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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Registration Statement
on
FORM SB-2
Under The Securities Act of 1933
PATRIOT SCIENTIFIC CORPORATION
(Exact name of registrant as specified in charter)
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<S> <C> <C>
DELAWARE 3812 84-1070278
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
12875 BROOKPRINTER PLACE, SUITE 300 ROBERT PUTNAM, SECRETARY
POWAY, CALIFORNIA 92064 12875 BROOKPRINTER PLACE, SUITE 300
(619) 679-4428 POWAY, CALIFORNIA 92064
(Address and telephone number of registrant's (619) 679-4428
principal executive offices and principal place of business) (Name, address and telephone number of agent for service)
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COPY TO:
JOHN D. BRASHER JR., ESQ.
BRASHER & COMPANY, ATTORNEYS AT LAW
90 MADISON STREET, SUITE 707, DENVER, COLORADO 80206
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
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CALCULATION OF REGISTRATION FEE (1)
================================================================================
Title of Proposed Proposed
each Class Amount Offering Offering Amount of
of Securities Being Price Per Aggregate Registration
Being Registered Registered Share Price (2) Fee (3)
================================================================================
<S> <C> <C> <C> <C>
Common Stock (1) ..... 975,000 $2.31 $2,252,250 $776.64
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(1) Shares of the Registrant's common stock, $.00001 par value per share, being
registered for resale on behalf of selling securityholders.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The fee with respect to these shares has been calculated pursuant to Rules
457(h) and 457(c) under the Securities Act of 1933, as amended, and based
upon the average of the bid and asked prices per share of the Registrant's
common stock on a date within five days prior to the date of filing this
registration statement, as quoted on the OTC Electronic Bulletin Board.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
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P R O S P E C T U S
PATRIOT SCIENTIFIC CORPORATION
975,000 Common Shares
This Prospectus relates to 975,000 shares of the Common Stock, $.00001
par value ("Common Stock" or "Common Shares"), of Patriot Scientific
Corporation, a Delaware corporation ("Company"), being resold by the persons
listed herein as the Selling Shareholders. The Common Shares are being offered
hereunder for the respective accounts of the Selling Shareholders and will be
sold from time to time by the Selling Shareholders in the over-the-counter
market or otherwise at their prevailing market prices, or in negotiated
transactions. The expenses of preparing and filing the Registration Statement of
which this Prospectus forms a part are being borne by the Company. The Company
will receive no proceeds from the sale of the Common Shares by the Selling
Shareholders.
THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Common Shares offered hereby were acquired by the Selling
Shareholders from the Company in private transactions and are "restricted
securities" under the Securities Act of 1933, as amended ("Act"). This
Prospectus has been prepared for the purpose of registering the Common Shares
under the Act to allow for future sales by the Selling Shareholders to the
public without restriction. To the knowledge of the Company, the Selling
Shareholders have made no arrangement with any brokerage firm for the sale of
the Common Shares. The Selling Shareholders may be deemed to be "underwriters"
within the meaning of the Act. Any commissions received by a broker or dealer in
connection with resales of the Common Shares may be deemed to be underwriting
commissions or discounts under the Act. See "Plan of Distribution."
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold, nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
The Common Stock of the Company is traded in the over-the-counter market
and is quoted on the OTC Electronic Bulletin Board operated by the National
Association of Securities Dealers, Inc. under the symbol "PTSC". On March 6,
1996, the bid and asked prices per share were $2.28 and $2.34, respectively.
This Prospectus is dated March __, 1996
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ADDITIONAL INFORMATION
The Company is subject to the informational requirements of Section
13(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
in accordance therewith files periodic reports and other information with the
Securities and Exchange Commission ("Commission") as a "small business" issuer
pursuant to Regulation S-B of the Commission. Reports, proxy statements and
other information filed by the Company with the Commission may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: 75 Park Place, New York, New York 10007; and
the Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60621. Copies of such material may be obtained from the Public
Reference Section of the Commission's Washington, D.C. office at prescribed
rates.
The Company has filed with the Commission a registration statement on
Form SB-2 of which this Prospectus is a part. This registration statement or any
part thereof may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street N.W., Judiciary Plaza,
Washington, D.C. 20549. Copies of such material may be obtained from the Public
Reference Section of the Commission's Washington, D.C. office at prescribed
rates.
(ii)
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PROSPECTUS SUMMARY
The following summary is intended only to supply certain facts and
highlights from material contained in the body of this Prospectus and is
qualified in its entirety by the detailed information and financial statements
appearing elsewhere below.
THE COMPANY. Patriot Scientific Corporation (the "Company" or
"Patriot"), a development stage company, is engaged in the development of
proprietary technologies including patented microprocessor technology and ISDN
interface technology both with products under development for the growing
Internet market. The ShBoom-architecture PSC1000 microprocessor is being
developed and targeted as a Java processor and the CyberShark is being developed
and targeted as a high-performance ISDN digital modem. The Company also owns
radar and antenna technology. The Company's strategy is to exploit one or more
of the technologies through product sales, licensing, strategic alliances or
government contracting. The Company has had no operating revenues since its
inception and there can be no assurance of future operating revenues. Its
address is 12875 Brookprinter Place, Suite 300, Poway, California 92064, and its
telephone number is (619) 679-4428. The Company's home page can be located on
the World Wide Web at http://www.ptsc.com.
SECURITIES OFFERED. No securities will be offered or sold by the Company
pursuant to this Prospectus, which relates solely to the resale of 975,000
shares of the Common Stock, $.00001 par value ("Common Stock" or "Common
Shares"), of the Company held and beneficially owned by persons listed herein as
the Selling Shareholders. The Common Shares are being offered hereunder for the
respective accounts of the Selling Shareholders and will be sold from time to
time by the Selling Shareholders in the over-the-counter market or otherwise at
their prevailing market prices, or in negotiated transactions.
COSTS; USE OF PROCEEDS. The expenses of preparing and filing the
Registration Statement of which this Prospectus forms a part are being borne by
the Company. The Company will receive no proceeds from the sale of the Common
Shares by the Selling Shareholders.
RISK FACTORS. The securities offered involve a high degree of risk. See
"Risk Factors."
RISK FACTORS
The securities offered for sale hereunder by the Selling Shareholders
are speculative in nature, involve a high degree of risk and should be purchased
by persons who can afford to lose the entire sum invested in the Common Shares.
Prospective purchasers of the Common Shares should carefully consider the
following factors relating to the business and prospects of the Company, in
addition to other information concerning the Company and its business contained
in this Prospectus, before purchasing any of the Common Shares.
DEVELOPMENT STAGE BUSINESS
The Company commenced its current operations in 1989 and its activities
to date have been limited to research and development of its technologies and
administrative activities. The Company has had no revenues or other financial
results upon which investors may base an assessment of its potential. There is
no assurance that the Company will become operational or profitable. The Company
has experienced in the past and may experience in the future many of the
problems, delays and expenses encountered by any business in its developmental
stage, some of which are beyond the Company's control. These include, but are
not limited to, substantial delays and expenses related to testing and
development of new products, production and marketing problems in connection
with new products and technologies, lack of market acceptance of such products
and technologies, and other unforeseen difficulties.
HISTORY OF LOSSES; UNCERTAINTY OF PROFITABILITY
For the fiscal years ended May 31, 1994 and 1995, the Company incurred
net losses of ($2,848,290) and ($1,838,236) respectively, ($1,875,000 of the
loss reported for the year ended May 31, 1994 resulted from a non-recurring
compensation expense associated with the release of shares from escrow and
$612,333 of the loss for the year ended May 31, 1995 resulted from amortization
of purchased technology). For the nine months ended February 29, 1996 the
Company incurred a net loss of $(1,734,422) including $459,250 of technology
amortization expense. The Company expects to incur additional operating losses
in future quarters until and if it is able to generate operating revenues
sufficient to support expenditures. There is no assurance that the Company will
be able to achieve or sustain significant periods of profitability in the future
NEED FOR ADDITIONAL FINANCING
Based on the current rate of expenditures and anticipated additional
expenditures, the Company does not have sufficient funds for the next twelve
months and will require funds from the sale of products or technology or from
other sources or will be required to scale back or curtail certain activities.
The minimum additional funding required for the next twelve months at the
planned level of expenditures is estimated at approximately $500,000 Potential
sources of future funds may include the exercise of outstanding options and
warrants, sale of additional Company equity securities, some form of debt
financing or the sale or licensing of certain of the Company's technologies.
There can be no assurance that any funds required during the next twelve months
or thereafter can be generated from operations or that such required funds will
be available from the aforementioned or other potential sources. The lack of
additional capital could force the Company to
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curtail or scale back operations and would therefore have an adverse effect on
the Company's business. Further there can be no assurance that any such required
funds, if available, will be available on attractive terms or that they will not
have a significantly dilutive effect on existing shareholders of the Company.
TECHNOLOGIES IN VARIOUS STAGES OF DEVELOPMENT; NO ASSURANCE OF COMPLETION
The Company's technologies are in various stages of development but none
have been developed to the point of production of marketable products. There can
be no assurance that any of the technologies can be completed to production or
marketability due to the inherent risks of new technology development,
limitations on financing, competition, obsolescence, loss of key technical
personnel and other factors. Although certain technology of the Company may be
licensable prior to completion, there can be no assurance thereof. The Company
has not generated any revenues from its various technologies to date, and has no
agreements or arrangements providing any assurance of revenues in the future.
The Company's development projects are high risk in nature, where unanticipated
technical obstacles can arise at any time and result in lengthy and costly
delays or result in determination that further development is unfeasible.
Discovery of chip design errors, frequent in the industry prior and after
production, could result in lengthy and costly redesign, fabrication and testing
in an industry where new technology rapidly eclipses prior innovations.
The development of the Company's technologies has taken longer than
anticipated by management and could be subject to additional delays. Therefore
there can be no assurance of timely completion of ShBoom-architecture
microprocessors for initial marketing or of the commercial availability of ISDN
digital modems nor that if available that they will be on a cost-effective
basis, or that if introduced, that these products will achieve market
acceptance.
DEPENDENCE ON MARKET ACCEPTANCE OF THE COMPANY'S TECHNOLOGIES AND PRODUCTS
The future of the Company is largely dependent upon the success of the
current and future generations of one or more of the Company's technologies.
There can be no assurance the Company can introduce any of its technologies or
products or that if introduced they will achieve market acceptance sufficient to
sustain the Company or achieve profitable operations.
COMPETITION AND OBSOLESCENCE
Technological competition from other and longer established
microprocessor, computer interface and GPR companies is significant and expected
to increase. Most of the companies with which the Company expects to compete
have substantially greater capital resources, research and development staffs,
marketing and distribution programs and facilities, and many of them have
substantially greater experience in the production and marketing of products. In
addition, one or more of the Company's competitors may succeed in developing
technologies and products that are more effective than any of those being
developed by the Company, rendering the Company's technology and products
obsolete or noncompetitive.
RELIANCE ON OUTSIDE FOUNDRIES, MANUFACTURERS AND SUPPLIERS
With respect to the production of ShBoom-architecture microprocessors,
the Company is dependent on the availability of contract fabrication facilities.
To produce microprocessors for customers, the Company will be required to locate
a foundry or foundries that can allocate a portion of their foundry capacity
sufficient to meet the Company's needs, to produce products of acceptable
quality and with acceptable manufacturing yields, and to deliver these products
to the Company on time. There can be no assurance the Company can locate a
foundry to meet its needs. The contract fabrication industry has and is expected
to experience capacity shortages from time to time which could adversely impact
the Company. With respect to its proposed CyberShark product, the Company plans
to arrange for contract assembly from standardized components purchased from
independent sources, and it is therefor dependent upon such outside vendors for
all of the components and end-products it intends to sell to customers. There
can be no assurance that these manufacturers and suppliers will be able to
provide adequately for the future equipment needs of the Company's customers. In
the event that any of the targeted suppliers should suffer quality control
problems or financial difficulties, the Company would be required to find
alternative sources, which could result in temporary business dislocations and a
decline in revenues.
PATENTS AND PROPRIETARY RIGHTS; POSSIBLE INFRINGEMENT
The Company relies on a combination of patents, trademarks, copyright
and trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company currently has one U.S.
patent issued, one patent application allowed but classified prior to issuance,
and 14 patents pending along with multiple foreign patents pending. The Company
is considering additional patent applications. There can be no assurance that
any patents held by the Company will not be challenged and invalidated, that
patents will issue from any of the Company's pending applications or that any
claims allowed from existing or pending patents will be of sufficient scope or
strength or be issued in all countries where the Company's products can be sold
to provide meaningful protection or any commercial advantage to the Company.
Competitors of the Company may also be able to design around the Company's
patents.
The fiercely competitive semiconductor industry is characterized by
vigorous protection and pursuit of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. There is currently no pending intellectual property litigation
against the Company. There is no assurance however, that the Company's
technologies or products do not and will not infringe the patents or proprietary
rights of third parties. Problems with patents or other rights could potentially
increase the cost of the Company's products, or delay or preclude new product
development and commercialization by the Company. If infringement claims against
the Company are deemed valid, the
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Company may seek licenses which might not be available on acceptable terms or at
all. Litigation could be costly and time-consuming but may be necessary to
protect the Company's future patent and/or technology license positions, or to
defend against infringement claims. A successful challenge to the Company's
technology could have a materially adverse effect on the Company and its
business prospects. There can be no assurance that any application of the
Company's technologies will not infringe upon the proprietary rights of others
or that licenses required by the Company from others will be available on
commercially reasonable terms, if at all.
DEPENDENCE ON THE INTERNET, JAVA AND GOVERNMENT FUNDING
The Company's ISDN interface products and ShBoom microprocessor
applications in Java processing will depend in large part upon a robust and
growing industry and infrastructure for providing Internet access and carrying
Internet traffic. There can be no assurance that the infrastructure or
complementary products necessary to make the Internet a viable commercial
marketplace will be developed, or, if developed, that the Internet will become a
viable commercial marketplace. Even if the Internet continues robust growth,
there can be no assurance of a market for ISDN interface products given its
dependence upon telepone company policies and rates and the intense competition
from other access technologies such as cable modems.
There can be no assurance that Java will become a widespread programming
language for the Internet or in embedded applications or that a market will
develop for devices to efficiently run Java. If the Internet does not become a
viable commercial marketplace, or if ISDN interface becomes technologically
obsolete or if Java applications for microprocessors do not develop, then the
Company's business, operating results and financial condition will be materially
adversely affected.
The Company is devoting only limited development and marketing efforts
towards its radar and antennae technologies and is seeking government funding to
further develop these technologies. Government defense and other funding is
facing serious cutbacks and accordingly there is less opportunity to exploit new
technologies within the government. Opportunities for funding require
significant efforts and long lead times. The Company has no prior experience in
obtaining government funding and is relying on consultants and agents to assist
the Company in its efforts. There can be no assurance the Company will be
successful in its efforts to obtain government assistance for any of its
projects or technologies.
LICENSE, ROYALTY AND INDEMNIFICATION RISKS
The Company assumed as part of its acquisition of the ShBoom technology
a license agreement related to a C program compiler for the microprocessor from
a third party, and is currently negotiating amendments to such agreement to
clarify the terms of future payments from licensing or sale of the compiler with
the ShBoom technology. The loss or inability to use the compiler as contemplated
could result in delays until a equivalent compiler could be identified and
integrated. The Company has not yet adopted a position on whether or not it is
obligated to pay certain royalties on the ShBoom technology specified in prior
agreements between nanoTronics Corporation and previous inventors. Should the
Company determine it is not obligated to make such royalty payments it may be
subject to unindemnified claims relating to the failure to pay such royalties.
The Company obtained its rights to the ShBoom technology pursuant to a
chain of agreements from multiple inventors, accordingly there can be no
assurance the Company will not be subject to claims from prior parties related
to the technology or that any such parties will not attempt to exploit the
technology independently of the Company's rights to do so. Pursuant to the
Assets Purchase Agreement and Plan of Reorganization (Agreement) between the
Company, nanoTronics Corporation and Helmut Falk (Falk), the Company was the
recipient of a number of warranties and indemnities related to the ownership of
the technology and other matters. The Company believes nanoTronics Corporation
has been liquidated and due to Mr. Falk's death in July 1995, the Company may be
limited in its ability to obtain satisfaction from his estate should it have any
future claims pursuant to the Agreement. The Company filed in January 1996 a
general claim against Mr. Falk's estate in an attempt to preserve its ability to
avail itself of indemnification should claims arise against the Company that
were indemnified. There can be no assurance that the Company could obtain
indemnification from the estate of Mr. Falk.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance
of its executive officers and key technical employees. Given the Company's early
stage of development, the Company is dependent on its ability to retain and
motivate high quality personnel, especially its management and highly skilled
technical personnel. Other than a $250,000 policy on Clay Douglass, Chief
Technology Officer, the Company does not have "key person" life insurance
policies on any other person. The loss of the services of any of its executive
officers or other technical employees could have a material adverse effect on
the business, operating results or financial condition of the Company.
The Company's future success and growth also depends on its continuing
ability to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. The
inability to attract and retain the necessary technical and managerial personnel
could have a material adverse effect upon the Company's business, operating
results or financial condition.
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POSSIBLE ADVERSE EFFECTS OF FUTURE SALES OF SHARES
In addition to the 975,000 shares being registered herein, a total of
9,736,666 shares of Common Stock currently outstanding and not subject to escrow
restrictions may be deemed "restricted securities" as that term is defined in
the Securities Act of 1933, as amended (the "Act"), and may only be sold
pursuant to a registration statement under the Act, in compliance with Rule 144
under the Act, or pursuant to another exemption therefrom. An aggregate of
4,736,666 of these currently outstanding shares of Common Stock are eligible for
immediate sale in the public market subject to compliance with the volume
limitations and the holding period and other requirements of Rule 144
promulgated under the Securities Act.
GENERAL CONFLICTS OF INTEREST
The Company's two executive officers, devote only part-time services to
the Company and have other employment and business interests to which they
devote significant attention and will continue to do so notwithstanding the fact
that management time should be devoted to the Company's business. Management
generally expects to devote time to the Company only on an as-needed basis over
the next twelve months.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
The Company's Certificate of Incorporation provides for the
indemnification of its officers, directors, employees and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them and
judgments rendered against them in any litigation to which they become a party
arising from their association with or activities on behalf of the Company. The
Company may also bear the expenses of such litigation for any of its officers,
directors, employees or agents, upon their promise to repay such sums if it is
ultimately determined that they are not entitled to indemnification. This
indemnification policy could result in substantial expenditures by the Company
which it may be unable to recoup even if so entitled.
EXCLUSION OF DIRECTOR LIABILITY
The Company's Certificate of Incorporation excludes personal liability
on the part of its directors to the Company for monetary damages for breach of
fiduciary duty, except in certain specified circumstances. Accordingly, the
Company will have a much more limited right of action against its directors than
otherwise would be the case. This exclusionary provision does not affect the
liability of any director under federal or applicable state securities laws.
NO DIVIDENDS WILL BE PAID
The Company does not contemplate paying cash dividends in the
foreseeable future. Future dividends will depend on the Company's earnings, if
any, and its financial requirements.
RISK OF LOW-PRICED STOCKS
The Company's common shares may be defined as "penny stocks" under the
Exchange Act, and rules of the Securities and Exchange Commission thereunder.
The Exchange Act and such penny stock rules generally impose additional sales
practice and disclosure requirements upon broker-dealers who sell the Company's
securities to persons other than certain "accredited investors" (generally,
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly
with spouse) or in transactions not recommended by the broker-dealer. For
transactions covered by the penny stock rules, the broker-dealer must make a
suitability determination for each purchaser and receive the purchaser's written
agreement prior to the sale. In addition, the broker-dealer must make certain
mandated disclosures in penny stock transactions, including the actual sale or
purchase price and actual bid and offer quotations, the compensation to be
received by the broker-dealer and certain associated persons, and deliver
certain disclosures required by the Securities and Exchange Commission.
Consequently, the penny stock rules may affect the ability of broker-dealers to
make a market in or trade the Company's shares and thus may also affect the
ability of purchasers of shares to resell those shares in the public markets.
NO ACTIVE TRADING MARKET; VOLATILITY
The Company's shares are traded on the OTC Electronic Bulletin Board, a
screen-based trading system operated by the National Association of Securities
Dealers, lnc. Securities traded on the Bulletin Board are, for the most part
thinly traded and, as the preceding Risk Factor indicates, subject to special
regulations not imposed on securities listed or traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system or on a
national securities exchange. The Company's shares have experienced in the past
and are expected to experience in the future significant price and volume
volatility, increasing the risk of ownership to investors.
MARKET OVERHANG OF REGISTERED STOCK
The purchase price of 900,000 shares of the stock being registered in
this offering was $0.50 per common shares and the balance of 75,000 common
shares was issued for services at $0.30 per common share. This pricing is below
the recent trading price of the Common Shares. Due to the lack of an active
trading market and past volatility of the Company's shares, sales by holders of
any of the shares registered herein may have an adverse effect on the trading
price of and market for the Company's common shares. Sales of significant
numbers of registered shares into the open market probably will have a
depressive effect on the market for and trading price of the common stock, but
the Company cannot predict the likely timing or extent of any such sales or the
long- or short-term market effect of any sales.
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NO ANTI-TAKEOVER MEASURES
Neither the Company's charter nor its bylaws contain any provision which
is designed or intended to serve as an anti-takeover measure or which is
intended to entrench Management or discourage mergers or other business
combinations involving the Company. In its charter the Company expressly elects
not to be governed by Section 203 of the Delaware General Corporation Law, which
relates to business combinations with interested shareholders; however, Section
203 would not apply to the Company at this time, since the Company is not listed
on a national securities exchange or the NASDAQ system and has less than 2,000
shareholders of record.
GLOSSARY OF TECHNICAL TERMS
ASIC (Application Specific Integrated Circuit) - a chip built to meet the
specific application of one customer, requiring large volumes to recover
the high development costs.
ASSP (Application Specific Standard Product) - a chip designed for a
particular market application rather than a single customer, e.g. a
keyboard controller that can be used by many customers.
BANDWIDTH - the rate at which information can move in a given medium.
BETA TESTING - testing with a small market segment immediately prior to end
user sales.
BIT - a binary digit, the smallest unit of digital information - either an on
(1) or off (0) signal.
BROWSER OR WEB BROWSER - user interface software integrating many Internet
functions such as Web searching and transfer, files transfers, news
group communications and e-mail under one simple easy-to-learn and use
interface. Browsers are compatible with the HTTP (Hypertext Transfer
Protocol). Also referred to as a Web client.
BUS INTERFACE - the logical and electrical connection between the computational
elements in a microprocessor and the circuitry external to the
microprocessor.
CACHES - a fast-access area for storing data within a computer when access to
the original data storage would be relatively much slower.
CHIP (DIE) - the small piece of a silicon wafer containing the microscopic
electrical components and wiring for an integrated circuit -- the
integrated circuit without a package surrounding it.
CMOS - (Complementary Metal-Oxide Semiconductor) a structure for building
transistors using pairs of positively and negatively charged areas
within the silicon. It is the dominant semiconductor manufacturing
process because of its high-density and low-power attributes.
CPU - central processing unit.
CYBERSHARK - the Company's ISDN terminal adapter (digital modem).
DESIGN WIN - a contract awarded by an electronic products manufacturer to a
supplier of microprocessor chips.
EMBEDDED CONTROL SYSTEMS (Embedded systems, embedded controller, embedded
control microprocessor) - products that contain computers, but are not
necessarily used as computers. Used for control applications such as
laser printer controllers, graphics controllers, accelerator cards,
motion controllers and video terminal controllers.
FABRICATION - the process of using a computer-readable description of a chip,
producing several "masks" (like negatives in photography), and using the
masks in sequence to control the etching and deposition of layers of
structures on a silicon wafer to build the components of the circuit.
GLUE LOGIC - the miscellaneous logic gates needed to connect together the
various major logic components in a digital circuit.
GPR (Ground Penetrating Radar) - a technique employing microwave radiation to
penetrate the earth's surface.
INTERNET - a worldwide cooperative interconnection of smaller public and
private computer networks (an interconnected network of networks)
consisting of an estimated seven million linked computers. The World
Wide Web is a portion of the Internet.
INTERNET TERMINAL - a portable computer-based device specifically designed to
access the Internet or the World Wide Web. Also referred to as a
Teleputer, Web Terminal, Net Computer, Internet PC, Internet Appliance,
Browser Box, Internet Box and similar names. A number of companies have
announced the future introduction of such portable devices. Many of
these devices are expected to utilize Java.
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INTRANET - private networks (primarily corporate) that use the infrastructure
and standards of the Internet and the WWW but are cordoned off from the
public Internet.
JAVA - an object-oriented programming language that operates independent of
any particular operating system and was developed by Sun Microsystems
Inc. Java programs, called applets, can be accessed over a network and
run on any processor whenever needed.
JAVA VIRTUAL MACHINE - an idealized imaginary CPU with byte sized operational
codes (opcodes) on which Java applets execute. The Java Virtual Machine
is emulated on real CPUs to allow Java to run independent of any
particular operating system or microprocessor.
JAVA RUNTIME ENGINE or JAVA PROCESSOR- a microprocessor designed primarily to
operate the Java Virtual Machine and execute Java on a particular CPU.
ISDN (Integrated Services Digital Network) - is a set of digital transmission
protocols that virtually all of the world's communications carriers have
adopted as a standard to allow a standard twisted-pair copper telephone
line to be a high-speed high-capacity digital line capable of multiple
transmissions.
KBPS - Kilobits per second, thousand bits per second.
MICROCONTROLLER - a specialized microprocessor that contains embedded within a
single silicon chip memory and input-output devices in addition to the
central processing unit (CPU) designed to perform a specific function.
For example, the devices used for managing a car's odometer or running
the paper feeder in a printer.
MICROPROCESSOR - the "intelligence" of most modern computers, typically
fabricated on a single silicon chip; a computer on a chip; or the
central processing unit (CPU) of a computer. A microprocessor processes
system data and controls input/output, peripheral and memory devices.
PIPELINE - a mechanism for executing computer instructions in multiple stages,
a stage at a time, in an assembly line fashion. Each stage
simultaneously performs a small piece of the execution of an
instruction, with several instructions executing simultaneously along
the line, but only one instruction completing at a time.
PROPRIETARY - means that the Company is the sole owner of the technology and
has the sole right to economically exploit the technology.
PSC1000- The Company's first proprietary RISC-based 32-bit microprocessor
(CPU) that is based on the ShBoom technology and architecture and is
integrated on a single chip using a 0.8 micron silicon manufacturing
process. The ShBoom technology or architecture describes the broad
technology that can be incorporated in a number of microprocessors of
different configurations and silicon manufacturing processes.
REGISTER - See Stack/Register Architecture.
RISC (Reduced Instruction Set Computer) - a computer whose instructions are
much simpler than Complex Instruction Set Computers (CISC). This, and
other architectural differences, allow RISC instructions to execute at a
faster rate and thus provide higher performance than a similar
technology CISC machine.
SEMICONDUCTORS - integrated circuits (in which a number of transistors and
other elements are combined to form a more complicated circuit) or
discrete devices (such as individual transistors). In an integrated
circuit, various elements are fabricated in a small area or "chip" of
silicon, which is then encapsulated in plastic, ceramic or other forms
of packaging and connected to a circuit board or substrate.
SHBOOM - The Company's tradename for its proprietary RISC-based 32-bit
microprocessor (CPU) technology and/or architecture.
SIGNAL PATH LOGIC - the circuitry that accepts electrical signals from the
microprocessor to perform the function for which the product was
designed.
STACK/REGISTER ARCHITECTURE - a register is a directly addressable location for
storing data within a computer. A stack is a group of storage locations
within a computer, maintained in sequence, accessible primarily from the
top. The limited accessibility of stacks simplify computer algorithms by
reducing the amount of information that must be kept to find a given
piece of information -- all data is located relative to the top of the
stack. A combined stack/register architecture supplies the benefits of
both register and stack architectures.
SUB-MICRON - silicon chip design using transistors smaller than 1.0 micron. The
smaller the transistor size, the more functionality can be contained on
a chip of a given physical dimension The PSC1000 is currently designed
in 0.8 micron geometry and the ShBoom technology is designed to
accommodate smaller micron geometry.
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SUPERSCALAR - a computer having the ability to completely execute several
instructions at the same time.
TERMINAL ADAPTER - Allows non ISDN devices to be connected to ISDN telephone
lines, e.g. computers. In computer use it operates comparable to modems
for analog telephone lines, in other words a "digital modem" or an "ISDN
modem."
TRANSISTOR - lowest level element in an integrated circuit which switches the
flow of electricity "on" or "off."
WAFERS - the typically 6" or 8" diameter slices of silicon crystal on which
integrated circuits are fabricated.
WORLD WIDE WEB OR WWW- a portion of the Internet which is a distributed
hypermedia system using hypertext documents which use text with pointers
to other text. The World Wide Web is accessed using browser programs
allowing searches and linking of documents and databases. Allows
non-technical users to exploit the capabilities of the Internet.
ZERO-OPERAND DESIGN - a computer architecture where the source and destination
of data manipulated by most instructions is in an assumed location,
usually on the top of a stack, and thus need not be specified in the
instructions.
PLAN OF DISTRIBUTION
Each Selling Shareholder is free to offer and sell his or her Common
Shares at such times, in such manner and at such prices as he or she shall
determine. The Selling Shareholders have advised the Company that sales of
Common Shares may be effected from time to time in one or more types of
transactions (which may include block transactions) in the over-the-counter
market, in negotiated transactions through the writing of options on the Common
Shares or a combination of such methods of sale, at market prices prevailing at
the time of sale, or at negotiated prices. Such transactions may or may not
involve brokers, dealers or cash transactions. The Selling Shareholders have
advised the Company that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities, nor is there an underwriter or coordinating broker
acting in connection with the proposed sale of the Common Shares by the Selling
Shareholders.
The Selling Shareholders may effect such transactions by selling Common
Stock directly to purchasers or to or through broker-dealers, which may act as
agents or principals. Such broker-dealers may receive compensation in the form
of discounts, concessions, or commissions from the Selling Shareholders and/or
the purchasers of Common Shares for whom such broker-dealers may act as agents
or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
The Selling Shareholders and any broker-dealers that act in connection
with the sale of Common Shares might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Act, and any commissions received by such
broker-dealers and any profit on the resale of the Common Shares sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions under the Act. The Selling Shareholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Shares against certain liabilities including liabilities arising
under the Act.
Because Selling Shareholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Act, the Selling Shareholders will be
subject to the prospectus delivery requirements of the Act. Furthermore, in the
event of a "distribution" of his or her shares, any Selling Shareholder, any
selling broker or dealer and any "affiliated purchasers" may be subject to Rule
10b-7 under the Exchange Act which prohibits any "stabilizing bid" or
"stabilizing purchase" for the purpose of pegging, fixing or stabilizing the
price of the common stock of the Company in connection with the Selling
Shareholders' offering of the Common Shares hereunder.
The Company has informed the Selling Shareholders that the
anti-manipulative Rules 10b-6 and 10b-7 promulgated under the Exchange Act may
apply to their sales in the market and has furnished each Selling Shareholder
with a copy of such rules and has informed them of the possible need for
delivery of copies of this Prospectus.
Selling Shareholders also may resell all or a portion of the Common
Shares in open market transactions in reliance upon Rule 144 under the Act,
provided they meet the criteria and conform to the requirements of such Rule.
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
Selling Shareholders as of February 29, 1996. Except as set forth below, none of
the Selling Shareholders currently is an affiliate of the Company, and none of
them has had a material relationship with the Company during the past three
years.
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<TABLE>
<CAPTION>
Amount and
Percentage of
Beneficial Maximum Number Common Stock
Ownership of Shares of After the Sale
of Common Stock Common Stock -------------------
Name at February 29, 1996 Offered for Sale Number %
- ---------- -------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Robert E. Crawford Jr. 410,000 400,000 10,000 - %
SEA Ltd. (1) 1,000,000 (2) 500,000 500,000 (3) 1.7%
Shaw Laboratories Limited
Money Purchase Plan 75,000 75,000 -0- 0%
</TABLE>
(1) Richard D. McDaniel, a director of the Company, may direct certain
voting and investment power over these shares.
(2) Consists of 500,000 common shares and a non-transferable warrant to
purchase an additional 500,000 common shares at $0.50 per share
expiring the earlier of 30 days after the effective date of this
registration statement or July 10, 1996.
(3) Consists of a warrant to purchase 500,000 common shares, see (2).
The number of Common Shares reported above as beneficially owned by each
Selling Shareholder is based solely on a review of a list of the Company's
shareholders prepared by the Company's transfer agent and registrar as of such
date. The foregoing table assumes that all Common Shares offered for sale
hereunder will be sold. There is no assurance that any of the Selling
Shareholders will sell all or any of the Common Shares respectively offered by
them hereunder.
THE COMPANY
GENERAL
Patriot Scientific Corporation (the "Company" or "Patriot"), a
development stage company, was organized under Delaware law on March 24, 1992 as
the successor by merger to Patriot Financial Corporation, a Colorado corporation
incorporated on June 10, 1987. Its address is 12875 Brookprinter Place, Suite
300, Poway, California 92064, and its telephone number is (619) 679-4428. The
Company's home page can be located on the World Wide Web at http://www.ptsc.com.
The Company is engaged in the development of proprietary technologies
including patented microprocessor technology and ISDN interface technology with
products under development for the growing Internet market. The
ShBoom-architecture PSC1000 microprocessor is being developed and targeted as a
Java processor and the CyberShark is being developed and targeted as a
high-performance ISDN digital modem. The Company also owns radar and antenna
technology. The Company's technologies, and products intended to be derived from
them, are targeted for rapidly growing market segments. The Company's strategy
is to exploit one or more of the technologies through product sales, licensing,
strategic alliances or government contracting. The Company has had no operating
revenues since its inception and there can be no assurance of future operating
revenues.
The Internet is a global web of computer networks. Developed over 25
years ago, this "network of networks" allows any computer attached to the
Internet to talk to any other using the Internet Protocol. The Internet provides
organizations and individuals with new means to conduct business. Commercial
uses of the Internet include business-to-business and business-to-consumer
transactions, product marketing, advertising, entertainment, electronic
publishing, electronic services and customer support. The Company believes that
organizations will also increasingly use the Internet and private Intranet
networks to improve communications, distribute information, lower operating
costs and change operations. The growth of the Internet and Intranets is
creating a demand for hardware, software and peripherals. The large number of
users connecting to the Internet is creating a demand for traditional analog
modems and ISDN digital modems, such as the Company's CyberShark. New software,
such as Java, is emerging to serve the requirements of Internet users.
The Company's patented microprocessor technology (named the ShBoom
technology or architecture) is being used to develop a sophisticated low-cost
32-bit advanced RISC microprocessor (first chip offering named PSC1000). The
PSC1000 employs a proprietary and patented zero-operand, 32-bit, stack oriented
architecture to simplify instruction execution, increase execution speed,
provide design flexibility and minimize costly silicon. The Company's
architecture incorporates many on-chip system functions and a "glueless" bus
interface, thus eliminating the requirement for some support chips to reduce
total system cost to users.
The Company believes the ShBoom-architecture microprocessor is a
highly-efficient and cost-effective Java processor. Java is designed to run on a
stack-oriented architecture and the Company's zero-operand, 32-bit,
stack-oriented architecture is believed by management to be a very efficient
Java processor. Many Java bytecodes require only a single 8-bit PSC1000
instruction to be executed, providing a performance advantage over other
processors, that require six 32-bit instructions to do the same task.
The Java programming language was formally announced as an
object-oriented language for the Internet in May 1995 by Sun Microsystems Inc. A
large number of major computer, software, browser and on-line service provider
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<PAGE> 12
companies have licensed the Java language. With Java, data and programs do not
have to be stored on the user's computer, they can reside anywhere on the
Internet to be called upon as needed. Among its various attributes, two key
features of Java are (1) its ability to run on a variety of computer operating
systems by defining a Java Virtual Machine within the host operating system
software thus getting around the problem of incompatibility across networks, and
(2) security, because Java enables the construction of virus-free, tamper-free
systems by using resource-access control and public-key encryption. Because of
Java's useful features, it may also become a popular programming language for
embedded applications.
The growth of Java is causing a number of companies to consider it as a
basis for a new style of computing tailored to the Internet. The concept is to
design inexpensive Internet Terminal devices or scaled-down computers to access
and compute via the Internet. Since Internet Terminals are designed to be
inexpensive appliances for Internet access, cost, speed and performance are
expected to be key features of designers. The Company believes the
ShBoom-architecture PSC1000 can be competitive based on these factors with other
newly announced Internet Terminal type microprocessors.
The Company is targeting its ShBoom technology for the Java processing
market, for internally developed products, and for a variety of embedded control
applications requiring a high-speed low-cost microprocessor. The WebBook Company
recently announced its intention to use the ShBoom-architecture PSC1000 in its
WebBook product, an Internet Terminal device currently under development. The
Company is working with the WebBook Company, a privately-owned company based in
Michigan, on its designs. There can be no assurance that the WebBook Company
will be successful in its development, that it will ultimately employ the
PSC1000 if it becomes commercially available, or that if introduced the WebBook
will result in any substantive orders for the Company's chips. There also can be
no assurance the Company will be successful in selling, licensing or otherwise
exploiting the ShBoom technology to other Java implementation companies or as an
embedded control product.
The Company has designed a line of ISDN interface products for
high-speed, cost-effective digital communications through telephone networks.
The Company's first product, the CyberShark I, is a PC compatible plug-in
terminal adapter card (a digital modem) targeted to allow homes, small
businesses and telecommuters to use ISDN to access networks and the Internet. By
allowing full use of an ISDN line to achieve up to 128Kbps, the CyberShark I
terminal adapter provides over four times the data rate of the fastest analog
modems currently available. It provides the needed bandwidth to support video
conferencing, Internet voice products and 3D Internet interfaces. The CyberShark
I has been prototyped and the Company is currently producing the first units for
beta testing and thereafter approximately 1,000 additional units for initial
marketing and distribution which is expected to commence prior to the end of
fiscal 1996. The Company anticipates that the ShBoom-architecture microprocessor
will be employed in future versions of its ISDN interface products when parts
become commercially available.
The Company has been engaged in developing and improving its radar and
antenna technology targeted for ground penetration applications. The Company has
innovated proprietary techniques for wave generation and proprietary antennae
for the sending and receiving of data. As a consequence of the Company's
innovations, the Company has assembled a prototype version of its GPR
technology, a mobile penetrating microwave radar (PMR) system (the "PMR
System"). The PMR System has been designed as a general purpose device for
testing and evaluation purposes. The Company's technology has demonstrated the
ability to penetrate multiple solid objects (walls and barriers) and identify
return signals from additional objects such as walls, persons and manmade
barriers. In certain ground strata, the Company has been able to resolve objects
of six inch size at approximately ten feet in depth.
The Company has identified plastic mine detection as a target
application of the GPR technology. According to the U.S. Army there are over 4
million land mines in Bosnia alone and according to U.N. information there are
over 100 million land mines buried in 64 countries around the world. The PMR
System prototype has indicated an ability to detect plastic mines in early
testing. The Company has been demonstrating its technology and presenting its
proposals to various government agencies but there can be no assurance of future
contracts or grants to further develop the technology for mine detection. The
Company anticipates that one or more ShBoom-architecture microprocessors will be
employed in future versions of portable GPR systems when chips become
commercially available.
BACKGROUND
In February of 1989 the Company completed its initial public offering
pursuant to a Registration Statement on Form S-18 under the Act, raising gross
proceeds of $50,000 and net proceeds of approximately $28,640 upon the sale of
2,500,000 units at $.02 per unit. Each unit sold in the public offering
consisted of one Common Share and one Class A common stock purchase warrant
exercisable to acquire one share of common stock and one Class B common stock
purchase warrant. All Class A and Class B warrants have since been exercised or
have lapsed.
On August 10, 1989 the Company acquired its GPR technology from the
inventor, Mr. Elwood G. Norris, now the Company's President and Chief Executive
Officer. The details of that acquisition and certain related agreements are
described in more detail in "Certain Transactions" below. A description of the
GPR technology, certain information about the industry generally, and the
Company's operational plans are discussed below under the caption "Business".
On May 12, 1992, the Company redomiciled itself from Colorado to
Delaware by merging into a wholly owned Delaware subsidiary (Patriot Scientific
Corporation) organized for that purpose. The reincorporation resulted in a
combination (reverse split) of each three of the Company's common shares, par
value $.00001, into one share of the Delaware corporation, par value $.00001.
Fractions of shares were lost during the reverse split. The reincorporation also
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<PAGE> 13
effected a change in the Company's charter and bylaws and a name change to
Patriot Scientific Corporation.
In May of 1993, the Company registered under the Act a total of
7,631,606 shares issuable upon the exercise of outstanding Class A and Class B
common stock purchase warrants. The Company received net proceeds of $3,343,915
upon the exercise of those warrants and the issuance of 7,538,102 common shares.
No warrants remain outstanding.
Effective May 31, 1994, pursuant to an Assets Purchase Agreement and
Plan of Reorganization ("nanoTronics Agreement") between the Company,
nanoTronics Corporation (nanoTronics) located in Eagle Point, Oregon and Helmut
Falk (Falk), the Company issued a total of 10,000,000 restricted common shares
to nanoTronics to acquire certain microprocessor technology of nanoTronics. The
technology acquired (ShBoom technology) is being used to develop a sophisticated
yet low cost 32-bit advanced RISC microprocessor (first chip offering named the
PSC1000). A total of 5,000,000 shares was the non-contingent portion of the
price paid and an additional 5,000,000 shares represented a contingent portion
of the purchase price with the contingent shares issued and outstanding but
subject to the terms of an earnout escrow arrangement. See "Business" and
"Certain Relationships".
BUSINESS
ORGANIZATION AND CORPORATE DEVELOPMENT
Certain matters relating to the organization and background of the
Company are discussed above under the caption "The Company."
During fiscal year 1995 and during the current fiscal year (fiscal 1996)
the Company's development strategy has focused efforts and a majority of
expenditures on the ShBoom microprocessor technology with limited resources
allocated to the Company's other technologies. The ShBoom technology and the
Company's initial microprocessor, the PSC1000, are targeted for the embedded
controller and Java processor marketplaces.
In reviewing markets for the ShBoom technology, the Company identified
within the communications market a product opportunity for the ISDN marketplace.
Starting in fiscal 1995 the Company initiated the development of a PC compatible
plug-in card allowing high-speed, cost-effective digital ISDN access to the
Internet and other networks. This product is expected to be marketable by the
end of fiscal 1996 and is expected to be modified to use the PSC1000 when
commercially available.
The Company's business is managed as three major technologies or
divisions (1) ShBoom microprocessor technology, (2) ISDN interface technology
and (3) radar and antennae technology. The Company anticipates that the PSC1000
and future generations of the ShBoom microprocessor technology will benefit the
radar and antennae technology and the ISDN interface technology. However, due to
the Company's small size, staffing overlaps among the divisions with certain
personnel working on more than one of the technologies from time to time.
INTERNET GROWTH AND THE EMERGENCE OF THE JAVA PROGRAMMING LANGUAGE
The Internet is a rapidly growing global web of computer networks.
Developed over 25 years ago, this "network of networks" allows any computer
attached to the Internet to talk to any other using the Internet Protocol. The
Internet provides organizations and individuals with new means to conduct
business. Commercial uses of the Internet include business-to-business and
business-to-consumer transactions, product marketing, advertising,
entertainment, electronic publishing, electronic services and customer support.
The Company believes that organizations will also increasingly use the Internet
and private Intranet networks to improve communications, distribute information,
lower operating costs and change operations.
Use of the Internet has grown rapidly since its commercialization in the
early 1990's. While industry estimates of the number of Internet users in the
U.S. varies widely from 9.5 million to 24 million or more in 1995, depending on
the source and the definition of a user, it is a rapidly growing market segment
impacting computer hardware, software and peripheral industries. By the end of
1995 there were approximately 7 million servers or "host" computers comprising
the Internet. The rapid growth in popularity of the Internet is in part due to
continuing penetration of computers and modems into U.S. households, growth of
informational, entertainment and commercial applications and resources of the
Internet and the growing awareness of such resources among individuals, and
increasing availability of user-friendly navigational and utility tools which
enable easier access to the Internet's resources.
The growth of the Internet and corporate Intranets is creating a demand
for hardware, software and peripherals. The large growing number of users
connecting to the Internet is creating a demand for traditional analog modems
and ISDN digital modems, such as the Company's CyberShark. New software, such as
Java, is emerging to serve the requirements of Internet users.
The Java programming language was originally developed for personal
digital assistant devices (PDA's) and television set top boxes. It was formally
announced as an object-oriented language for the Internet in May 1995 by Sun
Microsystems Inc. It was launched on the Internet through the free offer of a
Java programming software developer's kit and Java related browser. A large
number of major computer, software, browser and on-line service provider
companies have licensed the Java language. Accordingly, Java appears to be
emerging as the fundamental platform for distributed, network-centric
applications. There is a growing list of Java applications or applets now
available on the Internet that not only
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enhance Web pages but perform many functions of traditional computer software
programs.
With Java, data and programs do not have to be stored on the user's
computer, but can reside anywhere on the Internet to be called upon as needed,
sometimes referred to as just-in-time software. Among its various attributes,
two key features of Java are (1) its ability to run on a variety of computer
operating systems by defining a Java Virtual Machine within the host operating
system software, thus getting around the problem of incompatibility across
networks, and (2) security, because Java enables the construction of virus-free,
tamper-free systems by using resource-access control and public-key encryption.
Because of Java's useful features, it may also become a popular programming
language for embedded applications.
Since Java is designed to run on multiple types of computers and
operating systems, it allows developers to write a program once for many types
of operating systems, instead of having to write new versions for each type.
Java does this by interpreting a program's commands into something a particular
type of CPU can understand. This interpretive design runs programs slower than
if they were tailored for each type of CPU and is resulting in a need for
specialized microprocessors and compilers to increase Java's speed.
The growth of Java is causing a number of companies to consider it as a
basis for a new style of computing tailored to the Internet and not encumbered
by the limitations of, or requiring, traditional operating systems (such as
Microsoft DOS or Windows, UNIX or Macintosh). The concept is to design
inexpensive Internet Terminal devices or scaled down computers to access and
compute via the Internet. Public announcements of the development of such
devices range from a small private company such as The WebBook Company to major
companies such as Oracle and Sun Microsystems. There can be no assurance any
such devices will reach the market or become successful or that any will use the
ShBoom technology in the future.
SHBOOM MICROPROCESSOR TECHNOLOGY
GENERAL BACKGROUND. nanoTronics Corporation was formed in 1991 and
acquired certain base technology for a RISC-based 32-bit microprocessor
integrated on a single chip with merged stack/register architecture. NanoTronics
subsequently engaged in substantial technical development and fabricated a
first-generation microprocessor in early 1994.
Since the acquisition of the ShBoom technology effective May 31, 1994,
the Company has been engaged in correcting errors in the first-generation
microprocessor design, adding additional technical features to further modernize
the design, and improving and testing the new design. In late July 1995 a
second-generation chip design was delivered to a contract foundry. The Company
obtained a first run of second-generation chips in October 1995. Since that time
the Company has been testing the resultant chips, completing a C programming
language compiler and preparing application development tools. The compiler and
application development tools are necessary to enable system designers to
program the chip for specific applications.
The Company has made minor corrections to the design and submitted the
design for a second fabrication run of chips. Management anticipates, but there
can be no assurance, that the second run will result in chips for use in
demonstrations to prospective customers and any other changes can be made during
initial production runs of PSC1000 chips for customers, when and if orders are
obtained. Future enhancements and generations of chips employing the ShBoom
technology and architecture are contemplated by the Company.
INDUSTRY BACKGROUND. The semiconductor logic market has three major
sectors: (1) Standard Logic Products, (2) Application Specific Standard Products
(ASSPs), and (3) Application Specific Integrated Circuit (ASICs). Standard logic
products, such as the Intel 80X86 and Motorola 680X0 microprocessor families,
are neither application nor customer specific. They are intended to be utilized
by a large group of systems designers for a broad range of applications. Because
they are so broad they may not be cost effective for specific applications.
ASICs are designed to meet the specific application of one customer, requiring
large volumes to recover the development costs. ASSPs are developed for one or
more applications but are not generally proprietary to one customer. Examples of
ASSP applications include modems, cellular telephones, wireless communications,
multimedia applications, facsimile machines and local area networks. The
Company's chip is a microprocessor designed to be combined with
application-specific software to serve as an embedded control product for the
ASSP market sector.
ASSPs are typically used in embedded control systems by manufacturers to
provide an integrated solution for application specific control requirements.
Such systems usually contain a microprocessor or microcontroller, signal path
logic, memory and input/output circuitry. Electronic system manufacturers
combine one or more of these elements to fit a specific application. The
microprocessor provides the intelligence to control the system. The signal path
logic provides functions specific to the end application. The input/output
circuitry may also be application specific or an industry standard component.
The memory element, if not on the microprocessor, is usually a standard product
to store program instructions and data. In the past, these functions have been
executed through multiple integrated circuits assembled on a printed circuit
board. The requirements for reduced cost and improved system performance have
created market opportunities for semiconductor suppliers to integrate some or
all of these elements into a single ASSP chip or chip set, such as the
ShBoom-architecture PSC1000. The PSC1000 provides close integration of the
microprocessor and input/output function with the signal path logic providing an
advanced ASSP.
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Embedded control systems enable manufacturers to differentiate their
products, replace less efficient electromechanical control devices, add product
functionality and reduce product costs. In addition, embedded control systems
facilitate the emergence of completely new classes of products. Embedded control
systems have been incorporated into thousands of products and subassemblies
worldwide including automotive systems, remote controls, appliances, portable
computers and devices, cordless and cellular telephones, motor controls and many
other systems.
Management believes the ShBoom microprocessor architecture has
applications in a variety of existing and new embedded control systems but
because of its advanced features it also has applications beyond embedded
control systems to applications such as certain forms of parallel processing and
advanced memory control. And serendipitous to its design, management believes
the ShBoom architecture is a highly efficient Java Runtime Engine for Internet
Terminals and similar devices as more fully discussed below.
Microcontrollers are generally available in 4-bit through 32-bit
architectures. Although 4-bit microcontrollers are relatively inexpensive,
typically less than $1.00 each, they lack performance and features but account
for more than 40% of volume. In general use today are 8-bit architectures
generally costing $1.00 to $10.00 each and accounting for an additional 40% of
the worldwide microcontroller volume. To date 16-bit and 32-bit architectures,
with typical cost of over $10.00, have offered very high performance, but are
generally expensive for high-volume embedded control applications. The use of
16-bit and 32-bit architectures offers less internal limitations making
programming easier and providing higher performance. Although generally more
expensive per unit and requiring more support logic and memory, these devices
offer many advantages for more sophisticated embedded control systems. Although
the 32-bit architecture market is small in comparison to other architectures,
representing about 4% of volume, this represents more than 80 million parts in
1995 and is expected to double by 1998.
Electronic system designers, driven by competitive market forces, seek
semiconductor products with more intelligence, functionality and control which
can be used to reduce system costs and improve performance. For these needs, the
ShBoom architecture was designed to be a sophisticated 32-bit microprocessor
with advanced features, including the most commonly needed support logic (glue
logic) on the chip, but at a low cost providing improved performance to existing
embedded control applications and opening the opportunity for the development of
new, cost-effective applications.
TECHNOLOGY DESCRIPTION. Conventional high-performance microprocessors
are register-based with large register sets and are pipelined or superscalar.
These complex architectures consume costly silicon with multiple-operand
instructions, multiple execution units or lengthy execution pipelines. These
features generally diminish the fastest possible execution of individual
instructions and increase silicon size, thereby increasing chip cost.
The Company's technology was designed for simplicity. The Company's
initial microprocessor, the PSC1000, uses the patented ShBoom technology in a
highly-integrated CPU that includes two processors within one package, a
microprocessing unit (MPU) for performing conventional processing tasks, and an
input-output processor (IOP) for performing time-synchronous input-output
functions. The IOP can replace many dedicated peripheral functions supplied in
other processors. The zero-operand design eliminates most operand bits and the
decoding time and instruction space they require. Instructions are shrunk to
8-bits, increasing instruction bandwidth. By not employing pipeline or
superscalar execution, the resulting control simplicity increases execution
speed to issue and complete an instruction in a single clock cycle--as often as
every clock cycle--without a conventional instruction cache. A data cache and
its cost is also eliminated in favor of efficient register caches. The Company's
architecture incorporates many on-chip system functions and a "glueless" bus
interface, thus eliminating the requirement of support chips and reducing system
cost to users.
The PSC1000 has been designed with the following chip characteristics:
Speed: 100MHz internally
Memory Technology: From low cost DRAM (dynamic random-access
memory) to high speed SRAM (static random
access memory)
Packages: Various surface-mount and die-form packaging
The ShBoom has been designed to include the following built-in
application features:
- a programmable memory controller supporting multiple memory types
- compatibility with existing PC peripheral chips; network, serial,
modem, printer, timer, etc.
- an input-output processor to reduce or eliminate timing and data
transfer circuitry in many applications
- system support functions including a direct memory access controller
and an interrupt controller to eliminate external chips otherwise
required
The ShBoom has been designed to include the following technical
features:
- four instruction fetch per memory cycle can up to quadruple
instruction bandwidth
- merged stack/register architecture to enable high-speed single-cycle
instruction per instruction execution
- multiple fast-page-mode DRAM operation to enable high-speed execution
in large memory applications
- low power consumption at high speed in typical system configurations
There can be no assurance that the designed speed will be achieved prior
to or with production chips or that all of the desired functions will perform as
anticipated.
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The above advanced application and technical features differentiate the
PSC1000 from other 8-bit to 32-bit chips but are intended to be available at a
high volume cost that should be competitive with high-end 8-bit chips and
general 16-bit chips.
The PSC1000 has been designed to allow high-speed and high-yield
fabrication using generally available wafer fabrication technology and
facilities. Initial fabrications of the PSC1000 are being performed by a
contract fabrication facility. The Company has not established any supply or
other contracts with a fabrication facility and there can be no assurance
fabrication facilities will be available to produce the PSC1000 or future
generations should the Company elect to produce chips in addition to its planned
license activities. However since there are a large number of fabrication
facilities with the capability to produce the PSC1000, management believes chips
can be produced on a contract basis. Industry shortages of fabrication
facilities that may exist and are predicted in the future are generally limited
to the more demanding architectures.
THE SHBOOM MICROPROCESSOR ARCHITECTURE AS A JAVA PROCESSOR. The Company
believes the ShBoom microprocessor architecture is a highly-efficient and
cost-effective Java processor, or Java Runtime Engine. Java is designed to run
on a stack-oriented architecture and the zero-operand, 32-bit, stack-oriented
ShBoom architecture is believed by management to be very efficient for executing
the virtual stack machine internal to Java. Many Java bytecodes require only a
single 8-bit PSC1000 instruction to be executed, providing a performance
advantage over other more expensive processors that require six 32-bit
instructions to do the same task. This is an important advantage for executing
Java with increased speed. In addition, the incorporation of many on-chip system
functions is expected to allow the PSC1000 to perform most of the other
functions required of an Internet Terminal device, thereby eliminating
components. Since Internet Terminals are designed to be inexpensive appliances
for Internet access, cost, speed and performance are expected to be key
requirements for designers.
The WebBook Company has announced its intention to use the
ShBoom-architecture PSC1000 in its WebBook product, an Internet Terminal device
currently under development. The Company is working with the WebBook Company, a
privately-owned company based in Michigan, on its designs. No contract has been
entered into regarding such use. There can be no assurance that the WebBook
Company will be successful in its development, that it will ultimately employ
the PSC1000 if it becomes commercially available, or that if introduced the
WebBook will result in any substantive orders for the Company's chips.
STAGE OF DEVELOPMENT. An initial first-generation production of wafers
was fabricated in early 1994 at a contract fabrication facility using 6-inch
wafers employing 0.8 micron double-metal CMOS technology. Initial yields and
performance were within acceptable ranges. As is customary in early designs,
certain errors were discovered during testing of the chips. After the May 31,
1994 acquisition, the Company improved the original design, added important new
features and performed simulations and tests of the improved designs. In October
1995 a first run of six wafers of second-generation chips (of the same CMOS
technology) were fabricated by a contract fabrication facility. Since that time
the Company has been testing the resultant chips, completing a C compiler and
preparing application development tools. The compiler and application
development tools are necessary to enable system designers to program the
PSC1000 for specific applications. The Company has made minor corrections to the
design and submitted the design for an additional run of second-generation chips
from existing wafers. The Company's goal is to then use these chips, if
fabricated successfully, in demonstration boards for use by developers and
prospective customers and licensees.
At each stage of development, chips require extensive testing to
ascertain performance limitations and the extent and nature of errors (bugs), if
any. When significant limitations or errors are discovered, additional rounds of
design modifications and fabrication are required prior to having functional and
demonstrable chips for prospective customers and licensees. There can be no
assurance that the Company will not require additional rounds of design and
fabrication prior to commercial production.
The Company has developed initial marketing materials and product
manuals and is completing application development tools for use by prospective
licensees and customers. The manuals and tools are necessary to enable system
designers to quickly and easily program the PSC1000 for specific applications.
Although there can be no assurance, since completion of development is
subject to a variety of factors, many outside the control of the Company, and
the timetable for completion of second-generation chips has already been subject
to extensive delays, management anticipates that the PSC1000 should be ready for
licensing or sale prior to the end of fiscal 1996. Certain initial licensing
discussions (such as those with the WebBook Company) have commenced as a result
of the stage of development of the second-generation PSC1000 . However, there
can be no assurance of market acceptance of the PSC1000 or the Company's ShBoom
technology.
BUSINESS STRATEGY. The increasing demand for embedded control has made
the market for microcontrollers one of the largest segments of the semiconductor
logic market. The Company's strategy does not entail competing directly with
suppliers who have multiple chips in various market segments, but on identifying
certain market niches that would benefit from the advanced features of the
ShBoom-architecture embedded microprocessors.
The Company has commenced marketing efforts directed towards cultivating
prospective licensees, identifying
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product enhancement partnerships, identifying prospective OEM products, to
benefit from the technology, and reviewing prospects for in-house electronic
products possible with the speed/performance characteristics of the ShBoom
architecture. As a small one chip company, the Company is at a distinct
disadvantage in competing for a design win against established chip suppliers,
even if the ShBoom technology exhibits superior price performance. Other factors
such as product support capability, reputation, languages, development tools and
operating systems can influence decision making. Accordingly, it will be
difficult for the Company to compete without establishing a partnering or
licensing arrangement with a more established company. Although such
arrangements are common in the industry, there is no assurance the Company can
successfully establish any relationship.
Because of the above factors and competitive conditions, management
intends to focus initial efforts on the Java processor business, a new but
highly-competitive field without an established base of chips and for which
management believes the ShBoom architecture has certain technical advantages.
Licensing and partnering relationships are also intended to be targeted to
overcome some of the above factors.
Management believes that the ShBoom architecture is suited for
controller applications requiring high-performance and low system cost, such as
laser printers, dot-matrix printers, video terminals, robotics, motion
controllers, industrial controllers, digital communications, video games and TV
set-top boxes. The Company expects that early licensing and development efforts
will focus on Java processing, digital communications and motion control.
Management believes the appropriate approach for the Company initially
lies in a balanced effort of cultivating licensees or partners, identifying and
developing specific product enhancement partnerships, producing OEM products,
developing innovative in-house products, and providing technical support to
third parties on a contract basis. The overall balance of these approaches will
be monitored and modified as management attempts to ascertain and capitalize on
the highly dynamic and competitive embedded microprocessor market. There can be
no assurance that the Company can successfully exploit its ShBoom microprocessor
technology.
Subject to the availability of financial and personnel resources, while
the Company is commercializing the current version of the ShBoom technology, the
Company's strategy is to also design and develop future versions of the chip
with more demanding sub-micron technology and with more features. However, the
Company's resources are limited and there can be no assurance the Company will
be able to continue chip enhancement.
Since the Company's current chip design uses older and less challenging
fabrication technology (0.8 micron double-metal CMOS), management believes, but
there can be no assurance, that there are a number of domestic and foreign
contract fabrication facilities with the capacity to produce the Company's chips
in reasonable quantities. Should the Company elect to shrink or redesign the
chip to smaller sub-micron technology in order to improve speed and reduce
silicon cost, then arranging contract fabrication involves greater challenge and
risk. The Company does not have any arrangement or agreement for contract
fabrication of its chip. Many prospective licensees have access to fabrication
resources such that they will not be reliant upon the Company's ability to
arrange for chip production.
COMPETITION. The semiconductor industry is intensely competitive and has
been characterized by price erosion, rapid technological change and foreign
competition in many markets. The industry consists of major domestic and
international semiconductor companies, most of which have greater financial,
technical, marketing, distribution, development and other resources than the
Company. The market for microprocessors and for embedded control applications is
estimated at over 2 billion parts annually and is equally competitive.
While the Company's strategy is to target high-volume licensees and to
target markets requiring more sophisticated devices that are less susceptible to
pricing pressure, the Company can still expect significant competition. The
Company may also elect to develop embedded control system products utilizing the
ShBoom architecture for itself or by contract for other manufacturers.
The Company expects that the PSC1000, if successfully commercialized in
the embedded controller market, will compete with a variety of 16/32-bit
microprocessors including some of the following:
- The AMD29XXX family of 16/32-bit embedded microprocessors and AMD's
embedded 386 family
- The Intel I960 embedded 32-bit microprocessor and Intel's low power 386
(SC) series
- The Motorola MC68XXX 16/32-bit series embedded microprocessors
- NEC's V-series embedded Intel X86 software compatible 16/32-bit embedded
microprocessors
- Zilog's Z380 16-bit embedded microprocessor
As a Java Runtime Engine, the Company expects its PSC1000 will compete
with a broad range of microprocessors including most modern standard logic chips
such as the Pentium, PowerPC, 80486, Sparc and ARM. A number of major companies
have recently announced chips targeted for low-cost Internet Terminals including
Sun Microsystems, Inc. and Digital Equipment Corp. These companies have much
greater resources than the Company.
A new entrant, such as the Company, is at a competitive disadvantage to
these and other established producers due to the lack of product performance
experience, lack of experience by customers in using application development
systems and no record of technical service and support.
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ISDN INTERFACE TECHNOLOGY
TECHNOLOGY DESCRIPTION. The Integrated Services Digital Network (ISDN)
is a set of digital transmission protocols that virtually all of the world's
communications carriers have adopted as a standard. ISDN brings the digital
network to the individual user by turning the same twisted-pair copper telephone
line into a high-speed high-capacity ISDN line with the capacity for three
transmissions (two voice, fax or PC conversations and one data conversation) to
happen at the same time. Further up to eight separate devices (telephones,
computers, fax machines, etc.) can be connected to the same ISDN line and each
given separate telephone numbers.
An ISDN line consists of bearer channels (B channels) and a separate
data channel (D channel). Two or more channels can be combined into a larger
transmission "pipe" on demand to provide greater transmission speed. A basic
ISDN line installed in a business or home by the local telephone service
provider normally includes two 64Kbps B channels (for voice or data) and one
16Kbps D channel. In many home and business applications, the use of an ISDN
line provides dramatically increased speed and, by allowing multiple uses of one
line, improved economics over multiple lines.
PATRIOT'S ISDN PRODUCT. The Company has designed a line of ISDN
interface products for high speed, cost effective digital communications through
telephone networks. The Company's first product, the CyberShark I, is a PC
compatible plug-in terminal adapter card (a digital modem) targeted to allow
homes, small businesses and telecommuters to use ISDN to access networks and the
Internet. By allowing full use of an ISDN line to achieve up to 128Kbps
(2-64Kbps B channels), the CyberShark I terminal adapter provides over four
times the data rate of the fastest analog modems currently available. It
provides the needed bandwidth to support video conferencing, Internet voice
products and 3D Internet interfaces.
The CyberShark I has been prototyped and the Company is currently
producing the first units for beta testing and 1,000 units for initial marketing
and distribution which is expected to commence prior to the end of fiscal 1996.
The CyberShark is based upon software licensed on a non-exclusive basis from a
provider of ISDN protocol software. The product is primarily targeted for
Internet users, the vast majority of which are using slow analog modem access.
The use of CyberShark and an ISDN line offers dramatically improved Internet
utility, at costs competitive with current access methods.
The major features of the CyberShark I are:
- Allows economical ISDN connectivity to the Internet for E-mail, news,
file transfer and Internet phone or videoconferencing.
- Connects directly to an ISDN telephone line without the additional
hardware required by some terminal adapters.
- Compatible with all major communications packages.
- First low cost terminal adapter to provide serial access to both B
channels offering true 128Kbps connectivity.
The Company intends to add features and capabilities to the current
product through software upgrades and hardware revisions. Planned software
upgrades will allow bandwidth on demand up to 144Kbps and around-the-clock
connectivity. Hardware revisions are expected to reduce costs, allow traditional
telephones and fax machines to be connected to the CyberShark to maximize ISDN
economics for the small user, and add a ShBoom-architecture microprocessor to
handle more complex protocols and data compression to improve effective
bandwidth and further reduce costs.
COMPETITION. There are a number of ISDN terminal adapters offered by
competitors including Ascend Communications, Inc., Motorola, Inc., ISDN-tek,
Inc., IBM, Zyxel, Digi International and U.S. Robotics . These companies have
substantially greater resources than that of the Company. Although not all of
these offer PC plug-in card terminal adapters directly competitive with that of
the Company's proposed product, there can be no assurance additional direct
competitors will not introduce competitive products. The Company believes its
product will be competitive on both features and price with the known products
in the marketplace or those known by management to have been announced. ISDN
modems also compete with traditional analog modems and with other interface
technologies such as cable modems, accordingly this field is subject to rapid
technological change and fierce competition.
The Company does not believe it can avail itself of patent protection on
the product as currently designed, although future versions of the product
currently envisioned may have patentable features.
PRODUCTION AND MARKETING. The Company's strategy is to have the product
manufactured on a sub-contract basis. Effective February 28, 1996, the Company
entered into a non-exclusive manufacturing agreement and line of credit with
Labway Corporation, a Taiwan-based contract manufacturer. Labway Corporation has
agreed to manufacture the CyberShark product for the Company and has agreed to
provide deferred payment for up to 60 days on up to $250,000 of billings from
the date of shipment. The delayed payment terms extend for an initial period
from May 1, 1996 to October 31, 1996, subject to renegotiation and extension at
that time. However, the Company is not required to utilize Labway Corporation
for its CyberShark product manufacturing and since important price and delivery
terms are yet to be negotiated, there is no assurance that this arrangement will
be beneficial to the Company.
The CyberShark is expected to retail for under $400. The Company intends
to market the product through Internet service providers (businesses that
provide individuals and businesses access to the Internet through a local
telephone number), direct sales, sales through Internet marketers and ISDN
equipment resellers. Effective February 28, 1996 the Company entered into a
non-exclusive distribution and representation agreement with Innoware, Inc., a
wholly-owned
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subsidiary of Labway Corporation based in San Diego, California. Innoware, Inc.
currently markets multimedia products (sound cards, video cards and
communication cards for PC's) to PC system OEMs, PC peripheral distributors and
computer retailers. There can be no assurance that Innoware, Inc. will be
successful in representing the Company's CyberShark products to its existing
customers or new customers.
RADAR AND ANTENNA TECHNOLOGY
BACKGROUND. During the period from 1980-1983, Mr. Norris developed a
technique employing microwave radiation to penetrate the earth's surface. This
radar technology relates to "ground penetrating radar" or "GPR."
GPR technology is one of many of a family of geophysical tools and
sensing technologies which include seismic, electromagnetics, gravity, borehole
sampling and other techniques. GPR is a technique for producing profiles of
subsurface strata and features by emitting radar waves and recording the
reflected signals. Radar waves are reflected by differences in the electrical
properties of subsurface materials. Theoretically, it has long been known that
properly focused electromagnetic waves penetrate the earth's surface and that,
in the process, a portion of the energy introduced is backscattered or reflected
to the surface. GPR detects changes in the propagation velocity of
electromagnetic energy in the ground. Such changes typically result from
variations in the water content as well as the mineralogy of the rock or
structures encountered.
The limitations of existing equipment results in part from the
electrical conductivity of subsurface strata. For example, dry sands and
limestone have low conductivity and wet clay has very high conductivity thus
absorbing radar waves and resulting in less reflection. Accordingly, the type of
strata encountered limits GPR effectiveness. Another limitation is the
frequencies utilized. The penetration depth generally varies inversely with the
frequency. High frequencies provide less penetration with higher resolution and
lower frequencies provide greater penetration but less resolution.
The Company's research and experimentation with GPR equipment has
focused on two broad aspects, sensing and computer processing. Sensing
technology primarily relates to devices used for radar wave generation and
antennae used for transmission and reception. Computer processing includes the
conversion, compression, storage, analysis and visualization of reflected wave
forms.
CLASSIFIED TECHNOLOGY. In September 1994 the Company filed a patent
application on certain technology invented during its radar development.
Immediately upon receiving notice of allowance, the invention was classified
secret by the U.S. Department of Commerce in June, 1995 at the request of a
defense agency. This technology has not been used in any of the Company's
developments described herein and is not necessarily associated with nor limited
to GPR.
The Company is pursuing funding from the U.S. Government to develop this
technology. There can be no assurance the Company can be successful in these
efforts and is restricted from disclosing or otherwise commercializing the
technology.
In January 1996 the Company filed an application seeking
declassification of the technology and thereby allow commercial exploitation.
There can be no assurance that the U.S. Government will grant declassification
approval.
GPR TECHNOLOGY DESCRIPTION. The Company has been engaged in developing
and improving sensors (wave generators and antennae) and in developing and
improving the processing, conversion, compression, storage, and visualization
(collectively, computer processing) of GPR data. The Company has innovated
proprietary techniques for wave generation and proprietary antennae for the
sending and receiving of data. Further, the Company uses proprietary methods to
capture and computer process returned signals.
As a consequence of the Company's innovations, the Company has assembled
a prototype version of its GPR technology, a mobile penetrating microwave radar
(PMR) system (the "PMR System"). This system encompasses a blending of
laboratory equipment (with internal software and hardware custom configured and
modified to function as desired) and specialized components including antennae,
power generators and amplifiers. Such laboratory equipment and components have
been acquired and developed by the Company and are being used in the PMR System.
The PMR System has been designed as a general purpose device for testing
and evaluation purposes. The Company's technology has demonstrated the ability
to penetrate multiple solid objects (walls and barriers) and identify return
signals from additional objects such as walls, persons and manmade barriers. In
certain ground strata, the Company has been able to resolve objects of six inch
size at approximately ten feet in depth.
The existing system generates two-dimensional "field-grade" images with
additional data stored for advanced computer processing off the imaging site on
more powerful computers. The Company believes there are opportunities available
to improve the computer processing aspects of its technology to provide more
subsurface information.
Although the Company's GPR device is still in development, management
believes it has several advantages over existing commercial systems. Patriot's
device does not require contact with the ground providing enhanced mobility,
extended area coverage and the ability to look sideways (for example through
walls and in mine shafts). Patriot's system is designed to provide images
on-site thereby providing timely subsurface information allowing modification to
the surveying strategy.
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The Company has filed a U.S. patent application on certain of its
sensing (antenna) technology that may have other applications in communications
and other forms of radar. Other aspects of the PMR System are being maintained
as trade secrets, although additional patents may be filed in the future.
STAGE OF DEVELOPMENT OF GPR TECHNOLOGY. The Company commenced active
development of its GPR technology in April 1992. By May 1993 the Company was
able to demonstrate the sensing, processing and crude visualization of images
from its technology and by May 1994 the Company had completed its prototype PMR
System. Since May 1994 the Company has focused its efforts and limited financial
resources on the ShBoom technology and the ISDN technology effectively
suspending development and most marketing efforts.
The Company's prototype PMR System is used for limited prospective
customer and user evaluations of the technology. The Company has demonstrated
using the technology to detect plastic mines, side viewing through walls and
solid structures for detection of bodies or other objects, and viewing of
plastic pipes and other underground objects.
It is anticipated that most users will require more specifically
tailored equipment and multiple devices. Commercialization of the PMR device
would require additional development to replace the laboratory equipment with
specifically designed components to minimize cost and weight and improve
portability.
There can be no assurance that a commercially viable device will be
produced and the Company has no existing users or customers nor can there be
assurance any prospective users will select the Company's device over
competitive devices (See "Competition").
BUSINESS STRATEGY. The Company does not presently have the resources to
pursue further development to commercialize a system for the above markets. The
Company's strategy is to use its PMR System to demonstrate to prospective users
the Company's capabilities and to seek partnering arrangements to develop custom
commercial devices for specific applications. The Company's marketing activities
to date have been very limited and are focused primarily towards governmental
agencies. The strategy is to seek sponsorship to assist in further development
and commercialization of the present technology. There can be no assurance that
the Company can obtain any outside assistance or successfully complete
development and commercially exploit its GPR technology.
To further focus its efforts to governmental agencies, the Company has
identified plastic mine detection as a potentially viable application of the GPR
technology. According to the U.S. Army there are over 4 million land mines in
Bosnia alone and according to U.N. information there are over 100 million land
mines buried in 64 countries around the world. Although the Company has not
performed any competitor review, based on conversations with various U.S.
governmental officials management does not believe a commercially viable
competitive electronic system exists to detect plastic mines.
The PMR System prototype has indicated an ability to detect plastic
mines in early testing. The Company has designed, but not produced or tested, a
system that rather than providing a vertical slice subsurface image, provides a
camera view from above. Management believes this method has technical and user
advantages. The Company is in the stage of presenting its proposals to various
government agencies but there can be no assurance of future contracts or grants
to further develop the technology for mine detection. The Company anticipates
that one or more ShBoom-architecture microprocessors will be employed in future
versions of portable GPR systems when microprocessors become commercially
available.
The Company has not yet determined how its GPR technology will be
marketed and sold, such to be dependent on the type of relationship obtained, if
any. It could license the technology, manufacture and sell completed
instruments, or perform sub-surface analysis on a contract basis, or engage in a
combination of one or more of these strategies.
COMPETITION. The segment of the electronics industry which involves the
manufacture and sale of GPR equipment is not really large or cohesive enough to
be referred to as an "industry" but is more a specialized subset of geophysical
tools which include seismic equipment and other geophysical and scientific
instruments.
To the Company's knowledge, the major producers of GPR equipment or
technology for commercial use are GSSI, Inc., a wholly-owned subsidiary of OYO
Corporation, Pulse Radar, Inc., Airborne Environmental Surveys, Sensors and
Software, Inc., a Canadian company and radar technology developed and being
licensed by the Lawrence Livermore National Laboratory. In addition there
appears to be a large number of both academic and independent companies engaged
in GPR development, some which may have operating GPR devices being used for a
variety of applications. For example, an airborne GPR device was developed by a
Swedish government agency. There may also exist additional manufacturers of GPR
equipment or other companies or government agencies with existing GPR technology
or under development that are unknown to the Company. It is possible that any
such technology developed by others may be further advanced than the Company's
technology.
The Company has not yet developed a commercially marketable prototype.
Most of the Company's potential competitors are actively engaged in operations
and have had time to develop product recognition and market share and may have
more financial and other resources than the Company. However, this industry
segment is in its infancy and to this extent, the Company will not face the
usual disadvantage of gigantic competitors with established market share and
well-
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known products.
RESEARCH AND DEVELOPMENT
The Company's current development efforts are focused on the
introduction of the PSC1000 microprocessor and ISDN terminal adapters by the end
of fiscal 1996. The development of the Company's technologies has taken longer
than anticipated by management and could be subject to additional delays.
Therefore there can be no assurance of timely completion of the PSC1000 for
initial marketing or of the commercial availability of ISDN terminal adapters
nor that if available that they will be on a cost-effective basis, or that if
introduced, that these products will achieve market acceptance.
The Company incurred research and development expenditures of $928,107
and $739,723 for the fiscal years ended May 31, 1995 and 1994, respectively, and
$725,596 for the nine months ended February 29, 1996 on its technologies The
majority of the Company's expenditures in fiscal 1995 and to date in fiscal 1996
were expended on the ShBoom technology development. To date, the Company has
expensed internal software development costs as incurred. The Company believes
that technical advances are essential to its success and expects that it will
continue to expend substantial funds on research and development on
technologies; however, there can be no assurance that such research and
development efforts will result in the design and development of competitive
technologies in a timely manner.
LICENSES, PATENTS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of patents, copyright and trademark
laws, trade secrets, software security measures, license agreements and
nondisclosure agreements to protect its proprietary technologies. The Company
pursues a policy of seeking the protection of new products or processes through
the filing of patents, when management feels that such filing is in the
Company's best interests.
The Company has one U.S. patent issued on the ShBoom microprocessor
technology and has 13 U.S. patents pending most dating back to 1989, along with
multiple foreign patent applications pending. In addition to such factors as
innovation, technological expertise and experienced personnel, the Company
believes that a strong patent position is becoming increasingly important to
compete effectively in the semiconductor industry. It is common in the
semiconductor industry that it may become necessary or desirable in the future
for the Company to obtain patent and technology licenses from other companies
relating to certain technology that may be employed in future products or
processes. To date, the Company has not received notices of claimed infringement
of patents with any existing processes or products, but due to the nature of the
industry, the Company may receive claims in the future. Likewise, the Company
believes that it may have claims against other semiconductor companies should
certain of its pending patents be favorably granted, but there can be no
assurance thereof nor assurance that the Company could successfully exploit any
potential claims against larger competitors.
The Company assumed a license agreement related to a C program compiler
for the ShBoom-architecture microprocessor from a third party and is currently
negotiating amendments to such agreement to clarify the terms of future payments
from licensing or sale of the compiler with the ShBoom technology. The loss or
inability to use the compiler as contemplated could result in delays until
equivalent technology could be identified and integrated. The Company has not
yet adopted a position on whether or not it is obligated to pay certain
royalties on the ShBoom technology specified in prior agreements between
nanoTronics and previous inventors. Should the Company determine it is not
obligated to make such royalty payments it may be subject to unindemnified
claims relating to the failure to pay such royalties.
Pursuant to the Assets Purchase Agreement and Plan of Reorganization
(Agreement) between the Company, nanoTronics Corporation and Helmut Falk (Falk),
the Company was the recipient of a number of warranties and indemnities. The
Company believes nanoTronics Corporation has been or is in the process of
liquidation and due to Mr. Falk's death in July 1995, the Company may be limited
in its ability to obtain satisfaction should it have any future claims pursuant
to the Agreement.
The Company received notice of allowance on a U.S. patent application
arising out of its GPR technology and the invention was classified secret by the
U.S. Department of Defense prior to patent issuance. The Company has one patent
pending in the United States on antennae technology related to its GPR
technology. Although plans in this regard are not definite, the Company's
intention is to apply for patents only as to selected aspects of the Company's
GPR technology in order to reduce the risk of infringement or duplication by
competitors. Considering the rapid advancements in the field of electronics
generally, the Company believes that its interests will be best served by
treating as trade secrets non-patented components or instrumentation groups used
in some of its technologies. There are a large number of patents owned by others
in the radar field generally and in the field of GPR specifically. Accordingly,
although the Company is not aware of any possible infringement nor have any
notices of claimed infringement been received, the Company may receive claims in
the future.
Certain base-ISDN software technology has been licensed to the Company
by a third party. In addition to the protection afforded the Company through the
ISDN technology license, if any, the Company has created its own software and
hardware designs and intends to use copyright, trade secrets, software security
measures and nondisclosure agreements to protect its proprietary technology and
software. The Company has no patent applications pending with respect to its
ISDN interface technology. Despite the Company's precautions, it may be possible
for unauthorized third parties to copy aspects of, or otherwise obtain and use,
the Company's ISDN technology and software without authorization. In addition,
the Company cannot be certain that others will not develop substantially
equivalent or superseding proprietary technology thereby substantially reducing
the value of the Company's proprietary rights.
18
<PAGE> 22
There can be no assurance that any patents will issue from pending or
future applications or that any patents that are issued will provide meaningful
protection or other commercial advantage to the Company. Although the Company
intends to protect its rights vigorously, there can be no assurance that these
measures will be successful.
The Company generally requires all its employees and consultants,
including its management, to sign a non-disclosure and invention assignment
agreement upon employment with the Company.
EMPLOYEES
The Company currently has five full-time and one part-time research and
development personnel and one full-time and one part-time administrative
employees other than its executive officers, Mr. Norris and Mr. Putnam, who only
devote part time to the affairs of the Company. The Company also engages
additional consultants as needed from time to time. The Company has no other
current plans to hire additional personnel except as a result of management
identifying new development projects and as may be needed to support customers
as revenues commence. The number of additional personnel that may be required in
these areas is not presently determinable by management.
The Company's future success depends in significant part upon the
continued service of its key technical and senior management personnel. The
competition for highly qualified personnel is intense and there can be no
assurance that the Company will be able to retain its key managerial and
technical employees or that it will be able to attract and retain additional
highly qualified technical and managerial personnel in the future. None of the
Company's employees is represented by a labor union and it considers its
relations with its employees to be good.
GOVERNMENT REGULATION
To the Company's knowledge, its intended products are not subject to
governmental regulation by any federal, state or local agencies which would
affect the manufacture, sale or use of its products. The Company cannot, of
course, predict what sort of regulations of this type may be imposed in the
future, but does not anticipate any unusual difficulties in complying with
governmental regulations which may be adopted in the future. If any technical or
rating standards of professional bodies (such as UL or SAE) are applicable to
any equipment or components produced by the Company, it is management's
intention to comply with such standards.
The Company's proposed GPR device uses microwave radio waves. The use of
such waves are regulated by the Federal Communications Commission (FCC) and
should the Company elect to sell such devices the operation would have to meet
applicable FCC rules and regulations. Management does not believe that the
operation of the prototype on contract analysis projects would require FCC
approval.
The Company has not incurred costs associated with environmental laws
and does not anticipate such laws will have any effect or costs on the future
business proposed by the Company.
PROPERTIES
Effective October 1, 1993, the Company entered into a three year lease
with an unrelated party for approximately 4,300 square feet at a monthly rate of
$3,500. This space at 12875 Brookprinter Place, Suite 300, contains
approximately 3,100 square feet of improved space for office and technical
personnel, and the balance is unimproved warehouse space being used as a testing
and warehouse facility. Management believes this facility is adequate for the
present needs of the Company for the next twelve months. Three research and
development personnel are located in Los Gatos, California where they work from
a residence office for which the Company pays $500 per month on a month to month
basis.
LITIGATION
The Company is not a party to any material legal proceedings.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
During the fiscal years ended May 31, 1994 and 1995 and the interim
periods ended February 29, 1996 and February 28, 1995, the Company's operations
consisted primarily of research and development activities towards the
development of the ShBoom microprocessor technology, the CyberShark technology
and the GPR prototype, administrative activities related towards financing and
administrative operations and marketing expenditures incurred in initial phases
of market exploration. The Company expended a total of $928,107 as research and
development costs during the fiscal year ended May 31, 1995, primarily
consisting of salaries and benefits and prototype materials and components. This
was an increase of $188,384 over the amount of $739,723 incurred during the
previous fiscal year, the increase resulting from personnel costs associated
with four ShBoom-project engineers resulting in an increase of approximately
$280,000 offset in part by a reduction of approximately $90,000 in GPR
components and supplies.
The Company expended a total of $725,596 as research and development
costs during the nine months ended February 29, 1996 primarily consisting of
personnel and consultancy costs. This is comparable to the $719,598 incurred for
the nine months ended February 28, 1995.
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<PAGE> 23
General and administrative costs were $925,084 during fiscal 1995
compared to $2,119,305 for fiscal 1994 which included a noncash compensation
cost of $1,875,000 attributable to the release of 5,000,000 shares of common
stock from escrow to Mr. Norris. These shares were previously issued in 1989,
however, generally accepted accounting principles require the recording of
noncash compensation expense computed as the difference in the fair value of the
shares at release less the fair value at the date they were placed in escrow.
The balance of general and administrative costs for fiscal 1994 were $244,305.
The increase of $680,779 in fiscal 1995 compared to the adjusted 1994 total of
$244,305 includes a $630,000 increase in amortization and depreciation including
$612,333 amortization on purchased technology. The remaining increase is
attributable to insurance, legal and accounting.
General and administrative costs were $491,630 during the nine months
ended February 29, 1996 compared to $285,539 for the comparable period of the
prior year. The $206,091 increase consisted primarily of a $205,000 increase in
consultancy costs with $187,500 paid in the third quarter through the issuance
of 150,000 common shares pursuant to the Company's Employee Stock Compensation
Plan. The Company expects general and administrative costs to return to prior
levels in future quarters.
The Company incurred $71,351 of marketing expenditures during the 1995
fiscal year and $53,458 for the prior fiscal year. The increase is attributable
to increased marketing activities primarily consisting of personnel costs
associated with technology demonstrations and market development. The Company
incurred $83,539 of marketing expenditures during the nine months ended February
29, 1996 compared to $52,562 for the comparable period of the prior year. The
increase resulted primarily from compensation expenses associated with initial
marketing activities on the Company's ShBoom technology and the CyberShark ISDN
product. The Company expensed $459,250 as amortization expense on purchased
technology for the nine months ended February 29, 1996 and 1995.
During fiscal 1995, the Company used cash of $1,221,735 in operating
activities and $105,658 in investing activities for the purchase of equipment
and patent costs. During the nine months ended February 29, 1996 the Company
used cash of $958,983 in operating activities and $166,369 in investing
activities for the purchase of equipment and software. The Company's emphasis on
research and development activities related to developing its technologies is
expected to continue during the next twelve months.
PLAN OF OPERATION FOR NEXT TWELVE MONTHS
Since late 1989, the Company has been engaged in developing its
technologies. The Company has not generated any operating revenues to date and
there can be no assurance of future operating revenues. The Company's plan of
operation for the next twelve months is to introduce ISDN products, introduce to
market the second-generation of the ShBoom-architecture microprocessor, design
future generations of the ShBoom and ISDN technologies and exploit the radar and
antenna technology. To this end the Company anticipates continuing research and
development expenditures at current levels during the next twelve months with a
continued emphasis on ShBoom technology expenditures. There can be no assurance
the Company will be successful in exploiting its technologies.
At February 29, 1996, the Company had working capital of $854,018
compared to working capital of $1,111,772 at May 31, 1995. Cash on hand at
February 29, 1996 was $830,289. Other than its obligation pursuant to the
remaining term on a three year lease obligation aggregating $28,000 and an
obligation for $50,000 upon a GPR prototype demonstration meeting specific
criteria, the Company has no material commitments for capital or other
expenditures. The Company has no other material sources of liquidity at this
time. Based on the current fiscal year's rate of cash operating expenditures and
current plans, management anticipates a base level of cash operating
expenditures aggregating approximately $1,200,000 during the next twelve months.
However, the Company believes it will incur additional minimal expenditures of
approximately $50,000 on the ShBoom technology and $50,000 on the ISDN
technology. Should revenues commence, the Company may require additional
personnel and expenditures not currently estimable by management.
In addition to the part-time services of two executive officers, the
Company presently has five full-time and one part-time research and development
employees and one full-time and one part-time administrative persons. Subject to
availability of resources, management would like to hire one marketing executive
and one software engineer. Other than attempting to fill these slots, management
has no current plans to hire additional personnel during the next twelve months
except in response to specific new development opportunities or funding, or as
required to support contract or commercialization activities, if any. The
Company has in the past and may also in the future engage outside consultants
for specific development or marketing tasks. If any of the current technologies
prove successful, then during the next twelve months the Company may require
additional development, marketing and manufacturing personnel, the number
dependent upon a variety of factors not presently determinable by management.
The Company anticipates that it may require additional equipment,
fabrication, components and supplies during the next twelve months, not included
in the commitments outlined above, to continue development for the Company's
technologies. Product introductions such as those contemplated for ISDN products
and the PSC1000 microprocessor may require significant inventory and other
expenditures not presently estimable by management. Further, if expanded
development is commenced, or new generations of microprocessors or radar are
accelerated beyond current plans, additional expenditures, not currently
estimable by management, may be required.
It is possible, therefore, that higher levels of expenditures may be
required than currently contemplated by management resulting from changes in
development plans or as required to support new developments or
commercialization
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<PAGE> 24
activities or otherwise.
Based on the above factors including the current rate of expenditures
and anticipated additional expenditures, the Company does not have sufficient
funds for the next twelve months and will require funds from the sale of
products or technology or from other sources or will be required to scale back
or curtail certain activities. The minimum additional funding required for the
next twelve months is estimated at approximately $500,000. Potential sources of
future funds may include the sale of additional Company equity securities, some
form of debt financing or the sale or licensing of certain of the Company's
technologies. Should the warrants outstanding expiring in July and August 1996
be exercised in full the Company would realize $689,500 of gross proceeds. There
can be no assurance that any funds required during the next twelve months or
thereafter can be generated from operations or that such required funds will be
available from the aforementioned or other potential sources. The lack of
additional capital could force the Company to curtail or scale back operations
and would therefore have an adverse effect on the Company's business. Further
there can be no assurance that any such required funds, if available, will be
available on attractive terms or that they will not have a significantly
dilutive effect on existing shareholders of the Company.
TAX LOSS CARRYFORWARDS
As of February 29, 1996, the Company has approximately $3,697,000 of tax
loss carryforwards. A valuation allowance has been recorded for the net deferred
tax asset arising primarily from tax loss carryforwards because, in the
Company's assessment, it is more likely than not that the deferred tax asset
will not be realized.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets" and SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reported at the lower of the
carrying amount or their estimated recoverable amount and the adoption of this
statement by the Company is not expected to have a material impact on the
financial statements. SFAS No. 123 encourages the accounting for stock-based
employee compensation programs to be reported within the financial statements on
a fair value based method. If the fair value based method is not adopted, then
the statement requires pro forma disclosure of net income and earnings per share
as if the fair value based method had been adopted. The Company has not yet
determined how SFAS No. 123 will be adopted nor its impact on the financial
statements. Both statements are effective for fiscal years beginning after
December 15, 1995.
MANAGEMENT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Registrant, their
ages, positions held in the Company and duration as such, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES DIRECTOR SINCE
<S> <C> <C> <C>
Elwood G. Norris 56 President, CEO and Director August 1989
Robert Putnam 37 Secretary, Treasurer, Director August 1989
Donald R. Bernier 53 Director January 1995
Richard D. McDaniel 70 Director December 1995
Peter vR. Cooper 39 Director January 1996
</TABLE>
The terms of all directors will expire at the next annual meeting of the
Company's shareholders, or when their successors are elected and qualified.
Directors are elected each year, and all directors serve one-year terms.
Officers serve at the pleasure of the Board of Directors. No family relationship
exists among the Company's management members.
BIOGRAPHICAL INFORMATION
ELWOOD G. NORRIS. Mr. Norris has been a director of Patriot since 1989
and served as Chairman and CEO until June 1994. In June 1995 he was again
appointed President and CEO due to the illness of Mr. Falk. Since March 1988 he
has been a director of Norris Communications Corp. ("NCC"), a public company
engaged in electronic product development, distribution and sales. Until October
1995, when he became Chief Technology Officer, he was also President of NCC.
Since August 1980 he has also been a director of American Technology Corporation
("ATC"), a publicly held consumer electronics products company, and served as
its President and CEO until February 1994. Mr. Norris is an inventor with over
twenty U.S. patents primarily in the fields of electrical and acoustical
engineering. He invented the base GPR technology and the classified technology
owned by the Company. Mr. Norris devotes only part-time services to the Company.
ROBERT PUTNAM. Mr. Putnam has been since 1989 Secretary and Treasurer of
the Company. Since 1988 he has served as Secretary of NCC. Since 1984 he has
been a director of ATC, where he served as Secretary/Treasurer from 1984 until
February 1994 when he was appointed President and CEO. He received a B A. degree
in Mass Communication/Advertising from Brigham Young University in 1983. Mr.
Putnam devotes only part-time services to the Company.
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<PAGE> 25
DONALD R. BERNIER. Mr. Bernier founded in 1971 Compunetics Incorporated,
a Troy, Michigan-based electronics firm of which he is owner and President.
Compunetics engages in contract research and development, specializing in
microelectronics primarily for the automotive industry.
RICHARD D. MCDANIEL. Mr. McDaniel retired as Chairman and CEO of The
First National Bank of North East, Maryland in 1987. He is presently engaged in
private investment banking and personal investments. Since 1960 he has been
Chairman of McDaniel Enterprises, Inc., a Wilmington, Delaware based family
holding company and since 1993 has been Chairman and owner of XRA, Ltd. and GP
America, Inc., importers and distributors of medical X-ray film. In July 1995 he
became Chairman of Smart Business Systems, a copier and facsimile equipment
distributor. He graduated with a degree in Business from the University of
Delaware in 1950.
PETER VR. COOPER. Mr. Cooper has been an officer, director and owner of
Virtual Research Corporation, a Westlake Village, California-based software firm
since its founding in 1986. He is currently its President. Virtual Research
Corporation provides hardware, software and consulting services to the insurance
industry. Mr. Cooper previously held senior management systems positions at
Delphi Systems Inc. and Promethean Systems Inc. both which supplied hardware,
software and services to vertical market industries. Mr. Cooper received his
B.A. Degree in Economics from the University of California at Los Angeles in
1979.
GENERAL CONFLICTS OF INTEREST
Certain conflicts of interest now exist and will continue to exist
between the Company and its officers and directors due to the fact that each has
other employment or business interests to which he devotes some attention. Each
officer and director is expected to continue to do so. The Company has not
established policies or procedures for the resolution of current or potential
conflicts of interest between the Company and its management or
management-affiliated entities. There can be no assurance that members of
management will resolve all conflicts of interest in the Company's favor. The
officers and directors are accountable to the Company as fiduciaries, which
means that they are legally obligated to exercise good faith and integrity in
handling the Company's affairs. Failure by them to conduct the Company's
business in its best interests may result in liability to them.
SPECIAL CONFLICTS OF INTEREST
One of the Company's officers and directors, Mr. Robert Putnam, also
acts as Secretary of NCC, a company controlled by Mr. Elwood Norris. See
"Biographical Information" above. Mr. Putnam is also the president and chief
executive officer of ATC. In this position he is subordinate to Mr. Norris. The
possibility exists that these relationships will affect Mr. Putnam's
independence as a director of the Company.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
As permitted by Delaware law, the Company's Certificate of Incorporation
provides that the Company will indemnify its officers, directors, employees and
agents against attorneys' fees and other expenses and liabilities they incur to
defend, settle or satisfy any civil or criminal action brought against them
arising out of their association with or activities on behalf of the Company
unless, in any such action, they are adjudged to have acted with gross
negligence or to have engaged in willful misconduct. The Company may also bear
the expenses of such litigation for any such persons upon their promise to repay
such sums if it is ultimately determined that they are not entitled to
indemnification. Such expenditures could be substantial and may not be recouped,
even if the Company is so entitled. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in that
Act and is, therefore, unenforceable.
EXCLUSION OF DIRECTOR LIABILITY
Pursuant to the General Corporation Law of Delaware, the Company's
Certificate of Incorporation excludes personal liability on the part of its
directors to the Company for monetary damages based upon any violation of their
fiduciary duties as directors, except as to liability for any breach of the duty
of loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, acts in violation of Section 174 of
the General Corporation Law of Delaware, or any transaction from which a
director receives an improper personal benefit. This exclusion of liability does
not limit any right which a director may have to be indemnified and does not
affect any director's liability under federal or applicable state securities
laws.
EXECUTIVE COMPENSATION
There is shown below information concerning the compensation of the
Company's chief executive officers (a Named Officer) for the fiscal year ended
May 31, 1995. Compensation for the other four most highly compensated executive
officers (also Named Officers) is not required nor presented as no such other
executive officer's salary and bonus exceeded $100,000.
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<PAGE> 26
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
-------------------------- ------------------------------
Name and Fiscal Options All Other
Principal Position Year Salary Bonus (# of Shares) Compensation
- ------------------ ------ -------- ------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Elwood G. Norris 1995 $43,599 Nil None None
President and CEO(1) 1994 $42,000 $10,000 None $1,875,000(2)
1993 $42,000 Nil 150,000 shares None
Helmut Falk 1995 $104,069 Nil None None
Chairman, President and
CEO(3)
</TABLE>
(1) Mr. Norris served as CEO from 1989 to June 1994, upon the
appointment of Mr. Falk as Chairman, President and CEO. He was
reappointed President and CEO on June 5, 1995 due to Mr. Falk's
illness.
(2) In 1989 the Company issued 5,000,000 common shares to Mr. Norris in
connection with the acquisition of certain GPR radar technology. At the
time of the acquisition the shares were recorded at nominal value and
placed in escrow subject to performance based conditions. One condition
of release was an independent valuation report to satisfy the valuation
provisions which Mr. Norris provided to the Company for the release of
all of the 5,000,000 common shares. However, the acquisition of the
technology from nanoTronics resulted in a termination of the escrow and
pursuant to the terms thereof the shares were released to Mr. Norris. In
accordance with generally accepted accounting principles the Company
recorded noncash compensation expense computed as the difference in the
fair value of the shares at release less the fair value at the date they
were placed in escrow for a total of $1,875,000.
(3) Mr. Falk served as Chairman from June 1994 until his death on July
6, 1995. He also served as President and CEO from June 1994 to June 5,
1995.
No Named Officer received any form of non-cash compensation from the
Company in the fiscal year ended May 31, 1995 or currently receives any such
compensation.
The Company maintains employee benefits that are generally available to
all Company employees, including medical, dental and life insurance benefits and
a 401(k) retirement savings plan. There were no Company matching contributions
under the 401(k) plan to the Named Officer during the fiscal year ended May 31,
1995.
OPTION GRANTS
There were no stock option grants during fiscal 1995 pursuant to the
Company's 1992 Incentive Stock Option Plan (the "ISO Plan") and the 1992
Non-Statutory Stock Option Plan or any other plan to the Named Officers
reflected in the Summary Compensation Table shown above.
Effective October 1, 1995, the Company established the 1995 Employee
Stock Compensation Plan authorizing the grant of up to 250,000 common shares to
provide a further means to support and increase the Company's ability to
attract, retain and compensate persons in the development and success of the
Company. Executive officers and directors are not eligible to receive shares
under this plan. Through February 29, 1996 the Company had awarded 175,000
common shares pursuant to this plan.
There were no options exercised by Named Officers during the fiscal year
ended May 31, 1995. The Named Officers had no outstanding unexercised options at
May 31, 1995.
The Company has not awarded stock appreciation rights to any employee of
the Company and has no long-term incentive plans, as that term is defined in
Securities and Exchange Commission regulations (other than a $50,000
demonstration bonus payable to Mr. Norris upon successful demonstration of a
prototype GPR device meeting specified performance criteria, see "Certain
Transactions"). During the fiscal year ended May 31, 1995, the Company did not
adjust or amend the exercise price of stock options awarded to any Named
Officer.
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by the
Company to the directors in their capacity as directors other than the granting
of stock options. It is anticipated that during the next twelve months that the
Company will not pay any direct or indirect remuneration to any directors of the
Company in their capacity as directors other than in the form stock option
grants or the reimbursement of expenses of attending directors' or committee
meetings.
EMPLOYMENT CONTRACTS
Mr. Norris may be entitled to future compensation pursuant to agreements
described in "Certain Transactions". The Company has an employment agreement
dated November 20, 1995 with Mr. Norris, the Company's President and CEO, for a
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<PAGE> 27
three year term providing for a base salary of $60,000 with annual increases of
5% on each June 1. The agreement provides for a base salary reduction to $42,000
(adjusted for annual 5% increases) should a successor President and CEO be
appointed by the Board of Directors and he remain an employee. The Company may
terminate Mr. Norris' employment with or without cause, but termination without
cause (other than disability or death) results in a lump sum severance payment
of 24 months salary. Likewise upon a change in control, as defined in the
agreement, Mr. Norris may elect to terminate employment and obtain a lump sum
severance payment of 24 months salary.
CERTAIN TRANSACTIONS
There were no transactions, or series of transactions, for fiscal 1994
or 1995, nor are there any currently proposed transactions, or series of
transactions, to which the Company is a party, in which the amount exceeds
$60,000, and in which to the knowledge of the Company any director, executive
officer, nominee, five percent or greater shareholder, or any member of the
immediate family of any of the foregoing persons, have or will have any direct
or indirect material interest other than described below.
Pursuant to an Assets Purchase Agreement and Plan of Reorganization
("Purchase Agreement") dated June 22, 1994 between the Company, nanoTronics
Corporation (nanoTronics) and Helmut Falk (Falk), the Company issued a total of
10,000,000 restricted common shares to nanoTronics, 5,000,000 of which are a
contingent payment subject to the terms of an earnout escrow. These shares were
issued in consideration of technology acquired.
NanoTronics was formed in 1991 and acquired certain base technology for
a RISC-based (Reduced Instruction Set Computing) 32-bit microprocessor
integrated on a single chip with merged stack/register architecture. NanoTronics
expended in excess of $1.9 million (unaudited) while engaged in development and
produced from the basic architecture an enhanced chip (ShBoom-architecture
microprocessor). In connection with the acquisition, the Company also acquired
certain fixed assets including a Sun Sparc 2 Work Station and various terminals,
peripheral devices and software. A majority of the expenditures by nanoTronics
consisted of chip and related software development costs. The result of these
efforts was a successful initial fabrication of the chip in early 1994
demonstrating technical feasibility of the ShBoom architecture. nanoTronics also
expended funds on the preparation and prosecution of patent applications.
The shares were issued to nanoTronics of which Falk was the sole
shareholder. Although 5,000,000 of the shares issued are subject to the terms of
an earnout escrow, as more fully described below, the shares are issued for the
purpose of dividends and voting. Prior to the transaction, Mr. Falk was an
unaffiliated person with respect to the Company. At the time of issuance the
10,000,000 common shares represented approximately 36% of the total issued and
outstanding shares of the Company.
Although the transaction did not result in a majority change in the
board of directors of the Company, or a majority change in stock ownership of
Company, the issuance of new stock resulted in a large percentage ownership
controlled by one entity with the ability to have significant influence over the
Company's future affairs.
Pursuant to the terms of the Purchase Agreement, 5,000,000 of the common
shares were issued to nanoTronics pursuant to an earnout escrow arrangement as a
contingent purchase price. The terms of the escrow arrangement, as defined in
the Purchase Agreement, provides for the release from escrow of 500,000 common
shares for each $500,000 of Patriot revenues commencing June 1, 1994 and ending
May 31, 1999. The Purchase Agreement also provides for release on other major
corporate events including a sale of substantially all the assets of the
Company, certain mergers, combinations or consolidations, certain tender offers
and upon a liquidation or dissolution. Any shares not earned by May 31, 1999
would be canceled. The shares may be sold, assigned or transferred within the
escrow arrangement but would still be subject to the escrow terms.
Pursuant to the Purchase Agreement, Mr. Falk was to be entitled, for his
efforts in negotiating an agreement within 24 months of the date of the Purchase
Agreement (effectively terminating June 22, 1996), to a payment of 50% of any
up-front license fees and 50% of the first five years of royalties under the
first agreement and 25% of any up-front license fees and 25% of the first five
years of royalties pursuant to the second agreement, respectively, of any net
license and royalty proceeds from the license of the ShBoom technology to two
specific prospective licensees, in any order. There is no assurance either
prospective licensee will license the ShBoom technology within 24 months. Due to
Mr. Falk's death, it is unclear whether his legal representatives can perform
under the agreement or if they performed, whether the Company would be obligated
to make payments. Based on the stage of negotiations known to management, it
appears unlikely that a license agreement will result with either party prior to
June 22, 1996 and accordingly it is unlikely that any prospective payments will
be due.
The Company has granted certain registration and information rights with
respect to the shares issued to nanoTronics, such rights being assignable to
Falk and the Fish Family Trust (such trust having certain rights to become a
shareholder in nanoTronics). The Company has been advised that nanoTronics has
been liquidated with the 10,000,000 shares in the process of being transferred
to the Helmut Falk Family Trust. The Company has not determined whether the
Helmut Falk Family Trust is entitled to the same registration rights. Should the
agreement still be effective, the Company is obligated to use its best efforts
to effect a registration upon written request up to two times subject to certain
limitations. The Company is also obligated to include the shares, subject to
certain limitations, in any underwriting and in any other registration filed by
the Company.
24
<PAGE> 28
Under the terms of an Agreement to Exchange Technology for Stock dated
August 8, 1989 between Mr. Norris and the Company, Mr. Norris is entitled to a
royalty equal to two and one-half percent (2.5%) of the gross revenues received
by the Company directly or indirectly from exploitation of its GPR technology
(up to a maximum royalty of $400,000), against which royalty an advance payment
of $17,000 already has been made. Mr. Norris also is entitled to a cash bonus of
$50,000 within 45 days after the Company successfully demonstrates a working
prototype of a GPR unit meeting specified performance criteria and a request for
such bonus is made to the Board of Directors and approved.
Mr. Norris provided the Company with an independent valuation report to
satisfy the valuation provisions of the Share Escrow Agreement dated August 10,
1989 for the release of all of the 5,000,000 common shares of the Company
therein. However, pursuant to the terms of the Agreement to Exchange Technology
for Stock dated August 8, 1989, the acquisition of the technology from
nanoTronics as described above resulted in a termination of the Share Escrow
Agreement and pursuant to the terms thereof the shares were released to Mr.
Norris on July 8, 1994.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of February 29, 1996, the stock
ownership of each officer and director of the Company, of all officers and
directors of the Company as a group, and of each person known by the Company to
be a beneficial owner of 5% or more of its Common Stock. Except as otherwise
noted, each person listed below is the sole beneficial owner of the shares and
has sole investment and voting power as such shares. No person listed below has
any option, warrant or other right to acquire additional securities of the
Company, except as otherwise noted.
<TABLE>
<CAPTION>
Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
- -------- ---------------- --------------- --------
<S> <C> <C> <C>
Common stock nanoTronics, Inc. 10,000,000(1) 34.3%
par value attn: Gloria Felcyn, CPA
$.00001 14395 Saratoga Ave., Suite 110
Saratoga, California 95070
SAME Elwood G. Norris 4,720,000 16.2%
12875 Brookprinter Place #300
Poway, California 92064
SAME Richard D. McDaniel 1,000,000(2)(3) 3.4%
12875 Brookprinter Place, #300
Poway, California 92064
SAME Robert Putnam 116,666 (4) *
12875 Brookprinter Place, #300
Poway, California 92064
SAME Donald R. Bernier 50,000 (5) *
12875 Brookprinter Place #300
Poway, California 92064
SAME Peter vR. Cooper None --
12875 Brookprinter Place #300
Poway, California 92064
All directors & officers 5,886,666 (6) 19.7%
as a group (5 persons)
</TABLE>
* Less than 1%.
(1) These shares have been issued but 5,000,000 are subject to an escrow
arrangement as described in "Certain Transactions" below. The shares
were originally issued to nanoTronics in connection with the ShBoom
technology acquisition. The Company has been advised by the transfer
agent that it is in the process of transferring these shares to the
Helmut Falk Family Trust, Gloria Felcyn, Trustee. The Company has no
information on the beneficial control of these shares.
(2) Consists of 500,000 common shares and 500,000 shares issuable upon
the exercise of a warrant. The shares and warrant are held by Sea Ltd.,
a corporation over which Mr. McDaniel may direct certain voting and
investment powers. The 500,000 common shares are being registered hereby
(see "Selling Shareholders").
(3) Mr. McDaniel is pursuing a claim against the Falk estate pursuant to
a written agreement with Mr. Falk pursuant to which he believes he is
entitled to 5% of Patriot common shares (representing 250,000 shares
held outside of
25
<PAGE> 29
escrow and 250,000 shares held in escrow for a total of 500,000 common
shares) held by nanoTronics (see 1). The additional 500,000 shares are
not included in Mr. McDaniel's holdings described herein since he cannot
presently exert investment or voting control over the shares and there
can be no assurance he will prevail in his claim or in the event he
should prevail that the claim will not be settled in other amounts or
for consideration other than Patriot shares.
(4) Includes 100,000 shares issuable upon the exercise of outstanding
stock options.
(5) Consists entirely of shares issuable upon the exercise of
outstanding stock options.
(6) Includes 5,236,666 shares issued and outstanding and 650,000 shares
issuable upon exercise of stock options and warrants.
TRADING MARKET AND RELATED MATTERS
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the OTC Electronic Bulletin Board maintained by the National
Association of Securities Dealers, Inc., under symbol PTSC. The following table
sets forth the high and low bid quotations for the Common Stock for the fiscal
years ended May 31, 1995 and 1994 and the first three fiscal quarter of the
current fiscal year.
<TABLE>
<CAPTION>
BID QUOTATIONS
-------------------------
HIGH LOW
<S> <C> <C>
Fiscal Year Ending May 31, 1996
First Quarter $0.35 $0.125
Second Quarter $0.76 $0.22
Third Quarter $3.53125 $0.46875
Fiscal Year Ended May 31, 1995
First Quarter $0.72875 $0.125
Second Quarter $0.44 $0.125
Third Quarter $0.44 $0.094
Fourth Quarter $0.31 $0.094
Fiscal Year Ended May 31,1994
First Quarter $1.31 $0.56
Second Quarter $1.25 $0.50
Third Quarter $0.81 $0.375
Fourth Quarter $0.625 $0.25
</TABLE>
The above quotations reflect inter-dealer prices, without retail markup,
mark-down or commission and may not represent actual transactions. The Company
had approximately 151 shareholders of record as of February 29, 1996, which
number does not include shareholders whose shares are held in street or nominee
names.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 40,000,000
shares of Common Stock, $.00001 par value per share. There are no preferred
shares authorized.
At February 29, 1996, a total of 29,165,392 Common Shares were issued
and outstanding. The holders of Common Stock are entitled to one vote for each
share held. The affirmative vote of a majority of votes cast at a meeting which
commences with a lawful quorum is sufficient for approval of most matters upon
which shareholders may or must vote, including the questions presented for
approval or ratification at the Annual Meeting. However, removal of a director
from office or repeal of the certificate of incorporation in its entirety
require the affirmative vote of a majority of the total voting power for
approval, and certain other matters (such as shareholder amendment of the
bylaws, and amendment, repeal or adoption of any provision inconsistent with
provisions in the certificate of incorporation regarding indemnification of
directors, officers and others, exclusion of director liability, and the
Company's election not to be governed by statutory provisions concerning
business combinations with interested shareholders) require the affirmative vote
of two-thirds of the total voting power for approval. Common Shares do not carry
cumulative voting rights, and holders of more than 50% of the Common Stock have
the power to elect all directors and, as a practical matter, to control the
Company. Holders of Common Stock are not entitled to preemptive rights, and the
Common Stock is not subject to redemption.
A special meeting of shareholders may be called by or at the request of
the Chairman of the Board, the President or any two directors, and at the
request of persons owning in the aggregate not less than 20% of the issued and
outstanding Common Shares entitled to vote in elections for directors. Holders
of Common Stock are entitled to receive, pro rata, dividends when and as
declared by the Board of Directors out of funds legally available therefor. Upon
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share ratably in the Company's assets legally available for
distribution to its shareholders.
Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt
Lake City, Utah 84117, acts as transfer agent and registrar for the Common Stock
of the Company. Their telephone number is (801) 272-9294.
26
<PAGE> 30
Dividend Policy. The declaration and payment of dividends on Common
Shares is at the absolute discretion of the Company's Board of Directors and
will depend, among other things, on the Company's earnings, financial condition
and capital requirements. The Company has not paid any cash dividends to date,
and no cash dividends will be declared or paid on the common stock of the
Company in the foreseeable future.
LEGAL MATTERS
Certain legal matters in regard to the securities offered hereby will be
passed upon for the Company by Brasher & Company, Attorneys at Law, 90 Madison
Street, Suite 707, Denver, Colorado 80206.
EXPERTS
The financial statements of the Company included in the Prospectus and
Registration Statement for the fiscal years ended May 31, 1995 and 1994,
respectively, have been audited by BDO Seidman, LLP, independent certified
public accountants, as set forth in their report appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such report
given upon the authority of said firm as experts in accounting and auditing. The
unaudited financial statements for the nine-month periods ended February 29,
1996 and February 28, 1995 have not been audited or reported upon by such firm.
27
<PAGE> 31
PATRIOT SCIENTIFIC CORPORATION
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Audited Financial Statements:
Report of Independent Certified Public Accountants F-2
Balance Sheet as of May 31, 1995 F-3
Statements of Operations for the Years Ended May 31, 1995 F-4
and 1994 and for the period from June 10, 1987 (beginning of
the development stage) to May 31, 1995
Statements of Stockholders' Equity for the Years Ended F-5
May 31, 1995 and 1994 and for the period from June 10, 1987
(beginning of the development stage) to May 31, 1995
Statements of Cash Flows for the Years Ended May 31, 1995 F-6
and 1994 and for the period from June 10, 1987 (beginning of
the development stage) to May 31, 1995
Summary of Accounting Policies F-7
Notes to Financial Statements F-9
Unaudited Interim Financial Statements:
Balance Sheet as of February 28, 1996 F-16
Statements of Operations for the nine months ended February
29, 1996 and February 28, 1995 and cumulative from
inception to February 29, 1996 (unaudited) F-17
Statements of Cash Flows for the nine months ended February
28, 1996 and February 28, 1995 and cumulative from
inception to February 29, 1996 (unaudited) F-18
Notes to Interim Financial Statements F-19
</TABLE>
F - 1
<PAGE> 32
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
Patriot Scientific Corporation
Poway, California
We have audited the accompanying balance sheet of Patriot Scientific
Corporation (a development stage company) as of May 31, 1995 and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the two year period ended May 31, 1995 and for the period from June
10, 1987 (beginning of the development stage) to May 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Patriot Scientific Corporation
as of May 31, 1995, and the results of its operations and its cash flows for
each of the years in the two year period ended May 31, 1995 and for the period
from June 10, 1987 (beginning of the development stage) to May 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, certain amounts previously
capitalized as purchased technology as of May 31, 1994, were adjusted during
the current year. Accordingly, the 1994 financial statements have been
restated.
BDO Seidman, LLP
Denver, Colorado
July 14, 1995
F-2
<PAGE> 33
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
May 31, 1995
- -------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,105,641
Prepaid expenses 62,500
- -------------------------------------------------------------------------------
Total current assets 1,168,141
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net (Note 1) 213,535
PURCHASED TECHNOLOGY, net of accumulated
amortization of $612,333 (Note 2) 1,224,667
OTHER ASSETS 44,843
- -------------------------------------------------------------------------------
$ 2,651,186
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 50,204
Accrued liabilities 6,165
- -------------------------------------------------------------------------------
Total current liabilities 56,369
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 5)
STOCKHOLDERS' EQUITY (Notes 2 and 3):
Common stock $.00001 par value; 40,000,000
shares authorized: issued and outstanding, 27,762,226 278
Additional paid-in capital 8,019,340
Deficit accumulated during the development stage (5,424,801)
- -------------------------------------------------------------------------------
Total stockholders' equity 2,594,817
- -------------------------------------------------------------------------------
$ 2,651,186
===============================================================================
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-3
<PAGE> 34
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Development
Stage
Year Ended May 31, 1995 1994 Cumulative(a)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES -
Interest income $ 86,306 $ 64,196 $ 164,581
- --------------------------------------------------------------------------------------------
EXPENSES:
Research and development 928,107 739,723 2,091,955
Sales and marketing 71,351 53,458 202,629
General and administrative (Note 2) 925,084 2,119,305 3,294,798
- --------------------------------------------------------------------------------------------
Total expenses 1,924,542 2,912,486 5,589,382
- --------------------------------------------------------------------------------------------
Net loss $(1,838,236) $(2,848,290) $(5,424,801)
============================================================================================
NET LOSS PER SHARE OF COMMON STOCK $ (.08) $ (.25)
============================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 22,762,226 11,602,304
============================================================================
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
(a) Cumulative from June 10, 1987 (beginning of the development stage) to May
31, 1995.
F-4
<PAGE> 35
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
Years Ended May 31, 1995 and 1994 and Period from June 10, 1987 (beginning of
the development stage) to May 31, 1995
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Total
----------------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 10, 1987 - $ - $ - $ - $ -
Issuance of common stock
for cash at $.003 per share 1,433,334 14 5,236 - 5,250
Common stock issued for
services at $.30 and $.014
per share 253,290 3 9,277 - 9,280
Issuance of common stock
in public offering for
cash at $.06 per unit,
net of offering costs 833,333 8 20,152 - 20,160
Common stock issued for
technology 5,000,000 50 100 - 150
Contributed capital - - 100,000 - 100,000
Issuance of common stock
in private offering for
cash at $.30 per unit,
net of offering costs 2,629,167 26 768,337 - 768,363
Exercise of warrants at $.30
per share, net of offering
costs (Note 3) 3,721,518 38 1,070,007 - 1,070,045
Net loss - - - (738,275) (738,275)
- --------------------------------------------------------------------------------------------------------------
BALANCE, May 31, 1993 13,870,642 139 1,973,109 (738,275) 1,234,973
Exercise of warrants at $.30
and $.60 per share (Note 3) 3,816,584 38 2,273,832 - 2,273,870
Common stock issued for services
at $.30 per share 75,000 1 22,499 - 22,500
Common stock issued for
technology at $.38 per
share (Note 2) 10,000,000 100 1,874,900 - 1,875,000
Cost of purchased
technology at $.38
per share (Note 2) - - 1,875,000 - 1,875,000
Net loss - - - (2,848,290) (2,848,290)
- --------------------------------------------------------------------------------------------------------------
Balance, May 31, 1994 27,762,226 278 8,019,340 (3,586,565) 4,433,053
Net loss - - - (1,838,236) (1,838,236)
- --------------------------------------------------------------------------------------------------------------
Balance, May 31, 1995 27,762,226 $ 278 $8,019,340 $(5,424,801) $ 2,594,817
==============================================================================================================
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-5
<PAGE> 36
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Development
Stage
Year Ended May 31, 1995 1994 Cumulative(a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,838,236) $(2,848,290) $(5,424,801)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 696,175 36,595 748,656
Common stock issued for services - 22,500 28,930
Stock compensation cost (Note 2) - 1,875,000 1,875,000
Changes in:
Other assets (60,400) (17) (62,417)
Accounts payable 19,058 (8,022) 50,204
Accrued liabilities (38,332) 38,547 6,165
- ------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,221,735) (883,687) (2,778,263)
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (64,265) (150,183) (310,002)
Organization costs paid - - (1,939)
Patent costs paid (41,393) - (44,843)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (105,658) (150,183) (356,784)
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of common stock warrants - 2,273,870 3,343,915
Proceeds from issuance of common stock - - 896,773
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities - 2,273,870 4,240,688
- ------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,327,393) 1,240,000 1,105,641
CASH AND CASH EQUIVALENTS, beginning of year 2,433,034 1,193,034 -
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 1,105,641 $ 2,433,034 $ 1,105,641
======================================================================================================
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
(a) Cumulative from June 10, 1987 (beginning of the development stage) to May
31, 1995.
F-6
<PAGE> 37
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
================================================================================
DEVELOPMENT STAGE COMPANY
Patriot Financial Corporation was incorporated on June 10, 1987. The Company
is engaged in the development of sensing and computer processing technology
("GPR technology") and semiconductor microprocessor technology ("the ShBoom")
and Integrated Services Digital Network ("ISDN") product technology. The
Company is considered to be in the development stage, as it is devoting
substantially all of its efforts to establishing a new business and raising
capital.
The Company's plan of operation for the next twelve months is to complete and
introduce to market the ShBoom, introduce to market an ISDN terminal adapter,
obtain a strategic partner to commercialize the GPR technology and to design
improved versions of the Company's technologies. Management anticipates a base
level of expenditures aggregating approximately $1,000,000 during the next
twelve months plus additional expenditures of $200,000 on existing
technologies. Upon commencement of significant revenues, the Company may
require additional personnel and resources, which currently, are not estimable
by management. Therefore, the Company believes it may require funds from the
sale of products or technology or from other sources within the next twelve
months.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents.
The Company's cash equivalents are placed in high quality money market accounts
with major financial institutions. The investment policy limits the Company's
exposure to concentrations of credit risk. Such deposit accounts at times may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful life of three to five years using the straight line method.
F-7
<PAGE> 38
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
================================================================================
PURCHASED TECHNOLOGY
In accordance with the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 4, "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method", purchased
semiconductor microprocessor technology that is determined to have alternative
future uses is capitalized at cost. Effective June 1, 1994, the Company began
amortizing such technology using the straight-line method over its estimated
useful life of three years (See Notes 2 and 8).
Purchased technology is assessed periodically for impairment. The amount of
impairment, if any, is charged to operations. The Company recovers its
investments in purchased technology based upon net cash flows from future sales
and license agreements.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("FASB No. 109"). Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in
future years.
NET LOSS PER SHARE
Net loss per common share is based on the weighted average number of shares
outstanding during each period presented. Options to purchase stock are
included as common stock equivalents, when dilutive. Outstanding shares of
common stock held in escrow whose release are dependant upon the attainment of
future earnings or other events are not considered outstanding for purposes of
the calculation of net loss per share until such shares are released from
escrow (See Note 2).
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
F-8
<PAGE> 39
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at May 31, 1995:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
Laboratory equipment $ 158,730
Computer equipment and software 155,799
Furniture and fixtures 20,409
Vehicles 13,064
- -------------------------------------------------------------------------------
348,002
Less accumulated depreciation (134,467)
- -------------------------------------------------------------------------------
Net property and equipment $ 213,535
===============================================================================
</TABLE>
Depreciation expense was approximately $83,800 and $36,600 for the years ended
May 31, 1995 and 1994.
2. PURCHASED TECHNOLOGY
SEMICONDUCTOR MICROPROCESSOR TECHNOLOGY
Effective May 31, 1994, the Company acquired certain proprietary semiconductor
microprocessor technology (the "ShBoom Chip") and related computer software
from a corporation in exchange for 10,000,000 restricted shares of the
Company's common stock (5,000,000 of which are in escrow subject to release as
discussed below).
The cost of this technology of $1,875,000 was based upon the estimated current
fair market value of the 5,000,000 non-contingent shares of the Company's
common stock issued under this agreement. The remaining 5,000,000 shares
issued for this technology are subject to an earnout escrow arrangement. As
such, when the escrowed shares are earned, they will be charged to compensation
in a manner similar to a variable stock option plan. The terms of the escrow
arrangement provide for the release from escrow of 500,000 shares for each
$500,000 of revenues earned by the Company during the period from June 1, 1994
through May 31, 1999. Additionally, this agreement also provides for the
release of these shares upon the occurrence of certain defined major corporate
events. Any of the contingent shares not released by May 31, 1999 would be
returned to the Company and canceled.
F-9
<PAGE> 40
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
The terms of the above purchase agreement contain a provision that if rights to
the technology are licensed to certain entities, then the Company may be
required to make certain payments. Such payments, as defined in the agreement,
are based upon up-front license fees received and any royalties for a period of
five years. As of May 31, 1995 no amounts have been paid nor are due.
SENSING AND COMPUTER PROCESSING TECHNOLOGY
Effective August 8, 1989, the Company acquired certain proprietary sensing and
computer processing technology ("GPR technology) from a current director of the
Company, primarily in exchange for 5,000,000 shares of the Company's common
stock. Such shares were subject to an escrow agreement and were releasable to
the director under various specified conditions including the Company's
subsequent merger or business combination with any third party.
As a result of the Company's acquisition of the ShBoom, these 5,000,000 shares
were released to the director and the escrow agreement was terminated.
Effective May 31, 1994, additional cost totalling $1,875,000 of this previously
purchased GPR technology was recorded as compensation expense due to the
release of the 5,000,000 shares. Such cost was based upon the estimated
current fair market value of the Company's common stock.
Additionally, under the terms of the agreement to acquire the GPR technology,
the director is to be paid a royalty equal to 2.5% of all gross revenues
received from the GPR technology, up to a maximum of $400,000. The director
also is to receive a $50,000 bonus upon the successful demonstration of a
working prototype of the technology meeting specified performance criteria. As
of May 31, 1995 no amounts were due under this agreement, however an advance of
$17,000 against the royalty was paid at inception of the agreement. Also see
Note 8.
F-10
<PAGE> 41
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
3. STOCKHOLDERS' EQUITY
COMMON STOCK
During fiscal 1994 the Company issued 75,000 shares of common stock valued at
the discounted estimated fair market value of $.30 per share in exchange for
investment banking services. See Note 2 for additional fiscal 1994 common
stock transactions.
WARRANTS
In connection with certain public and private offerings of common stock and
capital contributions made to the Company, the Company had outstanding a total
of 3,815,803 Class A Warrants. Each Class A Warrant provided the right to
purchase one share of common stock and one Class B Warrant at an exercise price
of $.30. During fiscal 1994 and 1993 a total of 3,775,251 Class A Warrants
were exercised providing net proceeds of $1,086,165. The Class A Warrants
primarily expired May 31, 1993.
In connection with the exercise of the Class A Warrants, 3,775,251 Class B
Warrants were issued. The Company's Class B Warrants provided the right to
purchase one share of common stock at an exercise price of $.60. During fiscal
1994 a total of 3,762,851 Class B Warrants were exercised, providing net
proceeds of $2,257,750. The Class B Warrants expired on September 30, 1993.
1992 INCENTIVE STOCK OPTION PLAN ("ISO")
The Company has an ISO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the Company's common stock. The ISO Plan provides for grants
to either full or part time employees, at the discretion of the Board of
Directors, options to purchase common stock of the Company at a price not less
than the fair market value of the shares on the date of grant. In the case of
a significant stockholder, the option price of the share is not less than 110
percent of the fair market value of the share on the date of grant. Any
options granted under the ISO Plan must be exercised within ten years of the
date they were granted (five years in the case of a significant stockholder).
As of May 31, 1995, there were options outstanding covering 425,000 shares of
common stock at prices ranging from $.50 to $.875 per share expiring in 1997.
F-11
<PAGE> 42
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
1992 NON-STATUTORY STOCK OPTION PLAN ("NSO")
The Company has an NSO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the Company's common stock. The NSO Plan provides for grants
to either full or part time employees, at the discretion of the Board of
Directors, options to purchase common stock of the Company at a price not less
than the fair market value of the shares on the date of grant. Any options
granted under the NSO Plan must be exercised within ten years of the date they
were granted. As of May 31, 1995, there were options outstanding covering
620,000 shares of common stock at prices ranging from $.370 to $.875 per share
expiring beginning 1996 through 1998.
4. INCOME TAXES
As of May 31, 1995 the net deferred tax asset recorded and its approximate tax
effect consists of the following.
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
Net operating loss carryforwards $ 849,000
Purchased technology 208,000
Other 80,000
- -------------------------------------------------------------------------------
1,137,000
Valuation allowance (1,137,000)
- -------------------------------------------------------------------------------
Net deferred tax asset $ -
===============================================================================
</TABLE>
As of May 31, 1995, a valuation allowance equal to the net deferred tax asset
recognized has been recorded, as it was determined that it is more likely than
not that the deferred tax asset will not be realized.
At May 31, 1995 the Company has net operating loss carryforwards of
approximately $2,497,000 which expire through 2010 and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended.
F-12
<PAGE> 43
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
5. COMMITMENT
OPERATING LEASE
The Company leases office and warehouse space under a non-cancelable operating
lease at $3,500 per month through September 1996. Rent expense for the years
ended May 31, 1995 and 1994 was $51,200 and $56,400. As of May 31, 1995 future
minimum lease payments under this operating lease agreement are as follows:
$42,000 in 1996 and $14,000 in 1997.
6. PROFIT-SHARING PLAN
Effective July 1, 1993, the Company adopted a savings and profit-sharing plan
which allows participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. The Company matches contributions
at 20% of the employee's contribution up to 6% of the employee's salary. The
Company contributions are vested 20% per year beginning with the first year of
service. The Company's contributions to the plan were $1,200 and $1,500 in
fiscal 1995 and 1994.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing activities are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Issuance of common stock as a
preferential distribution in
exchange for ShBoom Chip
technology $ - $1,875,000
================================================================================
Additional cost of purchased
GPR technology $ - $1,875,000
================================================================================
Common stock issued for
services $ - $ 22,500
================================================================================
</TABLE>
F-13
<PAGE> 44
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
================================================================================
8. RESTATEMENT OF 1994 FINANCIAL STATEMENTS
Certain amounts previously capitalized as purchased technology as of May 31,
1994, were adjusted during the current year (see Note 2). Accordingly, the
Company restated its 1994 Financial Statements. Purchased technology, total
assets and total stockholders' equity at May 31, 1994 were decreased by
$1,125,000 as adjustments; 1) to expense, as compensation, the additional cost
of the previously purchased and capitalized GPR technology and 2) to capitalize
additional costs for the ShBoom Chip technology due to a revision in the fair
market per share price used for the common stock issued under that agreement.
As a result of this restatement, the 1994 net loss was also increased by
$1,875,000 or $.17 per share.
F-14
<PAGE> 45
PATRIOT SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Interim Financial Statements
February 29, 1996
F-15
<PAGE> 46
PATRIOT SCIENTIFIC CORPORATION
(A Development Stage Company)
BALANCE SHEET
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
February 29,
1996
<S> <C>
Current Assets
Cash and cash equivalents $ 830,289
Inventories 148,426
Prepaid expenses and other 18,281
-----------
996,996
Property and Equipment - net 282,078
Purchased Technology - net 765,417
Other Assets 38,932
-----------
Total Assets $ 2,083,423
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 142,978
Stockholders' Equity
Common stock $.00001 par value; authorized
40,000,000 shares; 29,165,392 shares
issued and outstanding 292
Additional paid-in capital 9,099,376
(Deficit) accumulated during the
development stage (7,159,223)
-----------
1,940,445
-----------
Total Liabilities and Stockholders' Equity $ 2,083,423
===========
</TABLE>
See notes to interim financial statements.
F - 16
<PAGE> 47
PATRIOT SCIENTIFIC CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Inception
Nine Months Ended (June 10, 1987)
February 29, February 28, to February 29,
1996 1995 1996
<S> <C> <C> <C>
Revenues
Interest $ 25,593 $ 67,432 $ 190,174
Expenses
Research and development 725,596 719,598 2,817,551
Sales and marketing 83,539 52,562 286,168
General and administrative 491,630 285,539 3,174,095
Amortization of technology 459,250 459,250 1,071,583
------------ ------------ ------------
1,760,015 1,516,949 7,349,397
------------ ------------ ------------
Net loss $ (1,734,422) $ (1,449,517) $ (7,159,223)
============ ============ ============
Loss per share $ (0.08) $ (0.06)
============ ============
Weighted average number of
common shares outstanding
during the period (Note 5) 23,014,507 22,762,226
============ ============
</TABLE>
See notes to interim financial statements.
F - 17
<PAGE> 48
PATRIOT SCIENTIFIC CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Inception
Nine Months Ended (June 10, 1987)
February 29, February 28, to February 29,
1996 1995 1996
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(1,734,422) $(1,449,517) $(7,159,223)
Adjustments to reconcile net (loss)
to cash used in operating activities:
Amortization and depreciation 567,446 517,393 1,316,102
Common stock issued for services 224,750 - 253,680
Stock compensation cost - - 1,875,000
Loss on sale of equipment 841 - 841
Change in inventories (148,426) - (148,426)
Changes in prepaids and other 44,219 2,075 (18,198)
Changes in accounts payable
and accrued liabilities 86,609 25,673 142,978
----------- ----------- -----------
Net cash used in operating
activities (958,983) (904,376) (3,737,246)
----------- ----------- -----------
Cash Flows from Investing Activities
Purchase of property and equipment (166,769) (55,983) (476,771)
Organization costs paid - - (1,939)
Proceeds on disposal of equipment 400 - 400
Patent costs paid - - (44,843)
----------- ----------- -----------
Net cash used in investing activities (166,369) (55,983) (523,153)
----------- ----------- -----------
Cash Flows Provided by Financing Activities
Proceeds from issuance of common stock
and exercise of warrants 850,000 - 5,090,688
------------ ------------ -----------
Net Increase (Decrease) in Cash (275,352) (960,359) 830,289
Cash and cash equivalents at
beginning of period 1,105,641 2,433,034 -
----------- ----------- -----------
Cash and cash equivalents at
end of period $ 830,289 $ 1,472,675 $ 830,289
=========== =========== ===========
</TABLE>
See notes to interim financial statements.
F - 18
<PAGE> 49
PATRIOT SCIENTIFIC CORPORATION
(A Development Stage Company)
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS
Patriot Scientific Corporation (the "Company"), is a development stage company
engaged in the development of semiconductor microprocessor technology ("ShBoom
Technology"), Integrated Services Digital Network ("ISDN") interface technology
(CyberShark digital modem) and radar and antenna technology ("GPR" technology).
2. STATEMENT PRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. They do not include all information and footnotes required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended May 31, 1995.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the nine month periods are
not necessarily indicative of the results that may be expected for the year.
3. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method. Inventories consisted of raw materials at
February 29, 1996.
4. PURCHASED TECHNOLOGY
Purchased technology at a cost of $1,837,000 relating to the Company's ShBoom
Technology is being amortized over its estimated useful life of three years.
Amortization expense of $459,250 was recorded related to this technology for the
nine months ended February 29, 1996 and February 28, 1995.
5. STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the nine months ended
February 29, 1996:
<TABLE>
<CAPTION>
Common
Shares Dollars
<S> <C> <C>
Balance June 1, 1995 27,762,226 $8,019,618
Common stock issued for services @ $.30 per share 75,000 22,500
Sale of units for cash @ $.50 per unit 700,000 350,000
Common stock issued for services @ $.59 per share 25,000 14,750
Common stock issued for services @ $1.25 per share 150,000 187,500
Exercise of warrants @ $.50 per share 200,000 100,000
Sale of units for cash @ $1.58 per unit 253,166 400,000
Warrants issued for manufacturing line of credit - 5,300
---------- ----------
Balance February 29, 1996 29,165,392 $9,099,668
========== ==========
</TABLE>
A total of 5,000,000 shares of the Company's outstanding common stock was issued
as a contingent cost of the Company's acquisition of its ShBoom Technology and
such shares are subject to an escrow arrangement. The shares are releasable from
escrow at the rate of 500,000 shares for each $500,000 of revenues earned by the
Company and upon the occurrence of certain defined major corporate events. The
shares are issued and outstanding and carry all shareholder rights. Any of the
escrowed shares not released prior to May 31, 1999 are to be returned to the
Company and canceled. These shares are excluded from the calculation of weighted
average number of common shares outstanding for the computation of (loss) per
share until the release conditions are met.
F - 19
<PAGE> 50
PATRIOT SCIENTIFIC CORPORATION
(A Development Stage Company)
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
5. STOCKHOLDERS' EQUITY (Continued)
At February 29, 1996 the Company had 600,000 options outstanding pursuant to its
1992 ISO Stock Option Plan exercisable at prices ranging from $0.50 to $0.875
per share expiring beginning 1997 through 2001. The Company also had 725,000
options outstanding pursuant to its 1992 NSO Stock Option Plan exercisable at
prices ranging from $0.30 to $0.875 per share expiring beginning 1997 through
2002.
In connection with the sale of the units described above, the Company has a
non-transferable warrant outstanding for the purchase of 500,000 common shares
at $.50 per share expiring no later than July 10, 1996 and has warrants
outstanding exercisable into 253,166 common shares at $1.58 per share until
August 31, 1996. The Company also has warrants outstanding exercisable into
25,000 common shares at $1.58 per share until August 31, 1996 issued in
connection with a $250,000 manufacturing line of credit, such shares valued at
$5,300 on issuance. At February 29, 1996 there were no amounts outstanding under
this line of credit which is effective commencing May 1, 1996.
As of October 1, 1995 the Board of Directors adopted the 1995 Employee Stock
Compensation Plan providing for the issuance of up to 250,000 common shares to
Employees, as defined. Executive officers and directors are not eligible under
the Plan. Through February 29, 1996 the Company had issued 175,000 common shares
pursuant to the plan recording compensation and consulting expense of $224,750.
F - 20
<PAGE> 51
No dealer, salesman or other person has been authorized to give any
information or make any representations other than those contained in this
Prospectus, and information or representations not herein contained, if given or
made, must not be relied upon as having been authorized by the Company or the
Selling Shareholders. This Prospectus speaks only as of its date, and neither
the delivery of this Prospectus, any amendment or supplement thereto nor any
sale made thereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company in their ordinary course,
since the date as of which information is furnished. Any material change in the
Company's business affairs must be disclosed in an amendment or supplement to
this Prospectus. This Prospectus does not constitute an offering or solicitation
in any jurisdiction in which such offering or solicitation may not lawfully be
made.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Information ................................................... ii
Prospectus Summary ....................................................... 1
Risk Factors ............................................................. 1
Glossary of Technical Terms .............................................. 5
Plan of Distribution ..................................................... 7
Selling Shareholders ..................................................... 7
The Company .............................................................. 8
Business ................................................................. 10
Litigation ............................................................... 19
Management's Discussion and Analysis ..................................... 19
Management ............................................................... 21
Certain Transactions ..................................................... 24
Principal Shareholders ................................................... 25
Trading Market and Related Matters ....................................... 26
Description of Securities ................................................ 26
Legal Matters ............................................................ 27
Experts .................................................................. 27
Index to Financial Statements ............................................ F-1
</TABLE>
UNTIL , 1996 ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PATRIOT SCIENTIFIC
CORPORATION
PROSPECTUS
975,000 COMMON SHARES
offered by
SELLING SHAREHOLDERS
March ___, 1996
<PAGE> 52
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to the Company's Certificate of Incorporation, and as permitted
by Section 145 of the General Corporation Law of Delaware, the Company may
indemnify its directors and officers under certain circumstances against
reasonable expenses (including court costs and attorney's fees), judgments,
penalties, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which any of them is a party by
reason of his being a director, officer, employee, or agent of the Company if it
is determined that he acted in accordance with the applicable standard of
conduct set forth in such statutory provisions. Thus, the indemnification
provisions will protect officers and directors from liability only if the
officer or director meets the applicable standard of conduct and the Company has
the financial ability to honor the indemnity.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable in connection with the registration and distribution of
the securities being registered hereunder, all of which will be borne by the
Registrant, are as follows:
<TABLE>
<S> <C>
Registration Fee - Securities and Exchange Commission .......... 777
Printing and Engraving ......................................... 1,000*
Legal Fees and Expenses ........................................ 10,000*
Accounting Fees ................................................ 3,000*
Blue Sky Fees and Expenses ..................................... 5,000*
-------
Total ........................................................ $19,777
</TABLE>
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information with respect to all common
stock, $.00001 par value, of the Registrant sold by it within the three-year
period preceeding the date of this Registration Statement:
(a) The Registrant offered and sold the following described securities,
either for cash or in consideration of services rendered as below indicated,
without registration under the Securities Act of 1933, as amended, and exemption
for such sales from registration under that Act is claimed in reliance upon the
exemption provided by Section 4(2) thereof on the basis that such offers and
sales were transactions not involving any public offering. Appropriate
precautions against transfer have been taken, including the placing of a
restrictive legend on all certificates evidencing such securities. All such
sales were effected without the aid of underwriters, and no sales commissions
were paid.
<TABLE>
<CAPTION>
Aggregate Purchase
Date of Number of Purchase Price
Sale Common Shares Price Per Share
-------- ------------- --------- ---------------
<S> <C> <C> <C> <C>
7/16/93 75,000 $ 50,000 $.001 Services
9/12/95 75,000 22,500 .30 Services
11/30/95 500,000 (1) 250,000 .50 Cash
1/10/96 200,000 (1) 100,000 .50 Cash
2/29/96 200,000 100,000 .50 Cash
</TABLE>
(1) Sold as units at $.50 per unit, each consisting of one share of common
stock and one warrant to purchase an additional share of common stock at
price of $.50 per share.
(b) Effective May 31, 1994, the Registrant acquired certain intellectual
property and other assets from nanoTronics Corporation, for which the Registrant
issued an aggregate of 10,000,000 shares of its common stock, valued at $.375
per share, to nanoTronics Corporation in payment for those assets. Such shares
were issued without registration under the Securities Act of 1933, as amended,
on the ground that such transactions did not involve any public offering.
Appropriate precautions against transfer have been taken, including the placing
of a restrictive legend on all certificates evidencing such securities. Such
shares were issued without the aid of underwriters, and no sales commissions
were paid.
(c) The Registrant on February 29, 1996 offered and sold for cash an
aggregate of 253,166 shares of common stock at a price of $1.58 per share to a
limited number of investors (all of whom but one already were shareholders of
the
II-1
<PAGE> 53
Registrant), plus a like number of warrants to purchase an additional 253,166
common shares at a price of $1.58 until August 31, 1996. These securities were
offered and sold without registration under the Securities Act of 1933, as
amended, and exemption for such sales from registration under that Act is
claimed in reliance upon the exemption provided by Rule 903 of Regulation S
thereunder on the basis that such offers and sales were made in offshore
transactions to persons who were not "U.S. Persons" as defined in Rule 902 of
Regulation S. Appropriate precautions were taken against transfer into the
United States or to any "U.S. Person" during the applicable restricted period,
including the placing of a restrictive legend on all certificates issued. All
such sales were effected without the aid of underwriters, and no sales
commissions were paid.
ITEM 27. EXHIBITS.
The Exhibits to this Registration Statement are listed in the Exhibit
Index commencing at page EX-1 hereof.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information in this Registration
Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this registration, or any material
change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment to
this Registration Statement any of the securities being registered which remain
unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the General Corporation Law of Delaware, the Certificate
of Incorporation, or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in such Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or person controlling the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or person controlling the Registrant in connection with any
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
II-2
<PAGE> 54
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and has duly caused this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Poway, State of California, on the date below.
DATED: March 18, 1996 PATRIOT SCIENTIFIC CORPORATION
By ELWOOD G. NORRIS
----------------
Elwood G. Norris, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
ELWOOD G. NORRIS President, Director, Chief Executive 03/18/96
---------------- Officer, Chairman of the Board
Elwood G. Norris
ROBERT PUTNAM Director, Treasurer, Secretary 03/18/96
------------- Principal Financial Officer and
Robert Putnam Principal Accounting Officer
DONALD BERNIER Director 03/18/96
--------------
Donald Bernier
PETER vR. COOPER Director 03/18/96
----------------
Peter vR. Cooper
RICHARD D. MCDANIEL Director 03/18/96
-------------------
Richard D. McDaniel
</TABLE>
II-3
<PAGE> 55
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under The Securities Act of 1933
EXHIBITS
PATRIOT SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
<PAGE> 56
EXHIBIT INDEX
PATRIOT SCIENTIFIC CORPORATION
The following exhibits are included as part of this registration
statement, except those exhibits marked (1), which have previously been filed
with the Securities and Exchange Commission and are incorporated by reference to
another registration statement, report or document. References to the "Company"
in this Exhibit Index mean PATRIOT SCIENTIFIC CORPORATION, a Delaware
corporation.
<TABLE>
<CAPTION>
Exh.No. Document No.
- ------- ---------------------------------------------------------------------- -----
<S> <C> <C>
2.0 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION.
2.1 Agreement to Exchange Technology for Stock in Patriot Scientific
Corporation, incorporated by reference to Exhibit 2.1 to Form 8-K
dated August 10, 1989 ................................................ (1)
2.2 Assets Purchase Agreement and Plan of Reorganization dated
June 22, 1994, among the Company, nanoTronics Corporation
and Helmut Falk, incorporated by reference to Exhibit 10.4
to Form 8-K dated July 6, 1994 ....................................... (1)
3.0 ARTICLES AND BYLAWS.
3.1 Original Articles of Incorporation of the Company's predecessor,
Patriot Financial Corporation, incorporated by reference to
Exhibit 3.1 to registration statement on Form S-18, file no.
33-23143-FW........................................................... (1)
3.2 Articles of Amendment of Patriot Financial Corporation, as filed
with the Colorado Secretary of State on July 21, 1988, incorporated
by reference to Exhibit 3.2 to registration statement on Form S-18,
File No. 33-23143-FW ................................................. (1)
3.3 Certificate of Incorporation of the Company, as filed with the
Delaware Secretary of State on March 24, 1992, incorporated by
reference to Exhibit 3.1 to Form 8-K dated May 12, 1992 .............. (1)
3.3.1 Certificate of Amendment to the Certificate of Incorporation of
the Company, as filed with the Delaware Secretary of State on
April 18, 1995, incorporated by reference to Exhibit 3.3.1
to Form 10-KSB for the fiscal year ended May 31, 1995 ................ (1)
3.4 Articles and Certificate of Merger of Patriot Financial
Corporation into the Company dated May 1, 1992, with Agreement
and Plan of Merger attached thereto as Exhibit A, incorporated
by reference to Exhibit 3.2 to Form 8-K dated May 12, 1992............ (1)
3.5 Certificate of Merger issued by the Delaware Secretary of State on
May 8, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K
dated May 12, 1992 ................................................... (1)
3.6 Certificate of Merger issued by the Colorado Secretary of State on
May 12, 1992, incorporated by reference to Exhibit 3.4 to Form 8-K
dated May 12, 1992 ................................................... (1)
3.7 Bylaws of the Company, incorporated by reference to Exhibit 3.5 to
Form 8-K dated May 12, 1992 .......................................... (1)
</TABLE>
EX-2
<PAGE> 57
<TABLE>
<S> <C> <C>
4.0 INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.
4.1 Specimen common stock certificate, incorporated by reference to
Exhibit 4.1 Form 8-K dated May 12, 1992 .............................. (1)
4.2 Form of Stock Purchase Warrant (Labway Corporation) dated
February 29, 1996, exercisable to purchase 253,166 common
shares at $1.58 per share until August 31, 1996, granted
to investors in connection with an offering of securities
made in reliance upon Regulation S, incorporated by reference
to Exhibit 4.2 to Form 10-QSB for fiscal quarter ended 2/29/96 ....... (1)
5.0 OPINION RE LEGALITY.
5.1 Legal opinion of Brasher & Company, Attorneys at Law ................. (2)
10.0 MATERIAL CONTRACTS.
10.1 1992 Incentive Stock Option Plan of the Company, incorporated
by reference to Exhibit 10.1 to Form 8-K dated May 12, 1992 .......... (1)
10.2 1992 Non-Statutory Stock Option Plan of the Company,
incorporated by reference to Exhibit 10.2 to Form 8-K
dated May 12, 1992 ................................................... (1)
10.3 Lease Agreement between the Company and Pomerado Properties
dated November 8, 1993, incorporated by reference to Exhibit 10.4
to Form 10-KSB for the fiscal year ended May 31, 1994 ................ (1)
10.4 Stock Purchase Agreement dated November 29 and 30, 1995,
between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4 to Form 8-K dated December 11, 1995 .................. (1)
10.4.1 Letter Amendment to Stock Purchase Agreement dated February 21,
1996, between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended 2/29/96 .... (1)
10.5 1995 Employee Stock Compensation Plan of the Company,
incorporated by reference to Exhibit 10.5 to Form 10-QSB
for fiscal quarter ended 11/30/95 .................................... (1)
10.6 Letter Stock and Warrant Agreement dated January 10, 1996
between the Company and Robert E. Crawford, Jr., incorporated
by reference to Exhibit 10.6 to Form 10-QSB for fiscal quarter
ended 2/29/96 ........................................................ (1)
10.7 Non-Exclusive Manufacturing and Line of Credit Agreement dated
February 28, 1996, between the Company and Labway Corporation,
incorporated by reference to Exhibit 10.7 to Form 10-QSB for
fiscal quarter ended 2/29/96 ......................................... (1)
10.8 Distribution and Representation Agreement dated February 28,
1996, between the Company and Innoware, Inc., incorporated by
reference to Form 10-QSB for fiscal quarter ended 2/29/96 ............ (1)
10.9 Employment Agreement dated November 20, 1995 between the
Company and Elwood G. Norris ......................................... (2)
10.10 Employment Agreement dated November 20, 1995 between the
Company and Robert Putnam ............................................ (2)
</TABLE>
EX-3
<PAGE> 58
<TABLE>
<S> <C> <C>
23.0 CONSENTS OF EXPERTS AND COUNSEL.
23.1 Consent of Brasher & Company, Attorneys at Law (included in Exhibit 5.1)
23.2 Consent of BDO Seidman, LLP .............................................. (2)
99.0 ADDITIONAL EXHIBITS.
99.1 Form of ISO Plan Option (Gaspar) dated May 29, 1992,
incorporated by reference to Exhibit 28.2 to registration
statement on Form SB-2, file no. 33-57858 ................................ (1)
99.2 Form of NSO Plan Option (Berlin) dated May 29, 1992,
incorporated by reference to Exhibit 28.3 to registration
statement on Form SB-2, file no. 33-57858 ................................ (1)
</TABLE>
(2) Exhibit Filed Herewith
EX-4
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
EXHIBIT 5.1
Legal opinion of Brasher & Company, Attorneys at Law
<PAGE> 2
[BRASHER & COMPANY Letterhead]
March 12, 1996
Board of Directors
PATRIOT SCIENTIFIC CORPORATION
12875 Brookprinter Place, Suite 300
Poway, California 92064
Re: Registration Statement on Form SB-2
975,000 Shares of Common Stock for Selling Shareholders
Gentlemen:
We have acted as counsel to Patriot Scientific Corporation, a Delaware
corporation ("Company"), in connection with the preparation and filing with the
U.S. Securities and Exchange Commission ("Commission") under the Securities Act
of 1933, as amended ("Act"), of the Company's registration statement on Form
SB-2 (together with all exhibits, supplements and amendments, the "Registration
Statement"). The Registration Statement relates to the registration under the
Act of 975,000 shares of the Company's common stock, $.00001 par value ("Common
Stock"), which may be sold from time to time by certain shareholders of the
Company, as described in the Registration Statement.
In connection with the opinions herein expressed, we have reviewed the
Registration Statement and included prospectus, and have examined and relied
upon, as to factual matters, originals or certified or photostatic copies of
such corporate records, including, without limitation, minutes of the Board of
Directors and other instruments, certificates of corporate officers and such
other documents as we have deemed necessary or appropriate for the opinions
expressed herein. In making such examinations, we have assumed the genuineness
of all signatures, the legal capacity of natural persons, the authenticity of
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified or photostatic copies, and the
authenticity of originals of such photostatic copies.
We have examined and relied upon, as to matters of law, such statutes,
rules and judicial precedents and such other considerations of law as we, in
our judgment, have deemed necessary or appropriate for the purposes of
rendering the opinions expressed herein. For the purpose of this opinion, we
have expressly assumed that shares covered by the Registration Statement will
be sold in the manner contemplated in the Registration Statement.
<PAGE> 3
Board of Directors Brasher & Company
PATRIOT SCIENTIFIC CORPORATION
March 12, 1996
Page 2 of 2
Based upon and in reliance upon the foregoing, and subject to the
qualifications and limitations herein set forth, we are of the opinion that the
shares of Common Stock covered by the Registration Statement have been legally
issued and are fully paid and nonassessable.
This opinion is limited to the laws of the United States of America
and the General Corporation Law of Delaware, and we express no opinion with
respect to the laws of any other jurisdiction.
We consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and to all references made to our firm in
the Registration Statement. However, in rendering this opinion, we do not
hereby admit that we are acting within the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Commission under the Act.
This opinion is being delivered and is intended for use solely in
regard to the transactions contemplated by the Registration Statement and may
not be used, circulated, quoted in whole or in part or otherwise referred to
for any purpose without our prior written consent and may not be relied upon by
any person or entity other than the Company, its successors and assigns. This
opinion is based upon our knowledge of law and facts as of its date. We assume
no duty to communicate to you with respect to any matter which comes to our
attention hereafter.
Yours very truly,
/s/ John D. Brasher Jr.
John D. Brasher Jr.
For the Firm
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
EXHIBIT 10.9
Employment Agreement dated November 20, 1995 between the Company and
Elwood G. Norris
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 20th day of November, 1995, between
PATRIOT SCIENTIFIC CORPORATION, a Delaware publicly traded corporation (the
"Company"), and Elwood G. Norris ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employees future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this agreement until November 19, 1998, and said employment shall continue after
such date until either party shall deliver written notice to the other party
hereto to the effect that the employment hereunder shall terminate thirty (30)
days from the giving of such notice. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee.
2. Services to be Rendered by Employee. Employee shall be subject to the
direction of the Board of Directors, or a duly authorized committee thereof and
his duties shall be those generally vested in the office of Chairman and Chief
Technology Officer for the corporation and he shall have such other powers and
duties as may be reasonably prescribed by the Board of Directors, or a duly
authorized committee thereof, and shall perform such duties as from time to time
may be decided upon by the Board of Directors, or a duly authorized committee
thereof, of the Company, including but not limited to, speaking for and
promoting the sale of the Company's product lines as public spokesman both in
print and television ads. The Board of Directors has previously appointed
Employee President and CEO until the Board of Directors appoints a full-time
successor. Employee shall devote a sufficient amount of his productive time,
energy and ability during the term of this Agreement to the proper and efficient
conduct of the Company's business during the term of this Agreement however the
Employee shall be only required to devote part time and attention to the
Company's business as heretofore provided but in any event not to exceed the
average hours previously provided unless otherwise agreed by the parties.
Employee shall at all times faithfully, industriously, and to the best of his
ability, experience and talent, perform the duties that may be reasonably
required to the reasonable satisfaction of the Board of Directors. Such duties
shall be rendered at such times and at such places as the Employee shall in good
faith determine is in the interest, needs, business, and opportunities of the
Company with periodic input and direction and consultation from the Board of
Directors.
As is the present case, Employee may from time to time work for other persons or
entities in any capacity, including but not limited to an officer, director,
employee or consultant, and conduct other business activities so long as such
work or activities do not adversely and directly impact on his duties and
obligations to the Company as has been reasonably performed in the past. The
Company acknowledges that Employee is an officer and director of Norris
Communications Corp. and American Technology Corporation and has duties thereto.
3. Compensation.
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a yearly original Base Salary of sixty
thousand dollars ($60,000.00); and thereafter the yearly Base Salary shall
increase by five percent (5%) on each annual Company fiscal anniversary date,
commencing June 1, 1996, from the yearly Base Salary for the immediately
preceding fiscal period. At such time as the Board of Directors appoints a
successor President and CEO the original Base Salary shall be adjusted to forty
two thousand dollars ($42,000), adjusting for any 5% increases on this original
Base Salary to the time of adjustment. The Base Salary shall be payable in equal
installments at such times as other employees are paid but in any case at least
in monthly installments. The Base Salary shall be subject to other upward
adjustment by and under the direction of the Board of Directors in its sole
discretion.
(b) Employee shall be entitled to participate in any bonus pool or similar
program established by the Board of Directors.
(c) Employee shall be entitled to participate in group life, medical, disability
and other plans or benefits, if any, maintained by the Company for its executive
employees. During the term of this Agreement, the Employee shall be entitled to
four weeks vacation per annum.
(d) The Company shall pay or reimburse Employee for all expenses normal
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations and the like
upon submission by him of vouchers or an itemized list thereof as the Board of
Directors; may from time to time adopt and authorize, and as say be required in
order to permit such payments as proper deductions to the Company under the
Internal Revenue Code of 1986 and the rules and regulations adopted pursuant
thereto now or hereafter in effect.
4. Competition. While employed by the Company and for one (1) year thereafter,
Employee will neither permit his name to be used by, nor engage in or carry on,
directly or indirectly, either for himself or as a member of a partnership, or
as a stockholder (except as a stockholder of less than one percent (1%) of the
issued and outstanding stock of a publicly held
1
<PAGE> 3
corporation), investor, officer or director of a corporation or as an Employee,
agent, associate or consultant of any person, partnership or corporation in any
business in direct competition with any business carried on by the Company or a
parent, subsidiary, affiliate or successor of the Company.
5. Termination of Employment.
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) If the Board of Directors of the Company, or a duly authorized
committee thereof, acting in good faith and upon reasonable grounds,
determines that the Employee has materially breached any provision of
this Agreement or has committed dishonesty, fraud or embezzlement, or
engaged in material misconduct or similar conduct in connection with
his duties under this Agreement.
(2) If the Company gives Employee thirty days advance written notice of
termination of employment.
(3) If the Employee dies (in which case except as otherwise provided
herein, this Agreement shall automatically terminate).
(4) If the Employee is unable for any reason to carry out or to perform
the duties required of him hereunder and does not resume his duties
prior to the termination date specified in the Company's written notice
of termination; provided, however, if the Employee shall fail to carry
out or to perform the duties required of him because of mental or
physical disability for a six consecutive month period during the term
hereof and following such period he is unable to perform his duties
hereunder because of mental or physical disability, as determined by
the Board of Directors of the Company, or a duly authorized committee
thereof, acting in good faith and upon reasonable grounds, or if this
Agreement is terminated because of the Employee's death he or his
estate shall be entitle to receive his then Base Salary he would
otherwise be entitled to hereunder during the term of this Agreement
pursuant to Paragraph 3 hereof for a period of not longer than twelve
(12) months after the termination of his employment pursuant to this
Paragraph 5(a) (4) or for a period not longer than twelve (12) months
after such death.
(5) If this Agreement is terminated by the Company and the Employee's
employment is terminated by the Company pursuant to Paragraph 5(a)(2)
hereof, then Employee shall be entitled to severance payments equal to
twenty four (24) months of his then monthly Base Salary payable in one
lump sum within thirty (30) days after such effective termination of
Employee's employment by the Company irrespective of the remaining term
of this agreement.
(b) The Employee shall have the right at his sole option to terminate employment
hereunder under the following conditions:
(1) at any time upon thirty (30) days written notice.
(2) upon written notice by Employee to the Company within thirty (30)
days of and indicating that a change in control of the Company has
occurred and therefore Employee elects to terminate as provided herein.
A change in control of the Company shall mean a change in control of a
nature that would be required to be reported in response to Item 5(f)
of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); provided that ,
without limitation, such a change in control shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing 25% or more of the combined
voting power of the Company's then outstanding securities; or (ii)
during any period of two (2) consecutive years from the date of this
Agreement, individuals who at the beginning of such period constitute
the Board of Directors of the Company cease for any reason to
constitute at least a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
(3) if termination by the Employee is pursuant to 5 (b) (1) then no
severance or termination payments shall be payable. If termination is
noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to
the same payments in the same manner provided in 5 (a) (5) described
above. In addition, the Employee shall be entitled to recover legal
fees and costs incurred by Employee should the Company not make timely
payment prescribed by this section and should the Employee prevail in
any action filed thereabout.
6. Soliciting Customers. The Employee agrees that he will not for a period of
one (1) year immediately following the termination of his employment with the
Company, either directly or indirectly make known to any competing person, firm,
or corporation the names or addresses of any of the customers of the Company or
any other information pertaining to them.
2
<PAGE> 4
7. Trade Secrets of the Company. The Employee prior to and during the term of
employment under this Agreement has had and will have access to and become
acquainted with various trade secrets, consisting of devices, secret inventions,
processes, and compilations of information, records, and specifications which
are owned by the Company, and which are regularly used or to be used in the
operation of the business of the Company. The Employee shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them in any way,
either during the term of this agreement or at any time thereafter, except as
required in the course of his employment. All files, records, documents,
drawings, specifications, equipment, and similar items relating to the business
of the Company, whether prepared by the Employee or otherwise coming into his
possession, shall remain the exclusive property of the Company and shall not be
removed under any circumstances from the premises of the Company where the work
is being carried on without prior written consent of the Company or consistent
with the Company's normal business practices.
8. Inventions and Patents. The Employee agrees that as to any inventions made by
him during the term of his employment, solely or jointly with others, which are
made using trade secret information of the Company or which relate at the time
of the conception or reduction-to-practice of an invention to the business of
the Company (which shall be limited to ISDN interface products, antenna and
radar technologies and embedded microprocessor technology as currently practiced
by the Company) or the Company's actual or demonstrably anticipated research or
development as promulgated by the Board of Directors prior to any invention
thereof, or which result from any work performed by the Employee directly for
the Company at the Board of Directors direction, shall belong to the Company and
the Employee promises to assign such inventions to the Company. The Employee
also agrees that the Company shall have the right to keep such inventions as
trade secrets, if the Company chooses. The Employee agrees to assign to the
Company the Employee's rights in any such inventions where the Company is
required to grant those rights to the United States government or any agency
thereof. This Agreement does not apply to any inventions which are the subject
of Section 2870 of the California Labor Code.
The Employee shall assist the Company in obtaining such patents on all
inventions described above, and designs, improvements, and discoveries deemed
patentable by the Company in the United States and in all foreign countries, and
shall execute all documents and do all things necessary to obtain letters
patent, to vest the Company with full and extensive title thereto, and to
protect the same against infringement by others.
Employee has been an inventor for more than 30 years for his own account and for
a variety of entities. Nothing in this Agreement is intended to restrict
Employees outside activities as an inventor other than as prescribed in this
section. Accordingly, unless an invention made by Employee relates to ISDN
interface products, antenna and radar technologies or embedded microprocessor
technology, the presumption shall be that any such invention is not owned by the
Company without the written consent of Employee and the burden of proofing the
invention is owned by the Company shall be that of the Company.
9. Severability. Each paragraph and subparagraph of this Agreement shall be
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
10. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
11. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid:
(a) If to Employee, addressed to him at the following address as may be changed
in writing from time to time:
Elwood G. Norris
13824 San Sebastian Way
Poway, California 92064
(b) If to the Company, addressed to:
Patriot Scientific Corporation
12875 Brookprinter Place, #300
Poway, California 92064
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
12, Title and Headings. Titles and headings to paragraphs hereof are for
purposes of references only and shall in no way limit, define or otherwise
affect the provisions hereof.
13. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
3
<PAGE> 5
14. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
15. Cumulative Rights. Each and all of the various rights, powers and remedies
of the Company in this Agreement shall be considered as cumulative, with and in
addition to any other rights, powers or remedies of the Company and no one of
them as exclusive of the others or as exclusive of any other rights, powers and
remedies allowed by law. The exercise or partial exercise of any right, power or
remedy shall neither constitute the election thereof nor the waiver of any other
right, power or remedy. Sections 4, 6, 7 and 8 hereof shall continue in full
force and effect notwithstanding the Employee's termination of employment and
the termination of this Agreement.
16. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
17. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
ROBERT PUTNAM November 20, 1995
- --------------------------- -----------------
Robert Putnam, Secretary Date
ELWOOD G. NORRIS November 20, 1995
- --------------------------- -----------------
Elwood G. Norris, Employee Date
4
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
EXHIBIT 10.10
Employment Agreement dated November 20, 1995 between the Company and
Robert Putnam
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 20th day of November, 1995, between
PATRIOT SCIENTIFIC CORPORATION, a Delaware publicly traded corporation (the
"Company"), and Robert Putnam ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employees future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this agreement until November 19, 1998, and said employment shall continue after
such date until either party shall deliver written notice to the other party
hereto to the effect that the employment hereunder shall terminate thirty (30)
days from the giving of such notice. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee.
2. Services to be Rendered by Employee. Employee shall, subject to and pursuant
to the orders and directions of Company, perform the duties of Secretary and
Treasurer of the Company and/or such other management duties on behalf of the
Company and its subsidiaries and affiliates, as may be assigned to him from time
to time by the Company in substitution for the aforementioned duties and which
are the same as or similar to his duties as presently conducted. Employee shall
devote a sufficient amount of his productive time, energy and ability during the
term of this Agreement to the proper and efficient conduct of the Company's
business during the term of this Agreement however the Employee shall be only
required to devote part time and attention to the Company's business as
heretofore provided but in any event not to exceed 10 hours per week unless
otherwise agreed by the parties.
Employee shall at all times faithfully, industriously, and to the best of his
ability, experience and talent, perform the duties that may be reasonably
required to the reasonable satisfaction of the Company. Such duties shall be
rendered at such times and at such places as the Company shall in good faith
determine is in the interest, needs, business, and opportunities of the Company.
As is the present case, Employee may from time to time work for other persons or
entities in any capacity, including but not limited to an officer, director,
employee or consultant, and conduct other business activities so long as such
work or activities do not adversely and directly impact on his duties and
obligations to the Company as has been reasonably performed in the past. The
Company acknowledges that Employee is an officer and director of Norris
Communications Corp. and American Technology Corporation and has duties thereto.
3. Compensation.
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a yearly original Base Salary of twenty
six thousand dollars ($26,000.00); and thereafter the yearly Base Salary shall
increase by five percent (5%) on each Company's fiscal anniversary date,
commencing June 1, 1996, from the yearly Base Salary for the immediately
preceding fiscal period. The Base Salary shall be payable in equal installments
at such times as other employees are paid but in any case at least in monthly
installments. The Base Salary shall be subject to other upward adjustment by and
under the direction of the Board of Directors in its sole discretion.
(b) Employee shall be entitled to participate in any bonus pool or similar
program established by the Board of Directors.
(c) Employee shall be entitled to participate in group life, medical, disability
and other plans or benefits, if any, maintained by the Company for its executive
employees. During the term of this Agreement, the Employee shall be entitled to
four weeks vacation per annum.
(d) The Company shall pay or reimburse Employee for all expenses normal
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations and the like
upon submission by him of vouchers or an itemized list thereof as the Board of
Directors; may from time to time adopt and authorize, and as say be required in
order to permit such payments as proper deductions to the Company under the
Internal Revenue Code of 1986 and the rules and regulations adopted pursuant
thereto now or hereafter in effect.
4. Termination of Employment.
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) If the Board of Directors of the Company, or a duly authorized
committee thereof, acting in good faith and upon reasonable grounds,
determines that the Employee has materially breached any provision of
this Agreement or has committed dishonesty, fraud or embezzlement, or
engaged in material misconduct or similar conduct in connection with
his duties under this Agreement.
1
<PAGE> 3
(2) If the Company gives Employee thirty days advance written notice of
termination of employment.
(3) If the Employee dies (in which case except as otherwise provided
herein, this Agreement shall automatically terminate).
(4) If the Employee is unable for any reason to carry out or to perform
the duties required of him hereunder and does not resume his duties
prior to the termination date specified in the Company's written notice
of termination; provided, however, if the Employee shall fail to carry
out or to perform the duties required of him because of mental or
physical disability for a six consecutive month period during the term
hereof and following such period he is unable to perform his duties
hereunder because of mental or physical disability, as determined by
the Board of Directors of the Company, or a duly authorized committee
thereof, acting in good faith and upon reasonable grounds, or if this
Agreement is terminated because of the Employee's death he or his
estate shall be entitle to receive his then Base Salary he would
otherwise be entitled to hereunder during the term of this Agreement
pursuant to Paragraph 3 hereof for a period of not longer than twelve
(12) months after the termination of his employment pursuant to this
Paragraph 4(a) (4) or for a period not longer than twelve (12) months
after such death.
(5) If this Agreement is terminated by the Company and the Employee's
employment is terminated by the Company pursuant to Paragraph 4(a)(2)
hereof, then Employee shall be entitled to severance payments equal to
twenty four (24) months of his then monthly Base Salary payable in one
lump sum within thirty (30) days after such effective termination of
Employee's employment by the Company irrespective of the remaining term
of this agreement.
(b) The Employee shall have the right at his sole option to terminate employment
hereunder under the following conditions:
(1) at any time upon thirty (30) days written notice.
(2) upon written notice by Employee to the Company within thirty (30)
days of and indicating that a change in control of the Company has
occurred and therefore Employee elects to terminate as provided herein.
A change in control of the Company shall mean a change in control of a
nature that would be required to be reported in response to Item 5(f)
of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); provided that ,
without limitation, such a change in control shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing 25% or more of the combined
voting power of the Company's then outstanding securities; or (ii)
during any period of two (2) consecutive years from the date of this
Agreement, individuals who at the beginning of such period constitute
the Board of Directors of the Company cease for any reason to
constitute at least a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
(3) if termination by the Employee is pursuant to 4 (b) (1) then no
severance or termination payments shall be payable. If termination is
noticed pursuant to 4 (b) (2) hereof then Employee shall be entitled to
the same payments in the same manner provided in 4 (a) (5) described
above. In addition, the Employee shall be entitled to recover legal
fees and costs incurred by Employee should the Company not make timely
payment prescribed by this section and should the Employee prevail in
any action filed thereabout.
5. Trade Secrets of the Company. The Employee prior to and during the term of
employment under this Agreement has had and will have access to and become
acquainted with various trade secrets, consisting of devices, secret inventions,
processes, and compilations of information, records, and specifications which
are owned by the Company, and which are regularly used or to be used in the
operation of the business of the Company. The Employee shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them in any way,
either during the term of this agreement or at any time thereafter, except as
required in the course of his employment. All files, records, documents,
drawings, specifications, equipment, and similar items relating to the business
of the Company, whether prepared by the Employee or otherwise coming into his
possession, shall remain the exclusive property of the Company and shall not be
removed under any circumstances from the premises of the Company where the work
is being carried on without prior written consent of the Company or consistent
with the Company's normal business practices.
6. Stock Options. The stock option agreements between the Company and Employee
aggregating exercise into 100,000 common shares that are presently in force
shall remain in full force and effect in accordance with their respective terms
and without any further change or modification during the term of this agreement
and for two years after any termination by the Employer (such period to be an
advisory period) during which period the options will still remain exercisable.
In addition the Company agrees that if it should cause the registration of any
stock options of any other senior officers that it will include the shares of
Employee, not previously the subject of a current registration statement, with
any such registration on
2
<PAGE> 4
a prorata basis at no cost to Employee. Further, in the event of any corporate
event affecting stock options, the options of Employee will be treated
equivalently with those of any senior officers of the Company.
7. Severability. Each paragraph and subparagraph of this Agreement shall be
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
8. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
9. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid:
(a) If to Employee, addressed to him at the following address as may be changed
in writing from time to time:
Robert Putnam
14238 Bounty Way
Poway, California 92064
(b) If to the Company, addressed to:
Patriot Scientific Corporation
12875 Brookprinter Place, #300
Poway, California 92064
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
10, Title and Headings. Titles and headings to paragraphs hereof are for
purposes of references only and shall in no way limit, define or otherwise
affect the provisions hereof.
11. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
12. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
13. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
14. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
ELWOOD G. NORRIS November 20, 1995
- ----------------------------------- -----------------
Elwood G. Norris, President and CEO Date
ROBERT PUTNAM November 20, 1995
- ----------------------------------- -----------------
Robert Putnam, Employee Date
3
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
EXHIBIT 23.2
Consent of BDO Seidman, LLP
<PAGE> 2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
Poway, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated July 14, 1995, relating to the
financial statements of Patriot Scientific Corporation, which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Denver, Colorado
March 13, 1996
