIAL TERMS OF
THE AGREEMENT ARE SUMMARIZED BELOW. PANDA SHAREHOLDERS SHOULD REVIEW
THE ASSET PURCHASE AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS
PROXY STATEMENT AS ANNEX A AND IS INCORPORATED HEREIN BY REFERENCE.
YOU ARE URGED TO CAREFULLY READ THE ASSET PURCHASE AGREEMENT IN ITS
ENTIRETY.
<PAGE>
Page 17
Operating Assets Being Sold and Liabilities and Obligations Assumed
Panda has agreed to sell to SBI the following Operating Assets and
rights of Panda relating to Panda's business operations:
- all permits, authorizations, licenses and other governmental
and third-party rights and privileges, in each case used in Panda's
business operations;
- all tangible personal property owned by Panda and used in
Panda's business operations and all right, title and interest of Panda
in the inventory and supplies of Panda used in its business
operations;
- any and all contracts and other rights, in each case used in
Panda's business operations, except for contracts which are excluded
below;
- all patents, trade and service marks, designs, drawings,
software (except for software necessary for the continuation of
Panda's operations), trade names, copyrights, mask works, applications
therefor, licenses thereof and similar intangible property
(collectively, "Intellectual Property"), in each case used in Panda's
business operations; and
- all of Panda's accounts receivable as of the closing date of
the asset sale transaction.
Those assets (other than assets constituting Intellectual Property)
exclusively used in Panda's computer systems business will not be sold
under the Asset Purchase Agreement.
In addition, SBI has agreed to assume or observe, subsequent to the
closing date of the Proposed Sale, Panda's obligations pursuant to the
contracts that are assigned by Panda to SBI in connection with the
sale of Operating Assets. The obligations to be assumed include the
following:
- Panda's trade accounts payable outstanding on the closing date
(up to a maximum amount of $300,000);
- specific items included in Panda's accrued payroll and
benefits account outstanding on the closing date, which will not
exceed $100,000;
- specific items included in Panda's "other current liabilities"
account on the closing date, which will not exceed $100,000;
- up to $2,000,000 of Panda's indebtedness to Helix, effective
upon such indebtedness' restructuring as described in the Voting
Agreement among SBI, Panda and certain shareholders of Panda dated May
14, 1999; and
- Panda's obligations under certain agreements assigned by Panda
to SBI.
These liabilities are collectively referred to herein as the "Assumed
Liabilities."
Consideration Price
The aggregate consideration for the Operating Assets will be (i)
shares of SBI's common stock initially representing 10% of SBI's
capital stock on a fully diluted basis and (ii) the assumption of the
Assumed Liabilities. In addition to Panda's initial 10% fully diluted
common equity interest, the capital structure of SBI upon consummation
of the Proposed Sale will be comprised of Vantage's 70% fully diluted
preferred equity interest and a 20% fully diluted pool of common
shares reserved for issuance upon exercise of stock options to be
issued to SBI's officers, directors, employees and consultants. Each
of these interests will be diluted pro rata by the issuance of a 2%
fully diluted preferred equity interest to Archimedes upon completion
of the Archimedes Exchange. See "Interests of Certain Persons in the
Proposed Sale." The SBI Common Stock to be received by Panda will be
entitled to one vote per share and to such dividends, if any, as are
declared by the SBI Board of Directors. SBI has indicated that it
does not intend to pay any common stock dividends for the foreseeable
future. The Vantage preferred equity interest will be comprised of
shares of preferred stock, the material terms of which include:
<PAGE>
Page 18
- one vote per share in all matters voted on by the common
stock;
- a liquidation preference equal in the aggregate to Vantage's
initial $6,000,000 investment in SBI plus a participation interest
along with SBI's common stock;
- non-cumulative 6% dividends;
- the right to convert on a one-for-one basis (subject to
customary weighted average anti-dilution protection) into shares of
SBI common stock;
- a pro rata right of first refusal on future stock issuances by
SBI; and
- the ability to appoint a majority of the board of directors of
SBI.
Upon consummation of the Proposed Sale, the authorized capital
stock of SBI will be 30,000,000 shares of Common Stock and 10,000,000
shares of Series A Preferred Stock. Of these shares, 1,000,000 shares
of Common Stock will be issued to Panda, 2,000,000 additional shares
of Common Stock will be reserved for issuance upon exercise of
employee stock options and 7,000,000 shares of Series A Preferred
Stock will be issued and outstanding. Any additional issuance of
currently authorized capital stock of the Company, or any additional
issuances of capital stock of the Company that is not currently
authorized but is authorized after the consummation of the Proposed
Sales will further dilute Panda's ownership of SBI. Panda's ownership
interest in SBI will not be sufficient to allow Panda to control SBI's
future authorization or issuance of securities or to control any other
corporate decision.
In connection with the Asset Purchase Agreement, Panda and SBI will
execute additional agreements to facilitate transfer of Panda's assets
(the "Ancillary Agreements").
Closing
The closing of the Proposed Sale will take place within three
business days of approval of the Proposed Sale by the Panda
shareholders. The closing, however, must in all events occur before
February 24, 2000.
Conditions to Closing
Conditions to Obligations of Purchaser
SBI's obligation to consummate the Proposed Sale is subject to the
satisfaction (or waiver) of various conditions, including the
following:
- the representations and warranties of Panda contained in the
Asset Purchase Agreement will have been true and correct when made and
as of the closing, and the covenants and agreements in the Asset
Purchase Agreement to be complied with by Panda on or before the
closing date have been complied with;
- no action will have been commenced or threatened against Panda
or SBI that would render inadvisable the consummation by SBI of the
transactions contemplated by the Asset Purchase Agreement, except in
the case where SBI has solicited or encouraged any such transaction;
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Page 19
- SBI and Panda will each have received all authorizations,
consents, orders and approvals which SBI reasonably deems necessary or
desirable for the consummation of the transactions contemplated by the
Asset Purchase Agreement and the Ancillary Agreements;
- SBI will have received amendments or novations of the
contracts identified in the Asset Purchase Agreement;
- no circumstance, change in or effect on Panda's operations
will have occurred which has a material adverse effect on the
Operating Assets;
- the approval of the number of Panda's shareholders necessary
to effect the Asset Purchase Agreement, including preferred
shareholders;
- the receipt by purchaser of all permits, authorizations,
licenses and other governmental and third party rights and privileges
necessary to operate the Business as currently conducted
(collectively, "Approvals");
- the delivery by Panda to SBI of a signed counterpart of a
stockholders' agreement as set out in the Asset Purchase Agreement;
- SBI's satisfaction that Panda is able to sell, convey and
assign to SBI, free and clear of all claims, liens and interests
except as provided in the Asset Purchase Agreement, title and interest
in the Operating Assets;
- Panda's compliance in all material respects with its covenants
and agreements under the Asset Purchase Agreement;
- the absence of any injunction, stay or restraining order
staying the effectiveness of any Approval; and
- the absence of any threatened or pending suit, action,
investigation, inquiry or other proceeding which could have a material
adverse effect on SBI's ability to acquire, use, operate or enjoy the
Operating Assets of Panda.
Panda has executed the contract amendments and novations required for
Closing. No governmental approvals are required for the consummation
of the Proposed Sale.
Conditions to Obligations of Seller
Panda's obligation to consummate the Proposed Sale will be subject
to the satisfaction (or waiver) of various conditions, including the
following:
- the Asset Purchase Agreement will have been approved and
adopted by the requisite vote of the Panda shareholders;
- the representations and warranties of SBI contained in the
Asset Purchase Agreement will have been true and correct when made and
as of the closing, and the covenants and agreements in the Asset
Purchase Agreement to be complied with by SBI on or before the closing
date have been complied with;
- the delivery by SBI to Panda of a signed counterpart of a
stockholders' agreement as set out in the Asset Purchase Agreement;
- SBI will be capitalized with equity capital of not less than
$6,000,000 in cash and commitments; and
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Page 20
- SBI's compliance in all material respects with its covenants
and agreements under the Asset Purchase Agreement.
SBI has been sufficiently capitalized to satisfy that condition for
Closing.
Representations and Warranties
The Asset Purchase Agreement contains various representations and
warranties customary for transactions of this type, including
representations and warranties of Panda relating to, among other
things:
- the due organization, valid existence, and good standing of
Panda and similar corporate matters;
- the authorization, execution, delivery, and enforceability of
the Asset Purchase Agreement;
- the accuracy and completeness of each report or proxy
statement delivered to SBI;
- Panda's compliance with the requirements of the Securities Act
of 1933 and the Securities Exchange Act of 1934;
- the compliance of Panda's financial statements as to form with
applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, and the accuracy of
Panda's financial statements;
- the collectability and status of Panda's accounts receivable;
- the good condition and saleability of Panda's business
inventories;
- Panda's compliance with all applicable laws and government
orders;
- Panda's receipt of all required government permits, licenses,
authorizations, certificates and approvals;
- Panda's environmental, tax, labor and employee benefit
matters;
- the legality, validity, enforceability, and assignability of
all contracts entered into by Panda that are necessary or useful for
the operation of its business, and the absence of any breach of these
contracts by Panda;
- Panda's ownership of the Intellectual Property that it will
sell to SBI under the Asset Purchase Agreement;
- Panda's year 2000 compliance;
- Panda's title to the Operating Assets;
- the insurance coverage of all the Operating Assets;
- Panda's authority to execute the Asset Purchase Agreement and
the Ancillary Agreements;
- the absence of any pending, threatened or contemplated
investigation of or administrative or legal proceeding against Panda
which Panda has not disclosed;
- the absence of any material inaccuracy or omission in the
Asset Purchase Agreement or in any document filed by Panda with the
SEC on or prior to the date of the Asset Purchase Agreement;
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Page 21
- the absence of any undisclosed changes in Panda's condition
that, in the aggregate, are materially adverse to SBI;
- the absence of any undisclosed material liabilities;
- the absence of any material tax liability, except for taxes
which Panda reasonably disputes, the filing of all returns and reports
due, and the absence of any tax liens on the Operating Assets;
- the absence of any event or circumstance which, under
applicable law, would require public disclosure but which has not been
so publicly disclosed;
- the absence of conflicts under Panda's charter or by-laws,
required consents or approvals, and violations of any instrument or
law;
- the absence of any notice that any significant customer has
ceased or substantially reduced, or will cease or substantially
reduce, its use of Panda's products;
- the absence of any notice that any significant supplier will
not sell goods related to the Business at any time after the closing
date on terms and conditions similar to those imposed on current sales
to Panda;
- the absence of certain liabilities by Panda under ERISA, and
the absence of any excise tax liabilities under certain sections of
the Internal Revenue Code;
- the absence of any undisclosed facts that affect Panda's
operations adversely or could do so in the future; and
- the absence of any broker's or finder's fees.
The Asset Purchase Agreement also contains various representations
and warranties of SBI with respect to the following:
- the due organization, valid existence, and good standing of
SBI and similar corporate matters;
- the authorization, execution, delivery, and enforceability of
the Asset Purchase Agreement;
- SBI's capitalization;
- SBI's financing commitments;
- the absence of any broker's or finder's fees; and
- the absence of conflicts under SBI's charter or by-laws,
required consents or approvals, and violations of any instrument, law,
or governmental order.
Covenants
In the Asset Purchase Agreement, Panda has agreed to the following
covenants:
- between the date of the Asset Purchase Agreement and the
closing date, Panda will not conduct its operations relating to the
Operating Assets other than in the ordinary course and consistent with
Panda's past practice;
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Page 22
- Panda will provide SBI full and complete access to all
facilities, relevant documents and personnel;
- Panda will use commercially reasonable efforts to obtain all
authorizations, consents, orders, and approvals that may be or become
necessary for execution and delivery of the Asset Purchase Agreement
and the Ancillary Agreements;
- prior to the closing, Panda will promptly notify SBI of all
events, circumstances, facts and occurrences arising subsequent to the
date of the Asset Purchase Agreement which could have a material
effect on its operations;
- Panda will not use any of the Intellectual Property after the
closing date of the Proposed Sale;
- Panda and SBI agree to cooperate and coordinate the making of
any public announcements concerning the Asset Purchase Agreement and
the Ancillary Agreements; and
- from the date of the execution of the Asset Purchase Agreement
until February 24, 2000, except as required pursuant to any fiduciary
duty, neither Panda nor any of its directors, officers, agents or
representatives will (i) solicit, encourage, initiate or participate
in any negotiations or discussions with respect to any offer or
proposal to acquire all or any part of its operations or assets
whether by purchase of assets or otherwise, (ii) disclose any
information not customarily disclosed to any person concerning its
operations or the Assets or afford to any person or entity access to
the properties, books or records of its operations or the assets or
(iii) cooperate with any person to make any proposal to purchase all
or any part of the assets of its operations or the assets (directly or
indirectly) other than inventory or non-essential or excess assets
sold in the ordinary course of business.
Stockholders Agreement
Panda will be required to enter into a stockholders agreement as a
condition to the receipt of SBI common stock. The stockholder
agreement will include the following terms:
- the SBI common stock held by Panda is not transferable for a
period of five years, except in limited circumstances such as an
initial public offering;
- Panda must vote its shares of SBI common stock proportionately
in accordance with the vote of all other holders of SBI common stock;
- if holders of 50% of the SBI preferred shares dispose of their
preferred shares, Panda may be required to sell
their shares on the same terms as the SBI preferred shareholders;
- SBI will have the right of first refusal for any sales of SBI
common stock; and
- SBI common stock will have registration rights on substantially
the same terms as the SBI preferred shares.
Indemnification
The representations, warranties, covenants, agreements and
obligations contained in the Asset Purchase Agreement, or in any
document or instrument executed and delivered in connection with that
agreement, will survive the closing of the Proposed Sale for a period
of one year. In addition, the Asset Purchase Agreement requires Panda
to indemnify and hold harmless SBI, its successors and assigns from,
for and against any loss, damage, liability, injury or deficiency
which results from the inaccuracy of any representation or the breach
of any warranty made by Panda in that agreement or the failure of
Panda duly to perform or observe any term, provision, covenant,
agreement or condition of the Asset Purchase Agreement relating to the
period prior to the closing date (other than with respect to the
liabilities that SBI will assume). In addition, the Asset Purchase
Agreement requires Panda to indemnify and hold harmless SBI, its
successors and assigns from, for and against any loss damage,
liability, injury or deficiency that results from the transport or
arranged transport or disposal of any hazardous materials to any
location which is listed or proposed for listing on any federal or
state list of sites requiring investigation or remediation. The right
of indemnification for any of the environmental problems does not
apply to any post-acquisition activities. Panda does not have
knowledge of any current environmental liability.
<PAGE>
Page 23
The Asset Purchase Agreement also requires SBI to indemnify and
hold harmless Panda, its successors and assigns from, for and against
any loss, damage, liability or deficiency which results from the
inaccuracy of any representation or the breach of any warranty made by
SBI or any failure of SBI duly to perform or observe any term,
provision, covenant, agreement or condition of the Asset Purchase
Agreement. The liability of Panda to indemnify SBI is limited to
$200,000 (the "Indemnification Limit"), and no damage can be recovered
unless the aggregate amount of damages exceeds $50,000, provided,
however, that once such threshold is met, the full amount of damages,
from the first dollar, can be recovered.
Panda agrees to indemnify and hold harmless SBI against the
following taxes and against any loss, damage, liability or expense,
including reasonable fees for attorneys and other outside consultants,
incurred in contesting or otherwise in connection with any such taxes:
- taxes imposed on SBI with respect to taxable periods ending on
or before the closing date;
- with respect to taxable periods beginning before the closing
date and ending after the closing date, taxes imposed on SBI or the
operations of Panda which are allocable to the portion of such period
ending on the closing date; and
- taxes imposed as a result of any breach of warranty or
misrepresentation of the Asset Purchase Agreement.
Indemnification obligations resulting from tax liabilities or
employee benefit liabilities are not subject to the Indemnification
Limit.
The Asset Purchase Agreement imposes specific procedures, terms and
conditions on any party seeking indemnification under the Asset
Purchase Agreement, including, without limitation, notice
requirements, defense of claim procedures and settlement conditions.
Termination and Waiver
The Asset Purchase Agreement may be terminated at any time prior to
the closing:
- by SBI, if between the date of the Asset Purchase Agreement
and the time scheduled for closing an event or condition occurs that
has resulted in or SBI reasonably believes may result in a material
adverse effect;
- by either Panda or SBI if the closing will not have occurred
by February 24, 2000, provided that such a right will not be available
to any party who causes the failure of the closing to occur on or
prior to such date;
- by either Panda or SBI in the event that any governmental
authority will have issued an order, decree, or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Asset Purchase Agreement and such
order, decree, ruling or other action will have become final and
nonappealable; or
- by the mutual written consent of Panda and SBI.
<PAGE>
Page 24
Pursuant to Section 5.07 of the Asset Purchase Agreement, Panda's
Board of Directors can negotiate a competing transaction consistent
with its fiduciary obligations if Panda receives a superior proposal
to SBI's proposal.
To the extent material provisions or conditions of the Asset
Purchase Agreement are waived or amended or the termination date is
extended, Panda will amend the Proxy Statement and resolicit proxies.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Financial Information gives
effect to the consummation of Panda's sale of substantially all of
its operating assets to SBI as if it had been consummated on September
30, 1999, in the case of the Unaudited Pro Forma Balance Sheet, and on
Unaudited Pro Forma Statements of Operations for the year ended March
31, 1997, the nine months ended December 31, 1997, the fiscal year
ended December 31, 1998, and the nine months ended September 30,
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 September 30,
1999.
The following Unaudited Pro Forma Financial Information is based
upon the historical financial data of Panda and should be read in
conjunction with the information appearing in "The Asset Purchase
Agreement," "Selected Historical Financial Data" and other financial
data included in this Proxy Statement. In the preparation of the
following Unaudited Pro Forma Financial Information, it has been
assumed that Panda's 10% interest in SBI is valued at $600,000 based
upon the initial $6,000,000 capitalization of SBI.
The Unaudited Pro Forma Balance Sheet at September 30, 1999, is
based upon Panda's financial position at June 30, 1999. The Unaudited
Pro Forma Statement of Operations for the nine months ended September
30, 1999 is based upon Panda's results of operations for the nine
months ended September 30, 1999. The Unaudited Pro Forma Statements
of Operations for the fiscal year ended March 31, 1997, the nine
months ended December 31, 1997 and the fiscal year ended December 31,
1998 is based on Panda's results of operations for those periods.
Page 25
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BALANCE SHEET
September 30, 1999
Pro Forma
Historical Adjustment As Adjusted
---------- ---------- -----------
Current assets
Cash and cash equivalents $ 80,535 $ - $ 80,535
Accounts receivable (net of
allowance of $295,292) 8,496 (8,496)(1) -
Inventory, net 24,167 (24,167)(1) -
Other receivables 289,618 (289,618)(1) -
Prepaid expenses and other
current assets 43,128 (43,128)(1) -
----------- ---------- -----------
Total current assets 445,944 (365,409) 80,535
Property and equipment, net 1,171,853 (1,171,853)(1) -
Restricted cash 80,000 - 80,000
Other assets 85,104 - 85,104
Investment in SBI - 600,000(1) 600,000
----------- ---------- -----------
Total assets $ 1,782,901 $ (937,262) $ 845,639
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities
Accounts payable $ 1,182,648 $ (300,000)(1) $ 882,648
Notes payable Helix 2,000,000 (2,000,000)(1) -
Notes payable SBI 950,000 - 950,000
Other current liabilities 2,282,584 (100,000)(1) 1,722,084
(460,500)(5)
----------- ---------- -----------
Total current
liabilities 6,415,232 (2,860,500) 3,554,732
Commitments and contingencies
Stockholders' (deficit)
Preferred stock, $.01 par
value, 2,000,000 shares
authorized; 529 historical
and zero, as adjusted,
shares issued and
outstanding 4,864,137 (4,864,137)(7) -
Common stock, $.01 par value,
50,000,000 shares
authorized; 29,698,425
historical and
49,946,515, as adjusted,
shares issued
and outstanding 296,985 202,627 (7) 499,612
Additional paid-in capital 76,931,972 4,661,510 (7) 82,053,982
460,500 (5)
Accumulated deficit (86,725,425) 1,462,738 (1) (85,262,687)
----------- ---------- -----------
Total stockholders'
(deficit) (4,632,331) 1,923,238 (2,709,093)
----------- ---------- -----------
Total liabilities
and stockholders'
(deficit) $ 1,782,901 $ (937,262) $ 845,639
=========== ========== ===========
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
Page 26
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1999
Pro Forma
Historical Adjustment As Adjusted
----------- ---------- -----------
Revenues
Product sales $ 403,841 $ (403,841)(2) $ -
Licensing fees 750,000 (750,000) (2) -
Contract research and
development revenues - - -
----------- ---------- -----------
Net revenues 1,153,841 (1,153,841) -
Other expenses
Cost of sales 206,060 (206,060)(2) -
Research and development 754,652 (754,652)(2) -
Selling, general and
administrative 3,582,071 (3,582,071)(2) 312,680
312,680 (6)
Amortization of debt
issuance costs/ accrued
penalties 2,695,500 (2,695,500)(2) -
Cost associated with asset
impairments 167,223 (167,223)(2) -
----------- ---------- -----------
Total operating expenses 7,405,506 (7,092,826) 312,680
----------- ---------- -----------
Operating loss (6,251,665) 5,938,985 (312,680)
Interest expense (302,938) 302,938(2) (27,552)
(27,552)(4)
Interest income - - -
Other income 111,059 (111,059)(2) -
Gain on sale/disposal
of assets 58,368 (58,368)(2) -
----------- ---------- -----------
Net loss from operations (6,385,176) 6,044,944 (340,232)
Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock (54,067) - (54,067)
----------- ---------- -----------
Net loss applicable
to common stock (6,439,243) 6,044,944 (394,299)
Net loss from discontinued
operations - (6,044,944)(2) -
6,044,944 (3)
----------- ---------- -----------
Net loss $(6,439,243) $6,044,944 $ (394,299)
=========== ========== ===========
Basic and diluted loss
per share $ (.26) $ (.01)
=========== ===========
Weighted average shares
outstanding 24,587,384 24,587,384
=========== ===========
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
Page 27
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Twelve Months Ended December 31, 1998
Pro Forma
Historical Adjustment As Adjusted
----------- ---------- -----------
Revenues
Product sales $ 586,907 $ (586,907)(2) $ -
Licensing fees 100,000 (100,000)(2) -
Contract research and
development revenues 135,673 (135,673)(2) -
----------- ---------- -----------
Net revenues 822,580 (822,580) -
Other expenses
Cost of sales 1,739,418 (1,739,418)(2) -
Research and development 3,395,577 (3,395,577)(2) -
Selling, general and
administrative 9,263,283 416,906 (6) 416,906
(9,263,283)(2) -
Cost associated with asset
impairments 125,038 (125,038)(2) -
----------- ---------- -----------
Total operating expenses 14,523,316 (14,106,410) 416,906
----------- ---------- -----------
Operating loss (13,700,736) 13,283,830 (416,906)
Interest expense (3,881,406) 3,881,406(2) -
(18,000)(4) (18,000)
Interest income 72,345 (72,345)(2) -
Other income 35,101 (35,101)(2) -
----------- ---------- -----------
Net loss from operations (17,474,696) 17,039,790 (434,906)
Dividends and amortization
of beneficial conversion
feature related to convertible
preferred stock (741,886) - (741,886)
----------- ---------- -----------
Net loss applicable
to common stock (18,216,582) 17,039,790 (1,176,792)
Net loss from discontinued
operations (17,039,790)(2)
- 17,039,790 (3) -
----------- ---------- -----------
Net loss $(18,216,582)$17,039,790 $(1,176,792)
=========== ========== ===========
Basic and diluted loss
per share $ (1.33) $ (.09)
=========== ===========
Weighted average shares
outstanding 13,732,936 13,732,936
=========== ===========
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
Page 28
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Nine Months Ended December 31, 1997
Pro Forma
Historical Adjustment As Adjusted
----------- ---------- -----------
Revenues
Product sales $ 923,792 $ (923,792)(2) $ -
Licensing fees 350,000 (350,000)(2) -
Contract research and
development revenues 973,003 (973,003)(2) -
----------- ---------- -----------
Net revenues 2,246,795 (2,246,795) -
Other expenses
Cost of sales 1,028,577 (1,028,577)(2) -
Research and development 3,255,335 (3,255,335)(2) -
Selling, general and
administrative 6,113,255 (6,113,255)(2) 312,680
312,680 (6)
----------- ---------- -----------
Total operating
expenses 10,397,167 (10,084,487) 312,680
Operating loss (8,150,372) 7,837,692 (312,680)
Interest expense (955,014) 955,014 (2) -
(18,000)(4) (18,000)
Interest income 144,449 (144,449)(2) -
Other income 11,285 (11,285)(2) -
----------- ---------- -----------
Net loss from
operations (8,949,652) 8,618,972 (330,680)
Net loss from discontinued
operations (8,618,972) (2)
- 8,618,972 (3) -
----------- ---------- -----------
Net loss $(8,949,652) $8,618,972 $ (330,680)
=========== ========== ===========
Basic and diluted loss
per share $ (.78) $ (.03)
=========== ===========
Weighted average shares
outstanding 11,541,811 11,541,811
=========== ===========
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
Page 29
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
Twelve Months Ended March 31, 1997
Pro Forma
Historical Adjustment As Adjusted
----------- ---------- -----------
Revenues
Product sales $ 1,547,896 $(1,547,896)(2)$ -
Licensing fees 100,000 (100,000)(2) -
Contract research and
development revenues 734,123 (734,123) (2) -
----------- ---------- -----------
Net revenues 2,382,019 (2,382,019) -
Other expenses
Cost of sales 2,762,936 (2,762,936) (2) -
Research and development 5,722,717 (5,722,717) (2) -
Selling, general and
administrative 13,142,099 (13,142,099) (2) 416,906
416,906 (6)
Cost associated with asset
impairments 2,056,025 (2,056,025) (2) -
----------- ---------- -----------
Total operating expenses 23,683,777 (23,266,871) (416,906)
----------- ---------- -----------
Operating loss (21,301,758) 20,884,852 (416,906)
Interest expense - (18,000) (4) (18,000)
Interest income 427,657 (427,657) (2) -
Other income - - -
----------- ---------- -----------
Net loss from operations (20,874,101) 20,439,195 (434,906)
Net loss from discontinued
operations (20,439,195) (2)
- 20,439,195 (3) -
----------- ---------- -----------
Net loss $(20,874,101)$20,439,195 $ (434,906)
=========== ========== ===========
Basic and diluted loss
per share $ (2.15) $ (.04)
=========== ===========
Weighted average shares
outstanding 9,723,801 9,723,801
=========== ===========
See Notes to Unaudited Pro Forma Financial Information
<PAGE>
Page 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 will recognize a
gain of $1,462,738, 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 $950,000 SBI bridge loan at the
6% annual interest rate as per the promissory note.
(5) To reflect elimination of accrued penalties on Class A
Preferred Stock and certain common stock penalties in the amount of
$460,500.
The Company had previously accrued certain penalties under the
Class A Preferred Stock Agreement, but under the new exchange
agreement executed in connection with the SBI purchase agreement, the
preferred shareholders waived the penalties due both for the Class A
Preferred Stock as well as their share of the accrued common stock
penalties totalling $383,500.
(6) To reflect estimated legal fees, accounting fees and other
general and administrative costs including payroll and rent to be
incurred as a result of the sale. Estimated operating costs for the
12-month period and nine-month period are $416,906 and $312,680,
respectively.
(7) To reflect the conversion of the Preferred Stock into
20,262,681 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 31
PROPOSAL 2:
AMENDMENT TO
ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED SHARES
Description
The Board of Directors proposes and recommends to the
shareholders an amendment to the Panda Articles of Incorporation (the
"Panda Articles") increasing the number of authorized shares of Panda
Common Stock from 50,000,000 shares to 100,000,000.
The text of the proposed amendment to the Panda Articles is set
forth on Annex B to this Proxy Statement.
Additional Shares Necessary to Meet Current Commitments
The Board of Directors determined that additional shares of Panda
Common Stock (the "Additional Shares") should be authorized to fulfill
Panda's obligations under certain commitments and obligations that, if
not fulfilled, threaten Panda's solvency.
In July 1996, the Company completed the sale of 1,087,833 shares of its
common stock in a private placement to accredited investors. The Company
received proceeds of approximately $9 million, net of expenses of approximately
$800,000. In addition to the shares of common stock purchased by each investor
in the placement, such investor received a warrant to purchase an equal number
of shares of common stock at an exercise price of $11 per share. In January,
1999 the Company reduced the price of the warrants and accelerated the
expiration date at the choice of the investor. Currently there are 112,500 of
the original warrants that remain outstanding. The warrants expire in July 2001
and are callable by the Company whenever the Company's common stock trades at a
price of $26 or more for thirty consecutive trading days. No value has been
separately allocated to these warrants. If the Company pays a dividend or makes
a distribution on the Common Stock payable otherwise than in cash out of
earnings or earned surplus (determined in accordance with generally accepted
accounting principles) except for a stock dividend payable in shares of Common
Stock (an "Liquidating Dividend"), then the Company will pay or distribute to
the holder of this Warrant, upon the exercise hereof, in addition to the Warrant
Shares purchased upon such exercise, the Liquidating Dividend which would have
been paid to such holder if he had been the owner of record of such shares
immediately prior to the date on which a record is
taken for such Liquidating Dividend. Any proceeds received from the exercising
of the warrants will be used for ongoing operational expenses.
In connection with the 1997 subordinated convertible debenture transaction,
the Company paid a fee of $384,000to Dusseldorf Securities Limited
("Dusseldorf") of which $192,000 was paid in cash and the balance by the
issuance to Dusseldorf of 30,918 shares of Common Stock (the "DSL Shares"). In
addition, the Company agreed to issue to Dusseldorf and Jefferies & Company,
Inc. ("Jefferies") warrants, exercisable during the period beginning April 14,
1997 and ending April 2, 2002 to purchase 42,667 shares and 27,429 shares,
respectively, of Common Stock of the Company at respective exercise prices of
$6.75 and $7.00per share. The warrants were issued for placement of the
debentures. Any proceeds received from the exercising of the warrants will be
used for ongoing operational expenses.
During December 1997 and January 1998, the Company received two short-term
loans in the amount of $1,000,000 each from Helix (PEI) Inc.("Helix"). On
February 27, 1998, the Company fully repaid both of these loans using a portion
of the proceeds from the issuance of preferred stock. The Company received
additional short-term loans from Helix during the quarter ended June 30, 1998
which aggregated $1,750,000, and an additional $250,000 was received in July
1998. The loans are secured by the Company's intellectual property. In
connection with the issuance of these notes, the Company issued warrants to
Helix to purchase an aggregate of 850,000 shares of the Company's common stock
at exercise prices ranging from $1.63 to $2.125 per share. On August 7, 1998,
Helix agreed to extend the maturity date of all outstanding notes payable to
February 15, 1999, from their original due date in August 1998, in exchange for
the issuance of a warrant to purchase up to 2,000,000 shares of the Company's
common stock at an exercise price equal to the fair market value of the
Company's common stock at the date of issuance ($2.125). The warrant has a term
of two years. The warrants issued to Helix have a cashless exercise.
Notwithstanding the foregoing provision regarding payment of the Exercise Price
in cash, Helix may elect to receive a reduced number of Shares in lieu of
tendering the Exercise Price in cash. Any proceeds received from the exercising
of the warrants will be used for ongoing operational expenses.
Sarubbi is entitled to 3,750,000 shares of Panda Common Stock to
fulfill Panda's obligation under the Amended Settlement Agreement
after the Panda Shareholders approve Proposal 2. In the event the
Panda shareholders do not approve this Proposal 2, Panda will be in
breach of the Amended Settlement Agreement due to a lack of authorized
shares to fulfill this obligation, which will materially affect Panda.
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. 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. In the event that
the increase in the number of authorized shares of Panda common stock
is not approved pursuant to Proposal 2, Panda will be obligated to pay
Sarubbi $1,502,041, which is equal to the amount of the judgement
entered in favor of Sarubbi plus attorneys' fees, less the value of
any cash or stock received by Sarubbi pursuant to the Settlement
Agreement or the 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.
<PAGE>
Page 32
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 has been funded
as of the date hereof. The proceeds were used for general corporate purposes.
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 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 August 1998 Private Placement, Panda is
obligated to issue certain Fill-Up Shares related to the one-year
anniversary date of the closing of the Private Placement. Under the
terms of the Securities Purchase Agreement relating to the Private
Placement, if on either the six-month or the one-year anniversary of
the date of closing of the Private Placement (each "Anniversary
Date"), the average closing bid price of the Common Stock for the 20
trading-day period ending on the trading day immediately prior to the
applicable Anniversary Date (the "Anniversary Price") is less than the
Closing Price ($2.0375), or the prior Anniversary Price in the event
the six-month Anniversary Price is less than the Closing Price,
respectively, the Company is required to issue a number of shares of
Common Stock within ten days after the Anniversary Date equal to the
product of (i) (x) the difference between the Closing Price (or if the
measurement date is the one-year Anniversary Date, the six-month
Anniversary Price if the six-month Anniversary Price is less than the
Closing Price) and the applicable Anniversary Price, multiplied by
.85, multiplied by (y) the number of shares of Common Stock purchased
by the investors in the Private Placement and not sold or assigned to
non-affiliated third parties, divided by (ii) (x) the applicable
Anniversary Price multiplied by (y) .85. The shares issuable pursuant
to this formula are referred to as the "Fill-Up Shares".
In the event (i) the Common Stock is delisted or suspended from
trading on NASDAQ, (ii) the Fill-Up Shares or the Private Placement
Warrant Shares are not issuable or are not listed with NASDAQ or (iii)
the Company fails to issue Fill-Up Shares as required, then the
Company shall pay to the initial investors $100,000 for each full
30-day period that the condition continues. The Company's common stock
was delisted from NASDAQ on December 16, 1998 and as a result the
Company has recognized liquidating damages. The Company continues to
incur the liquidated damages. Pursuant to the Agreement, additional
shares are issuable to purchasers if the average closing bid price of
the Common Stock for the 20 trading-day period immediately prior to
the anniversary date (August 15, 1999) is less than the prior
anniversary price (February 15, 1999 anniversary date). Upon approval
of Proposal 2, Panda will issue approximately 6,000,000 shares of the
Company's Common Stock under the Fill-Up Provision of the August 1998
Private Placement. In addition, the Company is in the process of
negotiating with August 1998 Private Placement holders who are not
Series A Preferred shareholders to accept shares of common stock in
lieu of the accrued liquidating damages of $460,500 as a result of the
Company's common stock delisting from Nasdaq. Upon approval of
Proposal 2 and the agreement with August 1998 Private Placement
investors, Panda will issue 4,600,000 shares to cover this
obligation.
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 33
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 500,000 and
50,000 shares may be granted, respectively. As of December 31, 1998,
there were 558,554; 468,800, and 10,000 shares available for grant
under the 1993 Plan, the 1995 Plan and the Director Plan,
respectively.
There were 50,000,000 authorized shares of Panda Common Stock,
with 29,698,425 shares outstanding as of November 15, 1999. Panda
anticipates that there will be approximately 49,961,106 shares of
Panda Common Stock outstanding as of the Record Date for the Annual
Meeting. The anticipated increase in the number of shares of Common
Stock outstanding prior to the Record Date is due to the expected
conversion of the remaining shares of the Series A Preferred Stock.
However, On May 14, 1999 the conversion price was set pursuant to the
Exchange Agreement at $.261. From July 1, 1998 through September 30,
1999, 271.76 shares of Series A Preferred were converted into an
aggregate of 4,637,310 shares of common stock of the Company. As of
September 30, 1999, 528.86 shares of Series A Preferred (including 171
penalty shares) have not been converted. However, these shares will
be converted five days prior to the record date into 20,262,681 Common
shares calculated as (528.82 x 10,000 / .261). Panda entered into the
Exchange Agreement, dated May 12, 1999, by and among Panda and the
Panda Series A Preferred shareholders (the "Exchange Agreement").
Pursuant to the Exchange Agreement, all holders of Series A Preferred
Stock agreed to exchange their Series A Preferred Stock for shares of
Panda Common Stock. In the Exchange Agreement, Panda agreed to allow
the conversion of certain shares of Series A Preferred Stock into
Panda Common Stock at a rate of $0.261 and to permit the sale of the
Panda Common Stock. This conversion rate was equal to the conversion
rate under the terms of the Series A Preferred Stock. Panda also
agreed to issue penalty shares to the holders of Series A Preferred
Stock at the same exchange rate to satisfy a covenant in the agreement
with the holders requiring Panda to pay the Holders an aggregate of
$100,000 per month during such time as Panda is not listed on a
national securities exchange or NASDAQ. The total amount of the
penalty was $916,500. The holders of Series A Preferred Stock agreed
(i) to enter into a voting agreement to vote their shares of Panda
Common Stock in favor of the Proposed Sale and (ii) not to sell
certain amounts of their Panda Common Stock received pursuant to the
Exchange Agreement. Holders of the Series A Preferred Stock also
agreed to release Panda from all existing obligations to them. No
other agreements were entered into among Panda and the Series A
Preferred shareholders to induce them to exchange their shares of
Series A Preferred Stock and to vote for the Proposed Sale. After the
Record Date, there will be 38,894 authorized shares of Panda Common
Stock reserved for issuance pursuant to options, warrants, contractual
commitments or other arrangements.
On February 11, 1998, the Company issued 600 shares of its Series A
Convertible Preferred Stock and Common Stock
Purchase 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. 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. The warrant
was issued at 155% of the average of the closing bid price per share of Common
Stock for the five (5) trading days immediately preceding the applicable
issuance date of this Warrant.
The Company may require that all unconverted shares of Series A
Preferred be converted at any time if the closing bid price of common
stock is equal to or greater than $12.00 per share for a period of
twenty consecutive trading days. In addition, on February 11, 2003,
the Company may, at its option, require the holders to convert the
Series A Preferred shares which remain outstanding on such date (plus
accrued and unpaid dividends) or redeem such shares of Series A
Preferred. In the event certain conditions are met, the Company has
the right to cause the issuance of an additional 400 shares of Series
A Preferred for an aggregate purchase price of $4,000,000. In such
event, the Company would be required to issue Warrants to the
purchasers of Series A Preferred to purchase an additional 100,000
shares of common stock. Any proceeds received from the exercising of the
warrants will be used for ongoing operational expenses.
The 225,000 warrants issued for investor relation services include 100,000 to
Mallory Factor. These warrants expire on September 10,2000 and have an exercise
price of $8.00 per share. Another 100,000 warrants were issued to AMT Capital in
August 1998 and have an expiration of August 15,2003. The AMT warrants have an
exercise price of $4.68. The remaining 25,000 warrant were issued to Martech
Associates. These warrants have an expiration date of July 15,2000 and an
exercise price of $3.625.Any proceeds received from the exercising of the
warrants will be used for ongoing operational expenses.
As of November 15, 1999, Panda has commitments to issue
41,030,105 additional shares of Panda Common Stock, including
20,262,681 shares pursuant to the Exchange Agreement, as follows:
Purpose for which Number of
Shares are Reserved Reserved Shares
- ------------------------ --------------------
Employee Stock Option Plans 815,900
Warrants:
1996 Equity Transaction 112,500
1998 Equity Transaction 2,223,928
Helix (PEI) Inc. 2,850,000
Convertible Preferred
Transaction in February 1998 120,000
<PAGE>
Page 34
Fees related to Convertible
Debenture in August 1997 70,096
Warrants issued related to
Investor Relation Services 225,000
Contractual Agreements:
Joseph A. Sarubbi Amendment
to Settlement Agreement
dated December 1998 (see "Legal
Proceedings") 3,750,000
Fill-Up Shares pursuant to the
August 1998 Private Placement
(approx.) 6,000,000
Other:
Potential shares in lieu of liquidating
damages related to the August 1998
Private Placement upon issuance of
new authorized shares 4,600,000
Of the Panda Common Stock reserved for issuance, it is highly
unlikely that 3,500,000 options and warrants would be issued due to
exercise prices that range from $0.75 to $44.25 within the given time
criteria pursuant to the respective option and warrant agreements.
There are no authorized and unissued shares of Panda Common Stock that
are not currently reserved for any specific use and available for
future issuances. If Proposal 2 is approved, there will be 29,371,470
such authorized and unissued shares of Panda Common Stock that are not
reserved for any specific use and available for future issuances.
Additional Authorized Shares Requested
Having the Additional Shares available for issuance in the future
would give the Company greater flexibility by allowing shares to be
issued without incurring the delay and expense of a special
stockholders' meeting. Except as described in this Proxy Statement,
the Company has no other definitive plans or comments to issue the
Additional Shares. The Additional Shares, together with other
authorized and unissued shares of Panda Common Stock, generally would
be available for issuance without the requirement for further
stockholder approval, unless action is required by applicable law or
Panda's governing documents.
Shareholders of Panda do not have any pre-emptive or similar rights
to subscribe for or purchase any additional shares of Panda Common
Stock that may be issued in the future, and therefore future issuances
of Panda Common Stock may, depending on the circumstances, have a
dilutive effect on the earnings and equity per share, voting power and
other interests of the existing shareholders of Panda.
The increase in the authorized number of shares of Panda Common
Stock also could be viewed as having anti-takeover effects. Although
the Board of Directors has no current plans to do so, shares of Panda
Common Stock could be issued in various transactions that would make a
change in control of the Company more difficult or dilute stock
ownership of a person seeking to obtain control.
The availability of this defensive strategy to the Company could
discourage unsolicited takeover attempts, thereby limiting the
opportunity for the Company's shareholders to realize a higher price
for their shares than is generally available in the public markets.
The Company is not aware of any effort to accumulate shares of Panda
Common Stock or obtain control of the Company by a tender offer, proxy
contest or otherwise, and the Company has no present intention to use
the Additional Shares for anti-takeover purposes.
<PAGE>
Page 35
The Board of Directors recommends a vote FOR approval of the
amendment to the Panda Articles.
Votes Required for Approval of Proposal 2
Approval of Proposal 2 requires that the number of votes cast in
favor of Proposal 2 exceed the number of votes cast against. Votes
for Proposal 2 may be cast in favor of or against the proposal or may
abstain from voting. Abstentions, therefore, will not have the
effect of a negative vote. Abstentions may be specified on the
proposal and will be considered present at the Annual Meeting, but
will not be counted as affirmative votes. In addition, broker non-
votes, where brokers are prohibited from exercising discretionary
authority in voting shares for beneficial owners who have not provided
voting instructions, will not be included in vote totals for Proposal
2, but will be counted for purposes of determining whether there is a
quorum at the Annual Meeting.
<PAGE>
Page 36
PROPOSAL 3:
ELECTION OF DIRECTORS
Panda's Articles of Incorporation provide that the Board of
Directors shall consist of not less than three nor more than nine
members, the exact number of directors to be fixed by the Board of
Directors. The Board of Directors has set the number of directors at
three. The Board of Directors has three classes, each of whose
members serve for a staggered three-year term. Currently, the Board
consists of one Class II director William E. Ahearn, one Class I
director John T. Friedline and one Class III director Stanford W.
Crane, Jr. At each annual meeting of shareholders, a class of
directors is elected for a three-year term to succeed the directors of
the same class whose terms are expiring. At Panda's upcoming annual
meeting, the Class II director will be elected for a term expiring at
the 2003 Annual Meeting of Shareholders and until his successor is
duly elected and qualified, subject to his earlier death, resignation
or removal. The Board of Directors has nominated William E. Ahearn
for election as Class II director at the Annual Meeting.
Because no annual meeting was held in 1999, the Company has
revised the terms of its directors so that the Class I director will
serve until the 2002 annual meeting, the Class II director will serve
until the 2003 annual meeting and the Class III director will serve
until the 2001 annual meeting.
The persons named in the accompanying form of proxy intend to vote
all valid proxies received in favor of the election of Mr. Ahearn as
Class II director unless authority is withheld.
Set forth below is certain biographical information furnished to
Panda by the director nominee. The nominee currently serves as a
director of Panda. For a summary of stock ownership information
concerning the director nominee, see "Security Ownership of Certain
Beneficial Owners and Management." In the event the nominee is unable
or unwilling to serve, discretionary authority is reserved to the
persons named in the accompanying form of proxy to vote for a
substitute nominee. Management does not anticipate that such an event
will occur. Also set forth below is certain information concerning
the Class I and Class III directors, whose terms of office will
continue after the Annual Meeting until the 2002 and 2001 annual
meetings, respectively.
Nominee for Class II Director
William E. Ahearn, age 61, was appointed to the Board of Directors
in November 1998 by the directors then in office. Mr. Ahearn joined
Panda in March of 1996 and served as President of the Archistrat
Systems division from April 1996 to December 1996. He served as Vice
President of Technology at Panda from January 1997 to September 1997
and as Vice President and Chief Scientist from September 1997 to
November 1998. From 1993 to 1996, he was Director of Multimedia
Products at AMP Incorporated. AMP is a manufacturer of electronic
components. From 1964 to 1993, Mr. Ahearn served in a variety of
positions at International Business Machines Corporation ("IBM"),
including Product Manager for Digital Video Interactive and
Collaborative Work Products IBM Europe, Product and Project Manager
for Input/Output Technology Entry Systems and Electro-Optical
Technologies at IBM Corporate Headquarters, and as staff member of
IBM's T.J. Watson Research Center. From 1984 to 1989, Mr. Ahearn was
a visiting scholar at the MIT Media Lab.
The Board of Directors recommends that shareholders vote "FOR" the
nominee for director.
Class I Director
John T. Friedline, age 58, was appointed to the Board of Directors
in June 1999 by the directors then in office. Since 1994, Mr.
Friedline has been President and Chief Executive Officer of Friedline
& Associates, Inc., an independent management consultant primarily in
the multi media arena. From 1965 to 1994, Mr. Friedline held various
positions at IBM Corp. ("IBM"). From 1965 to 1988, he served in IBM's
domestic offices, holding positions that included National Marketing
Manager - PCS and Application Development and Director - Systems
Application Architecture Marketing. From 1988 to 1994, he served in
IBM's European headquarters as Director of its New Business Solutions
Unit. From 1963 to 1965, Mr. Friedline was an engineer at Union
Carbide. He holds a B.S. in Engineering from Bucknell University and
an MBA from the University of Buffalo.
<PAGE>
Page 37
Class III Director
Stanford W. Crane, Jr., age 48, has served as President, Chief
Executive Officer and Chairman of the Board of Directors of the
Company since its inception in April 1992 and, since November 1993, as
Senior Vice President - Product Design and Development. From May 1990
to April 1992, Mr. Crane was self-employed, principally engaged in the
development of the Compass Connector. From 1984 to April 1990, Mr.
Crane was president of Crane Electronics, Inc., which supplied
advanced interconnection technology for military and commercial
products. From 1980 until 1984, Mr. Crane was an executive at Molex
Corporation, a publicly held corporation manufacturing and selling
electronic interconnect devices, and served from 1982 to 1984 on the
Chairman's staff for the Advanced Development Committee and assisted
in marketing and strategic planning for domestic and international
operations. From 1976 to 1980, Mr. Crane served as a sales executive
for AMP Incorporated, a manufacturer of electronic components.
Board and Committee Meetings
The Board of Directors of Panda held 19 meetings during 1998. The
Board has a standing Audit Committee and a standing Compensation and
Stock Option Committee. The Compensation and Stock Option Committee
and the Audit Committee met several times during 1998 to address Mr.
Crane's contract and employee stock option grants. A contract with
Mr. Crane was not renewed. Additional stock option grants were
approved by the Board of Directors in October 1998. Panda does not
have a nominating committee. During the most recent fiscal year, each
director attended at least 75% of the meetings of the Board and any
committee on which such director served.
Mr. Gingrich and James T.A. Wooder, a former director, served on
the Audit Committee of the Board of Directors until their resignation
in March 1999 and November 1998, respectively, the members of which
make recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the
results of the audit engagement, approve professional services
provided by the independent accountants, review the independence of
the independent public accountants, consider the range of audit and
non-audit fees and review the adequacy of Panda's internal accounting
controls. Mr. Ahearn now serves as the Audit Committee.
Mr. Gingrich and Dr. Tummala comprised the Compensation and Stock
Option Committee of the Board of Directors, which makes
recommendations to the Board regarding the executive and employee
compensation programs of Panda and which administers the 1993
Performance Incentive Plan, the 1995 Employee Stock Incentive Plan and
the Nonemployee Director Stock Option Plan. Mr. Gingrich and Dr.
Tummala both have resigned as of March 1999. The Board has not
replaced those members and has decreased the number of directors to
three.
Directors' Compensation
All directors hold office until the next annual meeting of
shareholders and the election and qualification of their successors.
Directors who are not employees and do not otherwise receive
compensation from Panda are entitled to a retainer of $2,000 per month
for serving on the Board of Directors in addition to the reimbursement
of reasonable expenses incurred at any meetings.
In addition, each outside director participates in Panda's
Nonemployee Director Stock Option Plan ("Director Plan"). Under this
plan each outside director receives an option to purchase 4,000 shares
of Panda Common Stock at each annual meeting of shareholders of Panda.
Such options have a per share exercise price equal to the fair market
value of the Panda Common Stock on the date of grant, vest annually in
four equal installments beginning on the first anniversary of grant
and, unless sooner terminated, expire five years from the date of
grant. During 1998, Messrs. Gingrich, Tummala and Wooder each
received an option to purchase 4,000 shares of Panda Common Stock
under the Director Plan at an exercise price of $3.81 per share. At
the Annual Meeting, an additional option to purchase 4,000 shares of
Panda Common Stock will be granted to each of the existing directors.
In 1999, there were no options granted to any Director of the Company.
<PAGE>
Page 38
Annual and Long-Term Incentive Compensation
Panda has no formal bonus program for its key employees.
Occasionally, bonus payments may be made to key employees based on the
achievement of agreed upon performance objectives or as a part of the
recruitment process.
Panda's stock option plans are designed to promote the identity of
long-term interests between Panda's employees and its shareholders and
to assist in the retention of executives. The size of option grants
is generally intended by the Committee to reflect the executive's
position with Panda and his or her contributions to Panda. Stock
options generally vest over a four-year period in order to encourage
key employees to continue in the employ of Panda. Stock options are
granted at an option price equal to the fair market value of Panda's
Common Stock on the date of grant; however, Panda reserves the right
to grant stock options having exercise prices less than the fair
market value of the Panda Common Stock on the date of grant, to modify
the terms of existing options and to reprice the options as an
incentive for employees to remain with Panda.
Benefits
Panda's executive officers are entitled to receive medical and life
insurance benefits and to participate in Panda's 401(k) Retirement
Savings Plan on the same basis as other full-time employees of Panda.
The amount of perquisites, as determined in accordance with the
rules of the Securities Exchange Commission relating to executive
compensation, did not exceed 10% of salary and bonus for 1999 for any
of the named executive officers.
Summary of Compensation of Chief Executive Officer
For the fiscal year ended December 31, 1999, Mr. Crane, Panda's
President and Chief Executive Officer, received a salary of $150,000.
Compliance with Internal Revenue Code Section 162(m)
Panda does not believe Section 162(m) of the Internal Revenue Code,
which disallows a tax deduction for certain compensation in excess of
$1 million, will generally have an effect on Panda. The Compensation
Committee intends to review the potential effect of Section 162(m)
periodically and in the future may decide to structure the
performance-based portion of its executive officer compensation to
comply with Section 162(m). The Compensation Committee has approved
the per-participant limitations included in Panda's 1993 Performance
Incentive Plan and in Panda's 1995 Employee Stock Incentive Plan as a
means of preserving flexibility in structuring executive officer
compensation.
<PAGE>
Page 39
Company Stock Price Performance
The following graph shows a comparison of cumulative total return
since December 1994 for the Company's stock, the Nasdaq Composite
Index and the Philadelphia Semiconductor Index. The performance graph
shows cumulative percentage increases or decreases in each investment.
Comparison of Cumulative Return since December 31, 1994*
[GRAPH]
The Panda Nasdaq Philadelphia
Project, Inc. Composite Index Semiconductor Index
------------ --------------- -------------------
12/31/94 100 100 100
12/31/95 195.51 139.92 143.24
12/31/96 33.15 171.69 171.54
12/31/97 41.01 208.83 188.19
12/31/98 4.21 291.60 250.25
12/31/99 .047 541.17 502.96
- --------------------
* Assumes $100 invested on December 31, 1994 in each investment.
Total Return assumes reinvestment of dividends.
Compensation and Stock Option Committee Interlocks and Insider
Participation
The members of the Compensation and Stock Option Committee were Rao
R. Tummala and Claud L. Gingrich until March 1999 when they resigned.
No member of the Compensation and Stock Option Committee was at any
time during fiscal year 1998, or formerly, an officer or employee of
Panda.
Employment Agreements
Mr. Crane entered into an employment agreement with Panda on
November 8, 1993, as amended and restated on February 22, 1994, which
expired on January 1, 1999 (subject to certain termination
provisions). Under this agreement Mr. Crane receives an annual base
salary of $150,000. Mr. Crane is also eligible to receive
discretionary bonuses as determined by the Board of Directors.
Furthermore, the agreement provides that Mr. Crane is entitled to
participate in any medical, stock option and benefit plans that Panda
may establish. Mr. Crane does not currently have an employment
agreement.
<PAGE>
Page 40
Mr. Crane's employment is terminable at will by Mr. Crane upon six
months' prior notice, and is terminable by Panda for cause at any time
or in the event that Mr. Crane becomes disabled and, as a result, is
unable to perform his obligations under the agreement for three
consecutive months. In the event that the agreement is terminated
other than as a result of Mr. Crane's death or disability or for
cause, Mr. Crane will be entitled to receive an amount equal to the
greater of $150,000 or his annual compensation for the preceding
calendar year. In addition, Mr. Crane has agreed not to compete with
Panda for a period of two years after the termination of his
employment provided he receives payments during that period equal to
twice the greater of $150,000 or his salary at the time of such
termination, calculated on an annualized basis.
Mr. Crane has assigned to Panda all improvements or related
discoveries or inventions developed or conceived by him during the
term of the agreement and the two-year noncompetition period which (i)
relate to the technology assigned by Mr. Crane to Panda pursuant to
the assignment by Mr. Crane in November 1993 of all of his rights to
certain prefabricated semiconductor packaging, printed circuit board
technology and computer technologies and products, including VSPA,
Compass PGA, Well Tech printed circuit board technology and Archistrat
4 Computers, as well as certain other products and technology being
developed by him on behalf of Panda, and all related proprietary
information (the "Crane Assignment"), or (ii) would enable the
development of replacements for the products developed by Panda. See
"Certain Relationships and Related Transactions."
Mr. Crane's employment agreement also provides that he may develop
products or technologies ("Unrelated Investigations") unrelated to
Panda's technology and proposed products provided that the cost to
Panda of such Unrelated Investigations is not significant in the
reasonable judgment of Panda's Board of Directors. Mr. Crane has
agreed to disclose the results of any Unrelated Investigations to
Panda and negotiate in good faith the terms pursuant to which Panda
may participate in any such products or technology. If no agreement
is reached, Mr. Crane may independently commercialize such products or
technology, but will pay Panda a 5% royalty on any sales, licensing
fees or other remuneration he receives with respect to Unrelated
Investigations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon the formation of Panda in April 1992, Panda issued 2,283,000
shares of Common Stock to Mr. Crane in connection with Mr. Crane's
agreement to assign and license to Panda certain technology and
products. Such license agreement (the "Crane-Panda License") was
amended in January 1996.
Under the Crane-Panda License, Mr. Crane has granted Panda the
nonexclusive right to utilize the Compass Connector, a key component
in the commercialization of Panda's Archistrat Computers and the
development and commercialization of the Compass PGA product. The
Crane-Panda License was executed in connection with the conversion to
a nonexclusive license of the 3M License described below. Under the
Crane-Panda License, Panda is required to pay Mr. Crane a royalty on
any sales of Compass Connectors as discrete parts in the amount of 5%
of the net sales price for the first five years of the term of the
agreement, 2.5% of the net sales price for the next five years of the
term of the agreement and 2% of the net sales price thereafter,
provided that no royalty is payable until aggregate net sales of the
Compass Connector as discrete parts exceed $100,000. The royalty rate
will be reduced after the fifth anniversary of the agreement if no
patent remains in effect with respect to the Compass Connector. No
royalty is payable on sales of the Compass Connector as incorporated
in the Archistrat Computers or other computer system or assembly.
Panda may grant sublicenses under the Crane-Panda License, but only
for the use of products as incorporated in the Archistrat Computers or
other computer system or assembly. To date, there have been no sales
requiring the payment of royalties to Mr. Crane under the Crane-Panda
License. The Crane-Panda License obligates Panda to maintain
proprietary information relating to the Compass Connector on a
confidential basis, notify Mr. Crane of any evidence of infringement
with respect to the Compass Connector and related technology, and
cooperate with Mr. Crane to contest any such infringement. In the
event that Panda becomes bankrupt or insolvent or defaults in any of
its material obligations under the Crane-Panda License and fails to
cure any such defaults within specified cure periods, Mr. Crane may
terminate the Crane-Panda License. Panda is substantially dependent
upon the Crane-Panda License. The termination of the agreement under
any circumstances would have a material adverse effect on Panda.
There can be no assurance that conflicts of interest will not arise
with respect to the Crane-Panda License or that such conflicts will be
resolved in a manner favorable to Panda. In addition, Mr. Crane
retains ownership of the Compass Connector technology, and has the
right to grant licenses to or otherwise transfer rights to the Compass
Connector technology to third parties.
<PAGE>
Page 41
In September 1992, Mr. Crane granted an exclusive license (the "3M
License") to Minnesota Mining and Manufacturing Co. ("3M") to develop,
manufacture, use and sell the Compass Connector other than as part of
a computer system. In February 1996, Mr. Crane and 3M agreed to
convert the 3M License to a nonexclusive license. Pursuant to the 3M
License, Mr. Crane is entitled to receive from 3M, in general, a 5%
royalty (decreasing to 2.5% after five years, and to 2% after ten
years) on net sales of the Compass Connector (including sales to
Panda). The 3M License provides in certain circumstances for the
payment of a royalty to Mr. Crane. As of April 20, 1998, Mr. Crane
had received no such payments.
In April 1999, Mr. Crane licensed the Compass Connector technology
to Winchester Electronics to develop, manufacture and sell on a non-
exclusive world-wide basis. Winchester Electronics competes in a
number of different market segments and is not currently competing
with any specific product versions offered by Panda.
In October 1993, Panda settled litigation with Jack R. Moore and
Gary Marvel, former officers and promoters of Panda. In connection
with the settlement, the former officers, or their designees, received
197,860 shares of Panda's Common Stock which were being held by an
escrow agent (the "Escrowed Shares") subject to Panda's or its
assignee's right to repurchase them. In February 1994, Panda's rights
to purchase the Escrowed Shares were assigned to Mr. Crane in
connection with his employment agreement. In March 1996, Mr. Crane
purchased the Escrowed Shares for an aggregate purchase price of
$312,000.
In July 1996, Mr. Crane purchased 1,000 shares of Panda Common Stock
at a purchase price of $9.00 per share in connection with a private
placement financing and warrants to purchase 1,000 shares of Panda
Common Stock in connection with such purchase having a term of five
years and an exercise price of $11.00 per share.
In October 1996, Panda and Mr. Crane entered into a license
agreement with LG Cable & Machinery Ltd. ("LG") whereby LG was granted
a license with respect to Compass Connector technology owned by Mr.
Crane and certain enhanced Compass Connector technology owned by
Panda. The license granted to LG is non-exclusive except for certain
limited exclusive manufacturing rights with respect to specified Asian
countries. The $1 million license fee will be split equally between
Mr. Crane and Panda. In addition, Panda and Mr. Crane are entitled to
receive royalties on sales of the Compass Connector products by LG or
its affiliates, which will be split equally between Mr. Crane and
Panda. As of June 30, 1999, Mr. Crane had received an aggregate of
$300,000 in payments under this Agreement.
In August 1997, Panda hired Melissa Crane, wife of Stanford W.
Crane, Jr., as Director of Strategic Business at an annual salary of
$100,000 per year. In September 1997, Ms. Crane was granted an option
to purchase 50,000 shares of Panda Common Stock at an exercise price
of $6.13 per share. In November 1997, the Board of Directors elected
Ms. Crane Vice President of Strategic Business and authorized an
increase in her annual salary to $125,000 per year. See "Executive
Compensation." In October 1998, the Board of Directors appointed Ms.
Crane the Acting Chief Financial Officer.
With respect to each transaction between Panda and an affiliate of
Panda, a majority of the disinterested members of the Board of
Directors determined that such transactions were on terms at least as
fair as had they been consummated with unrelated third parties.
<PAGE>
Page 42
Continuation of 1993 Performance Incentive Plan and 1995 Employee
Stock Incentive Plan
The 1993 Performance Incentive Plan and the 1995 Employee Stock
Incentive Plan remain in effect pursuant to their existing terms.
Compliance with Section 16(a) of the Exchange Act
Federal securities laws require the Company's directors, certain of
its officers, and person owning beneficially more than ten percent of
Panda's Common Stock to file reports of initial ownership and is
required to disclose into this Proxy Statement any failure of the
foregoing persons to file timely into this Form 10K any failure of the
foregoing persons to file timely those reports during its fiscal year
ended December 31, 1998. To the best of the Company's knowledge, they
solely upon a review of copies of reports furnished to it and written
representations that no other reports were required to report, and
greater that then percent beneficial owners made all such filing
timely, except that Mr. Ahearn and Helix filed their respective Form
4's late on one occasion.
SUMMARY COMPENSATION
The following table sets forth the compensation paid by the
Company for services performed on the Company's behalf during the
fiscal year ended December 31, 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, 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
<PAGE>
Page 43
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 $4,800 and Company contribution to
401(k) Plan.
(10) Mr. Ahearn's salary is prorated as he resigned on October 30,
1998.
(11) Mr. Hollis' salary is prorated as he resigned on August 14, 1998.
(12) Bonus paid to Ms. Crane is a result of achieving certain
performance incentives.
(13) Mr. Calhoun's salary is prorated as he resigned on September 30,
1998.
(14) Mr. Calhoun was paid a bonus in connection with achieving certain
objectives.
(15) Mr. Lee was hired during fiscal year 1997 and his salary was
prorated.
(16) Mr. Calhoun was hired during fiscal year 1997 and his salary was
prorated.
(17) Mr. Lee's salary was prorated as he left the Company in March 1999.
<PAGE>
Page 44
Roy K. Lee left the employment of the Company on March 15, 1999.
He had first joined the Company in 1996. Mr. Lee (age 37) was Vice
President of Engineering and Business Development for the Company. He
is a computer engineering manager specializing in computer
architectures including Intel, Alpha and X86 clones. He is
experienced in both hardware and software aspects of motherboards and
modular architectures including Archistrat 4s, 5s, 5r and IO-A.
Additionally, Mr. Lee worked with development teams on multichip
module solutions utilizing VSPA semiconductor packaging and Compass
interconnect solutions. Mr. Lee has an MSEE from the University of
Southern California, an MBA from the University of California, Irvine
and has authored articles on computers and software.
<PAGE>
Page 45
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Option Grants. There were no options granted for the Fiscal year
ended December 31, 1999. The following table summarizes option grants
during the fiscal year ended December 31, 1998 to the Named Executive
Officers:
Potential
Realizable
Value at
Assumed
Annual
Percent Rates of
of Total Stock Price
Options Appreciation
Options Granted to Exercise for Option
Granted Employees Price Expiration Term (2)
Name (#)(3) In Period ($/Share)(1) Date 5%($) 10%($)
- ---- ------- --------- ------------ ---------- ------ ------
Stanford
W. Crane,
Jr. - - - - - -
William E.
Ahearn 5,000 * 5.25 01/29/08 38,750 56,250
Daryl
Hollis 5,000 * 5.25 01/29/08 38,750 56,250
Melissa F.
Crane 35,000 4.5% 5.25 01/29/08 27,250 393,750
Roy Lee 5,000 * 5.25 01/29/08 38,750 56,250
5,000 6.45% 0.78 10/29/08 5,750 8,350
Kevin J.
Calhoun 2,500 * 5.25 01/29/08 38,750 56,250
- --------------------
* represents less than 1%.
(1) Equals fair market value of Panda Common Stock on the date of
grant.
(2) Amounts represent hypothetical gains that could be achieved for
the respective options if exercised at the end of the option term.
These gains are based on assumed rates of stock price appreciation of
5% and 10% compounded annually from the date of grant to their
expiration date. Actual gains, if any, on stock option exercises will
depend upon the future performance of Panda Common Stock and the date
on which the options are exercised.
(3) Options to purchase 20% of shares of Panda Common Stock are
exercisable six months from the date of grant; the remainder become
exercisable in equal annual installments on the first, second, third
and fourth anniversaries of grant.
Option Exercises and Year-End Values. None of the Named Executive
Officers exercised any stock options during the twelve-month period
for the year ended December 31, 1999. The following table summarizes
the value of options held by such persons as of December 31, 1999:
<PAGE>
Page 46
YEAR-END OPTION VALUES
Number of Unexercised Value of Unexercised
Options at December 31, 1998 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 34,000 51,000 - -
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.
<PAGE>
Page 47
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 December 15, 1999
(except as noted below), by (i) each person known by Panda to be the
owner of more than 5% of the outstanding shares of Panda Common Stock
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.
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 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. 2,100,000 0 0 2,100,000 7.1%
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
VantagePoint
Venture
Partners 5,833,238 - 528.8560 26,095,919 52.2%
1001 Bayhill Drive, #130
San Bruno, CA 94066 (5)
All executive
officers and 40,860 1,000 0 41,860 *
directors as
a group
(four
persons) (3)(4)
- --------------------
* Less than 1%.
<PAGE>
Page 48
(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
15, 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 15, 1999
plus any shares subject to options or warrants that are currently
exercisable within 60 days after December 15, 1999 and the number of
shares issuable on exchange of the Series A Preferred Stock.
(3) Includes 6,860 shares held by Mr. Crane jointly with his wife,
of which 1,000 shares are issuable upon exercise of a warrant.
(4) Includes 6,860 shares held by Ms. Crane jointly with her
husband, of which 1,000 shares are issuable upon exercise of a
warrant.
(5) Includes all shares of Panda Common Stock pursuant to which
VantagePoint currently has voting rights as well as all warrants
delivered pursuant to the 1998 Convertible Preferred issuance and the
August 1998 Private Placement.
Shareholders who are a party to agreements to vote in favor of the
Proposed Sale are Joseph A. Sarubbi, GAM Arbitrage Fund L.P., AGR
Halifax Fund, Ltd., Leonardo L.P., Ramius Fund, Ltd., Raphael L.P.,
Helix (PEI) Inc. and AG Super Fund L.P. These shareholders own
approximately 52% of the outstanding Panda Common Stock.
Recent Sales of Unregistered Securities
Set forth below is a description of recent sales 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.
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
IIRG 18,462 Investor 10-6-97 $ 86,129 1
Relations
Services
<PAGE>
Page 49
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
Helix 2,650,000 (2) In connection 8-7-98 -- 1
with
debentures
Private 2,223,928 (2) In connection 8-14-98 -- 9
Placement with
Investors investors
agreement
Private 600 (1) Financing 2-11-98 $6,000,000 7
Placement
Preferred Stock 30 (1) Preferred Stock 3-31-98, $170,762 7
Dividends Financing 6-30-98,
Agreement 9-30-98
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
Samtec,
Inc. 666,667 Financing 2-3-99 $ 500,000 1
Fill-Up
Shares 4,441,829 Private 6-29-99 $2,437,675 9
Placement
Helix 1,000,000 SBI/Helix/ 5-18-99 $ 266,000 1
Panda Agreement
Joseph
Sarubbi 3,875,000 Legal Settlement 6-29-99 $1,087,600 1
Agreement
- -------------------
(1) Preferred Stock.
(2) Warrants.
(3) Aggregate Underwriting Discount of $117,500.
<PAGE>
Page 50
SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of and
for the nine months ended September 30, 1999 and 1998 (unaudited), the
twelve months ended December 31, 1998, the nine months ended December
31, 1997 and 1996 (unaudited) and the twelve months ended March 31,
1997, 1996 and 1995. This information is qualified in its entirety
by, and should be read in conjunction with, the financial statements
and the notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations which are included
elsewhere in this Proxy Statement. The following data insofar as it
relates to the twelve-month period ended December 31, 1998, the nine
months ended December 31, 1997 and each of the years in the three-year
period ended March 31, 1997 has been derived from audited financial
statements.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Nine Months Ended
September 30, December 31, December 31, Fiscal Year Ended March 31,
------------------------ ------------ ------------------------- -----------------------------------
1999 1998 1998 1997 1996 1997 1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net
revenues $ 1,153,841 $ 647,620 $ 822,580 $ 2,246,795 $ 2,091,132 $ 2,382,019 $ 870,658 $ --
Research
and
development
costs 754,652 2,832,242 3,395,577 3,255,335 4,786,838 5,722,717 7,954,924 3,494,260
Selling,
general and
administrative
expenses 3,582,071 6,316,268 9,263,283 6,113,255 10,830,976 13,142,099 15,810,701 3,744,914
Costs
associated
with
asset
impairments 167,223 0 125,038 1,471,025 2,056,025
Net loss (6,385,176) (11,513,995) (17,474,696) (8,949,652) (17,217,703) (20,874,101) (23,894,426) (6,931,346)
Basic and
diluted
loss
per share ($0.26) ($0.95) ($1.33) ($0.78) ($1.79) ($2.15) ($3.07) ($1.25)
Weighted
average
shares
outstanding 24,587,384 12,779,174 13,732,936 11,541,811 9,605,280 9,723,801 7,786,426 5,531,941
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet
September 30, December 31, March 31,
------------ --------------------------- ----------------------------------------
1999 1998 1997 1997 1996 1995
(unaudited)
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Total
Assets $ 1,782,901 $ 2,837,837 $ 5,713,830 $ 7,337,320 $ 18,557,681 $10,245,133
Total
Liabilities $ 6,415,232 $ 4,563,731 $ 3,616,126 $ 2,524,445 $ 3,690,090 $ 1,069,810
Accumulated
Deficit $(86,725,425) $(80,340,249) $(62,865,553) $(53,915,901) $(33,041,800) $(9,147,374)
Stockholders'
Equity
(Deficit) $ (4,632,331) $ (1,725,894) $ 2,097,704 $ 4,812,875 $ 14,867,591 $ 9,175,323
</TABLE>
Panda computes per share data in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Due to
losses from continuing operations, the effect of stock options and
warrants is antidilutive. Accordingly, Panda's presentation of
diluted earnings per share is the same as that of basic earnings per
share.
<PAGE>
Page 51
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
1997
- ----
December 31, 1997 $ 9.38 $ 3.81
September 30, 1997 $ 7.31 $ 2.50
June 30, 1997 $ 6.00 $ 2.63
March 31, 1997 $ 9.25 $ 3.75
The closing bid price on the date immediately prior to the
announcement of the Proposed Sale, May 17, 1999, was $0.20 per share.
The closing bid price of Panda's Common Stock on the OTC Electronic
Bulletin Board on December 15, 1999 was $0.05 per share. As of
December 15, 1999, there were approximately 29,698,425 shares of Panda
Common Stock outstanding and 294 holders of record of Panda's Common
Stock. This number does not include beneficial owners of Panda Common
Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
Panda has never declared or paid any cash dividends. After the
consummation of the Proposed Sale, Panda intends to invest any income
received as Panda believes appropriate under the circumstances, which
may include U.S. Government Securities and other short-term
instruments. Panda currently intends to retain any future earnings to
finance the growth and development of its business and future
operations, and therefore does not anticipate paying any cash
dividends in the foreseeable future.
In addition, in February 1998, Panda issued shares of Series A
Preferred Stock, the terms of which prohibit Panda from paying any
dividends on Panda Common Stock or other shares junior in rank to the
Series A Preferred Stock unless all dividends for all past quarterly
periods have been paid or declared and a sum of cash or amount of
shares sufficient for the payment thereof set apart. Further, the
terms of the Series A Preferred Stock allow for the redemption of any
outstanding shares of Series A Preferred Stock in the event Panda
declares a dividend (other than a dividend payable in Panda Common
Stock).
<PAGE>
Page 52
INFORMATION REGARDING PANDA
BUSINESS
Overview
Statements in this Proxy Statement that are not statements of
historical fact are to be regarded as forward-looking statements which
are based on information available to Panda as of the date hereof and
involve a number of risks and uncertainties. Among the important
factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are delays in
product development, competitive pressures, general economic
conditions, risks of intellectual property and other litigation, and
the factors detailed below under "Certain Factors That May Affect
Future Results" or elsewhere herein or set forth from time to time in
Panda's periodic reports and registration statements filed with the
SEC.
Panda is a technology company engaged in the design, development,
manufacture, licensing and sale of interconnect solutions to generate
greater throughput from silicon to board to system. These
technologies are embodied in VSPA, a three-dimensional semiconductor
package, and the Compass Connector, a board-to-board interconnect
solution (collectively the "Technology Products"). VSPA has received
JEDEC JC-11 Committee designation and has passed Mil Std. 883. The
JEDEC JC-11 Committee is responsible for setting standards for
semiconductor packages. The Company obtained JEDEC designation in
1997. The JEDEC designation for VSPA is PQFP-B. Semiconductor
manufacturers can obtain relevant mechanical data and specifications
regarding the VSPA product. Military standard 883D is the reliability
standard for electrical and mechanical testing parameters which
indicate the level of future durability and performance for
components. In order for VSPA to be commercially viable, it was
necessary to prove its performance by achieving industry standard
levels. In addition, in September 1998, the Compass Connector
received Bellcore approval. Bellcore approval is an important series
of reliability, mechanical and electrical tests for the
telecommunications industry. In order for an interconnect to be used
in commercial applications for the telecommunications industries, most
potential end users will require that the connector be Bellcore
approved.
In September 1998, Panda announced a streamlining of operations that
included a significant reduction of operations related to the
development of the Archistrat line of computers and the Rock City line
of desktop computers (collectively the "Systems") and any upgradable
mother board development related to the Systems. Due to further cash
constraints in November 1998, Panda elected to exit its Systems
business entirely. Panda continues to focus its efforts on the
Technology Products.
Panda has delivered products for commitments of prototype,
pre-production and production orders of its Technology Products from
Veridicom, Motorola, Kaiser Aerospace & Electronics, Honeywell and
National Semiconductor. Several of these customers have notified
Panda that the VSPA parts have passed Mil Std. 883 level of
qualification for their specific application. See "Semiconductor
Packages."
Technology Products
The proliferation of increasingly sophisticated semiconductors for
computer operating systems and other electronic applications, along
with the explosive growth in Internet usage, have created the need for
substantially greater bandwidth in products ranging from the
semiconductor to the printed circuit board. Bandwidth refers to the
capacity for transmitting data inside the electronic device as well as
between two or more devices. In recent years, improvements in the
speed at which microprocessors and other integrated circuits can
process data have far outpaced the data transmission capacity of other
electronic components and of the connectors and lines which link the
devices. The resulting bandwidth bottlenecks have effectively negated
some of the improvement in processing speed attributable to the
enhanced microprocessors. The Technology Products include
semiconductor packages and interconnect devices which incorporate
designs which Panda believes enable these products to effectively
address the bandwidth bottlenecks. In addition, these Company
products, which are protected by a variety of patents which have
either been issued or for which applications are currently pending,
have significant advantages over currently available products,
including:
<PAGE>
Page 53
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.
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Panda has developed and patented 2 semiconductor packages: VSPA,
which a peripherally leaded package with one or multiple tiers, and
Compass PGA, a pluggable pin grid array. Both packages are made from
similar materials.
VSPA has been designed to address the increasing demands on
bandwidth from the silicon to the PCB. VSPA is a low cost surface
mount semiconductor package that provides higher I/O in less space
with improved electrical and thermal performance as compared to other
packages on the market today. VSPA, also called PQFP-B, is registered
with JEDEC JC-11 committee under MO-198 and has passed Military
Standard 883D. The qualification testing from the VSPA was performed
by independent companies including ISE/IQL Labs, Inc., Lockheed Martin
and the Georgia Tech Packaging Research Center.
VSPA is based on a three-dimensional architecture that utilizes
multiple rows of pins that are tiered to achieve a greater density
within a smaller area. The VSPA is scalable in X, Y, and Z axes being
either square or rectangular in shape. By using individual,
pre-stamped, pins the VSPA package does away with a traditional lead
frame and many of the labor intensive molding steps. As a result, it
allows leads to be interleaved and arranged in several tiers. The
number of tiers depends upon the target die size and necessary number
of I/O. VSPA can be configured with one to six tiers, allowing
packages up to and over 1,000 pins. This allows the package to shrink
and grow depending on the customer's chip application.
VSPA is also available in both 'cavity down' and 'cavity up'
versions. With VSPA's wide range of I/O's and variable package
dimensions, multichip modules (MCMs) are also possible with the VSPA.
This scalability allows silicon designers considerable flexibility in
choosing a VSPA package that will best suit their specific package
requirements.
This minimum lead length yields low package parasitic and inductance
by keeping pins a constant size for each tier and a common part number
for each package size. These parameters remain constant for each
package size since only the frame is scaled to accommodate different
die sizes. This cannot be achieved in PQFP or BGA packages. The
electrical characteristics of VSPA allow it to perform with faster
rise times and the ability to support high performance applications at
much higher frequencies. VSPA has tested resonance free to 3.5GHz
with the next generation projected for a 10GHz range.
In 1998, Panda introduced several versions of the VSPA package
including the thermally enhanced and super thermally enhanced versions
to address market demands. Panda shipped pre-production parts of the
VSPA TE and submitted several designs using the VSPA STE.
In January 1998, Panda received its first production order for 1
million units for a customized version of the VSPA package from
Veridicom. As of June 1, 1999, Panda shipped in excess of 115,000
units to Veridicom. Additionally, Panda has delivered prototype and
pre-production parts to Lucent Technologies, Motorola, EG&G Heimann,
Honeywell SSEC, Samsung, SEEQ Technologies, National Semiconductor,
Kaiser Electronics and several other companies. While Panda believes
that production orders may materialize from the initial orders
received, there can be no assurance that any of these activities will
result in sales of the VSPA product.
Compass PGA is a high density PGA semiconductor product primarily
designed to address the high density chipscale segment of the
packaging market. The Compass PGA employs multiple leads and requires
less surface area of the PCB to accommodate the same number of leads
in traditional PGA packages. Additional design and qualification work
must be done prior to commercialization of this product. The Compass
PGA can be used with existing wirebond and FlipChip technologies.
Panda believes that densities in excess of 1,100 can be achieved. In
July 1996, Panda received a patent covering the Compass PGA product.
Interconnect Products. Panda has been granted a license to the
Compass interconnect product by Stanford W. Crane, Jr., its inventor
and Company President and Chief Executive Officer. Panda has produced
the Compass II version in a 152 position right angle female, and 152
position vertical male connector. Currently Panda purchases and
resells the Compass V version from LG Cable & Machinery ("LG Cable"),
part of the LG Group in Korea, and a licensee of the Compass
technology. The Compass V is a 196 position connector available in
both straight and right angle female versions, and vertical male
versions.
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Compass V is the most dense interconnect currently in production.
On the edge of a printed circuit board it delivers 146 contacts per
linear inch when used in a double-sided arrangement. This compares
with 80 contacts per linear inch in the most widely used products used
in high density applications. LG Cable contracted for Bellcore
testing of the Compass V with Contech, an independent testing group.
The Compass V connector received Bellcore approval in 1998. Compass
uses a patented arrangement of contacts and is actually capable of
delivering over 300 contacts per linear inch on the edge of a printed
circuit board, and over 1100 in a parallel configuration in one square
inch.
Compass also forms the basic platform for Compass PGA (pin grid
array). Compass PGA utilizes the design of Compass to connect
semiconductors in a pluggable fashion to another substrate, such as a
printed circuit board.
Manufacturing
Panda has developed the ability to manufacture the VSPA
semiconductor package at its production facility in Boca Raton,
Florida, using two automated machines designed and built by Panda.
The machines have a wide range of flexibility in terms of the pin
count of the VSPA packages it will produce, and their production
capacity ranges from 235,000 parts per month to 290,000 parts per
month, depending upon the pin count of the package (i.e., the higher
the pin count, the lower the monthly production capacity). The first
machine became operational in late September 1997 and the second
machine, after undergoing refinements based on data derived from
operating the first machine, became operational in 1998. Although
these machines have been designed and developed by Panda, most of the
components from which they are built are available from multiple
suppliers. Panda believes these machines can be readily replicated to
increase manufacturing capacity as demand for VSPA increases. If
Panda is successful in commercializing VSPA, such commercialization
will require Panda to expand its manufacturing capacity for VSPA parts
or enter into additional licensing arrangements, joint ventures or
strategic alliances with respect to the manufacture of VSPA parts.
See "Marketing and Strategic Relationships."
Panda has an arrangement with LG Cable, a unit of Korea-based LG
Group and a licensee of Panda's Compass technology, to acquire the
Compass V Connectors for distribution as discrete parts to customers.
Panda believes that this source of supply is sufficient to meet the
demand for Compass V Connectors for the foreseeable future. If Panda
is successful in commercializing the Compass V Connector for use by
third parties, such commercialization may require its strategic
partners to expand their manufacturing capacity for Compass V
Connectors or for Panda to enter into additional licensing
arrangements, joint ventures or strategic alliances with respect to
the manufacture of Compass Connectors. See "Marketing and Strategic
Relationships."
Panda has also subcontracted with LG Cable for the manufacturing of
the VSPA 80/1 package for Veridicom. In addition to the single row
production machines Panda added internally, LG has built a fully
automated assembly line with capacity of 350,000 units per month.
In 1998, Panda contracted with Possehl Hong Kong Machinery limited
("PBE") for the production of the VSPA 360 and 240 products. PBE
specializes in providing leadframe and other raw materials for the
semiconductor packaging market. PBE has 16 factories in 12 countries
located in Europe, Asia and the U.S. The 360 and 240 have the same
body size and have an interchangeable footprint on the PCB. In March
1999, the machine at PBE was being qualified for production. PBE will
be responsible for all VSPA high volume production for these products.
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.
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Marketing and Strategic Relationships. In June 1996, September
1996, July 1997 and January 1999, Panda licensed the VSPA
semiconductor packaging technology to AMP Incorporated, Pantronix
Corporation, LG Cable and Samtec, Inc., respectively. Under the terms
of each licensing agreement, the licensee has been granted worldwide
rights to manufacture and sell VSPA. Panda currently has only
received up-front licensing fees and is unable to predict the amount
of sales revenue or royalty revenue, if any, that may be earned in the
future under these agreements.
In October 1996, Panda and Stanford W. Crane, Jr., Panda's President
and Chairman, entered into an agreement with LG Cable, under which LG
Cable was granted a license to the Compass technology. The license
granted to LG Cable is non-exclusive except for certain limited
exclusive manufacturing rights with respect to specified Asian
countries. LG Cable has built a production facility in Korea for
production of Compass V, an enhanced version of the Compass Connector.
Based on information supplied to Panda by LG Cable, production
capability of the Compass V reached 250,000 parts per month in January
1998. Under the terms of the agreement, LG Cable is to pay Panda and
Mr. Crane a royalty based on the sales price of each Compass Connector
produced and sold. See "Patents; Proprietary Information Systems."
Such royalties are to be divided equally between Panda and Mr. Crane.
Panda has also established relationships with semiconductor
assemblers for the back-end assembly process for VSPA which includes
mounting the chip, wirebonding, encapsulation and marking of the
finished product. These relationships include Gateway Semiconductor,
ATEC and ASE Malaysia. Other companies such as STATs, have
qualification underway. These relationships are needed for Panda's
customers to utilize the VSPA package. Additionally, Panda has worked
closely with ESEC, a Swiss manufacturer of die attachment and
wirebonding equipment, to optimize their equipment for the VSPA
package.
Panda markets it products through a direct sales force and a network
of independent sales representatives. At the present time Panda has
four salespeople engaged in the sales and marketing of its VSPA
product. Panda is engaged in recruiting additional personnel for
various geographic locations and positions.
Backlog. As of September, 1999, the Company's revenue backlog
amounted to approximately $966,000. In October 1999, Panda received
authorization to begin fulfilling a customer's order for an additional
150,000 VSPA units. This will reduce the backlog by $154,000. The
Company and/or SBI expect to completely fill the current backlog
within the next fiscal year. As of November 15, 1999, the backlog
consisted of product to be shipped to Veridicom under their respective
original purchase orders.
In the first quarter ending March 31, 1998, the Company reported
a backlog of approximately $1,700,000. Of the $1,700,000 reported,
$707,500 was recognized during year ending December 31, 1998. The
remaining portion of the backlog of $992,500 related to one customer
was not recognized due to delays to Veridicom in shipment of their
silicon wafers. Veridicom uses the VSPA product to house their
proprietary silicon. If Veridicom has delays in shipment of their
silicon wafers, then there would be a delay of ordering additional
VSPA packages. It is expected that Veridicom will continue to order
parts for this specific version of their product and therefore it is
expected that the original purchase order will be fulfilled by Panda
prior to the closing of the transaction and by SBI after closing the
transaction.
Research and Development
In early 1998, Panda's principal research and development efforts
were devoted to the design and development of VSPA and Rock City. The
Rock City development included new upgradable boards as well as a new
chassis design. Since September 1998, all research and development
was for the VSPA product and specific customer applications. In 1998,
Panda spent approximately $3,400,000 on research and development. For
the nine months ending December 31,1997, Panda spent approximately
$3,300,000 on research and development. There will be no further
development related to the Systems business.
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Panda currently anticipates that its research and development
activities over the next year will focus on enhancements to the
automated machine for producing VSPA, and developing specific
applications for VSPA and the Compass Connector. Panda believes that
its spending on research and development in the current fiscal year
will be approximately the same amount as it was during the previous
twelve months.
Patents and Proprietary Information
Panda's success will depend on its ability to obtain patents,
protect trade secrets, and operate without infringing on the
proprietary rights of others. As of July 12, 1999, Panda had obtained
18 United States patents and an aggregate of 41 foreign patents. In
addition, Panda had pending a total of 18 United States and 29 foreign
patent applications. These patents and pending applications relate to
VSPA, Compass PGA, various designs of the Computer Systems, the use of
the Compass Connector in Compass PGA and in the Computer Systems, and
a PCB manufacturing technology known as "Well Tech PCB." Panda's
foreign patent filings have been made in selected countries, including
the Republic of China (Taiwan), Germany, the United Kingdom, Ireland
and France. Panda will continue to file applications in certain
foreign jurisdictions to secure protection in those jurisdictions in
accordance with the Patent Cooperation Treaty and the Paris Convention
for the Production of Industrial Property (which allows such filings
to relate back to the original filing date in the United States)
covering Panda's technology and proposed products. To the extent
possible, Panda also intends to file patent applications with respect
to products and technology that it may develop in the future.
There can be no assurance that any of Panda's pending patent
applications will ultimately result in an issued patent. Moreover,
the patent laws of other countries may differ from those of the United
States as to the patentability of Panda's products or technology, and
the degree of protection afforded by foreign patents may be different
from that in the United States. The failure by Panda to obtain
patents for which applications are currently pending could have a
material adverse effect on Panda's ability to commercialize
successfully its proposed technology and products. Even if Panda is
able to obtain such patents, there can be no assurance that any such
patents will afford Panda commercially significant protection for its
technology or products. In addition, other companies may
independently develop equivalent or superior technologies or products
and may obtain patent or similar rights with respect to them.
Although Panda believes that its technology has been independently
developed and that its technology does not infringe on the patents or
violate the proprietary rights of others, there can be no assurance
that any of Panda's technology or products, will not be determined to
infringe upon the patents or proprietary rights of others, or that
patents or proprietary rights of others will not have an adverse
effect on the ability of Panda to do business. If Panda's technology
or products were determined to infringe on the patents, trademarks or
proprietary rights of others, Panda could, under certain
circumstances, become liable for damages, which also could have a
material adverse effect on Panda. Moreover, in the event that Panda's
technology or proposed products were deemed to infringe upon the
rights of others, Panda would be required to obtain licenses to
utilize such technology. There can be no assurance that Panda would
be able to obtain such licenses in a timely manner or on acceptable
terms and conditions, and the failure to do so could have a material
adverse effect on Panda. If Panda were unable to obtain such
licenses, it could encounter significant delays in product market
introductions while it attempted to design around the infringed upon
patents or rights, or could find the development, manufacture or sale
of products requiring such licenses to be foreclosed. In addition,
patent disputes are common in the computer industry and there can be
no assurance that Panda will have the financial resources to enforce
or defend a patent infringement or proprietary rights action.
Panda has registered the Archistrat, VSPA and Rock City trademarks
with the U.S. Patent and Trademark Office and has applied for
appropriate trademark, copyright and other legal protection for its
product names, logos and other identifications. There can be no
assurance that Panda will not be precluded by others from using any of
such identifications or creating proprietary rights with respect to
them.
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Pursuant to a license agreement entered into in January 1996 between
Panda and Mr. Crane (the "Crane-Panda License"), Mr. Crane has granted
Panda the nonexclusive right to utilize the Compass Connector, a key
component in the commercialization of Panda's Archistrat Computers and
the development and commercialization of Compass PGA. The Crane-Panda
License was executed in connection with the conversion to a
nonexclusive license of the 3M License described below and supersedes
an earlier license agreement between Mr. Crane and Panda relating to
the Compass Connector. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That
May Affect Future Results" and "--Dependence On The Crane-Panda
License Agreement; Potential Conflicts Of Interest." Under the Crane-
Panda License, Panda is required to pay Mr. Crane a royalty on any
sales of Compass Connectors as discrete parts in the amount of 5% of
the net sales price for the first five years of the term of the
agreement, 2.5% of the net sales price for the next five years of the
term of the agreement and 2% of the net sales price thereafter,
provided that no royalty is payable until aggregate net sales of the
Compass Connector as discrete parts exceed $100,000. The royalty rate
will be reduced after the fifth anniversary of the agreement if no
patent remains in effect with respect to the Compass Connector. No
royalty is payable on sales of the Compass Connector as incorporated
in the Archistrat Computers or other computer system or assembly.
Panda may grant sublicenses under the Crane-Panda License, but only
for the use of products as incorporated in the Archistrat Computers or
other computer system or assembly. To date, there have been no sales
requiring the payment of royalties to Mr. Crane under the Crane-Panda
License. The Crane-Panda License obligates Panda to maintain
proprietary information relating to the Compass Connector on a
confidential basis, notify Mr. Crane of any evidence of infringement
with respect to the Compass Connector and related technology, and
cooperate with Mr. Crane to contest any such infringement. In the
event that Panda becomes bankrupt or insolvent or defaults in any of
its material obligations under the Crane-Panda License and fails to
cure any such defaults within specified cure periods, Mr. Crane may
terminate the Crane-Panda License. Panda is substantially dependent
upon the Crane-Panda License. The termination of the agreement under
any circumstances would have a material adverse effect on Panda.
There can be no assurance that conflicts of interest will not arise
with respect to the Crane-Panda License or that such conflicts will be
resolved in a manner favorable to Panda. In addition, Mr. Crane
retains ownership of the Compass Connector technology, and has the
right to grant licenses to or otherwise transfer rights to the Compass
Connector technology to third parties.
Panda relies on confidentiality and nondisclosure arrangements with
its employees, consultants and others involved with Panda's product
and technological development efforts. There can be no assurance that
these agreements will provide meaningful protection to Panda or that
other companies will not acquire information which Panda considers
proprietary. Moreover, there can be no assurance that other companies
will not independently develop know-how comparable or superior to that
of Panda.
Competition
Panda competes with many large corporations for sales on
semiconductor packages and interconnect devices. These corporations
all have significantly greater financial resources than Panda. In
semiconductor packaging, companies such as IBM, Motorola and Amkor
have significant development capabilities and financial strength to
develop new semiconductor packages. VSPA competes against well
established products such as QFP's, BGA's and PGA's. Panda also
depends on third party subcontractors for volume production and may
have difficulties getting supply from time to time.
In the connector market, Compass competes with the AMP's Mictor Line
and the Teradyne VHDM connectors. These companies have significant
resources, not only financially, but also in manufacturing and sales
and marketing.
Employees
On November 15, 1999, Panda had 17 full-time employees. Mr. Crane
divides his time between product research, manufacturing, and general
management. Panda considers its relations with its employees to be
good. None of Panda's employees are represented by labor unions.
PROPERTIES
Panda leases its principal offices at 951 Broken Sound Parkway in
Boca Raton, Florida. This facility has housed Panda's operations
since November 1, 1998. The facility is approximately 11,230 square
feet with monthly rent of approximately $10,322 escalating to $12,547
beginning in November 2002. The lease terminates on October 21, 2003.
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Panda leases two additional facilities at 1101 Holland Drive in Boca
Raton, Florida totalling approximately 7,200 square feet and uses these
facilities for Panda's machining operations, the production of the
automated machines for producing VSPA parts and current VSPA
production. The leases for these two facilities total approximately
$5,000 in monthly rental payments. There is no long-term lease for
these facilities. The Company rents the property on a month-to-month
basis.
Panda also leases 10,547 square feet in Fremont, California and uses
this facility for sales & marketing and application engineering. The
lease is for a term of five years with monthly rental fees of
approximately $22,000 escalating to approximately $24,000 in 2003.
In addition to the facility in Fremont, Panda also leases a facility
in San Jose, California, which was previously used to house Panda's
Advanced Design Group, manufacturing administrative personnel and
certain sales personnel. The lease term is through December 1999 and
calls for monthly lease payments of $4,746. Effective August 1, 1997,
Panda entered into a sublease agreement with a term ending in December
1999 and which called for monthly sublease payments to Panda of
approximately $4,800.
Panda has terminated its lease in Hayward, California for 50,000
square feet, the original lease agreement had a term of 5 years with
monthly rental fees of approximately $18,000. Panda was required to
secure lease payments with an $80,000 Certificate of Deposit held at
the Silicon Valley Bank through July 16, 2002. On July 16, 2000, the
guaranty limit will be reduced to $40,000 provided no event of default
has occurred by the current tenant.
Panda believes that its properties are generally in good
condition, except for the facility at 951 Broken Sound Parkway, at
which 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.
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.
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On December 11, 1998, Panda and Joseph A. Sarubbi ("Sarubbi")
entered into a settlement agreement (the "Settlement Agreement")
relating to litigation in which Sarubbi has obtained a judgment
against Panda in the amount of $1,227,041. Sarubbi entered into a
consulting agreement with Panda in 1992. Sarubbi also later served as
a director and general manager of Panda. Under this consulting
arrangement, Sarubbi received 91,000 options to purchase shares of
Panda Common Stock. Sarubbi also served as a director of Panda in
1995 and 1996. In 1996, Sarubbi notified Panda of his desire to
exercise all of his options and to sell all of the Panda Common Stock
received upon the exercise of such options. A Florida district court
held Panda liable for certain losses Sarubbi alleged he incurred in
connection with the sale of his Panda Common Stock and for fees for
his previous service as director. The court granted a judgment of
$1,227,041 in favor of Sarubbi. Under the Settlement Agreement, Panda
has agreed to pay Sarubbi total consideration worth $1,000,000 of
which $240,000 has been paid in cash in December 1998 and the
remainder is to be satisfied upon the sale of shares of Panda's Common
Stock which have been delivered to Sarubbi by Panda. Panda has
registered 1,775,000 shares for Sarubbi pursuant to a registration
statement, declared effective on February 5, 1999. The parties have
agreed to petition the Florida Court of Appeals for the Fourth
District to dismiss the litigation within five business days after
Panda's obligations in the Settlement Agreement have been completed.
If such obligations are not completed, the judgment will remain in
effect. This settlement amount was recorded as a charge against
Company earnings for the quarter ended December 31, 1998. On April
14, 1999, Panda received a Notice of Default on the Settlement
Agreement. Sarubbi claimed that his inability to sell the stock that
he received in the settlement creates a breach under the Settlement
Agreement. Panda believes that it is in full compliance with the
Settlement Agreement and that no breach exists. On June 25, 1999, the
Settlement Agreement was amended to allow Panda to extend its time to
satisfy its obligations under the Settlement Agreement (the "Amended
Settlement Agreement"). Under the Amended Settlement Agreement, the
Company issued Sarubbi 2,100,000 shares of Panda Common Stock in the
second quarter of 1999 and such shares were recorded as an expense to
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. $585,000 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.
On July 18, 1999, a complaint was filed against the Company in Palm
Beach County, Florida by Liberty Property Limited Partnership
("Liberty"). The complaint alleges breach of contract by the Company
for non-monetary default of its lease agreement for the premises at
951 Broken Sound Parkway, Boca Raton, Florida. Liberty seeks
acceleration of future rent payments in the amount of approximately
$809,000. The Company has filed an answer to the complaint and the
outcome is both immeasurable and undeterminable. There can be no
assurance that the Company will be successful in defending this
litigation and the outcome to this litigation could have a material
adverse effect if the Company is unsuccessful.
Panda from time to time is involved in disputes that may lead to
litigation in the future. Panda cannot determine the impact of those
potential lawsuits at the current time. The disputes are not expected
to be material.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Fiscal Year End
During September 1997, the Company decided to change its fiscal year
from April 1 through March 31 to January 1 through December 31. For
discussion and analysis purposes, the twelve months ended December 31,
1998 are compared to the audited nine months ended December 31, 1997
and the audited nine months ended December 31, 1997 are compared to
the unaudited nine months ended December 31, 1996.
Results of Operations
Twelve Months Ended December 31, 1998 Compared to Nine Months Ended
December 31, 1997
Net revenues decreased to approximately $823,000 during the
twelve months ended December 31, 1998 from $2,247,000 for the nine
months ended December 31, 1997. Net revenues for the respective
periods include approximately $184,000 and $924,000 of net sales of
Archistrat Computers, $100,000 and $350,000 of licensing fees, and
approximately $136,000 and $973,000 of revenues associated with a
cooperative development agreement with the U.S. government. Also, the
Company realized approximately $170,000 of net revenues from the
introduction of the Rock City line of computers and approximately
$232,000 from the sale of VSPA and Compass semiconductor packages.
The Company completed all of the milestones set forth in its
cooperative development agreement with the Defense Advanced Research
Projects Agency (DARPA) during April 1998. The objective to the DARPA
program was to develop a family of VSPA semiconductor packages and
process technologies, including a variety of multi-chip modules, and
to define the infrastructure to manufacture these packages on a high
volume, low cost basis. The DARPA Agreement was not intended to
directly generate sales for the VSPA product. The grant was for
development of volume manufacturing capabilities and applications with
semiconductors. The US government has a non-exclusive non-
transferable royalty fee fully paid license to use, duplicate or
dispose for governmental purposes any data, technology and inventions,
whether patented or not, made or developed under the DARPA Agreement.
They are prohibited from giving the technology to any third party for
commercial uses. The decrease in revenue related to the Archistrat
Computers is directly related to the Company's refocused efforts
toward the Rock City line of computers introduced during the second
quarter of 1998. In September 1998, the Company streamlined
operations related to the Systems business including both Archistrat
and Rock City products. In November 1998, the Company ceased all
operations related to the Systems business.
Research and development ("R&D") expenses increased to approximately
$3,400,000 for the twelve-month period ending December 31,1998 as
compared to approximately $3,300,000 for the nine-month period ending
December 31,1997. However, on a monthly basis comparative spending on
R&D decreased approximately $83,000 per month. R&D efforts in 1998
were focused on new custom VSPA designs for specific customer
applications, the refinement of the existing VSPA Flex automation. In
addition, the Company also designed the IO-A architecture that was
going to be used in the Rock City line of computers. The Company
believes that although its level of R&D spending is appropriate to
support current operations, it will need to increase future R&D
spending to enhance further development of VSPA, Compass Connectors,
Compass PGA and other derivative technologies as resources are
available. Management is currently evaluating the appropriate R&D
expense relative to the current level of activity in its Technology
Products.
Selling, general and administrative ("SG&A") expenses increased to
approximately $9,300,000 for the twelve months ended December 31, 1998
from $6,100,000 for the nine months ended December 31, 1997. The
increase of approximately $3,200,000 is primarily related to a
$1,000,000 charge related to a legal settlement (see "Legal
Proceedings"), approximately $253,000 related to the relocation of the
Company's corporate headquarters in November 1998, and approximately
$285,000 charge to reserve certain receivables associated with the
Systems business. After the effect of these charges totalling
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 with management's decision to
streamline operations. During 1998, the Company reduced its number of
employees resulting in savings of approximately $211,000 related to
employee compensation, benefits and travel, $620,000 reduction related
to consulting agreements and an increase of $245,000 in advertising
and marketing expenses related to the introduction of the Rock City
line of computers in the first and second quarters of 1998.
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During the twelve months ending December 31, 1998, the Company
determined that, due to various events and changes in circumstances
associated with exiting the Systems Business, certain long-lived
assets were impaired. As a result, the Company recorded a charge of
approximately $125,000. The Company also recorded an inventory write
down of approximately $1,178,836 related to its decision to exit its
Systems business in November 1998.
During the twelve months ended December 31, 1998, the Company
recorded interest expense of approximately $3,881,000 representing the
amortization of the debt issuance and interest costs related to the
Helix loans. This is a significant increase from approximately
$955,000 recorded for the nine-month period ending December 31, 1997.
This expense represents a non-cash charge.
Nine Months Ended December 31, 1997 Compared to Nine Months Ended
December 31, 1996
Net revenues increased to approximately $2,247,000 during the nine
months ended December 31, 1997 from $2,091,000 for the nine-month
period ended December 31, 1996. Net revenues for the respective
periods include approximately $924,000 and $1,422,000 of net sales of
Archistrat Computers, $350,000 and $100,000 of licensing fees, and
approximately $973,000 and $569,000 of revenues associated with a
cooperative development agreement with the U.S. government. Computer
systems revenues of approximately $924,000 were recorded during the
nine months ended December 31, 1996 as a result of a barter
transaction with a software developer. Other sales of Archistrat
computers increased 85% during the nine months ended December 31, 1997
compared to the same period of 1996 as the Company refocused its
selling efforts on certain niche markets. In July 1997, the Company
entered into a second licensing agreement with LG Cable whereby LG was
granted a license with respect to a semiconductor package product. In
connection with this agreement, the Company was entitled to a non-
refundable license fee of $250,000 that became immediately vested upon
signing the agreement and has been recorded as revenue during the nine
months ended December 31, 1997. The Company accomplished a majority
of the milestones set forth in its cooperative development agreement
with the Defense Advanced Research Projects Agency (DARPA) during the
nine months ended December 31, 1997 which accounts for the 71%
increase in the related revenue compared to the same period of 1996.
Revenues associated with this agreement will be limited during 1998 as
the agreement near its end.
During the nine months ended December 31, 1997 as compared to the
same period of the prior year, research and development expenses
decreased 32% from approximately $4.8 million to $3.3 million.
Development activities associated with Archistrat 4s server were
substantially completed during the period ended December 31, 1996
which resulted in the overall decrease. Spending related to the
design and development of automated manufacturing equipment for the
Company's VSPA product line as well as various new Archistrat computer
systems increased during the nine months ended December 31, 1997 as
compared to the same period of the prior year.
SG&A expenses decreased approximately $4.7 million or 44% to $6.1
million during the nine months ended December 31, 1997 as compared to
$10.8 million during the comparable period of 1996. The most
significant changes were in the following categories: compensation and
benefits decreased approximately $3.1 million resulting from a
decrease in the average employee head count from approximately 118
during the nine months ended December 31, 1996 to approximately 60 for
the same period of the current year; legal fees decreased 48% or
$580,000 as a result of management's efforts to reduce such costs;
office rent expense decreased approximately $440,000 resulting from
certain lease termination costs incurred during 1996; sales and
marketing expenses were reduced approximately $700,000 as a result of
streamlining certain of the Company's advertising and promotional
campaigns, as well as the reduction of product marketing expenses
associated with the barter agreement entered into in the prior fiscal
year.
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During the nine months ended December 31, 1996, the Company
determined that, due to various events and changes in circumstances
(including efforts to streamline operations and to increase the use of
strategic alliances to manufacture and market the Company's products),
certain long-lived assets were imparted. As a result, the Company
recorded a charge of approximately $1.5 million. No such charges were
deemed necessary during the nine months ended December 31, 1997.
During the nine months ended December 31, 1997, the Company recorded
interest expenses of approximately $900,000 representing the
beneficial conversion feature associated with the convertible
debentures issued in April 1997. This expense represents a non-cash
charge with no net effect on total shareholders' equity.
Quarter and Nine Months Ended September 30, 1999 and 1998
Net revenues increased during the quarter ended September 30,
1999 ("Third Quarter of 1999") to approximately $250,000 as compared
to $190,000 for the quarter ended September 30, 1998 ("Third Quarter
of 1998"). The net revenue increase for the quarter was attributable
to a one time license fee to be paid by Aju Exim, a Korean lead frame
manufacturer. In addition, the third quarter of 1998 revenue was
solely recognized from product sales of remaining Rock City inventory
and VSPA sales for prototype, pre-production and production orders.
In the third quarter of 1999, no such product sales were realized.
Net revenues for the nine months ended September 30, 1999 were
approximately $1,154,000 compared to approximately $648,000 for the
same period last year as a result of increased technology revenues,
including two one time, up front licensing fees totalling $750,000. In
addition, in 1998 approximately $138,000 of revenue was recorded
related to contract research and development from DARPA which was
successfully completed in April of 1998.
Research and development ("R&D") expenses decreased to
approximately $183,000 for the Third Quarter of 1999 as compared to
approximately $804,000 for the Third Quarter of 1998. R&D for the
first nine months of 1999 was approximately $755,000 attributable to
new custom VSPA designs for specific customer applications and the
refinement of the existing VSPA Flex automation machines. R&D for the
first nine months of 1998 was approximately $2,832,000. This decrease
is primarily due to ceasing operations relating to Systems activity,
including the Rock City computers, and the completion of the
cooperative development agreement with the US government.
Consistent with management's focus on decreasing fixed costs,
selling, general and administrative ("SG&A") expenses decreased for
the Third Quarter 1999 to approximately $858,000 compared to
approximately $2,076,000 for the Third Quarter 1998. The average
number of employees has decreased from 40 at September 30, 1998 to 17
full time employees as of September 30, 1999. The decrease in full-
time employees is directly related to ceasing operations related to
Systems activity and the need to reduce on going operational costs.
Payroll and related expenses decreased to approximately $345,600 for
the quarter ended September 1999 as compared to $1,054,000 for the
quarter ended September 1998.
For the nine months ending September 30,1999 SG&A decreased to
approximately $3,582,000 compared to $6,316,000 for the same period in
1998. The average number of full-time employees decreased to 17 from
40. The decrease in full-time employees is directly related to
ceasing operations related to the Systems activity and the need to
reduce on going operational costs. Payroll and related expenses
decreased approximately $2,001,000 for the nine months ended September
30, 1999 compared to the same period in 1998. In addition, a non-cash
charge of $327,600 related to the issuance of 2,100,000 shares and
$585,000 related to the 3,750,000 shares to be issued pursuant to the
Sarubbi settlement is recorded in SG&A.
Total debt issuance costs associated with short-term borrowings from
Helix, including the value of the warrants issued in connection with
such borrowings, charged to amortization expense during the quarter
ended September 30, 1999, amounted to zero, however for the Third
Quarter 1998, $1,246,000 was charged to amortization expense. For the
nine months ending September 30, 1999 approximately $525,000 and for
the nine months ending September 30, 1998 approximately $2,476,000 was
charged to amortization expense. The valuation of the warrants and
related amortization expense represents a non-cash transaction.
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In the Third Quarter 1999,$177,000 of liquidating damages are
recorded in accrued penalties related to the 1998 common stock private
placement. For the nine months ended September 30, 1999 accrued
penalties totalling $2,170,000 related to the Series A Preferred
Convertible transaction and the 1998 common stock private placement
were recorded. 171 Preferred penalty shares at $1,710,000; pursuant
to the Exchange Agreement, will be converted at a fixed conversion
price of $.261. At today's market prices of approximately $.12 per
share the value of the common stock shares would be valued at
approximately $205,000. The penalty shares were issued related to the
Series A Preferred Convertible transaction and the 1998 common stock
private placement holders of the Series A Preferred Convertible in
lieu of any accrued or future penalties. In addition, $460,500 of
liquidating damages related to the remaining 1998 common stock private
placement holders which did not receive penalty shares is recorded in
accrued penalties. There were no such penalties as of the third
quarter of 1998.
Interest expense increased for the nine months ended September
30, 1999 to $302,000 as compared to $21,000 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.
Other income increased in the third quarter of 1999,
approximately $108,000 from the same period last year related to the
settlement of various trade receivables for less than the amount
originally expensed.
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 September 30, 1999, 271.76 shares
of preferred stock were converted into an aggregate of 4,637,310
shares of Panda Common Stock. As of September 30, 1999, 529.24
preferred shares are outstanding including dividends.
The Company may require that all unconverted shares of Series A
Preferred Stock be converted at any time if the closing bid price of
Panda Common Stock is equal to or greater than $12.00 per share for a
period of twenty consecutive trading days. In addition, on February
11, 2003, the Company may, at its option, require the holders to
convert the shares of Series A Preferred Stock which remain
outstanding on such date (plus accrued and unpaid dividends) or redeem
such shares of Series A Preferred Stock. The terms of the Series A
Preferred Stock, as revised on July 2, 1998, provide that upon the
occurrence of certain Triggering Events, as defined in the Panda
Articles, the Company may be required to pay the holders $100,000 per
month until such time that the Triggering Event has been remedied.
Any requirement that the Company pay such amounts could have a
material adverse impact on the Company in the event the Triggering
Event causing such payment is not remedied on a timely basis. On
December 16, 1998, a triggering event occurred related to the
delisting of Panda Common Stock from the Nasdaq National Market to the
OTC Bulletin Board. 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 Panda Common Stock and warrants in a private placement to
accredited investors with gross proceeds of $3.675 million. Upon
exercise of certain warrants, the investors may elect to receive a
reduced number of shares of common stock in lieu of tendering the
warrant exercise price in cash. The warrants have a term of five
years. The Company issued approximately 4,400,000 additional shares
associated with the fill-up provision. The Company is required to
issue approximately 6,000,000 additional shares of Panda Common Stock
as of August 15, 1999 in accordance with the Fill-up provision.
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During May, June and July 1998, the Company borrowed an aggregate of
$2 million from Helix PEI Inc. ("Helix"). The loans are secured by
the Company's intellectual property and were due August 7, 1998.
During August 1998, Helix agreed to extend the maturity date of all
the outstanding loans payable to February 15, 1999, from their
original due date in August 1998, in exchange for the issuance of a
warrant to purchase up to 2,000,000 shares of Panda Common Stock at an
exercise price equal to the fair market value of Panda Common Stock at
the date of issuance ($2.125). The loans bear interest at the Royal
Bank of Canada prime rate plus 2 percentage points per annum (9.40% at
June 30, 1999) payable monthly. The warrant has a term of two years.
The Company is currently in default on the Helix loans since the
Company did not repay the loan in February 1999.
On May 14, 1999, the Company, Helix and SBI entered into an
agreement whereas upon the closing of the acquisition of certain
assets of the Company by SBI, SBI will pay $1,000,000 to Helix. In
consideration of such payment, and the issuance of 1,000,000 shares of
Panda Common Stock to Helix, Helix released Panda from payment on all
accrued interest on the notes remaining unpaid as of the date of such
payment of $1,000,000. The remaining $1,000,000 and accrued interest
will be paid in eleven payments by SBI to Helix.
On December 15, 1998, the Company reduced the exercise price of
certain common stock purchase warrants if the warrant holders
accelerate the expiration date of their warrants from July 11, 2001 to
January 5, 1999. The exercise price was reduced from $11.00 to $0.75
per share. In January 1999, warrants representing 553,333 shares were
exercised at this reduced price, and the Company received net proceeds
of $415,000 upon such exercise. In February 1999, the Company
received $1,000,000 from Samtec, Inc. which includes a non-refundable
up-front license fee related to VSPA and a purchase of 666,667 shares
of Panda Common Stock.
In the third quarter 1999, the Company's payables were segmented
into the following categories: operational, professional, Systems and
Technology. Payables in the third quarter 1999 of approximately
$1,183,000 as compared to the third quarter 1998 of approximately
$1,208,000 increased or decreased as follows: Operations 15% versus
17%, professional fees 75% versus 21%, System 1% versus 34%, and
Technology 9% 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 (net of the allowance for
doubtful accounts for all System related receivables) related to the
third quarter of 1999 of approximately $8,500 represent Technology
related receivables whereas accounts receivables related to the third
quarter of 1998 of approximately $64,600 are approximately 80% related
to Computer Systems.
The Company has been able to obtain short-term financing through
secured promissory notes totalling $1,250,000 through October 1, 1999.
These funds have allowed the Company to fund certain monthly
obligations as well as certain payables. Additionally, the Company
has settled certain obligations through the issuance of Panda Common
Stock. In the event that the SBI transaction does not close, the
Company will seek additional financing from other alternatives. The
Company does not anticipate any additional liquidity from the letter
of intent, which expired May 1999, entered into by and between the
Company and Roundstone. Since the Company's current working capital
is insufficient to operate the Company, in the event that the Company
cannot seek additional financing, it will be forced to cease
operations.
The Company has entered into an agreement with SBI to sell its
intellectual property portfolio as well as the fixed assets related to
its interconnect and semiconductor business. As part of the sale, the
Company has restructured its outstanding loans with Helix that have
been in default since February 15, 1999. SBI will assume such Helix
loans upon closing. Additionally, the Company has entered into an
agreement with the Series A Preferred shareholders for the exchange
and conversion of the outstanding preferred shares into 22,995,919
common shares at a fixed price of $.261. The restructuring of these
agreements is partially contingent upon the closing of the sale to SBI
The transaction is subject to customary closing conditions, including
the approval of the Company' shareholders. Helix, Sarubbi and the
Series A Preferred shareholders have entered into a Voting Agreement
with SBI and such holders own sufficient shares, approximately 52%,
to assure the approval of the transaction by the Company's
shareholders. The Company will receive a 10% ownership interest in
SBI which will initially be capitalized with $6,000,000.
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In June, July, August and October 1999, the Company entered into
agreements with SBI pursuant to which SBI has loaned the Company
$1,250,000. In connection with the loan, the Company has granted to
SBI a security interest in substantially all of the assets of the
Company pursuant to the Security Agreement, dated October 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.
Year 2000 Issues
Like many other companies, Year 2000 computer issues create certain
risks for the Company. If our financial, operational and information
systems do not correctly recognize the process date information beyond
the year 1999, it could have a significant adverse impact on the
Company's ability to process information, which could create
significant potential liability for the Company. To address potential
Year 2000 issues with its internal systems, we have evaluated these
systems. The initial assessment indicated that certain internal
systems should be upgraded or replaced as part of a solution to the
Year 2000 problem. The costs incurred to date related to these
programs have not been material. The estimated cost to be incurred by
us in the future is not expected to exceed $20,000. These estimates
do not include potential costs related to any customer or other claims
or the cost of internal software and hardware replaced in the normal
course of business. These estimates are based on our current
assessment of the projects and may change as the project progresses.
The Company believes that its potential liability related to its
products for Year 2000 compliance is not expected to exceed $5,000.
The Systems products Rock City, 5R, and 5S are year 2000 compliant.
The 4S may not, depending on the operating system used, make the
transition automatically. Specifically, 4S systems using the Pentium
100 and Pentium 166 Intel processors. Once the systems are assisted
by changing the date and time in the Bios, then the system is year
2000 compliant. The Company estimates that approximately 100 4S
computers with this potential problem were sold. The Semiconductor
and interconnect products are sold as components as opposed to
completed products and therefore there is no liability associated with
the year 2000 issue.
We are also working with key suppliers of products and services to
monitor their progress toward Year 2000 compliance. The failure of a
major supplier to become Year 2000 compliant on a timely basis could
have a material adverse affect on our business, financial condition
and operating results.
We have begun internal discussions concerning contingency planning
to address potential problem areas with internal systems and with
suppliers and other third parties. We expect assessment, remediation
and contingency planning activities to continue throughout the year
1999 with the goal of resolving all material internal and external
systems and third-party issues. While the Company has not completed
its detail plans with regards to this uncertainty, management
believes, based on discussions with vendors of its major business
applications and Year 2000 Compliance certificates received from the
related software developers, that the financial impact of making the
required systems changes, if any, will not be material to the
Company's financial position, results of operations or cash flows.
We deem "Year 2000 Compliant" to mean software that can
individually, and in combination with all other systems, products or
processes with which the software is designed to interface, continue
to operate successfully (both in functionality and performance in all
material respects) over the transition into the twenty-first century
when used in accordance with the documentation relating to such
software. Year 2000 Compliance includes being able to, before, on and
after January 1, 2000, substantially conform to the following:
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- use logic pertaining to dates which allow users to identify
and/or use the century portion of any date fields without special
processing;
- respond to all date elements and date input to resolve any
ambiguity as to century in a disclosed, defined and pre-determined
manner; and
- provide date information in ways which are unambiguous as to
century.
This may be achieved by permitting or requiring the century to be
specified or where the date element is represented without a century,
the correct century be unambiguous for all manipulations involving
that element.
Votes Required for Approval of Proposal 3
Approval of Proposal 3 requires that the number of votes cast in
favor or Proposal 3 exceed the number of votes cast against. Votes
for Proposal 3 may be cast in favor of or against the proposal or may
abstain from voting. Abstentions may be specified on the proposal and
will be considered present at the Annual Meeting, but will not be
counted as affirmative votes. In addition, broker non-votes, where
brokers are prohibited from exercising discretionary authority in
voting shares for beneficial owners who have not provided voting
instructions, will not be included in vote totals for Proposal 3, but
will be counted for purposes of determining whether there is a quorum
at the Annual Meeting.
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PROPOSAL 4:
RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
On January 4, 1999, the Board, acting upon the recommendation of the
Audit Committee, voted to replace its independent public accountants,
PricewaterhouseCoopers LLP ("PWC"), which had served as the
independent public accountants of the Company since 1993. On October
21, 1998, PWC delivered notice it was terminating its client auditor
relationship with the Company. The reports of PWC for the two fiscal
years ended March 31, 1997 and 1996 and the transition period ended
December 31, 1997 did not contain any adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit
scope or accounting principles. The opinion, however, did include an
explanatory paragraph expressing substantial doubt about the Company's
ability to continue as a going concern. During the fiscal years ended
March 31, 1997 and 1996, the transition period ended December 31, 1997
and the subsequent interim period through October 21, 1998 preceding
such termination, there were no disagreements between the Company and
PWC on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PWC, would have
caused it to make a reference to the subject matter of the
disagreements in connection with its report. In addition, during the
fiscal years ended March 31, 1997 and 1996, the transition period
ended December 31, 1997 or the subsequent interim period through
October 21, 1998, there were no "reportable events" within the meaning
of Item 304 of the Securities and Exchange Commission's Regulation S-
K.
The Board of Directors has appointed the firm of Grant Thornton LLP
to continue as independent certified public accountants for Panda for
the fiscal year ending December 31, 1999. Grant Thornton LLP has been
acting as independent certified public accountants of Panda since
January 4, 1999. Unless otherwise indicated, properly executed
proxies will be voted for the ratification of the appointment of Grant
Thornton LLP, independent certified public accountants, to audit the
books and accounts of Panda for the fiscal year ending December 31,
1999.
Representatives of Grant Thornton LLP are expected to be present at
the Annual Meeting, will be given an opportunity to make a statement
if they desire to do so, and will also be available to respond to
appropriate questions from shareholders.
The Board recommends that shareholders vote "FOR" the ratification
of the appointment of Grant Thornton LLP as independent public
accountants for Panda for the fiscal year ending December 31, 1999.
Votes Required for Approval of Proposal 4
Approval of Proposal 4 requires that the number of votes cast in
favor of Proposal 4 exceed the number of votes cast against. Votes
for Proposal 4 may be cast in favor of or against the proposal or may
abstain from voting. Abstentions may be specified on the proposal and
will be considered present at the annual meeting, but will not be
counted as affirmative votes. In addition, broker non-votes, where
brokers are prohibited from exercising discretionary authority in
voting shares for beneficial owners who have not provided voting
instructions, will not be included in vote totals for Proposal 4, but
will be counted for purposes of determining whether there is a quorum
at the annual meeting.
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EXPERTS
The financial statements of Panda contained in this Proxy
Statement for the year ended December 31, 1998 are included in
reliance on the report (which contains an explanatory paragraph
relating to The Panda Project, Inc.'s ability to continue as a going
concern as described in Note B of the financial statements) of Grant
Thornton LLP for the year ended December 31, 1998 and the report
(which contains an explanatory paragraph relating to The Panda
Project, Inc.'s ability to continue as a going concern as described in
Note 2 to the financial statements) as of December 31, 1997 and for
the nine-month period ended December 31, 1997 and for the year ended
March 31, 1997 of PricewaterhouseCoopers LLP. Such financial
statements are given upon the authority of such firms as experts in
accounting and auditing.
SHAREHOLDER PROPOSALS
Panda presently anticipates that its next Annual Meeting of
Shareholders will be held on or about May 15, 2000. Any proposal by a
shareholder intended to be presented at the 2000 Annual Meeting of
Shareholders must be received by Panda at its principal executive
offices not later than March 1, 2000 for inclusion in Panda's Proxy
Statement and form of Proxy relating to that Annual Meeting of
Shareholders.
SHAREHOLDER LIST
A list of shareholders entitled to vote at the Annual Meeting will
be available for inspection by any shareholder for any purpose germane
to the Annual Meeting during ordinary business hours of Panda for a
period of ten days prior to the Annual Meeting at Panda's principal
executive offices.
WHERE YOU CAN FIND MORE INFORMATION
Panda files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also
available to the public from commercial document retrieval services
and at the web site maintained by the SEC at "http://www.sec.gov."
You should rely only on the information contained this Proxy
Statement to vote on the Proposed Sale. We have not authorized anyone
to provide you with information that is different from what is
contained in this Proxy Statement. This Proxy Statement is dated
December 27, 1999. You should not assume that the information
contained in this Proxy Statement is accurate as of any date other
than such date, and neither the mailing of this Proxy Statement to
shareholders nor the issuance of SBI common stock in the Proposed Sale
shall create any implication to the contrary.
By Order of the Board of Directors,
Melissa F. Crane
Secretary
<PAGE>
Page F-1
The Panda Project, Inc.
Index to the Financial Statements
- - -----------------------------------------------------------------
Page
Interim Financial Statements (unaudited)
Condensed Balance Sheets............................. F-2
Condensed Statements of Operations................... F-3
Condensed Statements of Cash Flows................... F-4
Notes to Condensed Financial Statements............. F-5 to F-14
Reports of Independent Certified Public Accountants..F-16 to F-17
Financial Statements
Balance Sheets....................................... F-18
Statements of Operations............................. F-19
Statements of Changes in Stockholders'
(Deficit) Equity.................................... F-20 to F-21
Statements of Cash Flows............................ F-22 to F-23
Notes to Financial Statements...................... F-24 to F-44
<PAGE>
Page F-2
The Panda Project, Inc.
Condensed Balance Sheets
September 30, December 31,
1999 1998
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 80,535 $ 60,613
Accounts receivable-trade (net of
allowance of $295,292 at September 30,
1999 and at December 31, 1998) 8,496 64,206
Inventory, net 24,167 47,319
Other receivables 289,618 19,273
Prepaid expenses and other current
assets 43,128 637,947
------------- -------------
Total current assets 445,944 829,358
------------- -------------
Property and equipment, net 1,171,853 1,845,939
Restricted cash 80,000 80,000
Other assets 85,104 82,540
------------- -------------
Total assets $ 1,782,901 $ 2,837,837
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 1,182,648 $ 1,207,662
Notes payable 2,950,000 2,000,000
Accrued expenses and other
current liabilities 2,282,584 1,356,069
------------- -------------
Total current liabilities 6,415,232 4,563,731
------------- -------------
Stockholders' Deficit:
Preferred stock, $.01 par value,
2,000,000 shares authorized: 1,000
shares designated as Series A, 529 shares
issued and outstanding at September 30,
1999 and 420 shares issued and
outstanding at December 31, 1998 4,864,137 3,967,057
Common Stock, $.01 par value, 50,000,000
shares authorized: 29,698,425 shares
issued and outstanding at September 30,
1999 and 16,744,088 shares issued
and outstanding at December 31, 1998 296,985 167,441
Additional paid-in capital 76,931,972 74,479,857
Accumulated deficit (86,725,425) (80,340,249)
------------ ------------
Total stockholders' deficit (4,632,331) (1,725,894)
------------ ------------
Total liabilities and stockholders'
deficit $ 1,782,901 $ 2,837,837
============= =============
See Notes to Condensed Financial Statements.
<PAGE>
Page F-3
<TABLE>
The Panda Project, Inc.
Condensed Statements of Operations (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 101 $ 193,268 $ 403,841 $ 515,186
Licensing fees 250,000 - 750,000 -
Contract research and
development revenues - - - 135,673
Less returns and
Allowances - (3,239) - (3,239)
----------- ----------- ----------- -----------
Net revenues $ 250,101 $ 190,029 $ 1,153,841 $ 647,620
Costs and expenses:
Cost of sales 11,933 169,152 206,060 563,604
Research and
development 182,988 803,722 754,652 2,832,242
Selling, general
and administrative 858,127 2,076,024 3,582,071 6,316,268
Amortization of debt
issuance costs/
accrued penalties 177,000 1,246,000 2,695,500 2,475,514
Cost associated with
asset impairments 167,223 - 167,223 -
----------- ----------- ----------- -----------
Total costs and
expenses 1,397,217 4,294,898 7,405,506 12,187,628
----------- ----------- ----------- -----------
Operating loss (1,147,170) (4,104,869) (6,251,665) (11,540,008)
Interest income (expense) (599) 21,299 (302,938) (21,298)
Other income 105,287 (3,075) 111,059 47,311
Gain on Sale/
Disposal of Assets 3,695 - 58,368 -
----------- ----------- ----------- -----------
Net loss $(1,038,787) $(4,086,645) $(6,385,176)$(11,513,995)
============ =========== =========== ===========
Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock - (177,872) (54,067) (689,713)
============ =========== =========== ===========
Net loss applicable to
common stock $(1,038,787)$(4,264,517) $(6,439,243) (12,203,708)
============ =========== =========== ===========
Basic and diluted loss
per common share $ (.04) $ (.31) $ (.26) $ (.95)
=========== =========== =========== ===========
Weighted average shares
outstanding 24,323,537 13,850,943 24,587,384 12,779,174
=========== =========== =========== ===========
See Notes to Condensed Financial Statements.
</TABLE>
Page F-4
The Panda Project, Inc.
Condensed Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
1999 1998
------------- -------------
Net cash used in
operating activities (1,925,453) (9,274,041)
Cash flows from investing activities:
Additions to property and equipment - (647,601)
Dispositions of property and equipment 80,200 -
------------- -------------
Net cash provided by (used in)
investing activities 80,200 (647,601)
Cash flows from financing activities:
Proceeds from issuance of
convertible preferred stock - 6,000,000
Proceeds from issuance of
common stock 915,175 3,778,465
Proceeds from issuance of notes
payable 950,000 3,000,000
Repayment of notes payable - (2,000,000)
Payments of convertible preferred
stock - -
issuance costs - (193,013)
------------- -------------
Net cash provided by financing
activities 1,865,175 10,585,452
------------- -------------
Net increase in cash
and cash equivalents 19,922 663,810
------------- -------------
Cash and cash equivalents at
beginning of period 60,613 619,683
------------- -------------
Cash and cash equivalents at end
of period $ 80,535 $ 1,283,493
============= =============
See Notes to Condensed Financial Statements.
<PAGE>
Page F-5
The Panda Project, Inc.
Notes to Condensed Financial Statements
September 30, 1999
1. Basis of Presentation
The accompanying condensed financial statements of The Panda Project,
Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles on a basis consistent in all material
respects with those applied in the Annual Report on Form 10-K for the
twelve months ended December 31, 1998. The interim financial
information is unaudited, but reflects all normal and recurring
adjustments which are, in the opinion of management, necessary to
provide a fair statement of results of operations for the interim
periods presented. The interim financial statements should be read in
connection with the financial statements in the Annual Report on Form
10-K for the twelve months ended December 31, 1998.
2. Inventory
The inventory as of September 30, 1999 is comprised of the Company's
VSPA raw materials and finished goods of $14,365 and the net
realizable value of the Systems inventory of $9,802 (net of reserves
of $1,557,934). The inventory as of December 31, 1998, is comprised
of the Company's VSPA raw materials and finished goods of $22,320 and
the net realizable value of the systems inventory of $25,000 (net of
reserves of approximately $1,778,837).
Product sales for the nine months ended September 30, 1999 includes
approximately $112,000 related to the sale of Systems inventory. These
sales had no related cost of sales as inventory items with original
cost of approximately $234,000 were reserved as of December 31, 1998.
3. Other Receivables
Other receivables consists of a $250,000 one time licensing fee with
Aju Exim, a Korean lead frame manufacturer. On October 27, 1999, the
company received payment of $250,000 related to the one time licensing
fee.
<PAGE>
Page F-6
4. Property and Equipment
During the three months ended September 30, 1999, the Company
determined that certain long-lived assets were impaired as a result of
changes in the functional use of the equipment. As a result, the
Company recorded charges totalling $167,223, related to certain
manufacturing equipment.
5. Accounts Payable
During the three months ended September 30, 1999, the Company settled
various trade receivables with vendors for less than the amount
originally expensed. This difference of $105,287 was recorded in
other income.
6. Notes Payable
The Company has outstanding loans from Helix in the aggregate
principal amount of $2,000,000. Such loans bear interest at an annual
rate equal to the prime rate of interest payable by the Royal Bank of
Canada plus 2%, are secured by the Company's intellectual property and
were due and payable on February 15, 1999. As of November 1, 1999,
this principal amount due Helix has not been repaid and is in default.
The inability of the Company to repay the Helix loans when due may
have a material adverse effect on the Company, including possible loss
of rights to its intellectual property through foreclosure which would
cause the Company to cease its operations. In connection with the
Helix loans, the Company has issued to Helix warrants to purchase an
aggregate of 2,850,000 shares of Common Stock at exercise prices
ranging from $1.63 to $2.125 per share (collectively, the "Helix
Warrants"). The Helix Warrants have expiration dates ranging from
December 19, 1999 to August 7, 2000. These warrants have been valued
at an aggregate of approximately $4,324,000 and have been recognized
as debt issuance costs and were fully amortized as of February 15,
1999. This accounting treatment has no impact on the Company's cash
balance. As of September 30, 1999, Helix and its affiliates hold
approximately 3.4% of the Company's outstanding Common Stock (not
including shares issuable upon exercise of warrants).
On May 14, 1999, the Company, Helix and Silicon Bandwidth, Inc.
("SBI") entered into an agreement ("Helix Agreement") whereas upon the
closing of the acquisition of certain assets of the Company by SBI,
SBI will pay $1,000,000 to Helix. In consideration of such payment,
and the issuance of 1,000,000 shares of Panda common stock to Helix,
Helix releases Panda from payment on all accrued interest on the notes
remaining unpaid as of the date of such payment of $1,000,000. The
remaining $1,000,000 and accrued interest will be paid in eleven
payments by SBI to Helix. (See exhibit 2.3)
<PAGE>
Page F-7
On June 11, 1999, the Company entered into an agreement with SBI
pursuant to which SBI has loaned the Company $300,000. 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 June 11, 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. (See Exhibit 4.9)
On July 15, 1999, the Company entered into an agreement with SBI
pursuant to which SBI has loaned the Company an additional $325,000
with borrowed amounts totalling $625,000. 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 July 15, 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. (See Exhibit 4.10)
On August 17, 1999, the Company entered into an agreement with SBI
pursuant to which SBI has loaned the Company an additional $325,000
with borrowed amounts totalling $950,000. In connection with the loan,
the Company has granted to SBI a security interest in substantially
all of the assets of the Company pursuant to the Security Agreement,
dated August 17, 1999, by and between the Company and SBI. The loan
bears an interest rate of 6% per annum and is due and payable on
February 24, 2000. (See Exhibit 4.11)
On October 1, 1999, the Company entered into an agreement with SBI
pursuant to which SBI has loaned the Company an additional $300,000
with borrowed amounts totalling $1,250,000. In connection with the
loan, the Company has granted to SBI a security interest in
substantially all of the assets of the Company pursuant to the
Security Agreement, dated October 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. (See Exhibit 4.12)
7. Common Stock
In January 1999, the Company received approximately $415,000 from the
exercise of warrants to purchase 553,333 shares of the Company's
common stock related to the 1996 private placement. In February 1999,
the Company received $1,000,000 from Samtec, Inc. which includes a
non-refundable upfront license fee related to VSPA and, a purchase of
666,667 shares of the Company's common stock.
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. 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 (See Legal Proceedings). $327,600 was
recorded in SG&A related to the issuance of the additional 2,100,000
shares of the Company's common stock and $585,000 was recorded
related to the 3,750,000 common shares to be issued upon shareholder
approval of additional authorized shares.
<PAGE>
Page F-8
8. SERIES A CONVERTIBLE PREFERRED STOCK
On February 11, 1998, the Company issued 600 shares of its Series A
Convertible Preferred Stock ("Series A Preferred") and Common Stock
Purchase Warrants ("Warrants") to purchase an aggregate of 150,000
shares of common stock for a total purchase price of $6,000,000. The
purchase price was allocated to the Series A Preferred and Warrants
based on their relative fair value. The Warrants, which have a term
of five years and an exercise price, subject to adjustment for stock
splits and similar events, of $6.10 per share, were valued at $411,000
using the Black-Scholes option pricing model. Issuance costs of
approximately $193,000 were deducted on a pro rata basis from the
gross proceeds assigned to the Series A Preferred and the Warrants.
Holders of Series A Preferred are entitled to a dividend of 5% per
annum of the purchase price for the shares, payable either in cash or
as an accrual to the purchase price utilized in computing the number
of shares of Series A Preferred issuable upon conversion. Dividends
payable for the quarter ended March 31, 1999 in the amount of $54,067
have been accrued and added to the purchase price of the Series A
Preferred in lieu of a cash payment. Accrued dividends equal 30
shares of the Company's Series A Preferred stock through March 31,
1999.
Shares of Series A Preferred are convertible into shares of common
stock pursuant to a formula whereby the purchase price of the shares
to be converted plus any such dividends is divided by a conversion
price defined as the lower of (i) $3.50 subject to adjustment in the
event of certain dilutive issuances of securities by the Company or
for stock splits or similar events, or (ii) a percentage of the
average closing bid price of the common stock for the five days
immediately preceding conversion equal to 92%, if conversion occurs in
the period beginning 120 days and ending 180 days after issuance of
the Series A Preferred, or 90%, if conversion occurs after 180 days
from issuance of the Series A Preferred. However, On May 14, 1999 the
conversion price was set pursuant to the Exchange Agreement at $.261.
From July 1, 1998 through September 30, 1999, 272.14 shares of Series
A Preferred were converted into an aggregate of 4,666,492 shares of
common stock of the Company. As of September 30, 1999, 528.85 shares of Series
A Preferred (including 171 penalty shares) have not been converted. However,
these shares will be converted five days prior to the record date into
20,262,681 Common shares calculated as (528.85 x 10,000 / .261).
<PAGE>
Page F-9
The Company may require that all unconverted shares of Series A
Preferred be converted at any time if the closing bid price of common
stock is equal to or greater than $12.00 per share for a period of
twenty consecutive trading days. In addition, on February 11, 2003,
the Company may, at its option, require the holders to convert the
Series A Preferred shares which remain outstanding on such date (plus
accrued and unpaid dividends) or redeem such shares of Series A
Preferred. In the event certain conditions are met, the Company has
the right to cause the issuance of an additional 400 shares of Series
A Preferred for an aggregate purchase price of $4,000,000. In such
event, the Company would be required to issue Warrants to the
purchasers of Series A Preferred to purchase an additional 100,000
shares of common stock.
Under the terms of the transaction, as modified on July 2, 1998,
without the prior written approval of the holders of 66 2/3% of the
Series A Preferred shares that include GAM Arbitrage Fund L.P.,
AGR Halifax Fund, Ltd, Leonardo L.P., Ramius Fund, Ltd, Raphael L.P.,
AG Super Fund L.P.,, the Company shall not (1) consolidate or merge
with another corporation or other entity or person, whereby the
shareholders of the Company own in the aggregate less than 50%
of the ultimate parent or surviving entity, (2) transfer all or
substantially all of the Company's assets to another corporation or
other entity or person, or (3) fix a record date for the declaration
of a distribution or dividend, whether payable in cash, securities
or assets (other than shares of common stock).
In addition, a "Triggering Event" shall be deemed to have occurred
under the following circumstances: (1) the Company does not issue
shares of common stock registered for resale for any reason, including
(a) the Company does not have a sufficient number of shares of common
stock authorized and available, (b) is otherwise prohibited by
applicable law or by the rules or regulations of any stock exchange or
inter-dealer quotation system from issuing such shares (including as a
result of the Series A Exchange Cap discussed below) or (c) fails to
have a sufficient number of shares of common stock registered for
resale under a registration statement, and if such condition remains
unremedied for a period of 30 days, (2) suspension for a period of 30
consecutive days of a registration statement covering shares issuable
upon conversion of Series A Preferred, (3) failure of the Common Stock
to be listed, or suspension of trading in the Company's Common Stock
on the NASDAQ National Market or the NASDAQ SmallCap Market for a
period of five consecutive days, or (4) notice by the Company to any
holder of Series A Preferred of its intention not to comply with
proper requests for conversion of Series A Preferred. After a
Triggering Event, the Company is required to pay the holders $100,000
on the first day of each month until the Triggering Event is remedied.
<PAGE>
Page F-10
In the event the Company is unable to issue shares of its common stock
pursuant to a request for conversion for any reason, including,
without limitation, because the Company (1) does not have sufficient
number of shares of Common Stock authorized and available, (2) is
otherwise prohibited by applicable law or by the rules or regulations
of any stock exchange from issuing such shares, or (3) fails to have a
sufficient number of shares of Common Stock registered for resale
under a registration statement, and if such condition remains
unremedied for a period of 30 days, the dividend rate for all shares
of Series A Preferred that cannot be converted into shares of Common
Stock pursuant to such limitations will increase on a formula basis
until such securities have been duly converted.
In connection with this transaction, the Company filed a registration
statement on form S-3 (the "form S-3") with the Securities and
Exchange Commission ("SEC") to effect the registration for resale of
2,000,000 shares of Common Stock issuable upon conversion of the
Series A Preferred and 150,000 shares of common stock issuable upon
exercise of the Warrants, plus an additional number of shares of
Common Stock, not to exceed the Exchange Cap, described below, that
may be usable upon conversion of the Series A Preferred as a result of
antidilution provisions. The Form S-3 has been declared effective by
the Securities and Exchange Commission. As of March 31, 1999,
3,650,214 shares of Common Stock issued upon conversion of Series A
Preferred had been sold pursuant to the Form S-3. As of September 30,
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 amortized over a period of six months. In the quarter
ending September 30, 1999 there was no additional amortization
expense.
On May 14, 1999 the Company entered into an Exchange Agreement with
the Series A Preferred Stock Holders ("Holders") to exchange their
preferred shares for the Company's common shares at an exchange rate
of $.261. In connection with this agreement the Company issued an
additional 171 shares of Series A Preferred stock to the Holders in
payment for penalties owed to such holders. The Holders hereby agree
to waive all penalties owed by the Company. Additionally, in
consideration of the Exchange Agreement the Holders have agreed to
enter into a voting agreement in favor of the Company's sale of its
intellectual property portfolio and certain fixed assets related to
the interconnect and semiconductor business. (See Exhibit 2.4)
<PAGE>
Page F-11
9. August Private Placement
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 has 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.
As of the six month anniversary date Panda has issued 4,441,658 shares
of the Company's common stock pursuant to the Fill-Up provision. The
twelve month anniversary was August 15,1999 and the Company is
required to issue approximately 6,000,000 additional shares of Panda
common stock. As of the current date these shares have not been
issued. The Company intends to seek shareholder approval to increase
the number of shares allowed to be issued to fulfill its obligation.
Accordingly, the Company recorded $600,000 as part of accrued
expenses.
<PAGE>
Page F-12
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.
Panda has agreed to file a registration statement with the Commission
to effect the registration for resale of the Common Stock issued in
the Private Placement pursuant to the Fill-Up provisions. If the
registration statement is not declared effective by the Commission
within 90 days after the closing of the Private Placement, Panda may
be liable to investors for penalty payments for each month that such
registration statement has not been declared effective. As of July 9,
1999, the registration statement relating to these shares of Common
Stock has not been declared effective and Panda could be subject to
such penalty payments. Panda shall pay to the holders of the common
stock an amount ranging from 1% to 3% of the purchase price paid for
the common shares issued multiplied by: (i) the number of months
(prorated for partial months) after the end of such 90-day period and
prior to the date the Registration Statement is declared effective by
the Commission exclusive of certain delays which are attributable to
the holders, (ii) exclusive of Allowed Delays (as defined), the number
of months (prorated for partial months) that sales cannot be made
pursuant to the Registration Statement after the Registration
Statement has been declared effective and (iii) exclusive of Allowed
Delays the number of months (prorated for partial months) that the
Common Stock is not listed or included for quotation on the NASDAQ,
NYSE or AMEX or that trading there on is halted after the Registration
Statement has been declared effective.
10. Commitments and Contingent Matters
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.
<PAGE>
Page F-13
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. 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. $585,000 has been
recorded in Panda's financial statements as part of SG&A for the
planned issuance of the additional 3,750,000 shares of Panda Common
Stock. The Amended Settlement Agreement imposed a deadline of
<PAGE>
Page F-14
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.
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.
11. Subsequent Events
On October 1, 1999, the Company entered into an agreement with SBI
pursuant to which SBI has loaned the Company an additional $300,000
with borrowed amounts totalling $1,250,000. In connection with the
loan, the Company has granted to SBI a security interest in
substantially all of the assets of the Company pursuant to the
Security Agreement, dated October 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. (See Exhibit 4.12)
On November 9, 1999, the Company filed an 8-K stating Mr. Sarubbi has
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.
<PAGE>
Page F-15
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
The Panda Project, Inc.
We have audited the accompanying balance sheet of Panda Project, Inc.
As of December 31, 1998, and the related consolidated statements of
operations, changes in stockholders' (deficit) equity, and cash flows
for the year 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 audit.
We conducted our audit 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 audit provides 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, 1998, and the results of its
operations and its cash flows for the year 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 $17,474,696
during the year ended December 31, 1998, and, as of that date, the
Company's current liabilities exceeded its current assets by
$3,734,373 and its total liabilities exceeded its total assets by
$1,725,894. In addition, the Company is in default on $2,000,000 of
its notes payable. 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
year ended December 31, 1998. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set
forth therein.
Grant Thornton LLP
Weston, Florida
March 18, 1999 (except for Note U,
as to which the date is April 14, 1999)
<PAGE>
Page F-16
Report of Independent Certified Public Accountants
To The Board of Directors and Stockholders of
The Panda Project, Inc.
In our opinion, the balance sheet and related statements of
operations, of changes in stockholders equity and of cash flows as of
December 31, 1997 and for the nine months ended December 31, 1997 and
year ended March 31, 1997 appearing on pages F4-F9 of this Annual
Report on Form 10-K present fairly, in all material respects, the
financial position, results of operations and cash flows of The Panda
Project, Inc. as of December 31, 1997 and for the nine months ended
December 31, 1997 and the year ended March 31, 1997, in conformity
with generally accepted accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which 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,
assessing the accounting principals used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the financial
statements of The Panda Project, Inc. for any period subsequent to
December 31, 1997.
The financial statements referred to above have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note B to the financial statements, the Company's recurring losses
from operations and limited capital resources raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plans in regard to these matters is also described in
Note B. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 10, 1998
<PAGE>
Page F-17
The Panda Project, Inc. - Balance Sheets
- ---------------------------------------------------------------------
The Panda Project, Inc.
BALANCE SHEETS
December 31,
ASSETS
1998 1997
Current assets
Cash and cash equivalents $ 60,613 $ 619,683
Accounts receivable (net of allowance
of $295,292 at December 31, 1998 and
$10,006 at December 31, 1997) 64,206 224,851
Inventory 47,319 965,199
Other receivables 19,273 105,825
Prepaid expenses and other current assets 637,947 378,242
----------- -----------
Total current assets 829,358 2,293,800
Property and equipment, net 1,845,939 2,818,218
Restricted cash 80,000 260,000
Debt issuance costs, net - 340,513
Other assets 82,540 1,299
----------- -----------
Total assets $ 2,837,837 $ 5,713,830
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable $ 1,207,662 $ 1,651,540
Notes payable 2,000,000 1,000,000
Other current liabilities 1,356,069 964,586
----------- -----------
Total current liabilities 4,563,731 3,616,126
Commitments and contingencies - -
Stockholders' (deficit) equity
Preferred Stock, $.01 par value, 2,000,000
shares authorized; 420 shares outstanding
at December 31, 1998 3,967,057 -
Common stock, $.01 par value, 50,000,000
shares authorized; 16,744,088 and
12,215,522 shares issued and outstanding
at December 31, 1998 and 1997, respectively 167,441 122,155
Additional paid-in capital 74,479,857 64,841,102
Accumulated deficit (80,340,249) (62,865,553)
----------- -----------
Total stockholders' (deficit) equity (1,725,894) 2,097,704
----------- -----------
Total liabilities and stockholders'
(deficit) equity $ 2,837,837 $ 5,713,830
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
PAGE F-18
The Panda Project, Inc.
STATEMENTS OF OPERATIONS
Nine Months Year
Year Ended Ended Ended
December 31, December 31, March 31,
1998 1997 1997
------------ ------------ ------------
Revenues
Product sales $ 586,907 $ 923,792 $ 1,547,896
Licensing fees 100,000 350,000 100,000
Contract research and
development revenues 135,673 973,003 734,123
------------ ------------ ------------
Net revenues 822,580 2,246,795 2,382,019
Other expenses
Cost of sales 1,739,418 1,028,577 2,762,936
Research and development 3,395,577 3,255,335 5,722,717
Selling, general and
administrative 9,263,283 6,113,255 13,142,099
Cost associated with asset
impairments 125,038 - 2,056,025
------------ ------------ ------------
Total operating expenses 14,523,316 10,397,167 23,683,777
------------ ------------ ------------
Operating loss (13,700,736) (8,150,372) (21,301,758)
Interest expense (3,881,406) (955,014) -
Interest income 72,345 144,449 427,657
Other income 35,101 11,285 -
------------ ------------ ------------
Net loss $(17,474,696) $ (8,949,652) $(20,874,101)
============ ============ ============
Dividends and amort-
ization of beneficial
conversion feature
related to convertible
preferred stock (741,886) - -
------------ ------------ ------------
Net loss applicable
to common stock $(18,216,582) $ (8,949,652) $(20,874,101)
============ ============ ============
Basic and diluted loss
per share $ (1.33) $ (.78) $ (2.15)
============ ============ ============
Weighted average
shares outstanding 13,732,936 11,541,811 9,723,801
============ ============ ============
The accompanying notes are an integral part of these statements.
<PAGE>
PAGE F-19
<TABLE>
The Panda Project, Inc.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
Year Ended December 31, 1998, Nine Months Ended December 31, 1997
and Year Ended March 31, 1997
<CAPTION>
Preferred Common Total
Stock Stock Addition- Stock
--------------------- ------------------ al Paid- Accumul- holders'
Par in ated Equity
Shares Value Shares Value Capital Deficit (Deficit)
---------- --------- ----------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
April 1, 1996 - - 8,680,488 $ 86,805 $47,822,586 $(33,041,800) $ 14,867,591
Issuance of
common stock - - 1,087,833 10,878 9,163,252 - 9,174,130
Exercise of
stock options - - 305,487 3,056 1,373,193 - 1,376,249
Exercise of
warrants - - 33,335 333 124,673 - 125,006
Warrants issued
for services
received - - - - 39,000 - 39,000
Issuance of
common stock
in connection
with legal
settlement - - 17,500 175 104,825 - 105,000
Net loss - - - - - (20,874,101) (20,874,101)
---------- --------- ----------- -------- ----------- ------------ ------------
Balance at
March 31, 1997 - - 10,124,643 101,247 58,627,529 (53,915,901) 4,812,875
Conversion of
debentures - - 1,996,822 19,968 4,780,032 - 4,800,000
Beneficial
conversion
feature related
to convertible
debentures - - - - 907,317 - 907,317
Deferred
issuance costs
related to
converted
debentures - - - - (550,943) - (550,943)
Issuance of
stock in
payment of
interest - - 13,592 136 35,374 - 35,510
Warrants
issued
related to
debt
issuance - - - - 566,651 - 566,651
Issuance of
common stock
under 401(k)
Plan - - 16,985 170 69,738 - 69,908
Issuance of
stock for
services
rendered - - 54,380 543 305,270 - 305,813
Exercise of
stock options - - 100 1 474 - 475
Exercise of
warrants - - 9,000 90 60,660 - 60,750
Warrants issued
for services
received - - - - 39,000 - 39,000
Net loss - - - - - (8,949,652) (8,949,652)
---------- --------- ----------- -------- ----------- ------------ ------------
<PAGE>
Page F-20
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)
</TABLE>
<PAGE>
Page F-21
The Panda Project, Inc.- STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $(17,474,696) $ (8,949,652) $(20,874,101)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,908,548 1,198,095 1,595,549
Provision for obsolete inventory 1,178,837 - -
Provision for doubtful accounts 285,286 60,905 236,303
Cost associated with asset impairments 125,038 - 2,056,025
Beneficial conversion feature related to
convertible debentures - 907,317 -
Other noncash charges - 188,322 144,000
Stock option compensation 298,130 - -
Changes in operating assets and liabilities
(Increase) in accounts receivable (124,641) (120,663) (90,021)
(Increase) decrease in other receivables 86,552 (86,920) 469,651
(Increase) decrease in prepaid expenses and
other current assets 265,295 (279,279) 147,979
(Increase) decrease in inventory (260,958) (142,890) 793,713
(Increase) decrease in restricted cash 180,000 (110,000) 600,000
Decrease (increase) in other assets (81,244) 13,448 83,300
Increase (decrease) in accounts payable,
and other current liabilities (52,394) 91,681 (1,165,645)
------------ ------------ ------------
Net cash used in operating activities (10,666,247) (7,229,636) (16,003,247)
Cash flows from investing activities:
Additions to property and equipment (331,126) (1,055,819) (2,160,173)
------------ ------------ ------------
Net cash used in investing activities (331,126) (1,055,819) (2,160,173)
Cash flows from financing activities:
Proceeds from issuance of convertible debentures - 4,800,000 -
Proceeds from issuance of preferred stock 6,000,000 - -
Payment of costs related to issuance of
preferred stock (206,486) - -
Debt issuance costs - (269,500) -
Proceeds from issuance of common stock 161,608 131,133 11,291,752
Proceeds from common stock private placement 3,674,500 - -
Payment of stock issuance costs (191,319) - (616,367)
Payment of notes payable (2,000,000) - -
Proceeds from issuance of notes payable 3,000,000 1,000,000 -
------------ ------------ ------------
Net cash provided by financing
activities 10,438,303 5,661,633 10,675,385
------------ ------------ ------------
Net (decrease) in cash and cash equivalents (559,070) (2,623,822) (7,488,035)
Cash and cash equivalents at beginning of period 619,683 3,243,505 10,731,540
------------ ------------ ------------
Cash and cash equivalents at end of period $ 60,613 $ 619,683 $ 3,243,505
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 138,798 $ 6,328 $ -
============ ============ ============
Taxes paid $ - $ - $ -
============ ============ ============
</TABLE>
<PAGE>
Page F-22
Supplemental schedule of noncash investing and financing activities:
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 1998, approximately 180 shares of the Company's convertible
preferred stock was converted into 2,234,363 shares of the
Company's common stock.
In 1998, The Company paid Preferred Stock dividends of $231,041 in
the form of Preferred Stock.
The accompanying notes are an integral part of these statements.
The Panda Project, Inc.
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1998, Nine Months Ended December 31, 1997
and Year Ended March 31, 1997
NOTE A - DESCRIPTION OF BUSINESS
The Panda Project, Inc. (the "Company") designs, develops,
manufactures, markets and licenses various products incorporating the
Company's proprietary semiconductor packaging and interconnect
technology ("Technology"). The Company markets and sells its
Technologies directly to end users as well as through a network of
sales representatives. Through October 1998, the Company designed,
developed, manufactured, and marketed powerful modular universal
platform computers, including personal computers, servers and
workstations ("Systems"). The Company continues to service and
support its Systems but elected to discontinue all other aspects of
the Systems business. The decision to continue only with the
Technologies business was based on the Company's limited capital
resources and other business and market factors. Based in Boca Raton,
Florida the Company conducts operations worldwide and has an inactive
wholly owned subsidiary, Archistrat Corporation, a Delaware
corporation.
Change in Fiscal Year
- ---------------------
During September 1997, the Company decided to change its fiscal
year from April 1 through March 31 to January 1 through December 31.
The accompanying audited financial statements are for the year ended
December 31, 1998, the transition period April 1, 1997 through
December 31, 1997 and for the year ended March 31, 1997.
<PAGE>
Page F-23
The following table sets forth the results of operations for the
transition period ended December 31, 1997 and the unaudited results of
operations for the nine months ended December 31, 1996.
1996
1997 (Unaudited)
------------- ------------
Net revenues $ 2,246,795 $ 2,091,132
Net loss $ (8,949,652) $(17,217,703)
Basic and diluted loss per share $ (0.78) $ (1.79)
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 is currently seeking additional financing, however, in the
event that the Company cannot obtain additional financing it will be
forced to cease operations. In addition, the Company did not repay
its notes to Helix (PEI) Inc. as of their due dates and is currently
in default. The negotiations are ongoing and the ultimate outcome
cannot be predicted. Should the Company be unable to renegotiate the
terms of the Notes, the Company may have to cease operations.
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. 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-24
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 recognized as received. 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 EPS. 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 16,350,000
for the year ended December 31, 1998, 2,341,492 for the nine months
ended December 31, 1997 and 2,246,916 for the year ended March 31,
1997, respectively have been excluded from the computation of diluted
earnings per share as the effect of their inclusion is antidilutive.
<PAGE>
Page F-25
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. Using the formula
approximately 10,158,730 would be issued which is calculated using
90% of the five day average closing price on the date of conversion.
The discounted price is assumed to be $.375.(the price per common
share on March 22, 1999). The Company is also required to issue an
additional 4,400,000 "Fill-Up" shares in connection with the August
1998 private placement of its common stock (Note M). During February
1999, the Company registered 1,775,000 common shares in connection
with the litigation settlement described in Note S. Additionally, in
February 1999, 666,667 shares of the Company's common stock were
issued to Samtec, Inc.
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 fixed quarters of years beginning
after June 1999. Management does not expect this standard to have a
significant impact on the Company's operations.
In 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities." SOP 98-5 provides guidance on
accounting for start-up costs and organization costs, which must be
expensed as incurred. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1998.
Management does not expect this Statement to have a material impact on
the Company's financial statements.
<PAGE>
Page F-26
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 N).
Debt Issuance Costs
- -------------------
Deferred loan costs of approximately $3,920,000 incurred in
connection with debt financing (Note I) are being amortized on a
straight-line basis over the life of the debt. As of December 31,
1998, the Company had $525,000 of deferred debt costs net of
accumulated amortization of $3,395,000, which is included in prepaid
expenses and other current assets. As of December 31, 1997, the
Company had $340,513 of deferred debt costs, net of accumulated
amortization of $63,487.
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, 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
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. The inventory at December 31, 1997 net of reserves of
$600,000 consists of the following:
Raw Materials $ 879,756
Work in Process 14,024
Finished Goods 71,419
-----------
$ 965,199
===========
<PAGE>
Page F-27
NOTE G - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Estimated December 31, December 31,
Useful Lives 1998 1997
------------ ----------- ----------
Office furniture and
equipment 3 - 10 years $ 3,180,103 $3,311,648
Machinery and equipment 3 - 5 years 1,889,458 873,560
Trade show booth and exhibit 5 years 420,428 420,428
Motor vehicles 5 years 54,535 54,535
Leasehold improvement 5 years 13,173 519,298
Construction in progress 281,915 826,828
Less: accumulated depreciation (3,993,673) (3,188,079)
----------- ----------
Total property and equipment, net $ 1,845,939 $2,818,218
=========== ==========
Depreciation expense for the year ended December 31, 1998, the
nine months ended December 31, 1997, and for the year ended March 31,
1997 totalled $1,178,427, $1,061,399, and $1,595,549, respectively.
During the years ended December 31, 1998 and March 31, 1997, the
Company determined that certain long-lived assets were impaired.
During the year ended December 31, 1998 the impairment occurred when
the Company continued the downsizing of its operations. In the year
ended March 31, 1997, the impairment was the result of various events
and changes in circumstances (including efforts to streamline
operations and to increase the use of strategic alliances to
manufacture and market the Company's products). As a result, the
Company recorded charges totalling approximately $125,000 and
$2,056,000 during the years ended December 31, 1998 and March 31,
1997, respectively. The impairment recognized in 1998 was attributable
to Systems sales equipment. During the 1997 period, approximately
$1,040,000 related to computer equipment and software, approximately
$467,000 related to demonstration and promotional equipment and
approximately $520,000 related to production equipment and tooling.
The Company determined the amount of the asset impairment charges
using various valuation techniques.
NOTE H - SUBORDINATED CONVERTIBLE DEBENTURES
During April 1997, the Company completed a private placement of
$4.8 million of 4% subordinated convertible debentures. As of July
1997, all of such debentures had been converted into an aggregate of
1,996,822 shares of the Company's common stock. In connection with
such transaction, the Company paid placement fees of $384,000 of which
$192,000 was paid in cash and the balance was paid by issuing 30,918
shares of the Company's common stock. The Company also issued
warrants to two parties in connection with the transaction to purchase
70,096 shares of the Company's common stock. Warrants to purchase
42,667 shares and 27,429 shares are exercisable through April 2002 at
an exercise price of
<PAGE>
Page F-28
$6.75 and $7.00 per share, respectively. These warrants have been
recorded with a value of approximately $163,000. Total deferred
issuance costs, including the placement fees, and the value of the
warrants were amortized as interest expense. Upon conversion of the
related debentures, the pro rata portion of any unamortized deferred
issuance costs was charged to additional paid-in capital.
The value of the beneficial conversion feature related to the
1997 Subordinated Convertible Debentures of $907,317 was calculated at
the date of issuance as the difference between the conversion price
and the fair market value of the Company's common stock into which the
debentures are convertible, multiplied by the number of shares into
which the debentures are convertible. The debentures were fully
convertible into shares of the Company's common stock prior to June
30, 1997 and as such, a non-cash charge to interest expense and an
increase to additional paid-in capital was recorded in the amount of
$907,317 during the nine months ended December 31, 1997. The
accounting for this transaction has no effect on total stockholders'
equity.
NOTE I - NOTES PAYABLE
During December 1997 and January 1998, the Company entered into
two $1,000,000 short-term loans with Helix (PEI) Inc. ("Helix"). In
connection with these loans the Company issued to Helix warrants to
purchase 400,000 shares of the Company's common stock at exercise
prices ranging from $4.00 to $4.50 per share. The warrants have a
term of two years and were recorded as debt issuance costs at an
aggregate value of approximately $872,000 which was fully amortized
upon the repayment of the loans in February 1998. The loans accrued
interest at an annual rate equal to the prime rate of interest payable
by the Royal Bank of Canada on US dollar advances plus 2%. Such
interest was paid when the loans were settled. The Company repaid
these loans in part from the proceeds from the issuance of Preferred
Stock (Note J).
During May, June, and July 1998, Helix made additional short-term
loans to the Company under three notes ("Notes") totalling $2,000,000.
The Notes accrue interest at an annual rate equal to the prime rate of
interest payable by the Royal Bank of Canada on US dollar advances
plus 2% (9.4% as of December 31, 1998). Interest is payable monthly.
The Notes are secured by the Company's intellectual property. In
connection with issuance of these Notes, the Company issued warrants
to Helix to purchase an aggregate of 450,000 shares of the Company's
common stock at exercise prices ranging from $1.63 to $2.125 per
share, as adjusted. The warrants have a term of two years. The total
value of these warrants is approximately $932,000 and has been
recognized as debt issue costs and was fully amortized as of August
1998, the original due date of the Notes.
On August 7, 1998, Helix agreed to extend the maturity date of
the Notes to February 15, 1999 in exchange for the issuance of a
warrant to purchase up to 2,000,000 shares of the Company's common
stock at an exercise price of $2.125, the fair market value on the
<PAGE>
Page F-29
date of issuance. The Warrant has a term of two years and has been
valued at $2,520,000, which has been recognized as deferred loan
costs. As of December 31, 1998 the Company has amortized $1,995,000 of
the loan costs. The Company did not repay the notes as of their due
dates and is currently in default. The negotiations are ongoing and
the ultimate outcome cannot be predicted. Should the Company be unable
to re-negotiate the terms of the Notes, the Company may have to cease
its operations.
Helix and its affiliates currently hold approximately 5.7% as of
March 30, 1999 of the Company's common stock. At the time the above
transactions occurred James T. A. Wooder, a former director of the
Company, was a Vice President of Helix's parent, Helix Investments
(Canada), Inc.
NOTE J - 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 an aggregate purchase price of $6,000,000.
The purchase price allocated to the Series A Preferred and Warrants
was $5,589,000 and $411,000, respectively. The Warrants have a term
of five years and an exercise price, subject to adjustment for stock
splits and similar events, of $6.10 per share. The Company incurred
$213,000 of issuance costs in connection with this transaction.
Holders of Series A Preferred are entitled to a dividend of 5% per
annum of the purchase price for the shares, payable quarterly, at the
option of the Company 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. So long as any Series A Preferred is
outstanding, no dividend may be paid nor shall any distributions be
made on Common Stock or other shares junior in rank to the Series A
Preferred ("Junior Shares") unless all dividends for all past
quarterly dividend periods have been paid or declared and a sum of
cash or amount of shares sufficient for the payment thereof set apart.
For the year ended December 31, 1998 $231,041 of dividends payable
have been accrued and added to the purchase price in lieu of cash
payment.
The terms of the Series A Preferred which permit the conversion
of the Series A Preferred at a discount to market is considered a
beneficial conversation feature (the "Beneficial Conversion Feature").
The Beneficial Conversion feature at the date of issuance of the
Series A Preferred was recognized as a dividend to the holders of the
Series A Preferred. Based upon the terms of the preferred stock
agreement and the market value of the Company's common stock, on the
date of issue, the Company valued the undiscounted Beneficial
Conversion Feature of the Series A Preferred at approximately $511,000
and recorded the amortization of the Beneficial Conversion Feature of
the same amount during the year ended December 31, 1998, as part of
preferred stock dividends. The beneficial dividend does not effect
the number Series A Preferred shares outstanding or the number of
<PAGE>
Page F-30
common shares issuable upon conversion of the Series A Preferred or
require any additional payments or compensation to the holders of the
Series A Preferred.
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series A
Preferred are entitled to receive in cash from assets of the Company,
before any amount shall be paid to holders of Junior Shares, an amount
per share of Series A preferred equal to the sum of (i) the purchase
price for such share and (ii) any accrued but unpaid dividends
thereon. If the amounts available for distribution are insufficient to
pay the full amount due to holders of Series A Preferred, and shares
of other classes or series of preferred stock of the Company that are
of equal rank to the Series A Preferred then each holder of Series A
Preferred stock and such other shares shall receive a percentage of
amounts available for distribution ratably in proportion to the
respective amounts of such assets to which they would otherwise be
entitled.
Holders of the Series A Preferred have no voting rights except
as required by law or as specified in the Articles of amendment, the
affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series A Preferred is required for (I) any
amendment to the Company's Articles of Incorporation which would alter
the rights and preferences of the Series A preferred or otherwise
impair the rights of the holders of Series A Preferred relative to the
holders of the Common Stock or the holders of any other class of
capital stock or (ii) any issuance of more than 1000 shares of Series
A Preferred. In addition, without the prior written approval of the
holders of 66 2/3% of the Series A Preferred shares that include GAM
Arbitrage Fund L.P., AGR Halifax Fund, Ltd, Leonardo L.P., Ramius
Fund, Ltd, Raphael L.P., AG Super Fund L.P., the Company shall
not (1) consolidate or merge with another corporation or other entity
or person, whereby the shareholders of the Company own in the
aggregate less than 50% of the ultimate parent or surviving entity,
(2) transfer all or substantially all of the Company's assets to
another corporation or other entity or person or (3) fix a record date
for the declaration of a distribution or dividend, whether payable in
cash, securities or assets (other than shares of common stock).
Shares of Series A Preferred are convertible into shares of
Common Stock pursuant to a formula whereby the purchase price of the
shares to be converted plus any such dividends is divided by a
conversion price defined as the lower of (i) $3.50 subject to
adjustment in the event of certain dilutive issuance's of securities
by the Company or for stock splits or similar events("the Fixed
Conversion Price") or (ii) a percentage of the average closing bid
price of the Common Stock for the five days immediately preceding
conversion equal to 92%, if conversion occurs in the period beginning
120 days and ending 180 days after of the Series A Preferred, or 90%,
if conversion occurs after 180 days from issuance of the Series A
Preferred. All outstanding Series A Preferred will automatically
convert into Common Stock at the then applicable conversion price, on
the fifth anniversary of issuance. In addition, the Company has the
right to require that all unconverted shares of Series A Preferred be
converted at any time if the closing bid price of Common Stock is
<PAGE>
Page F-31
equal to or greater than $12.00 per share for a period of twenty
consecutive trading days. For the year ended December 31, 1998 180
shares of Series A Preferred were converted into an aggregate
2,234,363 shares of the Company's common stock.
The terms of the Series A Preferred, provide that upon the
occurrence of certain "Triggering Events" as defined by the agreement
including suspension of sales under the Registration Statement,
Failure of the Common Stock to be listed, or the suspension of trading
in the Company's common stock, on Nasdaq National or Nasdaq Small Cap
Market, or failure of the Company to convert shares of Series A
Preferred as required, the Company is required to pay the holders
$100,000 on the first day of each month until the Triggering Events
have been remedied. A Triggering Event occurred on December 16, 1998
when the Company's stock was delisted from the Nasdaq National Market.
This event has not been remedied and the Company has recognized a
$50,000 penalty in the Statement of Operations for the year ended
December 31, 1998. The Company commenced and continues to re-negotiate
with the Series A Preferred stock holders to modify the terms of the
Agreement. The outcome of such negotiations is not known. Should the
Company be unable to re-negotiate the terms of the Agreement along
with the re-negotiations discussed in Notes I and M individually or
together they could have a substantial detrimental effect on the
ability of the Company to continue its operations.
NOTE K - 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 L - OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows:
December 31, December 31,
1998 1997
---------- ----------
Sarubbi Settlement liability (Note S) $ 760,000 $ -
Provision for warranties 200,000 200,000
Accrual for lease costs - 176,867
Accrual for professional fees 152,682 -
Other 243,387 587,719
---------- ----------
$1,356,069 $ 964,586
========== ==========
<PAGE>
Page F-32
NOTE M - COMMON STOCK
In August 1998, the Company completed the sale of 2,254,602
shares of its Common Stock in a private placement to accredited
investors with gross proceeds of approximately $3,675,000 (the
"Private Placement"). Costs related to the Private Placement were
approximately $191,000. In addition to the shares of Common Stock
purchased by each investor in the Private Placement, such investor
received a warrant (the "Private Placement Warrants") to purchase an
equal number of shares of Common Stock (the "Private Placement Warrant
Shares"), subject to adjustment for stock splits and similar events,
at an exercise price of $2.55 per share. Upon the 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.
Under the terms of the Securities Purchase Agreement relating to
the Private Placement, if on either the six-month or the one-year
anniversary of the date of closing of the Private Placement (each
"Anniversary Date"), the average closing bid price of the Common Stock
for the twenty-trading day period ending on the trading day
immediately prior to the applicable Anniversary Date (the "Anniversary
Price") is less than the Closing Price ($2.0375), or the prior
Anniversary Price in the event the six-month Anniversary Price is less
than the Closing Price, respectively, the Company is required to issue
a number of shares of Common Stock within ten days after the
Anniversary Date equal to the product of (i) (x) the difference
between the Closing Price (or if the measurement date is the one-year
Anniversary Date, the six-month Anniversary Price if the six-month
Anniversary Price is less than the Closing Price) and the applicable
Anniversary Price, multiplied by .85, multiplied by (y) the number of
shares of Common Stock purchased by the investors in the Private
Placement and not sold or assigned to non-affiliated third parties,
divided by (ii) (x) the applicable Anniversary Price multiplied by (y)
.85. The shares issuable pursuant to this formula are referred to as
the "Fill-Up Shares".
In the event (i) the Common Stock is delisted or suspended from
trading on NASDAQ, (ii) the Fill-Up Shares or the Private Placement
Warrant Shares are not issuable or are not listed with NASDAQ. Or
(iii) the Company fails to issue Fill-Up Shares as required, then the
Company shall pay to the initial investors $100,000 for each full 30-
day period that the condition continues. The Company's common stock
was delisted from NASDAQ on December 16, 1998 and as a result the
Company has recognized liquidating damages of $50,000 in the Statement
of Operations for the year ended December 31, 1998. The Company
continues to incur the liquidated damages.
The Company has filed a Registration Statement with respect to
the shares of Common Stock issuable in the Private Placement. Such
registration statement has not yet been declared effective. As a
result of the non-effectiveness the Company could be liable for
penalties of up to $36,000 until the Registration Statement is
declared effective.
<PAGE>
Page F-33
In January 1999 the Company sold 666,667 shares of its common
stock without registration rights to Samtec, Inc. ("Samtec") for
$500,000. Simultaneous with this transaction the Company and Samtec,
entered into a license agreement for the Company's VSPA semiconductor
technology for $500,000. Under the terms of the agreement the Company
is entitled to a royalty related to each VSPA sale for a term that
continues until the expiration of the last to expire of the patents
covered by the agreement. The license granted to Samtec is non-
exclusive.
NOTE N - EMPLOYEE BENEFIT PLANS
Stock Incentive Plans
- ---------------------
The Company maintains three stock option plans as follows: 1993
Performance Incentive Plan ("1993 Plan"), 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.
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 500,000 and
50,000 shares may be granted, respectively. As of December 31, 1998,
there were 558,554; 468,800, and 10,000 shares available for grant
under the 1993 Plan, the 1995 Plan and the Director Plan,
respectively.
In 1998, the Company issued options to outside consultants to
purchase up to 625,000 of the Company's common stock. The options
were issued with an exercise price that was equal to the market price
on the date of the grants. The total fair value of the options, as
determined by FAS 123, was 384,500 which is to be amortized over the
vesting period of the options. In 1998, the total expense associated
with nonemployee stock options total 298,130. The weighted average
fair value of options granted in 1998 was $.62.<PAGE>
Page F-34
A summary of the Company's stock option activity and related
information is presented below:
Year Ended Nine Months Ended
December 31, December 31,
1998 1997
----------------------- -------------------------
Weighted - Weighted -
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ----- -------- -----
Outstanding,
beginning of year 654,450 $7.45 586,900 $8.83
Granted 568,500 $2.26 266,500 $5.13
Exercised (3,000) $4.08 (100) $4.75
Forfeited (404,050) $7.00 (198,850) $8.40
-------- ----- -------- -----
Outstanding at
end of year 815,900 $4.32 654,450 $7.45
======= ===== ======== =====
Exercisable at
end of year 257,350 221,700
======= ========
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:
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1998 1997 1997
------------ ----------- ------------
Net loss:
As reported $(18,216,582) $(8,949,652) $(20,874,101)
Pro forma $(18,480,641) $(9,323,415) $(21,315,572)
Basic and diluted loss
per share:
As reported $ (1.33) $ (.78) $ (2.15)
Pro forma $ (1.35) $ (.81) $ (2.19)
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, 1998,
nine months ended December 31, 1997 and year ended March 31, 1997,
respectively. Risk-free interest rates of 5.5%, 6.2% and 6.3%;
dividend yields of 0% in all periods; volatility factors of the
expected market price of the Company's common stock ranging from 107%
to 119%, 97% and 98% 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
<PAGE>
Page F-35
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.
The following tables summarize information about outstanding and
exercisable stock options as of December 31, 1998:
Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted -
Average Weighted- Weighted-
Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (years) Price Shares Price
- - ------------ ------- ----------- -------- ------- ---------
$.78 375,000 9.5 years $ .78 - $ -
$2.75-$3.81 20,500 6.26 years $ 3.57 6,500 $ 3.28
$4.25-$6.13 301,650 8.53 years $ 5.20 168,350 $ 5.32
$7.75-$8.50 82,250 6.60 years $ 7.92 53,000 $ 7.87
$12.50-$14.25 16,000 6.00 years $13.10 14,000 $13.15
$28.25-$44.25 20,000 6.40 years $36.62 15,500 $31.63
------- ---- ----- ------- -----
815,900 8.62 years $ 4.32 257,350 $ 7.80
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 Company's
matching contributions to the Savings Plan amounted to approximately
$73,000 for the year ended March 31, 1997. The employer matching
contribution was discontinued as of October 1, 1996.
<PAGE>
Page F-36
NOTE O - 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
SG&A expense in the statement of operations for the year ended
December 31, 1998.
During the nine months ended December 1997, the Company issued
warrants to purchase 270,096 shares of the Company's common stock.
These warrants were recorded at a value of approximately $567,000.
In September 1996, the Company entered into an agreement with a
consulting firm, which served as an investor relations counsel to the
Company. The agreement provides for a minimum monthly fee of $3,500
plus payment of expenses for the term of one year. In connection with
this agreement, the Company granted the principal of the consulting
firm, a warrant to purchase 400,000 shares of the Company's common
stock at an exercise price of $8.00 per share. The warrant has a term
of 10 years and is exercisable (i) as to 100,000 shares at any time
during the term of the warrant, and (ii) as to the remaining shares,
upon attainment of certain milestones specified in the warrant, none
of which have been achieved.
The issuance of these warrants has been recorded based on the
fair market value of the services to be received over the term of the
agreement. The Company has determined the value of these services to
be $78,000 of which $39,000 was expensed during the nine months ended
December 31, 1997 and $39,000 was expensed during the year ended March
31, 1997.
NOTE P - REVENUE
LG Cable & Machinery Ltd.
- -------------------------
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 year ended December 31, 1998, the nine
months ended December 31, 1997 and the year ended March 31, 1997
<PAGE>
Page F-37
representing the first three payments received. The remaining
$200,000 will be recognized as payments are received. In addition,
the Company is entitled to receive royalties on sales of the Compass
Connector products by LG or its affiliates. No royalties have been
received under the agreement as of December 31, 1998.
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, 1998.
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.
Revenue was recognized over the term of the cooperative
development agreement based on the achievement of stated milestones.
For the year ended December 31, 1998, the nine months ended December
31, 1997 and the year ended March 31, 1997, the Company recognized
revenue related to the agreement of approximately $135,000, $973,000
and $684,000, respectively. Costs associated with the cooperative
agreement have not been separately disclosed on the face of the
Statement of Operations as such costs would have been incurred by the
Company regardless of the agreement. Of the $2.1 million and $1.2
million of expenses incurred during the nine months ended December 31,
1997 and year ended March 31, 1997, approximately $1,032,000 and
$610,000 are reflected in research and development and the balance is
included in selling, general and administrative expenses in the
Statement of Operations, respectively.
Other Revenue
- -------------
During fiscal 1997, the Company agreed to sell certain products
to a software developer in a non-cash exchange for certain products
and services. During the year ended March 31, 1997, the following
products and services were received from the software developer:<PAGE>
Page F-38
licenses to use the developer's software for internal purposes valued
at approximately $326,000 (recorded in property and equipment);
consulting and training services valued at $100,000 (recorded in
research and development expenses); and services associated with the
certification of the Company's 4s server to use the software
developer's CAD program and porting the software onto the 4s product.
These services were valued at approximately $570,000 and are reflected
equally between research and development expense and selling, general
and administrative expenses for the year ended March 31, 1997.
Revenues of approximately $923,000 were recorded during the year
ended March 31, 1997 as a result of this transaction. During the nine
months ended December 31, 1997, the Company shipped additional
computer systems to the software developer and recognized $37,000 of
revenue associated with this agreement.
Sales of computer systems to one customer accounted for 14% of
total revenue for the nine months ended December 31, 1997. No
individual customers accounted for more than 10% of total revenue for
the year ended December 31, 1998 and fiscal 1997.
NOTE Q - 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
nonexclusive 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 addition, Mr. Crane has granted the Company a nonexclusive
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.
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
<PAGE>
Page F-39
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 R - INCOME TAXES
As a result of tax losses incurred by the Company, no current tax
provision has been recorded for the year ended December 31, 1998, nine
months ended December 31, 1997 and the year ended March 31, 1997.
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:
Nine Months
Year Ended Ended
December 31, December 31,
1998 1997
------------ -----------
Deferred tax assets:
Net operating loss carryforwards $ 34,767,000 $28,504,000
Research and development credits 1,221,000 990,000
Write down of property and equipment 523,000 475,000
Inventory reserve 687,000 367,000
Allowance for doubtful accounts 114,000 4,000
Other 125,000 125,000
------------ -----------
Gross deferred tax asset 37,437,000 30,465,000
Deferred tax asset valuation
allowance (37,085,000) (30,113,000)
------------ -----------
Net deferred tax asset $ 352,000 $ 352,000
============ ===========
Deferred tax liabilities:
Tax depreciation and amortization
in excess of book $ (248,000) $ (248,000)
Other (104,000) (104,000)
------------ -----------
Deferred tax liability $ (352,000) $ (352,000)
============ ===========
Net deferred taxes $ - $ -
============ ===========
<PAGE>
Page F-40
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, 1998, the Company has available approximately
$90.1 million in net operating loss ("NOL") carryforwards available to
offset future taxable income, if any, for federal and state income tax
purposes. If unutilized, these NOL carryforwards will expire at
various times beginning in the year 2009.
At December 31, 1998, unused credit carryforwards for increasing
research activities of approximately $1,221,000 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 S - COMMITMENTS AND CONTINGENCIES
Operating Leases
- ----------------
The Company leases various facilities and equipment under
noncancelable operating lease arrangements which expire at various
dates through year 2003. Rent expense under all operating leases was
approximately $831,500, $641,000, and $1,035,000 for the year ended
December 31, 1998, the nine months ended December 31, 1997 and for the
year ended March 31, 1997, respectively.
Minimum future rental payments under non-cancelable operating
leases with remaining lease terms in excess of one year are as
follows:
December 31,
1999 $ 483,254
2000 439,024
2001 447,348
2002 460,880
2003 295,564
----------
Total minimum future
rental payments $2,126,070
==========
<PAGE>
Page F-41
During the year ended March 31, 1997, the Company entered into
certain agreements with its landlord related to its primary facility
whereby the Company was released from portions of the leased space.
As consideration for the release, the Company agreed to make certain
lump-sum payments to the landlord and agreed to make additional
payments for the unused space. As a result, a charge of approximately
$480,000 was recognized and is included under the caption, selling,
general and administrative expenses in the Statement of Operations for
the year ended March 31, 1997. In 1998, The Company was released from
the lease of its prior corporate headquarters as well as the facility
in Hayward California.
Year 2000
- - ---------
The Year 2000 issue relates to limitations in computer systems
and applications that may prevent proper recognition of the Year 2000.
The potential effect of the Year 2000 issue on the Company and its
business partners will not be fully determinable until the Year 2000
and thereafter. If the Year 2000 modifications are not properly
completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition
could be adversely impacted.
Employment Agreements
- ---------------------
Under the terms of an employment agreement with Mr. Crane entered
into in November 1993, he serves as the Senior Vice President, Product
Design and Development, and at the discretion of the Board of
Directors, as the Chairman of the Board and the Company's President
and Chief Executive Officer. Mr. Crane's agreement has a base annual
salary with salary increases and bonuses available to him based on the
attainment of specified objectives established at the discretion of
the Company's Board of Directors. The term of the agreement extends
to January 1999. As of April 14, 1999 the contract had not been
renewed. For the years ended December 31, 1997 and December 31, 1998,
Mr. Crane's salary was $150,000 in each year.
Pursuant to the terms of the agreement, Mr. Crane has assigned to
the Company the rights to all improvements or related discoveries or
inventions developed or conceived by him during the term of the
agreement which relate to the technology developed by him and
previously assigned to the Company. The employment agreement also
provides that Mr. Crane may develop additional products or
technologies unrelated to the products currently being developed by
the Company.
Commitments
- -----------
During the year ended December 31, 1998, the Company issued
significant purchase orders to three suppliers to provide materials
for the production of the Company's VSPA semiconductor package. The
<PAGE>
Page F-42
aggregate commitment under these purchase orders is approximately $1.1
million as of December 31, 1998.
Litigation
- - ----------
The Company is involved in various lawsuits from time to time of
the type routinely encountered in the ordinary course of business.
Management aggressively defends these lawsuits and believes that the
ultimate outcome of these lawsuits will not have a material adverse
impact on the Company's financial statements. Following are
litigation matters that management considers to be material in nature
such that disclosure is appropriate.
On December 11, 1998, the Company and Joseph Sarubbi, (a former
director of the Company) entered into a settlement agreement related
to litigation in which Sarubbi had obtained a judgment against the
Company in the amount of $1,227,041. Under the Settlement Agreement,
the Company paid Sarubbi total consideration worth $1,000,000 of which
$240,000 was paid in cash in December 1998 and the remaining $760,000
was paid via the issuance of 1,775,000 shares of the Company's common
stock. Under the Settlement Agreement the common stock was registered
in a registration statement filed in February 1999. The Company
recorded a $1,000,000 charge to selling general and administrative
expenses in December 1998. In the event that the 1,775,000 shares
does not generate sufficient precedes, the Company would have the
option to pay the difference in cash or additional shares of common
stock. Any further legal action taken by Mr. Sarubbi may be material to the
Company.
On October 16, 1998 a complaint was filed against the Company in
the United States District Court for the Southern District of New York
by Promethean Investment Group, L.L.C. The complaint alleges breach of
contract by the Company for failing to proceed with a financing
transaction and seeks damages in an unspecified amount in excess of
$270,000 or a declaration that the Company is to proceed with the
financing transaction. The outcome of this matter is both
undeterminable and immeasurable. Even if the Company is successful in
defending itself in this litigation, of which there is no assurance,
the diversion of critical resources involved in defending and settling
these actions could have a substantial material adverse effect on the
Company.
NOTE T - 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 have reported 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.
<PAGE>
Page F-43
NOTE U - SUBSEQUENT EVENTS
On December 15, 1998, the Company reduced the exercise price of
certain common stock purchase warrants if the warrant holders
accelerate the expiration date of their warrants from July 11, 2001 to
January 5, 1999. The exercise price was reduced from $11.00 to $0.75
per share. In January 1999, warrants representing 553,333 shares were
exercised at this reduced price, and the Company received net proceeds
of $415,000 upon such exercise.
On April 14, 1999, the Company received a Notice of Default on the
Settlement Agreement between Joseph A. Sarubbi and The Panda Project,
Inc. dated December 11, 1998. Mr. Sarubbi claimed that his inability
to sell the stock that he received in the settlement creates a breach
under the settlement agreement. The Company believes that it is in
full compliance with the agreement and that no breach exists. In the
event that the 1,775,000 shares does not generate sufficient proceeds
in accordance with the Settlement Agreement, the Company would have
the option to pay the difference in cash or additional shares of
common stock.
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
March 31, 1997
Allowance for
doubtful accounts $ 171,943 $ 236,303 $ - $ (297,284)(1)$ 110,962
=========== =========== ========== ========== ===========
Inventory obsolescence
reserve $ 128,412 $ 1,030,335 $ - $ (908,747)(2)$ 250,000
=========== =========== ========== ========== ===========
Deferred tax asset
Valuation allowance $12,849,000 $13,537,000 $ - $ - $26,386,000
=========== =========== ========== ========== ===========
Nine months ended
December 31, 1987
Allowance for
doubtful accounts $ 110,962 $ 60,911 $ - $ (161,867) $ 10,006
=========== =========== ========== ========== ===========
Inventory obsolescence
reserve $ 250,000 $ 350,000 $ - $ - $ 600,000
=========== =========== ========== ========== ===========
Deferred tax asset
Valuation allowance $26,386,000 $ 3,727,000 $ - $ - $30,113,000
=========== =========== ========== ========== ===========
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
=========== ========== ========== ========== ===========
<PAGE>
Page F-44
Deferred tax asset
Valuation allowance $30,113,000 $7,692,000 $ - $ - $37,085,000
=========== ========== ========== ========== ===========
(1) Write off of bad debts.
(2) Primarily relates to the revaluation of specific inventory items to net realizable value.
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
on Financial Statement Schedule
To the Board of Directors of
The Panda Project, Inc.
Our audits of the financial statements referred to in our report dated March 10,
1998, appearing on page F-16 of this Form 10-K of The Panda Project, Inc. also
included an audit of the information contained in the Financial Statement
Schedule appearing on page F-43 of this Form 10-K for the nine month period
ended December 31, 1997 and the year ended March 31, 1997. In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein for the nine months ended December 31, 1997 and
the year ended March 31, 1997 when read in conjunction with the related
financial statements. We have not audited the financial statements of The Panda
Project, Inc. for any period subsequent to December 31, 1997.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 10, 1998
Annex A
ASSET PURCHASE AGREEMENT
between
SILICON BANDWIDTH, INC.
as Purchaser
and
THE PANDA PROJECT, INC.
as Seller
Dated as of July 19, 1999
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS 1
SECTION 1.01 Certain Defined Terms 1
ARTICLE II PURCHASE AND SALE 7
SECTION 2.01 Assets to Be Sold 7
SECTION 2.02 Assumption and Exclusion of Liabilities 7
SECTION 2.03 Purchase Price; Allocation of Purchase Price 7
SECTION 2.04 Closing 7
SECTION 2.05 Closing Deliveries by Seller 7
SECTION 2.06 Closing Deliveries by Purchaser 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER 8
SECTION 3.01 Organization, Authority and Qualification
of Seller 8
SECTION 3.02 Corporate Condition 9
SECTION 3.03 Reporting Company 9
SECTION 3.04 No Conflict 9
SECTION 3.05 Governmental Consents and Approvals 10
SECTION 3.06 Reference Balance Sheet 10
SECTION 3.07 No Undisclosed Liabilities 10
SECTION 3.08 Receivables 11
SECTION 3.09 Inventories 11
SECTION 3.10 Conduct in the Ordinary Course; Absence of
Certain Changes, Events and Conditions 11
SECTION 3.11 Litigation 11
SECTION 3.12 Compliance with Laws 12
SECTION 3.13 Environmental and Other Permits and
Licenses; Related Matters 12
SECTION 3.14 Contracts 12
SECTION 3.15 Intellectual Property 12
SECTION 3.16 Year 2000 Compliant 14
SECTION 3.17 Assets 15
SECTION 3.18 Customers 15
SECTION 3.19 Suppliers 15
SECTION 3.20 Employee Benefit Matters 15
SECTION 3.21 Labor Matters 16
SECTION 3.22 Taxes 17
SECTION 3.23 Insurance 17
SECTION 3.24 Full Disclosure 17
SECTION 3.25 Brokers 18
SECTION 3.26 Authority Relative to this Agreement and
the Ancillary Agreements 18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER 18
SECTION 4.01 Organization and Authority of Purchaser 18
SECTION 4.02 No Conflict 19
SECTION 4.03 Governmental Consents and Approvals 19
SECTION 4.04 Capitalization 19
SECTION 4.05 Financing Commitments 19
SECTION 4.06 Brokers 19
ARTICLE V ADDITIONAL AGREEMENTS 19
SECTION 5.01 Conduct of Business Prior to the Closing 19
SECTION 5.02 Access to Information 20
SECTION 5.03 Regulatory and Other Authorizations;
Notices and Consents 21
SECTION 5.04 Notice of Developments 21
SECTION 5.05 Use of Intellectual Property 21
SECTION 5.06 Public Announcements 22
SECTION 5.07 Exclusivity 22
SECTION 5.08 Further Action 22
ARTICLE VI EMPLOYEE MATTERS 22
SECTION 6.01 Offer of Employment 22
ARTICLE VII TAX MATTERS 22
SECTION 7.01 Indemnity 22
SECTION 7.02 Conveyance Taxes 23
SECTION 7.03 Miscellaneous 23
ARTICLE VIII CONDITIONS TO CLOSING 23
SECTION 8.01 Conditions to Obligations of Purchaser. 23
SECTION 8.02 Conditions to Obligations of Seller. 26
ARTICLE IX INDEMNIFICATION 26
SECTION 9.01 Survival of Representations and Warranties. 26
SECTION 9.02 Indemnification by Seller 26
SECTION 9.03 Indemnification by Purchaser 27
SECTION 9.04 Indemnification Procedures 28
ARTICLE X TERMINATION AND WAIVER 29
SECTION 10.01 Termination 29
SECTION 10.02 Effect of Termination 30
SECTION 10.03 Waiver 30
ARTICLE XI MISCELLANEOUS 30
SECTION 11.01 Expenses 30
SECTION 11.02 Notices 30
SECTION 11.03 Public Announcements 30
SECTION 11.04 Headings 31
SECTION 11.05 Severability 31
SECTION 11.06 Entire Agreement 31
SECTION 11.07 Assignment 31
SECTION 11.08 No Third Party Beneficiaries 31
SECTION 11.09 Amendment 31
SECTION 11.10 Governing Law 31
SECTION 11.11 Arbitration 32
SECTION 11.12 Counterparts 32
SECTION 11.13 Specific Performance 32
ANNEX A ALLOCATION OF PURCHASE PRICE
ANNEX B KEY EMPLOYEES
EXHIBIT A TERMS OF STOCKHOLDERS' AGREEMENT
DISCLOSURE SCHEDULE
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of July 19, 1999 (as
hereafter amended, modified or supplemented, this "Agreement"),
between Silicon Bandwidth, Inc., a Delaware corporation ("Purchaser")
and the Panda Project, Inc., a Florida corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller owns and operates a semiconductor packaging
and interconnect devices business (collectively, the "Business"); and
WHEREAS, Seller desires to sell to Purchaser, and Purchaser
desires to purchase from Seller, substantially all of the Assets (as
defined below) relating to the Business and in connection therewith
Purchaser is willing to assume certain liabilities of Seller relating
thereto, all upon the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements and covenants hereinafter set forth, and intending
to be legally bound hereby, Purchaser and Seller hereby agree as
follows:
ARTICLE I
DEFINITIONS
Certain Defined Terms. Unless the context otherwise requires,
the following terms, when used in this Agreement, shall have the
respective meanings specified below:
"Acquisition Documents" shall mean this Agreement, the
Ancillary Agreements, and any certificate, Financial Statement,
Interim Financial Statement, report or other document delivered
pursuant to this Agreement or the transactions contemplated hereby.
"Action" shall mean any claim, action, suit, arbitration,
inquiry, proceeding or investigation by or before any Governmental
Authority.
"Affiliate" shall mean, with respect to any specified Person,
any other Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control
with, such specified Person.
"Ancillary Agreements" shall mean the Assumption Agreement and
the Bill of Sale.
"Approvals" shall mean all permits, authorizations, licenses
and other governmental and third party rights and privileges necessary
to operate the Business as currently conducted.
"Assets" shall mean all assets and property used in, or
necessary for the operation of, the Business, including, without
limitation, the Approvals, the Equipment, the Contracts, Intellectual
Property, Inventory, Receivables, Documents and the Intellectual
Property, and the Intellectual Property used in, or necessary for the
operation of, the computer systems business of Seller, but excluding
the Excluded Assets. Assets shall also include the intellectual
property assets of the computer systems business of Seller.
"Assumed Liabilities" shall mean: (a) the trade accounts
payable of Seller outstanding on the Closing Date (up to a maximum
amount of $300,000); (b) specific items included in the accrued
payroll and benefits account of Seller outstanding on the Closing,
which shall not exceed $100,000; (c) specific items included in the
"other current liabilities" listed on Schedule 1 hereto, account of
Seller outstanding on the Closing Date, which shall not exceed
$100,000; (d) the executory liabilities and obligations of Seller to
be performed after the Closing Date under each Contract in effect on
the Closing Date; and (e) up to $2,000,000 of indebtedness of Seller
to Helix (PEI) Inc., effective upon such indebtedness' restructuring
as described in Section 4 of the Voting Agreement (as herein defined).
Any liabilities not specifically listed in the preceding sentence
shall be Excluded Liabilities.
"Assumption Agreement" shall mean the Assumption Agreement to
be executed by Purchaser and Seller on the Closing Date in a form
mutually agreed to by Purchaser and Seller.
"Bill of Sale" shall mean the Bill of Sale and Assignment to
be executed by Seller on the Closing Date substantially in a form
mutually agreed to by Purchaser and Seller.
"Business" shall have the meaning specified in the recitals to
this Agreement.
"Business Day" shall mean any day that is not a Saturday, a
Sunday or other day on which banks are required or authorized by Law
to be closed in The City of New York.
"Closing" shall have the meaning specified in Section 2.04.
"Closing Date" shall have the meaning specified in Section
2.04.
"Code" shall mean the Internal Revenue Code of 1986, as
amended through the date hereof.
"Contracts" shall mean any and all contracts and other rights
used in or necessary for the operation of the Business, including,
without limitation, that certain Consulting Agreement, dated as of
September 30, 1998, as amended as of July 19, 1999, by and between
Archimedes Capital, LLC and Seller, except for contracts which are
Excluded Assets.
"Control" (including the terms "controlled by" and "under
common control with"), with respect to the relationship between or
among two or more Persons, shall mean the possession, directly or
indirectly or as trustee, personal representative or executor, of the
power to direct or cause the direction of the affairs or management of
a Person, whether through the ownership of voting securities, as
trustee, personal representative or executor, by contract or
otherwise, including, without limitation, the ownership, directly or
indirectly, of securities having the power to elect a majority of the
board of directors or similar body governing the affairs of such
Person.
"Disclosure Schedule" shall mean the Disclosure Schedule
attached hereto, dated as of the date hereof, and forming a part of
this Agreement.
"Documents" shall mean all books, records, diskettes or other
electronics media, logos and manuals owned or, to the extent legally
transferable, used by the Business and related to its operations.
"Environment" shall mean surface waters, groundwaters, soil,
subsurface strata and ambient air.
"Environmental Laws" shall mean any Law, now or hereafter in
effect and as amended, and any judicial or administrative
interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to the environment,
health, safety or Hazardous Materials.
"Equipment" shall mean all furniture, fixtures and all
equipment supporting the Business (including remanufacturing
equipment).
"ERISA" shall have the meaning specified in Section 3.20(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Excluded Assets" shall mean cash, accounting software, bank
accounts, minutes books and other corporate documents and tax refunds,
plus those assets (other than assets constituting Intellectual
Property) exclusively used in the computer systems business of Seller
which are not necessary or useful to carry on the Business, as now
conducted or as to be conducted by Purchaser in the future. Excluded
Assets shall also include the assets of Seller's computer systems
business other than the intellectual property assets.
"Excluded Liabilities" shall mean any liabilities of Seller
other than the Assumed Liabilities.
"Exclusivity Period" shall have the meaning specified in
Section 5.07.
"Financial Statements" shall have the meaning specified in
Section 3.02.
"Governmental Authority" shall mean any national, federal,
state, municipal or local or other government, governmental,
regulatory or administrative authority, agency or commission or any
court, tribunal, or judicial or arbitral body.
"Governmental Order" shall mean any order, writ, judgment,
injunction, decree, stipulation, determination or award entered by or
with any Governmental Authority.
"Hazardous Materials" shall mean (a) petroleum and petroleum
products, radioactive materials, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation, transformers or
other equipment that contain polychlorinated biphenyls, and radon gas,
(b) any other chemicals, materials or substances defined as or
included in the definition of "hazardous substances", "hazardous
wastes", "hazardous materials", "extremely hazardous wastes",
"restricted hazardous wastes", "toxic substances" "toxic pollutants",
"contaminants" or "pollutants", or words of similar import, under any
applicable Environmental Law, and (c) any other chemical, material or
substance exposure to which is regulated by any Governmental
Authority.
"Identified Employees" shall have the meaning specified in
Section 6.01.
"Indemnified Party" shall have the meaning specified in
Section 9.04(a).
"Indemnifying Party" shall have the meaning specified in
Section 9.04(a).
"Intellectual Property" shall mean patents, trade and service
marks, designs, drawings, software, tradenames, copyrights, mask
works, applications therefor, licenses thereof, and similar intangible
property.
"Inventory" shall mean all inventory used in connection with
the Business.
"IRS" shall mean the Internal Revenue Service of the United
States.
"Law" shall mean any national, federal, state, municipal or
local or other statute, law, ordinance, regulation, rule, code, order,
other requirement or rule of law.
"Letter of Intent" shall mean that Letter of Intent executed
by the Parties on May 14, 1998.
"Liabilities" shall mean any and all debts, liabilities and
obligations, whether accrued or fixed, absolute or contingent, matured
or unmatured or determined or determinable, including, without
limitation, those arising under any Law (including, without
limitation, any Environmental Law), Action or Governmental Order and
those arising under any contract, agreement, arrangement, commitment
or undertaking.
"License Agreement" shall have the meaning specified in
Section 3.15(b).
"Licensed Intellectual Property" shall mean all Intellectual
Property licensed or sublicensed by Seller from a third party.
"Loss" shall have the meaning specified in Section 9.02(a).
"Material Adverse Effect" shall mean any circumstance, change
in, or effect on, the Business that, individually or in the aggregate
with any other circumstances, changes in, or effects on, the Business
(i) is, or could reasonably be expected to be, materially adverse to
the business, operations, assets or liabilities (including, without
limitation, contingent liabilities), employee relationships, customer
or supplier relationships, results of operations or the condition
(financial or otherwise) or prospects of the Business or (ii) could
materially adversely affect the ability of Purchaser to operate or
conduct the Business in the manner in which it is currently operated
or conducted by Seller.
"Owned Intellectual Property" shall mean all Intellectual
Property in and to which Seller has a right to hold, right, title and
interest.
"Permits" shall have the meaning specified in Section 3.13.
"Person" shall mean any individual, partnership, firm,
corporation, association, trust, unincorporated organization or other
entity, as well as any syndicate or group that would be deemed to be a
person under Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended.
"Plans" shall have the meaning specified in Section 3.20(a).
"Proceeding" shall have the meaning specified in Section 3.01.
"Purchase Price" shall have the meaning specified in Section
2.03.
"Purchaser" shall have the meaning specified in the recitals
to this Agreement.
"Purchaser Common Stock" shall have the meaning specified in
Section 2.03 of this Agreement.
"Receivables" shall mean all accounts receivable of Seller
outstanding as of the Closing Date.
"Reference Balance Sheet" shall have the meaning specified in
Section 3.06.
"Reference Balance Sheet Date" shall mean March 31, 1999 until
Seller delivers the unaudited sheet of the Business as of June 30,
1999 pursuant to Section 3.06 then Reference Balance Sheet Date shall
mean June 30, 1999.
"Regulations" shall mean the Treasury Regulations (including
Temporary Regulations) promulgated by the United States Department of
Treasury with respect to the Code or other federal tax statutes.
"Release" shall mean disposing, discharging, injecting,
spilling, leaking, leaching, dumping, emitting, escaping, emptying,
seeping, placing and the like into or upon any land or water or air or
otherwise entering into the Environment.
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning specified in Section
3.02.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Seller" shall have the meaning specified in the recitals to
this Agreement.
"Software Programs" shall have the meaning specified in
Section 3.15(f).
"Tax" or "Taxes" shall mean any and all taxes, fees, levies,
duties, tariffs, imposts, and other charges of any kind (together with
any and all interest, penalties, loss, damage, liability, expense,
additions to tax and additional amounts or costs incurred or imposed
with respect thereto) imposed by any government or taxing authority,
to the extent Purchaser may be held liable for any such amount or to
the extent any such amount constitutes a lien on the Assets or the
Business.
"Third Party Claims" shall have the meaning specified in
Section 9.04(c).
"Threshold Amount" shall have the meaning specified in Section
9.02(b).
"Transferred Employee" shall have the meaning specified in
Section 6.01.
"U.S. GAAP" shall mean United States generally accepted
accounting principles and practices in effect from time to time
applied consistently throughout the periods involved.
"Voting Agreement" shall mean that certain Voting Agreement
among Purchaser, Seller and certain shareholders of Seller dated May
14, 1999.
ARTICLE II
PURCHASE AND SALE
Section 2.01 Assets to Be Sold. On the terms and subject to the
conditions of this Agreement, Seller shall, on the Closing Date, sell,
convey and assign to Purchaser, free and clear of all claims, liens
and interests except as is provided for herein, all of Seller's right,
title and interest in and to the Assets.
Section 2.02 Assumption and Exclusion of Liabilities (a) On the
terms and subject to the conditions of this Agreement, Purchaser
shall, on the Closing Date, assume only the Assumed Liabilities.
(b) Seller shall retain, and shall be responsible for
paying, performing and discharging when due, and Purchaser shall not
assume or have any responsibility for the Excluded Liabilities.
Purchase Price; Allocation of Purchase Price
Section 2.03 Purchase Price; Allocation of Purchase Price (a) The
aggregate purchase price (the "Purchase Price") for the Assets shall
be (i) shares of common Stock of the Purchaser ("Purchaser Common
Stock") initially representing 10% of the capital stock of Purchaser
on a fully diluted basis (including such shares underlying the options
available for issuance pursuant to Purchaser's stock option plans as
well as the 7,000,000 shares of Series A Preferred Stock of Purchaser
currently outstanding) and (ii) the assumption of the Assumed
Liabilities.
(b) The sum of the Purchase Price and the Assumed
Liabilities shall be allocated among the Assets as of the Closing Date
in accordance with Annex A. Any subsequent adjustments to the sum of
the Purchase Price and Assumed Liabilities shall be reflected in the
allocation hereunder in a manner consistent with Treasury Regulation
1.1060-1T(f). For all Tax purposes, Purchaser and Seller agree to
report the transactions contemplated in this Agreement in a manner
consistent with the terms of this Agreement, including the allocation
under Annex A, and that none of them will take any position
inconsistent therewith in any Tax return, in any refund claim, in any
litigation, or otherwise.
Section 2.04 Closing. Subject to the terms and conditions of this
Agreement, the sale and purchase of the Assets and the assumption of
the Assumed Liabilities contemplated by this Agreement shall take
place at a closing (the "Closing") to be held at the offices of
Brobeck, Phleger & Harrison LLP, Spear Street Tower, One Market, San
Francisco, California at 10:00 A.M. California time on the second
Business Day following the later to occur of the satisfaction or
waiver of all conditions to the obligations of the parties set forth
in Article VIII, or at such other place or at such other time or on
such other date as Seller and Purchaser may mutually agree upon in
writing (the day on which the Closing takes place being the "Closing
Date").
Section 2.05 Closing Deliveries by Seller. At the Closing, Seller
shall deliver or cause to be delivered to Purchaser:
(a) the Bill of Sale, and such other instruments, in form
and substance satisfactory to Purchaser, as may be requested by
Purchaser to transfer the Assets to Purchaser or evidence such
transfer on the public records;
(b) executed counterparts of the Assumption Agreement,
Transition Services Agreement, Sublease Agreement, Supply Agreement
and Stockholders' Agreement;
(c) a receipt for the Purchase Price; and
(d) the opinions, certificates and other documents
required to be delivered pursuant to Section 8.01.
Section 2.06 Closing Deliveries by Purchaser. At the Closing,
Purchaser shall deliver to Seller:
(a) The Purchaser Common Stock payable to Seller pursuant
to Section 2.03;
(b) executed counterparts of the Assumption Agreement,
Transition Services Agreement, Sublease Agreement, Supply Agreement
and Stockholders' Agreement; and
(c) the documents required to be delivered pursuant to
Section 8.02.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF SELLER
As an inducement to Purchaser to enter into this Agreement,
Seller hereby represents and warrants to Purchaser as follows:
Section 3.01 Organization, Authority and Qualification of Seller.
Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Florida and has all necessary
corporate power and authority to enter into this Agreement and the
Ancillary Agreements, to carry out its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and
thereby. Seller is duly licensed or qualified to do business and is
in good standing in each jurisdiction in which the properties owned or
leased by it or the operation of its business makes such licensing or
qualification necessary. The execution and delivery of this Agreement
and the Ancillary Agreements by Seller, the performance by Seller of
its obligations hereunder and thereunder and the consummation by
Seller of the transactions contemplated hereby and thereby have been
duly authorized by all requisite action on the part of Seller and its
shareholders. This Agreement has been, and upon their execution the
Ancillary Agreements and upon shareholder approval will be, duly
executed and delivered by Seller, and (assuming due authorization,
execution and delivery by Purchaser) this Agreement constitutes, and
upon their execution the Ancillary Agreements and upon Shareholder
approval will constitute, legal, valid and binding obligations of
Seller enforceable against Seller in accordance with their respective
terms. Seller is not subject to any pending, threatened or, to its
knowledge, contemplated investigation or administrative or legal
proceeding (a "Proceeding") by the Internal Revenue Service, the
taxing authorities of any state or local jurisdiction, the SEC, the
National Association of Securities Dealers, Inc., the Nasdaq Stock
Market, Inc. or any state securities commission, or any other
governmental entity which has not been disclosed in the SEC Documents
(as defined below). None of the disclosed Proceedings, if any, will
have a Material Adverse Effect upon Seller.
Section 3.02 Corporate Condition. Each report or proxy statement
delivered to the Purchaser is a true and complete copy of such
document as filed by Seller with the SEC. Seller has filed in a
timely manner all documents that Seller was required to file with the
SEC under Sections 13, 14(a) and 15(d) of the Exchange Act during the
twelve (12) months preceding the date of this Agreement. As of their
respective filing dates, all documents filed by Seller with the SEC on
or prior to the date hereof (the "SEC Documents") complied in all
material respects with the requirements of the Exchange Act or the
Securities Act, as applicable. Each of the SEC Documents, as of their
respective dates, did not contain any untrue statement of material
fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The
financial statements of Seller included in the SEC Documents (the
"Financial Statements") comply as to form in all material respects
with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto. Seller's condition
is, in all material respects, as described in the SEC Documents.
Seller's Financial Statements have been prepared in accordance with
generally accepted accounting principles, consistently applied (except
as otherwise permitted by Regulation S-X of the Exchange Act), and
fairly present the financial condition of Seller as of the dates of
the balance sheets included therein and the consolidated results of
its operations and cash flows for the periods then ended. Without
limiting the foregoing, there are no material liabilities, contingent
or actual, that are not disclosed in the SEC Documents (other than
liabilities incurred by Seller in the ordinary course of its business,
consistent with its past practice, after the period covered by the SEC
Documents). Seller has paid all material taxes, which are due, except
for taxes which it reasonably disputes. This Agreement and the SEC
Documents do not contain any untrue statement of a material fact and
do not omit to state any material fact required to be stated therein
or herein necessary to make the statements contained therein or herein
not misleading in the light of the circumstances under which they were
made. No event or circumstance exists relating to Seller which, under
applicable law, requires public disclosure but which has not been so
publicly announced or disclosed.
Section 3.03 Reporting Company. Seller is subject to the reporting
requirements of the Exchange Act, has a class of securities registered
under Section 12 of the Exchange Act, and has filed all reports
required by the Exchange Act since the date Seller first became
subject to such reporting obligations. Seller undertakes to furnish
Purchaser with copies of such reports as may be reasonably requested
by Purchaser prior to the Closing.
Section 3.04 No Conflict. The execution, delivery and performance of
this Agreement and the Ancillary Agreements by Seller do not and will
not (a) violate, conflict with or result in the breach of any
provision of the charter or by-laws (or similar organizational
documents) of Seller, (b) conflict with or violate (or cause an event
which could have a Material Adverse Effect as a result of) any Law or
Governmental Order applicable to Seller or any of its assets,
properties or businesses, including, without limitation, the Assets
and the Business, or (c) except as set forth in Section 3.04 of the
Disclosure Schedule, conflict with, result in any breach of,
constitute a default (or event which with the giving of notice or
lapse of time, or both, would become a default) under, require any
consent under, or give to others any rights of termination, amendment,
acceleration, suspension, revocation or cancellation of, or result in
the creation of any encumbrance on any of the assets or properties of
Seller pursuant to, any note, bond, mortgage or indenture, contract,
agreement, lease, sublease, license, permit, franchise or other
instrument or arrangement to which Seller is a party or by which any
of such assets or properties is bound or affected.
Section 3.05 Governmental Consents and Approvals. The execution,
delivery and performance of this Agreement and each Ancillary
Agreement by Seller do not and will not require any consent, approval,
authorization or other order of, action by, filing with or
notification to, any Governmental Authority, except as described in
Section 3.03 of the Disclosure Schedule.
Section 3.06 Reference Balance Sheet (a) Seller has delivered true
and complete copies of the unaudited balance sheet of the Business as
of March 31, 1999, which shall be replaced within twenty (20) days of
this Agreement by an unaudited balance sheet of the Business as of
June 30, 1999 for which all representations and warranties in this
Agreement related to the "Reference Balance Sheet" shall also be true
and correct. The Reference Balance Sheet (i) was prepared in
accordance with the books of account and other financial records of
Seller, (ii) presents fairly the financial condition and results of
operations of Seller related to the Business as of the date thereof or
for the period covered thereby, (iii) has been prepared in accordance
with U.S. GAAP applied on a basis consistent with the past practices
of Seller and throughout the period involved, and (iv) will include
all adjustments (consisting only of normal recurring accruals) that
are necessary for a fair presentation of the financial condition of
Seller related to the Business and the results of the operations of
Seller related to the Business as of the date thereof for the period
covered thereby.
(b) The books of account and other financial records of
Seller as they relate to the Business: (i) reflect all items of income
and expense and all assets and Liabilities required to be reflected
therein in accordance with U.S. GAAP applied on a basis consistent
with the past practices of Seller and throughout the periods involved,
(ii) are in all material respects complete and correct, and do not
contain or reflect any material inaccuracies or discrepancies, and
(iii) have been maintained in accordance with good business and
accounting practices.
Section 3.07 No Undisclosed Liabilities. There are no Liabilities of
Seller related to the Business other than Liabilities (i) reflected or
reserved against on the Reference Balance Sheet, (ii) disclosed in
Section 3.07 of the Disclosure Schedule, or (iii) incurred since the
date of this Agreement in the ordinary course of business, consistent
with past practice, of Seller related to the Business and which do not
and could not have a Material Adverse Effect. Reserves are reflected
on the Reference Balance Sheet against all Liabilities of Seller
related to the Business, other than Liabilities relating to the
Excluded Liabilities, in amounts that have been established on a basis
consistent with the past practices of Seller related to the Business
and in accordance with U.S. GAAP.
Section 3.08 Receivables. Except to the extent, if any, reserved for
on the Reference Balance Sheet, all Receivables reflected on the
Reference Balance Sheet related to the Business arose from, and the
Receivables existing on the Closing Date related to the Business will
have arisen from, the sale of Inventory or services to Persons not
affiliated with Seller and in the ordinary course of the Business
consistent with past practice and, except as reserved against on the
Reference Balance Sheet, constitute or will constitute, as the case
may be, only valid, undisputed claims of Seller not subject to valid
claims of set-off or other defenses or counterclaims other than normal
cash discounts accrued in the ordinary course of the Business
consistent with past practice.
Section 3.09 Inventories. The Inventories do not consist of obsolete
inventories or items that are damaged or otherwise slow-moving. The
Inventories do not consist of any items held on consignment. Seller
is not under any obligation or liability with respect to accepting
returns of items of Inventory or merchandise in the possession of its
customers. The Inventories are in good and merchantable condition in
all material respects, are suitable and usable for the purposes for
which they are intended and are in a condition such that they can be
sold in the ordinary course of the Business consistent with past
practice.
Section 3.10 Conduct in the Ordinary Course; Absence of Certain
Changes, Events and Conditions. Since the Reference Balance Sheet
Date, except as disclosed in Section 3.10 of the Disclosure Schedule,
the Business has been conducted in the ordinary course and consistent
with past practice. Seller has not permitted or suffered any liens or
encumbrances on the Assets, made any unusual payments, purchases,
transactions, capital expenditures or agreements. As amplification
and not limitation of the foregoing, since the Reference Balance Sheet
Date, Seller has not:
(i) written down or written up (or failed to write
down in accordance with U.S. GAAP consistent with past
practice) the value of any Inventories or Receivables or
revalued any assets of Seller related to the Business other
than in the ordinary course of business consistent with past
practice and in accordance with U.S. GAAP;
(ii) (A) granted any increase, or announced any
increase, in the wages, salaries, compensation, bonuses,
incentives, pension or other benefits payable by Seller related
to the Business to any of its employees, including, without
limitation, any increase or change pursuant to any Plan, or (B)
established or increased or promised to increase any benefits
under any Plan, in either case except as required by Law or any
collective bargaining agreement and involving ordinary
increases consistent with the past practice of Seller related
to the Business; or
(iii) suffered any Material Adverse Effect related to
the Business.
Section 3.11 Litigation. Except as set forth in Section 3.11 of the
Disclosure Schedule, there are no Actions by or against Seller related
to the Business, or affecting any of the Assets or the Business,
pending before any Governmental Authority (or, to the best knowledge
of Seller after due inquiry, threatened to be brought by or before any
Governmental Authority). Except as set forth in Section 3.11 of the
Disclosure Schedule, neither Seller nor any of its assets or
properties, including, without limitation, the Assets, is subject to
any Governmental Order (nor, to the best knowledge of Seller after due
inquiry, are there any such Governmental Orders threatened to be
imposed by any Governmental Authority).
Section 3.12 Compliance with Laws. To the best of Seller's
knowledge, it has conducted and continues to conduct the Business in
accordance with all Laws and Governmental Orders applicable to Seller
or any of its properties or assets, including, without limitation, the
Assets and the Business, and Seller is not in violation of any such
Law or Governmental Order.
Section 3.13 Environmental and Other Permits and Licenses; Related
Matters. Seller currently holds all the health and safety and other
permits, licenses, authorizations, certificates, exemptions and
approvals of Governmental Authorities (collectively, "Permits")
necessary or proper for the current use, occupancy and operation of
the Assets and the conduct of the Business, and all such Permits are
in full force and effect. There is no existing practice, action or
activity of Seller and no existing condition of the Assets and the
Business, which will give rise to any civil or criminal Liability
under, or violate or prevent compliance with, any health or
occupational safety or other applicable Environmental Law. Seller has
not received any notice from any Governmental Authority revoking,
canceling, rescinding, materially modifying or refusing to renew any
Permit or providing written notice of violations under any
Environmental Law related to the Assets or the Business. Seller is in
all respects in compliance with the Permits and the requirements
thereof.
Section 3.14 Contracts. (a) Except as disclosed in Section 3.14(a)
of the Disclosure Schedule, each Contract: (i) is legal, valid and
binding on the respective parties thereto and is in full force and
effect, (ii) is freely and fully assignable to Purchaser without
penalty or other adverse consequences, and (iii) upon consummation of
the transactions contemplated by this Agreement and the Ancillary
Agreements, except to the extent that any consents set forth in
Section 3.04 of the Disclosure Schedule are not obtained, shall
continue in full force and effect without penalty or other adverse
consequence. Seller is not in breach of, or default under, any
Contract.
(b) Except as disclosed in Section 3.14(b) of the
Disclosure Schedule, no other party to any Contract is in breach
thereof or default thereunder.
Section 3.15 Intellectual Property. (a) The Disclosure Schedule
contains a true and complete list of Seller's patents, patent
applications, trademarks, trademark applications, trade names, service
marks, service mark applications, Internet domain names, Internet
domain name applications, copyrights and copyright registrations and
applications and other filings and formal actions made or taken
pursuant to federal, state, local and foreign laws by Seller to
protect its interests in the Intellectual Property.
(b) The Intellectual Property consists solely of items and
rights which are: (i) owned Intellectual Property; (ii) in the public
domain; or (iii) Licensed Intellectual Property, the parties and date
of each such license agreement (each, a "License Agreement") being set
forth on Section 3.15(c) of the Disclosure Schedule. Seller has all
rights in Intellectual Property necessary to carry out Seller's
current activities (and had all rights necessary to carry out its
former activities at the time such activities were being conducted),
including without limitation, to the extent required to carry out such
activities, rights to make, use, reproduce, modify, adopt, create
derivative works based on, translate, distribute (directly and
indirectly), transmit, display and perform publicly, license, rent and
lease and, other than with respect to the Licensed Intellectual
Property, assign and sell, the Intellectual Property.
(c) To the Seller's knowledge, the reproduction,
manufacturing, distribution, licensing, sublicensing, sale or any
other exercise of rights in any Intellectual Property owned by the
Seller, product, work, technology or process as now used or offered or
proposed for use, licensing or sale by Seller does not infringe on any
copyright, trade secret, trademark, service mark, trade name, trade
dress, firm name, Internet domain name, logo, trade dress, mask work
or of any person or the patent of any person. With the exception of
the patents and patent applications listed in Disclosure Schedule B
and the claim set forth in Disclosure Schedule C, no claims (i)
challenging the validity, effectiveness or ownership by Seller of any
of the Intellectual Property, or (ii) to the effect that the use,
distribution, licensing, sublicensing, sale or any other exercise of
rights in any product, work, technology or process as now used or
offered or proposed for use, licensing, sublicensing or sale by Seller
infringes or will infringe on any intellectual property or other
proprietary right of any person have been asserted or, to the
knowledge of Seller, are threatened by any person, nor are there, to
Seller's knowledge, any valid grounds for any bona fide claim of any
such kind. All registered, granted or issued patents, trademarks,
Internet domain names and copyrights held by Seller are enforceable
and subsisting. To the best of Seller's knowledge, , there is no
unauthorized use, infringement or misappropriation of any of the
Intellectual Property owned by the Seller by any third party, employee
or former employee.
(d) With the exception of the patents and patent
applications listed in Disclosure Schedule B, all personnel, including
employees, agents, consultants and contractors, who have contributed
to or participated in the conception and development of the
Intellectual Property owned by the Seller on behalf of Seller (i) have
been a party to a "work-for-hire" arrangement or agreements with
Seller in accordance with applicable national and state law that has
accorded Seller full, effective, exclusive and original ownership of
all tangible and intangible property thereby arising, or (ii) have
executed appropriate instruments of assignment in favor or Seller as
assignee that have conveyed to Seller effective and exclusive
ownership of all tangible and intangible property thereby arising.
(e) Seller is not, nor as a result of the execution or
delivery of this Agreement, or performance of Seller's obligations
hereunder, will Seller be, in violation of any license, sublicense,
agreement or instrument to which Seller is a party or otherwise bound,
nor will execution or delivery of this Agreement, or performance of
Seller's obligations hereunder, cause the diminution, termination or
forfeiture of any Intellectual Property.
(f) Section 3.15(f) of the Disclosure Schedule contains a
true and complete list of all of Seller's software programs (the
"Software Programs"). Seller owns full and unencumbered right and
good, valid and marketable title to such Software Programs free and
clear of all mortgages, pledges, liens, security interests,
conditional sales agreements, encumbrances or charges of any kind.
(g) The source code and system documentation relating to
the Software Programs (i) have at all times been maintained in strict
confidence, (ii) have been disclosed by Seller only to employees who
have a "need to know" the contents thereof in connection with the
performance of their duties to Seller and who have executed the
nondisclosure agreements referred to in Section 3.15, and (iii) have
not been disclosed to any third party.
Section 3.16 Year 2000 Compliant. (or, as the context may require,
"Year 2000 Compliance") means that any particular hardware or software
will: (i) process date data from at least the years 1900 through 2101,
or involving date information from more than one century, without
error, interruption, malfunction, corruption, ceasing to function,
generating incorrect data or otherwise producing incorrect results or
adversely impacting current or future operations; (ii) maintain
functionality with respect to the introduction, processing and output
of records containing dates falling on or after January 1, 2000; and
(iii) support numeric and date transitions from the twentieth century
to the twenty-first century, and back (including, without limitation,
all calculations, aging, reporting, printing, displays, reversals,
disaster and vital records recoveries) without error, interruption,
malfunction, corruption, ceasing to function, generating incorrect
data or otherwise producing incorrect results or adversely impacting
current or future operations.
(a) Except as set forth in Section 3.16(a)(i) of the
Disclosure Schedule, all of Seller's products and services (including
products sold to date, products currently being sold or future
products), both individually and when operating in conjunction with
all other systems, products or services with which they are designed
to interface (assuming such other systems, products or services are
Year 2000 Compliant), and all computer software and hardware
(including, without limitation, microcode, firmware, system and
application programs, files, databases, computer services and
microcontrollers, including those embedded in computer and noncomputer
equipment) contained in Seller's products or services (including
products and services sold to date, products and services currently
being sold or future products and services) are Year 2000 Compliant.
(b) All of Seller's internal computer systems are, both
individually and in conjunction with all other systems with which they
interface (assuming such other systems, products or services are Year
2000 Compliant), Year 2000 Compliant.
(c) Seller has made inquiries of its key suppliers of
services and products and, to its knowledge, Seller is not relying on
the products or services of any third party whose systems, products or
services are not Year 2000 Compliant.
(d) Except as set forth in Section 3.16(a)(ii), Seller does
not have any material expenses or other material liabilities
associated with securing Year 2000 Compliance, or making contingency
arrangements to address Year 2000 Compliance issues, with respect to
Seller's products or services (including products and services sold to
date, products and services currently being sold or future products
and services), internal computer systems (to the knowledge of Seller)
or the computer systems of Seller's key suppliers or customers.
(e) Seller has not made any representations or warranties
specifically relating to the ability of any product or service sold,
licensed, rendered, or otherwise provided by Seller in the conduct of
its business to be Year 2000 Compliant.
Section 3.17 Assets. (a) Except as disclosed in Section 3.17(a) of
the Disclosure Schedule, Seller owns, leases or has the legal right to
use all the Assets and has good and marketable title to, or, in the
case of leased or subleased Assets, valid and subsisting leasehold
interests in, all the Assets, free and clear of all encumbrances.
(b) The Assets constitute all the properties, assets and
rights forming a part of, used, held or intended to be used in, and
all such properties, assets and rights as are necessary in the conduct
of, the Business.
(c) Except as set forth in Sections 3.15(b), 3.16(b),
3.17(a) or 3.17(c) of the Disclosure Schedule, Seller has the complete
and unrestricted power and unqualified right to sell, assign,
transfer, convey and deliver the Assets to Purchaser without penalty
or other adverse consequences.
Section 3.18 Customers. Seller has not received any notice, written
or otherwise, from any significant customer (defined for purposes of
this Section 3.18 to be a customer who has purchased $25,000 of
products produced by the Business, in the aggregate, in any twelve
(12) month period in any of the last three (3) fiscal years) of Seller
has ceased, or will cease, to use the products of Seller produced by
the Business or has substantially reduced, or will substantially
reduce, the use of such products at any time.
Section 3.19 Suppliers. Seller has not received any notice, written
or otherwise, that any significant supplier will not sell raw
materials, supplies, merchandise and other goods related to the
Business to Seller at any time after the Closing Date on terms and
conditions similar to those imposed on current sales to the Business,
subject only to general and customary price increases.
Section 3.20 Employee Benefit Matters. (a) Plans and Material
Documents. Section 3.20(a) of the Disclosure Schedule lists all
employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) and all
bonus, stock option, stock purchase, restricted stock, incentive,
deferred compensation, retiree medical or life insurance, supplemental
retirement, severance or other benefit plans, programs or
arrangements, and all employment, termination, severance or other
contracts or agreements, whether legally enforceable or not, to which
Seller is a party with respect to the Business, with respect to which
Seller has any obligation or which are maintained, contributed to or
sponsored by Seller for the benefit of any current or former employee,
officer or director of Seller with respect to the Business
(collectively, "Plans").
(b) Absence of Certain Liabilities and Events. There has
been no prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) with respect to any Plan. Seller
has not incurred any liability for any excise tax arising under
Section 4971, 4972, 4980 or 4980B of the Code and to the best of
Seller's knowledge no fact or event exists which could give rise to
any such liability. Seller has not incurred any liability under,
arising out of or by operation of Title IV of ERISA (other than
liability for premiums to the Pension Benefit Guaranty Corporation
arising in the ordinary course), including, without limitation, any
liability in connection with (i) the termination or reorganization of
any employee benefit plan subject to Title IV of ERISA, or (ii) the
withdrawal from any Multiemployer Plan or Multiple Employer Plan, and
no fact or event exists which could give rise to any such liability.
No complete or partial termination has occurred within the five years
preceding the date hereof with respect to any Plan. No reportable
event (within the meaning of Section 4043 of ERISA) has occurred or is
expected to occur with respect to any Plan subject to Title IV of
ERISA. No Plan had an accumulated funding deficiency (within the
meaning of Section 302 of ERISA or Section 412 of the Code), whether
or not waived, as of the most recently ended plan year of such Plan.
Section 3.21 Labor Matters. Except as set forth in Section 3.21 of
the Disclosure Schedule, (a) Seller is not a party to any collective
bargaining agreement or other labor union contract applicable to
persons employed by Seller with respect to the Business, and currently
there are no organizational campaigns, petitions or other unionization
activities seeking recognition of a collective bargaining unit which
could affect the Business; (b) there are no controversies, strikes,
slowdowns or work stoppages pending or, to the best knowledge of
Seller after due inquiry, threatened between Seller and any of the
employees of the Business, and Seller has not experienced any such
controversy, strike, slowdown or work stoppage within the past three
years; (c) Seller has not breached or otherwise failed to comply with
the provisions of any collective bargaining or union contract with
respect to the Business and there are no grievances outstanding
against Seller under any such agreement or contract; (d) there are no
unfair labor practice complaints pending against Seller with respect
to the Business before the National Labor Relations Board or any other
Governmental Authority or any current union representation questions
involving employees of the Business; (e) Seller is currently in
compliance with all applicable Laws relating to the employment of
labor, including those related to wages, hours, collective bargaining,
employee benefits and the payment and withholding of taxes and other
sums as required by the appropriate Governmental Authority with
respect to the Business and has withheld and paid to the appropriate
Governmental Authority or is holding for payment not yet due to such
Governmental Authority all amounts required to be withheld from
employees of the Business and is not liable for any arrears of wages,
taxes, penalties or other sums for failure to comply with any of the
foregoing; (f) Seller has paid in full to all employees of the
Business or adequately accrued for in accordance with U.S. GAAP
consistently applied all wages, salaries, commissions, bonuses,
benefits and other compensation due to or on behalf of such employees;
(g) there is no claim with respect to payment of wages, salary or
overtime pay that has been asserted or is now pending or threatened
before any Governmental Authority with respect to any Persons
currently or formerly employed by Seller in the Business; (h) Seller
is not a party to, or otherwise bound by, any consent decree with, or
citation by, any Governmental Authority relating to employees or
employment practices with respect to the Business; (i) there is no
charge or proceeding with respect to a violation of any occupational
safety or health standards that has been asserted or is now pending or
threatened with respect to the Business; and (j) there is no charge of
discrimination in employment or employment practices, for any reason,
including, without limitation, age, gender, race, religion or other
legally protected category, which has been asserted or is now pending
or threatened before the United States Equal Employment Opportunity
Commission, or any other Governmental Authority in any jurisdiction in
which Seller has employed or currently employs any Person with respect
to the Business.
Section 3.22 Taxes. All returns and reports in respect of Taxes
required to be filed have been timely filed and all Taxes required to
be shown on such returns and reports or otherwise due have been timely
paid. All such returns and reports are true, correct and complete in
all material respects. There are no Tax liens on the Assets or the
Business.
Section 3.23 Insurance. (a) All material assets, properties and
risks of the Business are, and for the past five years have been,
covered by valid and, except for policies that have expired under
their terms in the ordinary course, currently effective insurance
policies or binders of insurance (including, without limitation,
general liability insurance, property insurance and workers'
compensation insurance) issued in favor of Seller, in each case with
responsible insurance companies, in such types and amounts and
covering such risks as are consistent with customary practices and
standards of companies engaged in businesses and operations similar to
those of Seller with respect to the Business.
(b) At no time subsequent to December 31, 1996 has Seller
(i) been denied any insurance or indemnity bond coverage which it has
requested with respect to either the Assets or the Business, (ii) made
any material reduction in the scope or amount of its insurance
coverage with respect to either the Assets or the Business, or
received notice from any of its insurance carriers that any insurance
premiums will be subject to increase in an amount materially
disproportionate to the amount of the increases with respect thereto
(or with respect to similar insurance) in prior years or that any
insurance coverage referred to in Section 3.23(a) will not be
available in the future substantially on the same terms as are now in
effect or (iii) suffered any extraordinary increase in premium for
renewed coverage with respect to either the Assets or the Business.
Since December 31, 1996, no insurance carrier has cancelled, failed to
renew or materially reduced any insurance coverage for Seller with
respect to either the Assets or the Business or given any notice or
other indication of its intention to cancel, not renew or reduce any
such coverage with respect to either the Assets or the Business.
Section 3.24 Full Disclosure. (a) Seller is not aware of any facts
pertaining to Seller or the Business which affect adversely Seller or
the Business or which are likely in the future to affect adversely
Seller or the Business and which have not been disclosed in this
Agreement, the Disclosure Schedule, the Financial Statements, the
Reference Balance Sheet, or otherwise disclosed to Purchaser by Seller
in writing.
(b) No representation or warranty of Seller in this
Agreement, nor any statement or certificate furnished or to be
furnished prior to or at the Closing to Purchaser pursuant to this
Agreement, or in connection with the transactions contemplated by this
Agreement, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading.
Section 3.25 Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement or the
Ancillary Agreements based upon arrangements made by or on behalf of
Seller.
Section 3.26 Authority Relative to this Agreement and the Ancillary
Agreements. Seller has all necessary corporate power to and authority
to execute and deliver this Agreement and the Ancillary Agreements, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and
delivery of this Agreement by Seller and the consummation of the
transaction contemplated hereby have been duly and validly authorized
by all necessary corporate action and no other corporate proceedings
on the part of Seller are necessary to authorize this Agreement or to
consummate such transactions (other than the approval and adoption of
this Agreement by a majority of the holders of 66 2/3% of the Series
A Preferred shares that include GAM Arbitrage Fund L.P., AGR Halifax
Fund, Ltd, Leonardo L.P., Ramius Fund, Ltd, Raphael L.P., AG Super
Fund L.P. of common stock of Seller. Securityholders of Seller holding
sufficient shares of capital stock of Seller to assure all necessary
shareholder approvals of this Agreement, the Ancillary Agreements and
the transactions contemplated hereby and thereby have executed the
Voting Agreement. This Agreement has been duly executed and delivered
by Seller and, assuming due delivery by Purchaser, constitutes the
legal, valid and binding obligation of seller, enforceable against
Seller in accordance with its terms.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PURCHASER
As an inducement to Seller to enter into this Agreement,
Purchaser hereby represents and warrants to Seller as follows:
Section 4.01 Organization and Authority of Purchaser. Purchaser is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all necessary
corporate power and authority to enter into this Agreement and the
Ancillary Agreements, to carry out its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the
Ancillary Agreements by Purchaser, the performance by Purchaser of its
obligations hereunder and thereunder and the consummation by Purchaser
of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of Purchaser. This
Agreement has been, and upon their execution the Ancillary Agreements
will be, duly executed and delivered by Purchaser, and (assuming due
authorization, execution and delivery by Seller) this Agreement
constitutes, and upon their execution the Ancillary Agreements will
constitute, legal, valid and binding obligations of Purchaser,
enforceable against Purchaser in accordance with their respective
terms.
Section 4.02 No Conflict. Except as may result from any facts or
circumstances relating solely to Seller, the execution, delivery and
performance of this Agreement and the Ancillary Agreements by
Purchaser, do not and will not violate, conflict with or result in
the breach of any provision of the Articles of Incorporation or by-
laws (or other organizational documents) of Purchaser, (b) conflict
with or violate any Law or Governmental Order applicable to Purchaser
or (c) conflict with, or result in any breach of, constitute a default
(or an event which with the giving of notice or lapse of time, or
both, would become a default) under, require any consent under, or
give to others any rights of termination, amendment, acceleration,
suspension, revocation or cancellation of, or result in the creation
of any encumbrance on any of the assets or properties of Purchaser
pursuant to, any note, bond, mortgage or indenture, contract,
agreement, lease, sublease, license, permit, franchise or other
instrument or arrangement to which Purchaser is a party or by which
any of such assets or properties is bound or affected, which would
have a material adverse effect on the ability of Purchaser to
consummate the transactions contemplated by this Agreement or by the
Ancillary Agreements.
Section 4.03 Governmental Consents and Approvals. The execution,
delivery and performance of this Agreement and each Ancillary
Agreement to which it is a party by Purchaser do not and will not
require any consent, approval, authorization or other order of, action
by, filing with, or notification to, any Governmental Authority.
Section 4.04 Capitalization. As of the Closing Date, the authorized
capital stock of Purchaser shall consist of 10,000,000 shares of
preferred stock, 7,000,000 of which shall be issued and outstanding,
and 30,000,000 shares of common stock, 1,000,000 of which shall be
issued and outstanding to Seller pursuant to Section 2.03 hereof.
Section 4.05 Financing Commitments. Purchaser has received
irrevocable commitments from investors to provide Purchaser equity
capital of not less than $6,000,000 in cash and commitments, subject
only to the Closing in accordance with the terms and conditions of
this Agreement.
Section 4.06 Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement or the
Ancillary Agreements based upon arrangements made by or on behalf of
Purchaser.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.01 Conduct of Business Prior to the Closing. (a) Seller
covenants and agrees that, between the date hereof and the Closing,
Seller shall not conduct the Business other than in the ordinary
course and consistent with Seller's past practice. Without limiting
the generality of the foregoing, Seller shall (i) continue its
advertising and promotional activities, and pricing and purchasing
policies, in accordance with past practice; (ii) not shorten or
lengthen the customary payment cycles for any of its payables or
receivables; (iii) use its commercially reasonable efforts to (A)
preserve intact its business organization and the business
organization of the Business, (B) keep available to Purchaser the
services of the employees of Seller, (C) continue in full force and
effect without material modification all existing policies or binders
of insurance currently maintained in respect of Seller and the
Business, and (D) preserve its current relationships with its
customers, suppliers and other persons with which it has significant
business relationships; and (iv) not engage in any practice, take any
action, fail to take any action or enter into any transaction which
could cause any representation or warranty of Seller to be untrue or
result in a breach of any covenant made by Seller in this Agreement.
(b) Except as described in Section 5.01(b) of the
Disclosure Schedule, Seller covenants and agrees that, prior to the
Closing, without the prior written consent of Purchaser, Seller will
not do any of the things enumerated in Section 3.08.
Section 5.02 Access to Information. (a) Seller will provide
Purchaser, together with its accountants, counsel and other authorized
representatives, full and complete access during normal business hours
to all properties, books, records, agreements and facilities of Seller
(insofar as the same are relevant to the Business or the Assets),
wherever located, and Seller will make its officers, employees,
attorneys, agents, independent accountants and actuaries available to
discuss with Purchaser and its accountants, counsel and other
authorized representatives such aspects of the business, financial
condition or prospects of the Business and the Assets as Purchaser may
deem necessary or desirable. To the extent that the transactions
contemplated hereby are not consummated, all written information
provided by Seller to Purchaser or its aforementioned representatives
will promptly be returned following Seller's written request to
Purchaser. All material non-public information provided by Seller
will be treated as confidential and will not be disclosed by Purchaser
or its representatives to any third party (other than its accountants,
counsel and authorized representatives and prospective debt and equity
investors for the sole purpose of evaluating the transactions
contemplated herein) without the prior written consent of Seller,
except as required by law or in connection with any civil,
administrative, criminal or other legal proceedings and
investigations.
(b) In order to facilitate the resolution of any claims
made against or incurred by Seller prior to the Closing, for a period
ending on the close of business on the 120th day following the
expiration of the applicable statute of limitations with respect to
Tax liabilities, Purchaser shall (i) retain the books and records of
Seller which are transferred to Purchaser pursuant to this Agreement
relating to periods prior to the Closing in a manner reasonably
consistent with the prior practices of Seller, and (ii) upon
reasonable notice, afford the officers, employees and authorized
agents and representatives of Seller reasonable access (including the
right to make photocopies at Buyer's expense), during normal business
hours, to such books and records.
(c) In order to facilitate the resolution of any claims
made by or against or incurred by Purchaser after the Closing or for
any other reasonable purpose, for a period ending on the close of
business on the 120th day following the expiration of the applicable
statute of limitations with respect to Tax liabilities, Seller shall
retain all books and records of Seller which are not transferred to
Purchaser pursuant to this Agreement and which relate to Seller, its
operations or the Business for periods prior to the Closing and which
shall not otherwise have been delivered to Purchaser, and (ii) upon
reasonable notice, afford the officers, employees and authorized
agents and representatives of Purchaser reasonable access (including
the right to make photocopies at Purchaser's expense), during normal
business hours, to such books and records.
Section 5.03 Regulatory and Other Authorizations; Notices and
Consents. (a) Seller shall use commercially reasonable efforts to
obtain all authorizations, consents, orders and approvals of all
Governmental Authorities and officials, customers, vendors and other
parties who may have or be able to assert legal rights with respect to
this transaction that may be or become necessary for execution and
delivery of this Agreement, and the performance of Seller's
obligations pursuant to, this Agreement and the Ancillary Agreements
and will cooperate fully with Purchaser in promptly seeking to obtain
all such authorizations, consents, orders and approvals.
(b) Seller and Purchaser agree that, in the event any
consent, approval or authorization necessary or desirable to preserve
for the Business or Purchaser any right or benefit under any lease,
license, contract, commitment or other agreement or arrangement to
which Seller is a party is not obtained prior to the Closing, Seller
will, subsequent to the Closing, cooperate with Purchaser in
attempting to obtain such consent, approval or authorization as
promptly thereafter as practicable. If such consent, approval or
authorization cannot be obtained, Seller will use its commercially
reasonable efforts to provide Purchaser with the rights and benefits
of the affected lease, license, contract, commitment or other
agreement or arrangement for the term of such lease, license, contract
or other agreement or arrangement, and, if Seller provides such rights
and benefits, Purchaser shall assume the obligations and burdens
thereunder.
Section 5.04 Notice of Developments. Prior to the Closing, Seller
shall promptly notify Purchaser in writing of (a) all events,
circumstances, facts and occurrences arising subsequent to the date of
this Agreement which could have a Material Adverse Effect on the
Business, and (b) all other material developments affecting the
Assets, Liabilities, business, financial condition, operations,
results of operations, customer or supplier relations, employee
relations or projections of the Business.
Section 5.05 Use of Intellectual Property. Seller shall not use any
of the Intellectual Property after the Closing Date.
Section 5.06 Public Announcements. Seller and Purchaser agree to
cooperate on making, and coordinate the making of, any public
announcements concerning this Agreement, the Ancillary Agreements and
the transactions contemplated hereby and thereby.
Section 5.07 Exclusivity. From the date of execution of this
Agreement until September 30, 1999 (the "Exclusivity Period"), none of
Seller nor any of its respective directors, officers, agents or
representatives will (i) solicit, encourage, initiate or participate
in any negotiations or discussions with respect to, any offer or
proposal to acquire all or any portion of the Business or the Assets
whether by purchase of assets or otherwise, (ii) disclose any
information not customarily disclosed to any person concerning the
Business or the Assets or afford to any person or entity access to the
properties, books or records of the Business or the Assets, or (iii)
cooperate with any person to make any proposal to purchase all or any
part of the assets of the Business or the Assets (directly or
indirectly) other than inventory or -essential or excess assets sold
in the ordinary course of business; provided, however, that nothing
contained in this Section 5.08 shall prohibit the board of directors
of Seller (i) form complying with Rule 14d-9 or 14e-2(a) promulgated
under the Exchange Act with regard to a tender of exchange offer not
made in violation of this Section 5.08 or (ii) prior to receipt of the
approval by the shareholders of Seller of this Agreement and the
transaction contemplated hereby from providing information in
connection with, and negotiating, another unsolicited, bona fide
written proposal regarding a competing transaction (a "Competing
Transaction") that (i) the Seller's board of directors shall have
concluded in good faith, after considering applicable state law, on
the basis of a written opinion of independent outside counsel of
nationally recognized reputation, that such action is necessary to
prevent Seller's board of directors from violating its fiduciary
duties to Seller's shareholders under applicable law, (ii) if any cash
consideration is involved, shall not be subject to any financing
contingency, and with respect to Seller's board of directors shall
have determined (based upon the advice of Seller's independent
financial advisors of nationally recognized reputation) in the proper
exercise of its fiduciary duties to Seller's stockholders that the
acquiring party is capable of consummating such Competing Transaction
on the terms proposed, and (iii) Seller's board of directors shall
have determined in the proper exercise of its fiduciary duties to
Seller's stockholders that such Competing Transaction provides greater
value to the shareholders of Seller than the transaction contemplated
hereby (based upon the written opinion of Seller's independent
financial advisors of nationally recognized reputation that such
Competing Transaction is superior from a financial point of view).
Section 5.08 Further Action. Each of the parties hereto shall use
all reasonable efforts to take, or cause to be taken, all appropriate
action, do or cause to be done all things necessary, proper or
advisable under applicable Laws, including obtaining any necessary
consents or approvals from, or making any necessary filings with the
U.S. or any foreign regulatory agencies, and execute and deliver such
documents and other papers, as may be required to carry out the
provisions of this Agreement, cause the conditions to Closing set
forth in Article VIII of this Agreement to be satisfied, and
consummate and make effective the transactions contemplated by this
Agreement.
ARTICLE VI
EMPLOYEE MATTERS
Section 6.01 Offer of Employment. Following the Closing Date
Purchaser shall offer employment to all of the employees of the
Business other than selected individuals to be identified by Purchaser
at least five (5) days prior to the Closing Date (collectively, the
"Identified Employees"). Shares of Purchaser Common Stock equal to
20% of the initial capital stock of Purchaser (computed on a fully
diluted basis including the issuance to Seller and the issuance of
7,000,000 shares of Series A Preferred Stock of Purchaser) will be
reserved for issuance to Purchaser's employees, officers and directors
(specifically including the Identified Employees) upon the exercise of
employee stock options with terms and conditions, including vesting
tied to continued employment by Purchaser, customary to venture
capital backed start-up companies.
ARTICLE VII
TAX MATTERS
Section 7.01 Indemnity. Seller agrees, to indemnify and hold
harmless Purchaser against the following Taxes and against any loss,
damage, liability or expense, including reasonable fees for attorneys
and other outside consultants, incurred in contesting or otherwise in
connection with any such Taxes: (i) Taxes imposed on Purchaser or the
Business with respect to taxable periods ending on or before the
Closing Date; (ii) with respect to taxable periods beginning before
the Closing Date and ending after the Closing Date, Taxes imposed on
Purchaser or the Business which are allocable, to the portion of such
period ending on the Closing Date; and (iii) Taxes imposed on
Purchaser as a result of any breach of warranty or misrepresentation
under Section 3.19 of this Agreement. Purchaser shall be responsible
for Taxes of the Business for periods after the Closing Date.
Section 7.02 Conveyance Taxes. Seller and Purchaser shall equally
bear all real property transfer or gains, sales, use, transfer, value
added, stock transfer, and stamp taxes, any transfer, recording,
registration, and other fees, and any similar Taxes which become
payable in connection with the transactions contemplated by this
Agreement and the Ancillary Agreements.
Section 7.03 Miscellaneous. (a) Seller and Purchaser agree to treat
all payments made by either to or for the benefit of the other under
this Article VII, under other indemnity provisions of this Agreement
and for any misrepresentations or breach of warranties or covenants,
as adjustments to the Purchase Price or as capital contributions for
Tax purposes and that such treatment shall govern for purposes hereof
except to the extent that the laws of a particular jurisdiction
provide otherwise, in which case such payments shall be made in an
amount sufficient to indemnify the relevant party on an after-tax
basis.
(b) Notwithstanding any provision in this Agreement to the
contrary, the obligations of Seller and Parent to indemnify and hold
harmless Purchaser pursuant to this Article VII, and the
representations and warranties contained in Section 3.19, shall
terminate at the close of business on the 120th day following the
expiration of the applicable statute of limitations with respect to
the Tax liabilities in question (giving effect to any waiver,
mitigation or extension thereof).
(c) For purposes of this Article VII, "Purchaser" and
"Seller", respectively, shall include each member of the affiliated
group of corporations of which it is or becomes a member.
ARTICLE VIII
CONDITIONS TO CLOSING
Section 8.01 Conditions to Obligations of Purchaser. Unless waived
in writing by Purchaser, Purchaser's obligation to consummate the
Acquisition shall be subject to the satisfaction of the following
conditions:
(a) Representations, Warranties and Covenants. The
representations and warranties of Seller and Parent contained in this
Agreement shall have been true and correct when made and shall be true
and correct as of the Closing with the same force and effect as if
made as of the Closing, other than such representations and warranties
as are made as of another date, the covenants and agreements contained
in this Agreement to be complied with by Seller on or before the
Closing shall have been complied with, and Purchaser shall have
received a certificate of Seller to such effect signed by a duly
authorized officer thereof;
(b) No Proceeding or Litigation. No Action shall have been
commenced or threatened by or before any Governmental Authority
against either Seller or Purchaser, seeking to restrain or materially
and adversely alter the transactions contemplated hereby which in the
good faith determination of Purchaser is likely to render it
impossible or unlawful to consummate the transactions contemplated by
this Agreement or otherwise render inadvisable the consummation by
Purchaser of the transactions contemplated by this Agreement;
provided, however, that the provisions of this Section 8.01(b) shall
not apply if Purchaser has solicited or encouraged any such Action;
(c) Resolutions of Seller. Purchaser shall have received a
true and complete copy, certified by the Secretary or an Assistant
Secretary of Seller, of the resolutions duly and validly adopted by
the Board of Directors of Seller evidencing its authorization of the
execution and delivery of this Agreement and the Ancillary Agreements
and the consummation of the transactions contemplated hereby and
thereby;
(d) Legal Opinion. Purchaser shall have received from
Morgan, Lewis & Bockius, LLP, counsel to Seller, an opinion, addressed
to Purchaser and dated the Closing Date, in a form satisfactory to
Purchaser.
(e) Consents and Approvals. Purchaser and Seller shall
have received, each in form and substance reasonably satisfactory to
Purchaser in its sole and absolute discretion, all authorizations,
consents, orders and approvals of all Governmental Authorities and
officials and all third party consents and estoppel certificates which
Purchaser reasonably deems necessary or desirable for the consummation
of the transactions contemplated by this Agreement and the Ancillary
Agreements;
(f) Ancillary Agreements. Seller shall have executed and
delivered to Purchaser each of the Ancillary Agreements to which it is
a party;
(g) Contracts. Purchaser shall have received, each in form
and substance reasonably satisfactory to Purchaser, amendments or
novations of each Contract identified in Section 3.14(a) of the
Disclosure Schedule which Purchaser reasonably deems necessary or
desirable for the consummation of the transactions contemplated by
this Agreement, the Ancillary Agreements and the ongoing operation of
the Business, including, without limitation, all third party consents
required under any Contracts;
(h) No Material Adverse Effect. No circumstance, change
in, or effect on the Business shall have occurred which has a Material
Adverse Effect;
(i) Due Diligence. Completion of, and satisfaction with
the results of, financial, business, technical and legal due diligence
reviews of Seller by the Purchaser;
(j) Approval of Holders of Seller's Common Stock. Seller
shall have solicited and received the approval of the holders of
common stock of Seller necessary to effect the sale of substantially
all of the assets of Seller;
(k) Approval of Holders of Seller's Preferred Stock. If
necessary to consummate the Acquisition, Seller shall have solicited
and received the approval of the holders of 66-2/3% of the shares of
Series A Preferred Stock of Seller;
(l) Approvals. Purchaser shall have received all Approvals
which shall not contain any condition or restriction which materially
impairs Purchaser's ability to use, operate or enjoy the Assets;
(m) No Injunction, Stay, Order. There shall not be in
effect any injunction, stay or restraining order issued by a court of
competent jurisdiction, whether foreign or domestic, staying the
effectiveness of any Approval, and there shall not be any pending
request for such an injunction, stay or restraining order;
(n) Litigation. There shall not be threatened or pending
any suit, action, investigation, inquiry or other proceeding by or
before any court of competent jurisdiction or governmental agency
which, in Purchaser's reasonable judgment, could have a material
adverse effect on Purchaser's ability to acquire, use, operate or
enjoy the Assets;
(o) Deliveries by Seller. Seller shall have delivered to
Purchaser the items set forth in Section 2, satisfactory in form and
substance to Purchaser;
(p) Stockholders' Agreement. Seller shall have delivered
to Purchaser a signed counterpart of a stockholders' agreement
including the terms set forth in Exhibit A hereto and otherwise
satisfactory to Purchaser (the "Stockholders' Agreement");
(q) Bulk Sale. Purchaser shall be satisfied that
applicable bulk sale or similar requirements shall have been complied
with by Seller on a timely basis;
(r) Financial Statements. Purchaser shall have received
the Financial Statements and the Reference Balance Sheet;
(s) Key Employees. All of the employees of Seller prior to
the Closing Date designated by the Purchaser as key employees on Annex
B ("Key Employees") shall have accepted the offer of employment by
Purchaser made pursuant to Section 6.01 above;
(t) Purchaser Satisfaction. Purchaser shall be satisfied
in its sole discretion that Seller is able to sell, convey and assign
to Purchaser, free and clear of all claims, liens and interests except
as is provided for herein, all of Seller's right, title and interest
in and to the Assets; and
(u) Seller Compliance. Seller shall have complied in all
material respects with its covenants and agreements hereunder.
Section 8.02 Conditions to Obligations of Seller. Unless waived in
writing by Seller, Seller's obligation to consummate the transactions
contemplated hereby shall be subject to the satisfaction of the
following conditions:
(a) the conditions set forth above in Section 8.01 (j) and
(k) shall have been satisfied;
(b) Purchaser and its current stockholders shall each have
delivered to Seller a signed counterpart of the Stockholders'
Agreement;
(c) Purchaser shall have been capitalized with equity
capital of not less than $6,000,000 in cash and commitments; and
(d) Purchaser shall have complied in all material respects
with its covenants and agreements hereunder.
ARTICLE IX
INDEMNIFICATION
Section 9.01 Survival of Representations and Warranties. The
representations and warranties of Seller contained in this Agreement
and the Ancillary Agreements, and all statements contained in the
Acquisition Documents, shall survive the Closing until twelve (12)
months thereafter; provided, however, that (a) the representations and
warranties dealing with Tax matters shall survive as provided in
Section 7.03(b), and (b) insofar as any claim is made by Purchaser for
the breach of any representation or warranty of Seller contained
herein, which claim arises out of allegations of personal injury or
property damage suffered by any third party on or prior to the Closing
Date or attributable to products or Inventory sold or shipped, or
activities or omissions that occur, on or prior to the Closing Date,
such representations and warranties shall, for purposes of such claim
by Purchaser, survive until thirty (30) calendar days after the
expiration of the applicable statute of limitations governing such
claims. Neither the period of survival nor the liability of Seller
with respect to Seller's representations and warranties shall be
reduced by any investigation made at any time by or on behalf of
Purchaser. If written notice of a claim has been given prior to the
expiration of the applicable representations and warranties by
Purchaser to Seller, then the relevant representations and warranties
shall survive as to such claim until the claim has been finally
resolved.
Section 9.02 Indemnification by Seller. (a) Indemnifiable Losses.
Subject to Section 9.02(b) and (c) below, Purchaser and its
Affiliates, officers, directors, employees, agents, successors and
assigns shall be indemnified and held harmless by Seller for any and
all Liabilities, losses, damages, claims, costs and expenses,
interest, awards, judgments and penalties actually suffered or
incurred by them (including, without limitation, any Action brought or
otherwise initiated by any of them) (a "Loss"), arising out of or
resulting from the following:
(i) the breach of any representation or warranty made by
Seller contained in the Acquisition Documents;
(ii) the breach of any covenant or agreement by Seller
contained in the Acquisition Documents;
(iii) any and all Losses suffered or incurred by
Purchaser by reason of or in connection with any claim or
cause of action of any third party to the extent arising out
of any action, inaction, event, condition, liability or
obligation of Seller occurring or existing prior to the
Closing; and
(iv) liabilities, whether arising before or after the
Closing Date, that are not expressly assumed by Purchaser
pursuant to this Agreement, including, without limitation the
Excluded Liabilities.
(b) Claims; Threshold Amount. Notwithstanding the foregoing,
Seller shall have no liability with respect to the matters described
in paragraph (a)(i) above unless and until the aggregate amount of
Losses thereunder of which Seller receives written notice exceeds
$50,000 (the "Threshold Amount"). At such time as the aggregate
Losses with respect to matters described in paragraph (a)(i) exceed
the Threshold Amount, Purchaser shall be indemnified to the full
extent of all such Losses (including Losses counted in determining
whether the aggregate Losses equal or exceed the Threshold Amount);
provided, however, that Seller shall be liable for any such Losses
arising out of any intentional or fraudulent breach of any
representation or warranty.
(c) Limits on Indemnification. Notwithstanding anything to the
contrary contained in this Agreement, the maximum amount of
indemnifiable Losses which may be recovered from Seller arising out of
or resulting from the causes enumerated in Section 9.02(a) shall be an
amount equal to $200,000, provided, however, that such limitation
shall not apply to Article VII or Section 3.19.
Section 9.03 Indemnification by Purchaser. Seller and each of its
Affiliates, officers, directors, employees, agents, successors and
assigns shall be indemnified and held harmless by Purchaser for any
and all Losses out of or resulting from:
(i) a breach of any representation, warranty,
covenant or agreement of Purchaser contained in this Agreement
which has not been expressly waived by Seller in writing;
(ii) any claim, suit, action or proceeding to the
extent the same pertains to the ownership, organization,
operation or conduct of the Business on or after the Closing;
and
(iii) all liabilities, obligations, responsibilities
and Losses, attributable to Assumed Liabilities which were not
in existence on the Closing Date.
Section 9.04 Indemnification Procedures. (a) For purposes of this
Section 9.04, "Indemnified Party" shall mean (i) each of Purchaser and
its Affiliates, officers, directors, employees, agents, successors and
assigns, when being indemnified by Seller pursuant to Section 9.02,
and (ii) each of and its Affiliates, officers, directors, employees,
agents, successors and assigns, when being indemnified by Purchaser
pursuant to Section 9.03, and "Indemnifying Party" shall mean (x)
Seller when indemnifying Purchaser and its Affiliates, officers,
directors, employees, agents, successors and assigns pursuant to
Section 9.02, and (y) Purchaser when indemnifying Seller and its
Affiliates, officers, directors, employers, agents, successors and
assigns pursuant to Section 9.03.
(b) A Indemnified Party shall give the Indemnifying Party
notice of any matter which an Indemnified Party has determined has
given or could give rise to a right of indemnification under this
Agreement, within sixty (60) days of such determination, stating the
amount of the Loss, if known, and method of computation thereof, a
brief description of the facts upon which such claim is based and
containing a reference to the provisions of this Agreement in respect
of which such right of indemnification is claimed or arises. If,
after the amount of the claim is specified by the Indemnified Person,
the Indemnifying Party objects to any such claim, it may give written
notice to the Indemnified Person within thirty (30) days of the later
of receipt of the Indemnified Person's notice of claim or the
specification by the Indemnified Person of the amount of the claim,
advising the Indemnified Person of its objection. If no such notice
is timely received from the Indemnifying Party by the Indemnified
Person, the Indemnified Person will be entitled to payment from the
Indemnifying Party in the amount of the Loss arising out of the claim
specified in its notice of claim. If the Indemnifying Party advises
the Indemnified Person within such thirty (30) day period that it
objects to such claim, the Indemnified Person and the Indemnifying
Party shall promptly meet and use their best efforts to settle the
dispute in writing. If the Indemnified Person and the Indemnifying
Party are unable to reach agreement within thirty (30) days after the
Indemnifying Party objects to the claim, then the disputed portion of
the claim shall be submitted to arbitration in accordance with Section
11.11. If the arbitrator shall determine that the Indemnified Person
is entitled to indemnification with respect to the dispute submitted,
the Indemnified Person will be entitled to obtain payment from the
Indemnifying Party within thirty (30) days in the amount determined by
the arbitrator.
(c) The obligations and Liabilities of the Indemnifying
Party under this Article IX with respect to Losses arising from claims
of any third party which are subject to the indemnification provided
for in this Article IX ("Third Party Claims") shall be governed by and
contingent upon the following additional terms and conditions: if an
Indemnified Party shall receive notice of any Third Party Claim, the
Indemnified Party shall give the Indemnifying Party notice of such
Third Party Claim within thirty (30) days of the receipt by the
Indemnified Party of such notice; provided, however, that the failure
to provide such notice shall not release the Indemnifying Party from
any of its obligations under this Article IX except to the extent the
Indemnifying Party is materially prejudiced by such failure and shall
not relieve the Indemnifying Party from any other obligation or
Liability that it may have to any Indemnified Party otherwise than
under this Article IX. If the Indemnifying Party acknowledges in
writing its obligation to indemnify the Indemnified Party hereunder
against any Losses that may result from such Third Party Claim, then
the Indemnifying Party shall be entitled to assume and control the
defense of such Third Party Claim at its expense and through counsel
of its choice if it gives notice of its intention to do so to the
Indemnified Party within five (5) days of the receipt of such notice
from the Indemnified Party; provided, however, that if there exists or
is reasonably likely to exist a conflict of interest that would make
it inappropriate in the judgment of the Indemnified Party, in its
reasonable discretion, for the same counsel to represent both the
Indemnified Party and the Indemnifying Party, then the Indemnified
Party shall be entitled to retain its own counsel, in each
jurisdiction for which the Indemnified Party determines counsel is
required, at the expense of the Indemnifying Party. In the event the
Indemnifying Party exercises the right to undertake any such defense
against any such Third Party Claim as provided above, the Indemnified
Party shall cooperate with the Indemnifying Party in such defense and
make available to the Indemnifying Party at the Indemnifying Party's
expense, all witnesses, pertinent records, materials and information
in the Indemnified Party's possession or under the Indemnified Party's
control relating thereto as is reasonably required by the Indemnifying
Party. Similarly, in the event the Indemnified Party is, directly or
indirectly, conducting the defense against any such Third Party Claim,
the Indemnifying Party shall cooperate with the Indemnified Party in
such defense and make available to the Indemnified Party, at the
Indemnifying Party's expense, all such witnesses, records, materials
and information in the Indemnifying Party's possession or under the
Indemnifying Party's control relating thereto as is reasonably
required by the Indemnified Party. No such Third Party Claim may be
settled by the Indemnifying Party without the prior written consent of
the Indemnified Party.
(d) To the extent that the Indemnifying Parties'
undertakings set forth in this Article IX may be unenforceable, the
Indemnifying Parties shall be obligated, jointly and severally, to
contribute the maximum amount that it is permitted to contribute under
applicable Law to the payment and satisfaction of all Losses incurred
by the Indemnified Parties.
ARTICLE X
TERMINATION AND WAIVER
Section 10.01 Termination. This Agreement may be terminated at any
time prior to the Closing:
(a) by Purchaser if, between the date hereof and the time
scheduled for the Closing an event or condition occurs that has
resulted in or that Purchaser reasonably believes may result in a
Material Adverse Effect;
(b) by either Seller or Purchaser if the Closing shall not
have occurred by October 31, 1999; provided, however, that the right
to terminate this Agreement under this Section 10.01(b) shall not be
available to any party whose failure to fulfill any obligation under
this Agreement shall have been the cause of, or shall have resulted
in, the failure of the Closing to occur on or prior to such date;
(c) by either Purchaser or Seller in the event that any
Governmental Authority shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting
the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and
nonappealable; or
(d) by the mutual written consent of Seller and Purchaser.
Section 10.02 Effect of Termination. In the event of termination of
this Agreement as provided in Section 10.01, this Agreement shall
forthwith become void and there shall be no liability on the part of
either party hereto except (i) as set forth in Section 11.01 and (ii)
that nothing herein shall relieve either party from liability for any
willful breach of this Agreement.
Section 10.03 Waiver. Either party to this Agreement may (a) extend
the time for the performance of any of the obligations or other acts
of the other party, (b) waive any inaccuracies in the representations
and warranties of the other party contained herein or in any document
delivered by the other party pursuant hereto, or (c) waive compliance
with any of the agreements or conditions of the other party contained
herein. Any such extension or waiver shall be valid only if set forth
in an instrument in writing signed by the party to be bound thereby.
Any waiver of any term or condition shall not be construed as a waiver
of any subsequent breach or a subsequent waiver of the same term or
condition, or a waiver of any other term or condition, of this
Agreement. The failure of any party to assert any of its rights
hereunder shall not constitute a waiver of any of such rights.
ARTICLE XI
MISCELLANEOUS
Section 11.01 Expenses. Except as otherwise specified in this
Agreement, all costs and expenses, including, without limitation, fees
and disbursements of counsel, financial advisors and accountants,
incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such costs
and expenses, whether or not the Closing shall have occurred.
Section 11.02 Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given
or made (and shall be deemed to have been duly given or made upon
receipt) by delivery in person, or by courier service, cable,
telecopy, telegram, or registered or certified mail (postage prepaid,
return receipt requested) to the respective parties hereto at their
addresses set forth on the signature pages to this Agreement (or at
such other address for a party hereto as shall be specified in a
notice given in accordance with this Section 11.02).
Section 11.03 Public Announcements. No party to this Agreement shall
make, or cause to be made, any press release or public announcement in
respect of this Agreement or the transactions contemplated hereby or
otherwise communicate with any news media without the prior written
consent of the other party and the parties shall cooperate as to the
timing and contents of any such press release or public announcement.
Section 11.04 Headings. The descriptive headings contained in this
Agreement are for convenience of reference only and shall not affect
in any way the meaning, construction or interpretation of this
Agreement.
Section 11.05 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any
Law or public policy, all other terms and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is
not affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner
in order that the transactions contemplated hereby are consummated as
originally contemplated to the greatest extent possible.
Section 11.06 Entire Agreement. This Agreement (including the
Annexes, Exhibits and Disclosure Schedule) constitutes the entire
agreement of the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements (including the Letter of
Intent), representations, undertakings and understandings, both
written and oral, between Seller and Purchaser with respect to the
subject matter hereof.
Section 11.07 Assignment. This Agreement may not be assigned by
operation of Law or otherwise without the express written consent of
Seller and Purchaser (which consent may be granted or withheld in the
sole discretion of Seller and Purchaser); provided, however, that
Purchaser may assign this Agreement to an Affiliate of Purchaser
without the consent of Seller and without diminishing Purchaser's
obligations hereunder.
Section 11.08 No Third Party Beneficiaries. This Agreement shall be
binding upon and inure solely to the benefit of the parties hereto and
their permitted assigns and nothing herein, express or implied, is
intended to or shall confer upon any other Person, including, without
limitation, any union or any employee or former employee of Seller,
any legal or equitable right, benefit or remedy of any nature
whatsoever, including, without limitation, any rights of employment
for any specified period, under or by reason of this Agreement.
Section 11.09 Amendment. This Agreement may not be amended, modified
or supplemented except (a) by an instrument in writing signed by, or
on behalf of, Seller and Purchaser or (b) by a waiver in accordance
with Section 10.03.
Section 11.10 Governing Law. IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE
OBLIGATIONS OF EACH PARTY ARISING HEREUNDER SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK APPLICABLE TO CONTRACTS EXECUTED IN AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF
REGARDING CONFLICT OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA.
Section 11.11 Arbitration. The parties shall submit any dispute
concerning this interpretation of or the enforcement of rights and
duties under this Agreement to final and binding arbitration pursuant
to the American Arbitration Association. At the request of any party,
the arbitrators, attorneys, parties to the arbitration, witnesses,
experts, court reports, or other persons present at the arbitration
shall agree in writing to maintain the strict confidentiality of the
arbitration proceedings. Arbitration shall be conducted by a single,
neutral arbitrator, appointed in accordance with the Commercial
Arbitration Rules of the American Arbitration Association in the City
of [San Francisco, California]. The award of the arbitrator(s) shall
be enforceable according to the applicable provisions of the
[California] Code of Civil Procedure. The arbitrator(s) may award
damages and/or permanent injunctive relief, but in no event shall the
arbitrator(s) have the authority to award punitive or exemplary
damages. Notwithstanding the foregoing, a party may apply to a court
of competent jurisdiction for relief in the form of a temporary
restraining order or preliminary injunction, or other provisional
remedy pending final determination of a claim through arbitration in
accordance with the paragraph. If proper notice of any hearing has
been given, the arbitrator(s) will have full power to proceed to take
evidence or to perform any other acts necessary to arbitrate the
matter in the absence of any party who fails to appear.
Section 11.12 Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the
same agreement.
Section 11.13 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this
Agreement was not performed in accordance with the terms hereof and
that the parties shall be entitled to specific performance of the
terms hereof, in addition to any other remedy at Law or equity,
without the necessity of demonstrating the inadequacy of money
damages.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, Seller and Purchaser have caused this
Agreement to be executed as of the date first written above by their
respective officers thereunto duly authorized.
THE PANDA PROJECT, INC.
By /s/ Stanford W. Crane, Jr.
----------------------------
Name: Stanford W. Crane, Jr.
Title: President
951 Broken Sound Parkway
Boca Raton, FL 33487
Telephone: (561) 994-2300
Telecopy: (561) 994-0191
By /s/ Alan E. Salzman
-----------------------------
Name: Alan E. Salzman
Title: Chairman
1001 Bayhill Drive, Suite 140
San Bruno, CA 94066
Telephone: (650) 866-3100
Telecopy: (650) 869-6078
AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT
AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT, dated as of
September 7, 1999 (this "Amendment"), between Silicon Bandwidth, Inc.,
a Delaware corporation ("Purchaser"), and The Panda Project, Inc., a
Florida corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller and Purchaser have entered into that certain
Asset Purchase Agreement, dated as of July 19, 1999 (as hereafter
amended, modified or supplemented, the "Agreement"); and
WHEREAS, Seller and Purchaser desire to amend the Agreement
pursuant to the terms of this Amendment;
NOW THEREFORE, in consideration of the premises and the mutual
agreements and covenants hereinafter set forth, and intending to be
legally bound hereby, Purchaser and Seller hereby agree as follows:
1. Section 10.01(b) of the Agreement is hereby amended by
replacing the phrase "October 31, 1999" therein by the phrase
"December 30, 1999."
2. From and after the date hereof each reference in the
Agreement to "this Agreement," "the Agreement," "hereunder," "hereof,"
"herein," or words of like import shall mean and be a reference to the
Agreement as amended by this Amendment.
3. Except as specifically amended above, the Agreement shall
remain in full force and effect and is hereby ratified and confirmed.
4. This Amendment may be executed in one or more
counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the
same agreement.
IN WITNESS WHEREOF, Seller and Purchaser have caused this
Amendment to be executed as of the date first written above by their
respective officers thereunto duly authorized.
THE PANDA PROJECT, INC. SILICON BANDWIDTH, INC.
By: /s/ Stanford W. Crane, Jr. By: /s/ Alan E. Salzman
- - ----------------------------- -----------------------
Name: Stanford W. Crane, Jr. Name: Alan E. Salzman
Title: President and CEO Title: Chairman
AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT
AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT, dated as of October
28, 1999 (this "Amendment"), between Silicon Bandwidth, Inc., a
Delaware corporation ("Purchaser"), and The Panda Project, Inc., a
Florida corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller and Purchaser have entered into that certain
Asset Purchase Agreement, dated as of July 19, 1999 (as hereafter
amended, modified or supplemented, the "Agreement"); and
WHEREAS, Seller and Purchaser desire to amend the Agreement
pursuant to the terms of this Amendment;
NOW THEREFORE, in consideration of the premises and the mutual
agreements and covenants hereinafter set forth, and intending to be
legally bound hereby, Purchaser and Seller hereby agree as follows:
1. Section 10.01(b) of the Agreement is hereby amended by
replacing the phrase "December 30, 1999" therein by the phrase
"February 24, 1999."
2. Section 5.07 of the Agreement is hereby amended by replacing
the phrase "December 30, 1999" therein by the phrase "February 24,
1999."
3. From and after the date hereof each reference in the
Agreement to "this Agreement," "the Agreement," "hereunder," "hereof,"
"herein," or words of like import shall mean and be a reference to the
Agreement as amended by this Amendment.
4. Except as specifically amended above, the Agreement shall
remain in full force and effect and is hereby ratified and confirmed.
5. This Amendment may be executed in one or more counterparts,
and by the different parties hereto in separate counterparts, each of
which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, Seller and Purchaser have caused this
Amendment to be executed as of the date first written above by their
respective officers thereunto duly authorized.
THE PANDA PROJECT, INC. SILICON BANDWIDTH, INC.
By: /s/ Stanford W. Crane, Jr. By: /s/ Alan E. Salzman
----------------------------- -----------------------
Name: Stanford W. Crane, Jr. Name: Alan E. Salzman
Title: President and CEO Title: Chairman
Annex B
Text of Proposed Amendment to Panda's Articles of Incorporation
The Articles of Incorporation of this corporation are to be
amended as follows:
The first sentence of Article III is amended in its entirety to
read as follows:
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 102,000,000 shares,
consisting of (i) 100,000,000 shares of Common Stock, $.01 par value
(the "Common Stock"), and (ii) 2,000,000 shares of Preferred Stock,
$.01 par value ("Preferred Stock").
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
The undersigned hereby appoints __________, ___________ and
___________, and each of them acting alone, with the power to appoint
his or her substitute, proxy to represent the undersigned and vote as
designated below all of the shares of Common Stock of The Panda
Project, Inc. (the "Company") held of record by the undersigned on
_________, 2000, at the Annual Meeting of Shareholders to be held on
___________, 2000 and at any adjournment thereof.
1. Approval of the Asset Purchase Agreement, dated as of July 19,
1999, between the Company and Silicon Bandwidth, Inc. and related
transactions for the sale of substantially all of the operating assets
of the Company.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
2. Approval of an amendment to the Company's Articles of
Incorporation to increase the authorized shares of the Company's
common stock, par value $.01 per share, from 50,000,000 to
100,000,000.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
3. Election of William E. Ahearn to serve on the Company's Board
of Directors until the 2003 Annual Meeting and until his successor is
duly elected and qualified.
[ ] FOR the nominee [ ] WITHHOLD AUTHORITY to vote
for the nominee
4. Approval of Grant Thornton LLP as independent accountants for
the current fiscal year.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
5. In his or her discretion, the proxy is authorized to vote upon
such other business as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED "FOR" THE DIRECTOR NOMINEE AND "FOR" PROPOSALS 1,
2 AND 4.
Dated: _____________________________
_____________________________________
Signature
_____________________________________
Signature if held jointly
Please sign exactly as name appears to
the left. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
