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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED MAY 31, 1996
Commission File Number 0-22182
PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)
Delaware 84-1070278
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
12875 Brookprinter Place, #300, Poway, California 92064
(Address of principal executive offices) (Zip Code)
(619) 679-4428
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.00001 par value
(Title of Class)
Check whether the issuer (1 ) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES_X_ NO___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. None
The aggregate market value of the voting stock held by non-affiliates of the
registrant on August 9, 1996 (assuming for this purpose that only directors and
officers of the registrant are affiliates of the registrant) was $58,743,753
based on a closing bid price of $2.44 as reported on the OTC Electronic Bulletin
Board system.
At August 9, 1996, 29,811,975 shares of common stock, par value $.00001 per
share (the registrant's only class of voting stock) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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TABLE OF CONTENTS
Page
PART I
ITEM 1. Description of Business 5
ITEM 2. Description of Property 17
ITEM 3. Legal Proceedings 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
PART II
ITEM 5. Market for Common Equity and Related 18
Stockholder Matters
ITEM 6. Management's Discussion and Analysis or Plan of Operation 18
ITEM 7. Financial Statements 20
ITEM 8. Changes in and Disagreement with Accountants on 20
Accounting and Financial Disclosure
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; 20
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation 22
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 24
ITEM 12. Certain Relationships and Related Transactions 26
ITEM 13. Exhibits and Reports on Form 8-K 27
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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 or speed at which information can move in a given medium,
such as an electronic wire or the air.
BIT - a binary digit, the smallest unit of digital information - either an "on"
(1) or "off" (0) signal. Microprocessors are generally 4-bit to 32-bit
referring to the amount of data they can process.
BROWSER OR WEB BROWSER - user interface software used to navigate the Internet.
It integrates many Internet functions such as Web searching and transfer,
file transfers, news group communications and electronic mail under one
simple easy-to-learn and use interface.
CENTRAL PROCESSING UNIT (CPU) - the part of a computer that interprets and
executes instructions.
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.
COMPUTER - a programmable electronic machine that performs high-speed
mathematical and logical operations or otherwise processes information.
CYBERSHARK - the Company's tradename for its ISDN digital modem product.
DIGITAL MODEM - Allows non ISDN devices, e.g. computers, to be connected to
ISDN telephone lines. In computer use it operates comparable to modems for
analog telephone lines. More technical term is a "terminal adapter" and
sometimes called an "ISDN modem."
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, digital communication devices and video terminal controllers.
GROUND PENETRATING RADAR (GPR) - a technique employing microwave radiation
(radar) to penetrate the earth's surface. Devices using this technique may
also be used to penetrate walls and other objects.
INTEGRATED CIRCUIT - A device that incorporates many transistors in a small
area or "chip" of silicon, which is encapsulated in plastic, ceramic or
other forms of packaging and connected to a circuit board.
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 COMPUTER - a portable computer-based device specifically designed to
access the Internet or the World Wide Web. Also referred to as a Internet
Terminal, Teleputer, Web Terminal, Net Computer, Internet PC, Internet
Appliance, Browser Box, Internet Box and similar names. A number of
companies have announced the introduction of such portable devices. Many
of these devices are expected to utilize Java.
INTRANET - private networks (primarily corporate) that use the infrastructure
and standards of the Internet and the World Wide Web 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.
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JAVAPROCESSOR- a microprocessor designed primarily to execute the Java
language 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 - an integrated circuit that contains the entire central
processing unit (CPU) of a computer, typically fabricated on a single
silicon chip. A microprocessor processes system data and controls
input/output, peripheral and memory devices.
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 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 - a directly addressable location for storing data within a computer.
Most microprocessors are register based. Also 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.
SEMICONDUCTOR - a substance, such as silicon, on which many transistors and the
connections between them are fabricated as an integrated circuit. The term
"Semiconductors" is often more broadly defined as integrated circuits.
SHBOOM - The Company's tradename for its proprietary RISC-based 32-bit
microprocessor (CPU) technology and/or architecture.
STACK - A group of storage locations within a computer, maintained in sequence,
accessible for data retrieval primarily from the top of the stack. 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.
Stack-based or stack-oriented has advantages in certain applications over
the vast majority of computers which are register-based designs.
STACK/REGISTER ARCHITECTURE - The combined stack/register architecture employed
by the ShBoom is primarily stack-based but offers some design benefits of
register-based 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.
TRANSISTOR - a small electronic device containing a semiconductor. It is the
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.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
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 high-speed digital modem
technology both with products under development for the growing Internet market.
The Company also owns and is developing innovative 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 Internet is a global web of computer networks. Developed over 25 years
ago, this "network of networks" allows any computer connected to the Internet to
talk to any other. The Internet provides organizations and individuals with new
means to conduct business. The growth of the Internet and corporate 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 higher speed digital modems. New software, such as Java, is emerging
to serve the requirements of Internet users.
The Java programming language is an object-oriented language for the
Internet and corporate Intranets. With Java, data and programs do not have to be
stored on the user's computer, they can reside anywhere on the Internet or
Intranet to be called upon as needed. Java can run on a variety of computer
operating systems thus avoiding the problem of incompatibility across networks
and Java offers high data security. Because of Java's useful features, it may
also become a popular programming language for embedded control applications
(products that contain computers). 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 using inexpensive Internet computer devices.
A microprocessor is the computer chip providing intelligence for
electronic devices. The Company's microprocessor technology, tradenamed ShBoom,
uses a proprietary architecture in a high-performance microprocessor integrated
on a single silicon chip manufacturable at a low production cost. The Company's
first ShBoom-architecture microprocessor, the PSC1000, is being developed and
targeted as a Java programming language processor, for internally developed
products and for a variety of embedded control applications requiring a
high-speed, low-cost microprocessor. Embedded controllers are small computers
used in sophisticated products including laser printers, motion and industrial
controllers and digital communication devices such as cable and satellite modems
and television set-top boxes. These products are candidates for using the
PSC1000. There 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's digital modem, tradenamed CyberShark, is being developed and
targeted as a high-performance interface between a computer and ISDN telephone
lines (Integrated Services Digital Network, a standard digital communication
protocol using existing telephone lines). High-capacity digital modems provide
over four times the data speed as traditional analog modems and the capability
of multiple transmissions through one telephone line. They also provide the
needed bandwidth or data transmission speed to support video conferencing,
Internet voice products and 3D (three-dimensional) Internet interfaces. The
CyberShark has been prototyped and the Company has produced the first units for
testing and intends to produce 1,000 additional units for initial marketing and
distribution which is expected to commence during the first six months of fiscal
1997. The Company anticipates that the ShBoom-architecture microprocessor will
be employed in future versions of its ISDN digital modem products when parts
become commercially available.
The Company has innovated proprietary techniques for wave generation and
prociessing 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 ground penetrating radar ("GPR") technology designed as a general
purpose device for testing and evaluation purposes. The Company's prototype 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
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in depth. The Company's prototype has indicated an ability to detect plastic
land 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 or other purposes. 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.
During the course of the Company's radar development, the Company
developed and filed a patent on certain gas antenna technology which employs
ionized gas as the conducting element of an antenna. This technology was
classified secret by the U.S. government in June 1995 and in June 1996 the
Company was successful in getting the technology declassified allowing for both
governmental and commercial exploitation of the technology. The Company
anticipates that its U.S. patent on this technology, which was noticed for
allowance but suspended during classification, will soon issue. The Company has
performed a proof of concept prototype of the gas antenna and believes the
technology may have a number of advantages over traditional solid wire antenna
technology. This technology may also have applications in the Company's GPR
technology.
The Company has had no operating revenues since its inception and there
can be no assurance of future operating revenues.
BACKGROUND
In February of 1989 the Company completed its initial public offering
pursuant to a Registration Statement on Form S-18 under the Securities Act of
1933, as amended (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 Chairman. The details of that
acquisition and certain related agreements are described in more detail in
"Certain Transactions" below.
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
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. None
of the Class A or Class B 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) and Helmut Falk (Falk), the Company issued a total of
10,000,000 restricted common shares to nanoTronics to acquire certain
microprocessor technology (ShBoom technology) of nanoTronics. 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 Transactions".
CORPORATE DEVELOPMENT
During fiscal years 1995 and 1996 the Company's development strategy
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 language 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 computer
compatible plug-in card allowing high-speed, cost-effective digital ISDN access
to the Internet and other networks. This product, the CyberShark digital modem,
is expected to be marketable in the first quarter of fiscal 1997 and is expected
to be modified to use the PSC1000 when commercially available.
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In 1994 during the course of the Company's GPR development, the Company
identified certain antenna technology employing ionized gas as the conducting
element. Management believes this technology has applications in digital
communications and radar.
The Company's business is managed as three major technologies or divisions
(1) ShBoom microprocessor technology, (2) ISDN digital modem 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 digital modem technology. 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
connected 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 form of
Internet software interface. 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 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 thus avoiding 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 computer can understand. This interpretive design runs programs slower than
if they were tailored for each type of computer 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 computer devices or scaled down computers to access and
compute via the Internet. Public announcements of the development of such
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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 an advanced microprocessor integrated on a
single chip. 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 microprocessor design,
adding additional technical features to further modernize the design, and
improving and testing the new design. The Company obtained the latest run of
prototype chips in late May 1996 (current version, the PSC1000). These chips are
being employed in demonstrations for prospective customers. Management
anticipates, but there can be no assurance, that any additional changes
encountered in current testing 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, logic
circuitry, 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 logic
circuitry 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 logic circuitry providing an
advanced ASSP.
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.
Microcontrollers are generally available in 4-bit through 32-bit
architectures, which refers to the amount of data they can process. 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
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needs, the ShBoom architecture was designed to be a sophisticated 32-bit RISC
(reduced instruction set computer) microprocessor with advanced features,
including the most commonly needed support logic, 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. These registers are directly
addressable storage locations requiring a complex architecture that consumes
costly silicon. This conventional architecture provides processing power for
computer applications but complicates and slows the execution of individual
instructions and increases silicon size, thereby increasing chip cost.
The Company's technology is fundamentally different from most other
microprocessors because it is stack-oriented, the data is stored in groups. The
Company's microprocessor further employs the best features of register and stack
designs. The resultant merged stack-register architecture improves program
execution for a wide range of embedded applications. The Company's design
combines two processors in one highly-integrated package, a microprocessing unit
(MPU) for performing conventional processing tasks, and an input-output
processor (IOP) for performing input-output functions. The IOP replaces many
dedicated peripheral functions supplied with other processors. The
microprocessor's design simplifies the manipulation of data. ShBoom's
architecture employs instructions which are shrunk from 32-bits to 8-bits. This
simplified instruction scheme improves execution speed for computer
instructions. The Company's architecture incorporates many on-chip system
functions, thus eliminating the requirement of support chips and reducing system
cost to users.
The PSC1000 has been designed to operate at a speed of 100Mhz internally
(current versions operate at 50 to 75Mhz) and is compatible with a wide range of
memory technology from low cost DRAM (dynamic random-access memory) to high
speed SRAM (static random access memory). The chip can be packaged in various
surface-mount and die-form packaging. There can be no assurance that the
designed speed will be achieved with production chips or future versions or that
all of the desired functions will perform as anticipated.
The ShBoom technology is not designed or targeted to compete with high-end
processors for use in personal computers. It is targeted for embedded control
applications. The above advanced features differentiate the PSC1000 from other
8-bit to 32-bit chips targeted for embedded control applications. Considering
the reduced requirement for support chips, the PSC1000 is intended to be
available at a high volume price (under $15 each) that should be price
competitive with high-end 8-bit chip and general 16-bit chip systems but with
higher performance (speed and functional capability).
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 AS A JAVA PROCESSOR. The Company believes the
ShBoom microprocessor architecture is a highly-efficient and cost-effective Java
programming language processor. This is because Java is designed to run on a
stack-oriented architecture and the stack-oriented ShBoom architecture is very
efficient for executing the virtual stack machine internal to Java. Many Java
bytecodes (byte or 8-bit sized operation codes or instructions) require only a
single 8-bit PSC1000 instruction to be executed, providing a performance
advantage over other more expensive processors that require six or more 32-bit
instructions to do the same task. This is an important advantage for executing
Java programs 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 computer device, thereby eliminating
components. Since Internet computers are designed to be inexpensive appliances
for Internet access, cost, speed and performance are expected to be key
requirements for designers. The Company believes the ShBoom technology can
compete favorably on the basis of such requirements, although there can be no
assurance the Company can successfully exploit Java related applications or that
competitors will not create superior Java processors.
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. Subsequently,
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the Company tested the resultant chips, while completing a C computer language
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 made minor
corrections to the design from testing the first run and produced an additional
run of second-generation chips from existing wafers. Second run chips were
received in May 1996. In July 1996, the Company commenced employing these chips
in demonstration boards for use by developers and prospective customers and
licensees.
In August 1996 the Company commenced development efforts aimed at
producing a 0.5 micron chip based on the same ShBoom technology employed in the
PSC1000. Management anticipates that a reduction to 0.5 micron double-metal CMOS
technology will improve operating speed, reduce power requirements, reduce
physical size and reduce fabrication cost resulting in improved cost-performance
over the PSC1000 and competitors. Management believes, although there can be no
assurance, that the reduction in size can be completed within the current fiscal
year.
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. Although PSC1000
version chips have been sent to prospective customers in anticipation of
production quantity orders, there can be no assurance that the Company during
its continued testing or these prospects in their testing, will not identify
errors requiring additional rounds of design and fabrication prior to commercial
production. Additional delays could have an adverse effect on the marketability
of the Company's technology.
The Company has developed initial marketing materials, product manuals and
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.
Management believes that the PSC1000 is ready for licensing or sale and
that any additional changes encountered in current testing will be minor and can
be made during initial production runs of PSC1000 chips for customers, when and
if orders are obtained. Certain initial licensing discussions and customer
demonstrations have commenced. 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 and its corresponding low system
cost.
The Company has commenced marketing efforts directed towards cultivating
prospective licensees, identifying 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 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 communication devices, video games, cable and
satellite modems and TV set-top boxes. The Company expects that early licensing
of the technology and product applicationswill focus on embedded control.
In March 1996 the Company appointed Evolve Software, Inc., a wholly-owned
subsidiary of Universal Electronics, Inc., as its exclusive ShBoom
microprocessor representative to the major TV set-top box, satellite and cable
modem manufacturers. In June 1996 the Company appointed Compunetics
Incorporated, a private company controlled
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by a director of the Company, as its exclusive ShBoom microprocessor
representative to the three major U.S. auto producers. Also in July 1996 the
Company appointed Premier Technical Sales, Inc. as the primary marketing
representative organization in the U.S. They will be responsible for
representing the PSC1000 to a wide range of prospective embedded control users.
The Company anticipates appointing additional representatives in other markets
and/or for other distribution channels.
Management believes the appropriate approach for the Company initially
lies in a balanced effort of cultivating licensees 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. The Company has elected to shrink or redesign the chip
to smaller sub-micron technology (0.5 micron double-metal CMOS) in order to
improve speed and reduce silicon cost. Generally, as the size is reduced,
arranging for contract fabrication involves greater challenge and risk. The
Company does not have any arrangement or agreement for contract fabrication of
its chip and there can be no assurance of future supply. Many prospective
licensees or large volume users 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 two 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 but low-cost devices, 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 manufactured by major competitors including Intel, Motorola,
NEC, Zilog, Advanced Micro Devices. As a Java processor, 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.
ISDN DIGITAL MODEM 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 computer 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. 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.
ISDN service is easily connected by local telephone companies.
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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, is a computer 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 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 has been prototyped and the Company has produced the first
units for testing and plans to produce 1,000 units for initial marketing and
distribution which is expected to commence during the first six months of fiscal
1997. 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 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.
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 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.
COMPETITION. There are a number of ISDN terminal adapters offered by
competitors including Ascend Communications, Inc., Motorola, Inc., ISDN-tek,
Inc., 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.
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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.
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.
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
mobile prototype version of its GPR technology. This prototype 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.
The Company's prototype has been designed as a general purpose device for
testing and evaluation purposes. The prototype 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 prototype 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.
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 GPR 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
device. 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.
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The Company's prototype 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 GPR technology 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").
GAS ANTENNA 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 is not currently used in and is separate and
apart from the GPR technology, although it may be employed in the GPR technology
in the future.
In January 1996 the Company filed an application seeking declassification
of the technology and in June 1996 was advised that de-classification had been
approved and that the U.S. patent will soon issue. The recent de-classification
now allows the Company to exploit the technology to both governmental and
commercial customers.
The Company's gas antenna technology employs ionized gas as the conducting
element of an antenna. This is a fundamental change from traditional antenna
design which generally employs solid wires as the conducting element. Management
believes ionized gas is an efficient conducting element with a number of
advantages. Since the gas is ionized only for the precise time of transmission
or reception, ringing and associated effects of solid wire antenna design is
reduced. The design allows for extremely short pulses, important to many forms
of digital communication and radar. The design further provides the opportunity
to construct an antenna that can be dynamically reconfigured for frequency,
direction, bandwidth, gain and beamwidth. Management believes antennas can be
designed that are low in weight, small in size and with lower power consumption
than traditional solid wire antennae.
There can be no assurance that the Company can successfully exploit this
technology.
BUSINESS STRATEGY. The Company does not presently have the technical
staffing or resources to pursue further development to commercialize a GPR
system for the above markets or to exploit the gas antenna technology. The
Company's strategy is to use its GPR and gas antenna prototypes 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 or gas
antenna technology.
The Company has identified plastic mine detection as a potentially viable
application of the GPR technology. According to U.S. Army estimates, as reported
by the Wall Street Journal on May 17, 1996, there are at least 3.2 million land
mines planted in Bosnia, Croatia and Serbia and according to U.N. information,
as reported by Business Week on February 5, 1996, 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, although there are
a large number of competitors addressing this opportunity.
The Company's GPR 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 or gas antenna technology
will be marketed and sold, such to be dependent on the type of relationships
obtained, if any. It could license the technologies, manufacture and sell
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completed instruments or devices, or perform sub-surface GPR 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. The antenna industry is very competitive and consists of a large
number of companies with substantial resources, a large installed base,
established government and commercial relationships, and large research and
development staffs.
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 of
its GPR or gas antenna technology. 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.
RESEARCH AND DEVELOPMENT
The Company's current development efforts are focused on the introduction
of the PSC1000 microprocessor and ISDN digital modems anticipated during the
first quarter of fiscal 1997. 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 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.
The Company incurred research and development expenditures of $1,036,245
and $928,107 for the fiscal years ended May 31, 1996 and 1995, respectively, on
its technologies. The majority of the Company's expenditures 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 its
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 issuance of patents that it considers important
to its business to protect inventions and technology that support the Company's
microprocessor and radar and antennae technologies.
The Company has two U.S. patents issued and has twelve U.S. patents
pending, most dating back to 1989, on the ShBoom microprocessor technology. The
Company has one ShBoom technology patent pending in five European countries and
Japan and may file additional applications under international treaties
depending on an evaluation of the costs and anticipated benefits that may be
obtained by expanding possible patent coverage.
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.
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The Company has not yet adopted a position on whether or not it is
obligated to pay certain royalties on aspects of the ShBoom technology specified
in prior agreements between nanoTronics Corporation and previous inventors. The
Company purchased the ShBoom technology but did not assume royalty obligations
of nanoTronics under its prior agreements, but provided certain limited
indemnities to nanoTronics regarding royalties, if it is determined they are
payable. The Company believes that certain royalty provisions with previous
inventors may have been extinguished by prior transactions or otherwise. A
determination of the amount of royalties, if any, is also dependent on an
evaluation of the technology contributed by previous inventors and that
contributed by nanoTronics Corporation and the Company. 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
does not believe that provision for royalties would deter it from executing its
business strategy, but could require increased prices or reduced operating
margins.
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 has received notice of allowance on a U.S. patent application
on its gas antenna technology and expects the patent to soon issue. The
Company's ability to obtain protection in other countries may be limited due to
the time delay caused by the secrecy order. The Company has one patent pending
in the United States on antennae technology directly related to its GPR
technology. No foreign application was made. 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 and gas antenna 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 and antenna fields
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 digital modem 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.
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, one part-time marketing person and two full-time and one
part-time administrative employee other than its executive officers. Mr. Norris
and Mr. Putnam, only devote part time to the affairs of the Company. Mr.
Carenzo devotes substantially full-time to the affairs of the Company (see
"Item 9"). The Company also engages additional consultants as needed from time
to time.
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.
16
<PAGE> 17
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 and antenna technology 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 their
operation would have to meet applicable FCC rules and regulations. Management
does not believe that the operation of the GPR 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.
ITEM 2. DESCRIPTION OF PROPERTY
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, Poway, California
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. Should the
Company be unable or unwilling to extend the term of the current lease,
management believes comparable facilities are generaly available in the San
Diego area. Three research and development personnel are located in Los Gatos,
California. The Company has executed a one year lease at a monthly rate of
$1,975 commencing August 19, 1996 for 1,795 square feet of improved office space
at 170 Knowles Drive, #200, Los Gatos, California as a research and development
facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any threatened or pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's fiscal 1995 Annual Meeting of Shareholders held on May
17, 1996, the following members, constituting all the members, were elected to
the Board of Directors: Elwood G. Norris, Robert Putnam, Donald R. Bernier,
Richard D. McDaniel and Peter vR. Cooper.
The following proposals were approved at the Company's Annual Meeting of
Shareholders:
<TABLE>
<CAPTION>
Affirmative Negative Votes
Votes Votes Withheld
----- ----- --------
<S> <C> <C> <C>
1. Proposal to Approve the 1996 Stock Option Plan
Covering an Aggregate of 1,500,000 Common Shares 10,836,289 651,713 196,506
2. Appointment of BDO Seidman, LLP as Independent
Auditors of the Company 18,167,640 36,815 34,665
3. Election of Directors
Elwood G. Norris 19,312,985 600 62,965
Robert Putnam 19,312,985 600 62,965
Donald R. Bernier 19,312,985 600 62,965
Richard D. McDaniel 19,312,985 600 62,965
Peter vR. Cooper 19,312,985 600 62,965
</TABLE>
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the NASD OTC Bulletin Board system maintained by the National
Association of Securities Dealers, Inc. Prices reported represent prices between
dealers, do not include markups, markdowns or commissions and do not necessarily
represent actual transactions. The market for the Company's Shares has been
sporadic and at times very limited.
The following table sets forth the high and low bid quotations for the
Common Stock for the fiscal years ended May 31, 1996 and 1995.
<TABLE>
<CAPTION>
BID QUOTATIONS
--------------
HIGH LOW
<S> <C> <C>
Fiscal Year Ended May 31,1996
First Quarter $0.35 $0.12
Second Quarter $0.76 $0.22
Third Quarter $3.53 $0.47
Fourth Quarter $3.97 $2.00
Fiscal Year Ended May 31, 1995
First Quarter $0.72 $0.12
Second Quarter $0.44 $0.12
Third Quarter $0.44 $0.09
Fourth Quarter $0.31 $0.09
</TABLE>
The Company had approximately 137 shareholders of record as of August 9,
1996. At August 9, 1996 there were 29,811,975 shares of Common Stock issued and
outstanding. The Company has never paid a cash dividend on its Common Stock and
does not expect to pay one in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
During the fiscal years ended May 31, 1995 and 1996, the Company's
operations consisted primarily of research and development activities towards
the development of the ShBoom microprocessor technology, the CyberShark
technology, radar and antenna technology and administrative activities
associated with financing and administrative operations and marketing
expenditures incurred in initial phases of market exploration. The Company
expended a total of $1,036,245 as research and development costs during the
fiscal year ended May 31, 1996, primarily consisting of salaries and benefits,
materials and components. This was an increase of $108,138 over the amount of
$928,107 incurred during the previous fiscal year. The major change resulted
from $89,000 of fabrication costs incurred in fiscal 1996 versus none in fiscal
1995 and an increase in depreciation expense of approximately $50,000.
General and administrative costs were $1,186,342 during fiscal 1996
compared to $925,084 for fiscal 1995. The increase of $261,258 in fiscal 1996
included a $215,000 increase in consulting costs, a majority of which was
non-cash costs incurred from the issuance of common stock for services. The
balance of the increase resulted from a general increase in a number of
administrative cost components.
The Company incurred $186,080 of marketing expenditures during the 1996
fiscal year and $71,351 for the prior fiscal 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 $612,333 as amortization expense on purchased
technology for each of the years ended May 31, 1996 and 1995.
During fiscal 1996, the Company used cash of $1,273,378 in operating
activities and $294,103 in investing activities for the purchase of equipment
and patent costs. The Company obtained $1,300,000 from financing activities from
the sale of common stock and the exercise of warrants. The Company anticipates
research and development activities related to developing its technologies to
continue at comparable levels during the next twelve months with an increasing
emphasis on marketing initial ShBoom and CyberShark products.
18
<PAGE> 19
PLAN OF OPERATION FOR NEXT TWELVE MONTHS; LIQUIDITY AND CAPITAL RESOURCES
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 initial ShBoom-architecture microprocessor products, 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 approximate 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 May 31, 1996, the Company had working capital of $746,600 compared to
working capital of $1,111,772 at May 31, 1995. Cash on hand at May 31, 1996 was
$838,160. Other than its obligation pursuant to the remaining term on its office
lease obligation aggregating $14,000 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 primarily on the prior fiscal year's
rate of cash operating expenditures and current plans, management anticipates a
base level of cash operating expenditures aggregating approximately $1,500,000
during the next twelve months. Should revenues commence, the Company may require
additional personnel and expenditures not currently estimable by management.
In addition to one full-time and two part-time executive officers, the
Company presently has five full-time and one part-time research and development
employees, one part-time marketing person and two full-time and one part-time
administrative persons. Subject to availability of resources, management is
seeking to hire one additional marketing and two additional technical personnel.
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. Should CyberShark product or
ShBoom product sales or licensing develop, the Company may be required to add
technical and marketing support personnel. Likewise, if the radar or antenna
technology should 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 has in the past and may also in the
future engage outside consultants for specific development or marketing tasks.
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 activities or otherwise.
Based on the above factors including the current rate of expenditures,
anticipated additional expenditures and uncertainty as to future 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 $700,000. 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 August 1996 be exercised in full the Company would
realize $239,500 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 May 31, 1996, the Company has approximately $3,841,000 of tax loss
carryforwards. A valuation allowance has been recorded for the net deferred tax
asset of $1,945,000 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.
19
<PAGE> 20
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("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 an 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item begin on page F-1 with the
index to financial statements followed by the financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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 57 Chairman and Director August 1989
Michael A. Carenzo 55 President, CEO and Director June 1996
Robert Putnam 38 Secretary, Treasurer, Director August 1989
Donald R. Bernier 54 Director January 1995
Richard D. McDaniel 71 Director December 1995
Peter vR. Cooper 40 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 gas antenna
technology owned by the Company. Mr. Norris devotes only part-time services to
the Company, approximately 25 hours per week. Mr. Norris was replaced as
President and CEO on June 1, 1996 by Mr. Carenzo whereupon Mr. Norris was
appointed Chairman.
20
<PAGE> 21
MICHAEL A. CARENZO. Mr. Carenzo has been a Senior Partner of CADWA
Associates, a management consulting group specializing in extended executive
consulting assignments, from July 1994 to the present. Prior to joining the
Company, he devoted a majority of his consulting efforts developing strategic
alliances and international markets at the senior executive level with the Coors
Ceramics division of NYSE listed ACX Technologies Inc. From February 1992 to
June 1994, he served as President and Director of Datakey Inc., a public company
engaged in semiconductor-based manufacturing of portable memory devices. Prior
to February 1992, Mr. Carenzo served 22 years with the DuPont Co., where he held
a number of key executive positions with the DuPont Electronics Group. Mr.
Carenzo is a 1966 graduate of American International College where he received a
B.S. degree in Business. Mr. Carenzo has entered into an employment contract and
became President, CEO and Director effective on June 1, 1996. Mr. Carenzo will
devote at least 80% of his time to the Company during the first seven months of
his employment during which he will wind down his outside consulting activities
and thereafter he will devote full-time 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, approximately 10
hours per week.
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 they have other
employment or business interests to which they devote some attention and they
are 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.
It is conceivable that the respective areas of interest of the Company,
ATC and NCC could overlap or conflict. The Company believes that although each
of the three corporations are involved in the electronics industry, the
respective areas of focus, products and technology directions of the three
companies are sufficiently distinct such that no conflict in business lines or
executive loyalties will result. Because of this unlikelihood, no steps have
been taken to resolve possible conflicts, and any such conflicts, should they
arise, will be addressed at the appropriate time.
The Company hired an experienced President and CEO effective June 1, 1996
whereupon Mr. Norris became Chairman and will be responsible primarily for radar
and antenna development.
SPECIAL CONFLICTS OF INTEREST
Officer and director Robert Putnam also acts as secretary of NCC and
president and chief executive officer of ATC, both companies effectively
controlled by Elwood Norris. The possibility exists that these other
relationships could affect Mr. Putnam's independence as a director of the
Company.
21
<PAGE> 22
The Company has not provided a method of resolving these conflicts (such
as recusal from voting as directors, obtaining an independent third-party
evaluation of proposed actions, and the like) and probably will not do so,
partly due to inevitable extra expense and delay any such measures would
occasion and partly because Mr. Norris and Mr. Putnam do not represent a
majority of the Board of Directors and do not control the outside directors. Mr.
Norris and Mr. Putnam are obligated to perform their duties in good faith and to
act in the best interest of the Company and its shareholders, and any failure on
their part to do so may constitute a breach of their fiduciary duties and expose
them to damages and other liability under applicable law. While the Company's
Certificate of Incorporation excludes liability of directors for monetary
damages based on breach of their fiduciary duties as directors (See "Exclusion
of Director Liability" below), Mr. Norris and Mr. Putnam also are employees and
officers of the Company, and no such exclusion shields them from damages for any
action taken in their capacities as officers and employees.
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.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Act") requires
the Company's officers, directors and persons who own more than 10% of a class
of the Company's securities registered under Section 12(g) of the Act to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of copies of the reports it received from
persons required to make such filings and its own records, the Company believes
that from the period June 1, 1995 through July 15, 1996, all persons subject to
the Section 16(a) reporting requirements timely filed the required reports,
except as follows:
- Mr. Michael A. Carenzo's Form 3 due on June 10, 1996 was filed after
the due date for such form.
ITEM 10. 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, 1996. 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.
22
<PAGE> 23
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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 1996 $ 60,693 Nil 50,000 shares None
President and CEO (1) 1995 $ 43,599 Nil None None
1994 $ 42,000 $10,000 None $1,875,000(2)
Helmut Falk 1996 $ 9,231 Nil None None
Chairman, President and 1995 $104,069 Nil None None
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 and served in such
capacity until June 1, 1996 when Mr. Michael A Carenzo was appointed
President and CEO.
(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, 1996 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 Officers during the fiscal year ended May 31,
1996.
OPTION GRANTS
Shown below is further information on grants of stock options pursuant to
the Company's 1996 Stock Option Plan to the Named Officer reflected in the
Summary Compensation Table shown above.
OPTION GRANTS TABLE FOR FISCAL YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
Percent of Total
Number of Options Granted Exercise Expiration
Name Options Granted to Employees in Fiscal Year Price Date
---- --------------- --------------------------- -------- ----------
<S> <C> <C> <C> <C>
Elwood G. Norris 50,000 3.0% $2.30 4/22/99
</TABLE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no options exercised by Named Officers during the fiscal year
ended May 31, 1996. The following table provides information on unexercised
options at May 31, 1996:
23
<PAGE> 24
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
May 31, 1996 May 31, 1996
------------ ------------
Name Exercisable Exercisable
- ---- ----------- -----------
<S> <C> <C>
Elwood G. Norris 50,000 $50,500
</TABLE>
(1) Based on the last sale price at the close of business on the last trading
day of the fiscal year of $3.31.
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, 1996, the Company did not adjust or
amend the exercise price of stock options awarded to the Named Officer nor other
persons, and the Company has no defined benefit or actuarial plans covering any
person.
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 Chairman, for a three
year term providing for a base salary of $60,000 with annual increases of 5% on
each June 1. 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.
The Company entered into an employment agreement dated as of May 8, 1996,
approved by the Company's directors and executed on May 17, 1996, with Mr.
Carenzo providing for his employment as President and CEO effective June 1,
1996. The agreement is for a three year term providing for a base salary of
$90,000 per year with an increase in the second year to at least $108,000 as
determined by the Board of Directors. The agreement provides for incentive
bonuses in certain instances with a bonus of at least $45,000 guaranteed for the
first year. The Company may terminate Mr. Carenzo's employment with or without
cause, but termination without cause (other than disability or death) results in
a lump sum severance payment ranging, depending on length of service, from six
to twelve months salary plus any prorated earned bonuses. Likewise upon a change
of control, as defined in the agreement, Mr. Carenzo may elect to terminate
employment and obtain a lump sum severance payment ranging, depending on length
of service, from six to twelve months salary plus any prorated earned bonuses.
The Company has granted Mr. Carenzo options to purchase 900,000 common shares,
90,000 vesting on June 1, 1996 and the balance vesting monthly in equal amounts
over three years subject to earlier vesting based on certain events.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 9, 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.
24
<PAGE> 25
<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 Corporation 10,000,000(1) 33.5%
par value attn: Gloria Felcyn, CPA
$.00001 14395 Saratoga Ave., Suite 110
Saratoga, California 95070
SAME Elwood G. Norris 4,770,000(2) 16.0%
12875 Brookprinter Place #300
Poway, California 92064
SAME Richard D. McDaniel 1,050,000(2)(3)(4) 3.5%
12875 Brookprinter Place, #300
Poway, California 92064
SAME Michael A. Carenzo 900,000(8) 2.9%
12875 Brookprinter Place, #300
Poway, California 92064
SAME Robert Putnam 116,666(5) *
12875 Brookprinter Place, #300
Poway, California 92064
SAME Donald R. Bernier 50,000(6) *
12875 Brookprinter Place #300
Poway, California 92064
SAME Peter vR. Cooper 50,000(2) *
12875 Brookprinter Place #300
Poway, California 92064
All directors & officers 6,936,666(7) 22.4%
as a group (6 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) For each of Messrs. Norris, McDaniel and Cooper, the amount includes
50,000 shares issuable upon the exercise of immediately exercisable
outstanding stock options granted pursuant to the 1996 Stock Option Plan.
(3) Includes 1,000,000 common shares held by Sea Ltd., a corporation over
which Mr. McDaniel may direct certain voting and investment powers.
(4) 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 escrow and 250,000 shares held in escrow for a total of 500,000
common shares) held by nanoTronics (see Note 1). Representatives of
nanoTronics have advised the Company that they believe Mr. McDaniel's claim
relates only to an interest in nanoTronics and therefore he has no direct
interest in nanoTronics' Patriot common shares until and if the claim is
resolved. The additional 500,000 shares claimed by Mr. McDaniel 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 common shares.
25
<PAGE> 26
(5) Includes 100,000 shares issuable upon the exercise of outstanding stock
options.
(6) Consists entirely of shares issuable upon the exercise of outstanding
stock options.
(7) Includes 5,736,666 shares issued and outstanding and 1,200,000 shares
issuable upon exercise of stock options.
(8) Consists entirely of shares issuable upon the exercise of outstanding
stock options. A total of 90,000 options vest on June 1, 1996 and the
balance at the rate of 22,500 monthly for 36 months, however any unvested
options may vest earlier in certain circumstances.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions, or series of transactions, for fiscal 1995 or
1996, 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.
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 which is entitled to the same registration
rights. 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.
26
<PAGE> 27
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list and index of Exhibits required by Item 601 of
Regulation S-B along with an indication of the location of the Exhibit:
EXHIBIT INDEX
<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)
2.2.1 Amendment to Development Agreement dated April 23, 1996 between the
Company and Sierra Systems, incorporated by reference to Exhibit 2.2.1 to
Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2 dated
April 29, 1996 (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)
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C> <C>
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)
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)
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)
10.1.1 Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17,
1996 (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)
10.2.1 Amendment to 1992 Non-Statutory Stock Option Plan dated January 11,
1995 (2)
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)
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
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, incorporated by reference to Exhibit 10.9
to Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.9.1 First Amendment to Employment Agreement dated May 17, 1996 between
the Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9.1
to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996 (1)
10.10 Employment Agreement dated November 20, 1995 between the Company and
Robert Putnam, incorporated by reference to Exhibit 10.10 to Registration
Statement on Form SB-2 dated March 18, 1996 (1)
10.11 Sales Contractual Agreement dated March 19, 1996 between the Company and
Evolve Software, Inc., incorporated by reference to Exhibit 10.11 to
Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2 dated
April 29, 1996 (1)
10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to
Evolve Software, Inc. Providing for the Purchase of up to 50,000
Common Shares at $2.85, incorporated by reference to Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 dated April 29,
1996 (1)
10.12 Employment Agreement dated as of May 8, 1996 between the Company and
Michael A. Carenzo, including Schedule A - Stock Option Agreement,
incorporated by reference to Pre-Effective Amendment No. 2 to Registration
Statement on Form SB-2 dated May 23, 1996 (1)
10.13 1996 Stock Option Plan of the Company dated March 25, 1996 and approved
by the Shareholders on May 17, 1996, incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996 (1)
10.14 Sales Contractual Agreement dated June 20, 1996 between the Company
and Compunetics Incorporated (2)
10.15 Sales Contractual Agreement dated July 31, 1996 between the Company and
Premier Technical Sales, Inc. (2)
23.0 CONSENTS OF EXPERTS AND COUNSEL.
23.1 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>
29
<PAGE> 30
<TABLE>
<S> <C> <C>
99.3 Form of Incentive Stock Option Agreement to the Company's
1996 Stock Option Plan (individual agreements differ as to number of shares,
dates, prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23, 1996 (1)
99.4 Form of NonQualified Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreement differ as to number of shares,
date, prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23, 1996 (1)
</TABLE>
(1) Previously filed in indicated registration statement or report.
(2) Exhibit filed herewith this Annual Report on Form 10-KSB for the
fiscal year ended May 31, 1996.
(b) The Company filed no reports on Form 8-K during the last fiscal quarter of
the year ended May 31, 1996.
30
<PAGE> 31
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
BALANCE SHEET AS OF MAY 31, 1996 F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
MAY 31, 1996 AND 1995 AND FOR THE PERIOD
FROM JUNE 10, 1987 (BEGINNING OF THE
DEVELOPMENT STAGE) TO MAY 31, 1996 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED MAY 31, 1996 AND 1995 AND
FOR THE PERIOD FROM JUNE 10, 1987
(BEGINNING OF THE DEVELOPMENT STAGE)
TO MAY 31, 1994 F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED MAY 31, 1996 AND 1995 AND
FOR THE PERIOD FROM JUNE 10, 1987
(BEGINNING OF THE DEVELOPMENT STAGE)
TO MAY 31, 1996 F-6
SUMMARY OF ACCOUNTING POLICIES F-7 - F-9
NOTES TO FINANCIAL STATEMENTS F-10 - F-15
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, 1996 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the two
year period ended May 31, 1996 and for the period from June 10, 1987 (beginning
of the development stage) to May 31, 1996. 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, 1996, and the results of its operations and its cash flows for
each of the years in the two year period ended May 31, 1996 and for the period
from June 10, 1987 (beginning of the development stage) to May 31, 1996 in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Denver, Colorado
June 28, 1996
F-2
<PAGE> 33
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
May 31, 1996
- ------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 838,160
Inventories 145,800
Prepaid expenses 54,000
- ------------------------------------------------------------------------------
Total current assets 1,037,960
PROPERTY AND EQUIPMENT, net (Note 1) 274,919
PURCHASED TECHNOLOGY, net of accumulated
amortization of $1,224,667 (Note 2) 612,333
OTHER ASSETS:
Patents and trademarks 150,004
Other 5,300
- ------------------------------------------------------------------------------
Total other assets 155,304
- ------------------------------------------------------------------------------
$ 2,080,516
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 232,571
Accrued liabilities 58,789
- ------------------------------------------------------------------------------
Total current liabilities 291,360
- ------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY (Notes 2 and 3):
Common stock $.00001 par value; 40,000,000
shares authorized: issued and outstanding, 29,811,975 298
Additional paid-in capital 9,591,870
Deficit accumulated during the development stage (7,803,012)
- ------------------------------------------------------------------------------
Total stockholders' equity 1,789,156
- ------------------------------------------------------------------------------
$ 2,080,516
- ------------------------------------------------------------------------------
</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, 1996 1995 Cumulative(a)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES -
Interest income $ 30,456 $ 86,306 $ 195,037
- ------------------------------------------------------------------------------
EXPENSES:
Research and development 1,036,245 928,107 3,128,200
Sales and marketing 186,080 71,351 388,709
General and administrative (Note 2) 1,186,342 925,084 4,481,140
- ------------------------------------------------------------------------------
Total expenses 2,408,667 1,924,542 7,998,049
- ------------------------------------------------------------------------------
Net loss $(2,378,211) $(1,838,236) $(7,803,012)
==============================================================================
NET LOSS PER SHARE OF COMMON STOCK $ (.10) $ (.08)
==============================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 23,312,419 22,762,226
==============================================================================
</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, 1996.
F-4
<PAGE> 35
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31, 1996 and 1995 and Period from June 10, 1987 (beginning of
the development stage) to May 31, 1994
- ------------------------------------------------------------------------------
<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 328,290 4 31,776 -- 31,780
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 3,721,518 38 1,070,007 -- 1,070,045
Exercise of warrants at $.30
and $.60 per share 3,816,584 38 2,273,832 -- 2,273,870
Common stock issued for
technology at $.38 per
share 10,000,000 100 1,874,900 -- 1,875,000
Cost of purchased
technology at $.38
per share -- -- 1,875,000 -- 1,875,000
Net loss -- -- -- (3,586,565) (3,586,565)
- --------------------------------------------------------------------------------------------------------------------
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
Common stock issued for services
at $.30 to $2.00 per share 270,000 3 264,747 -- 264,750
Issuance of common stock in
private offering for cash at
$.50 per unit, net of offering
costs 700,000 7 349,993 -- 350,000
Issuance of common stock in
private offering for cash at
$1.58 per unit, net of offering
costs 253,166 2 399,998 -- 400,000
Value assigned to warrants issued -- -- 7,800 -- 7,800
Exercise of warrants at $.50
and $1.58 per share 826,583 8 549,992 -- 550,000
Net loss -- -- -- (2,378,211) (2,378,211)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, May 31, 1996 29,811,975 $298 $9,591,870 $(7,803,012) $ 1,789,156
====================================================================================================================
</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, 1996 1995 Cumulative(a)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,378,211) $(1,838,236) $(7,803,012)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 738,651 696,175 1,487,307
Common stock issued for services 264,750 -- 293,680
Warrants issued for services 2,500 -- 2,500
Stock compensation cost (Note 2) -- -- 1,875,000
Changes in:
Inventories (145,800) -- (145,800)
Other assets 9,741 (60,400) (52,676)
Accounts payable 182,367 19,058 232,571
Accrued liabilities 52,624 (38,332) 58,789
- ---------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,273,378) (1,221,735) (4,051,641)
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (188,942) (64,265) (498,944)
Organization costs paid -- -- (1,939)
Patent costs paid (105,161) (41,393) (150,004)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (294,103) (105,658) (650,887)
FINANCING ACTIVITIES:
Proceeds from exercise of common stock warrants 550,000 -- 3,893,915
Proceeds from issuance of common stock 750,000 -- 1,646,773
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,300,000 -- 5,540,688
- ---------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (267,481) (1,327,393) 838,160
CASH AND CASH EQUIVALENTS, beginning of year 1,105,641 2,433,034 --
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 838,160 $ 1,105,641 $ 838,160
=========================================================================================================
</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, 1996.
F-6
<PAGE> 37
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
DEVELOPMENT STAGE COMPANY
Patriot Scientific Corporation was incorporated on June 10, 1987. The Company is
engaged in the development of semiconductor microprocessor technology ("the
ShBoom"), radar and antenna technology and Integrated Services Digital Network
("ISDN") communication 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 digital modem,
obtain a strategic partner to commercialize radar and antenna technology and to
design improved versions of the Company's technologies. Management anticipates a
base level of expenditures aggregating approximately $1,500,000 during the next
twelve months. Based upon that level of expenditures, management estimates that
minimum additional funding of approximately $700,000 is required. Additionally,
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 equity
securities, the placement of debt securities, the exercise of outstanding
warrants, or from the sale or licensing of products or technology.
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.
F-7
<PAGE> 38
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
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.
INVENTORIES
Inventories consist of raw materials and are valued at the lower of cost or
market value. Cost is determined using the first-in, first-out (FIFO) method.
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.
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 Note 2).
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.
PATENTS AND TRADEMARKS
Patents and trademarks are carried at cost less accumulated amortization and are
amortized over their estimated useful lives of four years.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
F-8
<PAGE> 39
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
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 and warrants 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 revenues 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). USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("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 of
their estimated recoverable amount and the adoption of this statement by the
Company is not expected to have an impact on the financial statements. SFAS No.
123 encourages the accounting for stockbased 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 statement. Both statements are
effective for fiscal years beginning after December 15, 1995.
F-9
<PAGE> 40
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, 1996:
<TABLE>
<S> <C>
Computer equipment and software $331,903
Laboratory equipment 171,568
Furniture and fixtures 20,409
Vehicles 10,966
--------
534,846
Less accumulated depreciation 259,927
--------
Net property and equipment $274,919
========
</TABLE>
Depreciation expense was approximately $126,300 and $83,800 for the years ended
May 31, 1996 and 1995.
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-10
<PAGE> 41
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, 1996 no amounts have been paid nor are due.
RADAR TECHNOLOGY
Effective August 8, 1989, the Company acquired certain proprietary ground
penetrating radar ("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, 1996 no amounts were due under this agreement, however an advance of $17,000
against the royalty was paid at inception of the agreement.
F-11
<PAGE> 42
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
3. STOCKHOLDERS' EQUITY
COMMON STOCK
During fiscal 1996, the Company issued 75,000 shares of common stock valued at
the estimated fair market value of $.30 per share in exchange for services.
1995 EMPLOYEE STOCK COMPENSATION PLAN ("ESC")
Effective October 1995, the Company adopted the ESC Plan, expiring September 30,
1998, reserving for issuance 250,000 shares of the Company's common stock. The
ESC Plan provides for compensation awards of the Company's common stock to
employees (as defined), at the discretion of the Board of Directors. During
fiscal 1996, the Company issued 195,000 shares of common stock under the Plan
recording compensation expense of $242,250 for awards valued at estimated fair
market values ranging from $.59 to $2.00 per share.
PRIVATE OFFERINGS AND WARRANTS
During fiscal 1996, the Company completed private offerings of 700,000 units and
253,166 units, consisting each of one share of the Company's common stock and
one warrant to purchase one share of the Company's common stock at $.50 and
$1.58 per share, respectively. During fiscal 1996, in connection with such
offerings, a total of 826,583 shares of the Company's common stock were issued
upon the exercise of outstanding warrants providing net proceeds of $550,000.
At May 31, 1996, the Company has, in connection with the sale of the units
described above, a non-transferable warrant outstanding for the purchase of
126,583 shares of the Company's common stock at $1.58 per share expiring August
31, 1996. Additionally, in connection with a $250,000 manufacturing
line-of-credit agreement and a sales contractual agreement, the Company has
warrants outstanding at May 31, 1996 which are exercisable into 50,000 shares of
the Company's common stock at $1.58 and 25,000 shares at $2.85 per share. Such
warrants expire August 31, 1996 and March 18, 1998.
F-12
<PAGE> 43
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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).
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.
1996 STOCK OPTION PLAN
Effective March 1996, the Company adopted the 1996 Stock Option Plan, expiring
March 24, 2006, reserving for issuance 1,500,000 shares of the Company's common
stock. The 1996 Stock Option 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 shares on the date of grant. Any option granted under the 1996 Stock
Option Plan must be exercised within ten years of the date they were granted
(five years in the case of a significant stockholder).
F-13
<PAGE> 44
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
The following is a summary of option activity:
<TABLE>
<CAPTION>
Number Option Price
Year Ended May 31, 1996 of Shares Per Share Expiration
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, June 1, 1994 465,000 $.63 to $3.50 1994 to 1997
Options granted 825,000 $.37 to $.88 1996 to 1998
Options canceled or expired (245,000) $.88 to $3.50
- -------------------------------------------------------------------------------------
Options outstanding, May 31, 1995 1,045,000 $.37 to $.88
Options granted 1,680,000 $.50 to $2.30 1999 to 2002
Options canceled or expired (20,000) $.63
- -------------------------------------------------------------------------------------
Options outstanding, May 31, 1996 2,705,000 $.37 to $2.30 1997 to 2002
=====================================================================================
</TABLE>
As of May 31, 1996, no options have been exercised under any of the Company's
option plans.
4. INCOME TAXES
As of May 31, 1996, the net deferred tax asset recorded and its approximate tax
effect consists of the following.
<TABLE>
<S> <C>
=============================================================
Net operating loss carryforwards $ 1,306,000
Purchased technology 420,000
Other 219,000
- -------------------------------------------------------------
1,945,000
Valuation allowance (1,945,000)
- -------------------------------------------------------------
Net deferred tax asset $ --
=============================================================
</TABLE>
As of May 31, 1996, a valuation allowance equal to the net deferred tax asset
recognized has been recorded, as Management has determined that it is more
likely than not that the deferred tax asset will not be realized.
F-14
<PAGE> 45
PATRIOT SCIENTIFIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
At May 31, 1996, the Company has net operating loss carryforwards of
approximately $3,841,000 which expire through 2011 and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended.
5. 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 $1,045 and $1,200 in
fiscal 1996 and 1995.
F-15
<PAGE> 46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PATRIOT SCIENTIFIC CORPORATION
August 16, 1996
By: /s/ MICHAEL A. CARENZO
Michael A. Carenzo
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: August 16, 1996 By /s/ MICHAEL A. CARENZO
Michael A. Carenzo, President,
CEO and Director
(Principal Executive Officer)
Date: August 16, 1996 By /s/ ROBERT PUTNAM
Robert Putnam, Secretary
Treasurer and Director
(Principal Financial and
Accounting Officer)
Date: August 16, 1996 By /s/ ELWOOD G. NORRIS
Elwood G. Norris, Chairman and
Director
Date: August 16, 1996 By /s/ DONALD R. BERNIER
Donald R. Bernier
Director
Date: August 16, 1996 By /s/ RICHARD D. MCDANIEL
Richard D. McDaniel
Director
Date: August 16, 1996 By /s/ PETER VR. COOPER
Peter vR. Cooper
Director
<PAGE> 47
EXHIBIT INDEX
<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)
2.2.1 Amendment to Development Agreement dated April 23, 1996 between the
Company and Sierra Systems, incorporated by reference to Exhibit 2.2.1
to Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2
dated April 29, 1996 (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)
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)
</TABLE>
<PAGE> 48
<TABLE>
<S> <C> <C>
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)
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)
10.1.1 Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17,
1996 (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)
10.2.1 Amendment to 1992 Non-Statutory Stock Option Plan dated January 11,
1995 (2)
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, incorporated by reference to Exhibit 10.9 to
Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.9.1 First Amendment to Employment Agreement dated May 17, 1996 between the
Company and Elwood G. Norris, incorporated by reference to Exhibit
10.9.1 to Pre-Effective Amendment No. 2 to Registration Statement on
Form SB-2 dated May 23, 1996 (1)
</TABLE>
<PAGE> 49
<TABLE>
<S> <C> <C>
10.10 Employment Agreement dated November 20, 1995 between the Company and
Robert Putnam, incorporated by reference to Exhibit 10.10 to
Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.11 Sales Contractual Agreement dated March 19, 1996 between the Company
and Evolve Software, Inc., incorporated by reference to Exhibit 10.11
to Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2
dated April 29, 1996 (1)
10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve
Software, Inc. Providing for the Purchase of up to 50,000 Common Shares
at $2.85, incorporated by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2 dated April 29, 1996 (1)
10.12 Employment Agreement dated as of May 8, 1996 between the Company and
Michael A. Carenzo, including Schedule A - Stock Option Agreement,
incorporated by reference to Pre-Effective Amendment No. 2 to
Registration Statement on Form SB-2 dated May 23, 1996 (1)
10.13 1996 Stock Option Plan of the Company dated March 25, 1996 and approved
by the Shareholders on May 17, 1996, incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996 (1)
10.14 Sales Contractual Agreement dated June 20, 1996 between the Company and
Compunetics Incorporated (2)
10.15 Sales Contractual Agreement dated July 31, 1996 between the Company and
Premier Technical Sales, Inc. (2)
23.0 CONSENTS OF EXPERTS AND COUNSEL.
23.1 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)
99.3 Form of Incentive Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreements differ as to number of shares,
dates, prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
99.4 Form of NonQualified Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreement differ as to number of shares, date,
prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
(1) Previously filed in indicated registration statement or report.
(2) Exhibit filed herewith this Annual Report on Form 10-KSB for the
fiscal year ended May 31, 1996.
</TABLE>
<PAGE> 1
EXHIBIT 10.2.1
Amendment to 1992 Non-Statutory Stock Option Plan
<PAGE> 2
EXHIBIT 10.2.1
PATRIOT SCIENTIFIC CORPORATION
1992
NON-STATUTORY STOCK OPTION PLAN
(Amendment dated January 11, 1995)
1. AMENDMENT OF PLAN.
The 1992 Non-Statutory Stock Option Plan ("Plan") of PATRIOT SCIENTIFIC
CORPORATION, a Delaware corporation ("Company"), was adopted by the Board of
Directors of the Company on March 20, 1992, and subsequently approved by the
shareholders of the Company. This amendment to the Plan, which was adopted by
the Board of Directors of the Company on November 15, 1994, effects an increase
from 500,000 to 750,000 in the number of common shares of the Company reserved
for issuance under the Plan upon the exercise of incentive stock options
granted under the Plan. This amendment to the Plan shall become effective on
the date it is approved by vote of the Company's shareholders. Terms used in
this amendment and not otherwise defined shall have the meanings given them in
the Plan. Provisions of the Plan not expressly affected by this amendment shall
be deemed to remain in force and effect as originally written.
2. STOCK RESERVED FOR THE PLAN.
Subject to adjustment as provided in Paragraph 9 of the Plan, a total
of 750,000 shares of Common stock, $.00001 par value ("Stock"), of the Company
shall be subject to issuance upon the exercise of options granted under the
Plan. The foregoing provision amends the first sentence of Paragraph 4 of the
Plan.
PATRIOT SCIENTIFIC CORPORATION
By
/s/ ELWOOD G. NORRIS
--------------------
ELWOOD G. NORRIS
AUTHORIZED OFFICER
ATTEST:
By /s/ ROBERT PUTNAM
-----------------
Robert Putnam
Secretary
1
<PAGE> 3
CERTIFICATION OF SHAREHOLDER APPROVAL
I, the undersigned Secretary or assistant secretary of this
Corporation, hereby certify that the foregoing amendment to the 1992
Non-Statutory Stock Option Plan of this Corporation was duly approved by the
requisite vote of holders of the issued and outstanding common stock of this
Corporation as of January 11, 1995.
DATED: January 11, 1995
/s/ ROBERT PUTNAM
__________________
ROBERT PUTNAM
SECRETARY
<PAGE> 1
EXHIBIT 10.14
Sales Contractual Agreement with Compunetics Incorporated
<PAGE> 2
EXHIBIT 10.14
SALES CONTRACTUAL AGREEMENT
AGREEMENT dated this 20th day of June 1996 by and between Patriot
Scientific Corporation the (PRINCIPAL) having its primary office at 12875
Brookprinter Place, Suite 300, Poway, CA 92064 (hereinafter called the
"Company"), Don Bernier and Compunetics, having its principal office and place
of business at 2500 Rochester Court, Troy, MI 48083 (hereinafter called the
"Representative").
WITNESSETH
In consideration of the mutual promises and agreements herein
contained, the parties agree as follows:
1. APPOINTMENT.
Subject to the terms and conditions of this Agreement, the
Company hereby appoints the Representative as its exclusive
representative to the customer (hereinafter called the "Customer")
described in Schedule A of this Agreement to promote the sale of, and
solicit orders for the ShBoom Microprocessor (hereinafter called the
"Product") specified in Schedule B of the Agreement; and the
Representative hereby accepts such appointment. During the term of this
agreement, the Company will not appoint any other person, firm or
corporation to act as its agent or distributor of Products to this
customer for the uses described in Schedule A.
Nothing in this agreement shall preclude the Company from
licensing or selling the Product or its patents or the
ShBoom-architecture technology or other Company owned technology to any
company or entity for any use whatsoever. Nothing is this agreement
shall preclude the Company from selling the Product, without commission
to Representative, to any company or entity not listed in Schedule A or
in good faith selling the Product to those customers listed in Schedule
A for purposes other than described therein. However, should the
Company sell Product to customers in Schedule A for other than the
purposes described therein, but it be ascertained that the Product is
being used for the purposes described in Schedule A, then the Company's
only obligation and liability shall be to make the commission payments
on such Product as provided in Section 3 below.
Should one of the Customers listed in Schedule A desire to
license or acquire rights to any of the Company's technology during the
term of this agreement, no payments, commissions or finders fees or
other compensation shall be payable to Representative unless agreed to
in advance in writing. However, should the Representative advise the
Company in writing that one of the Customers is desirous of pursuing
licensing or other arrangements (other than product purchases covered
by this agreement), and the Company is not already in discussions with
such satisfactory to the Company directly though your efforts, then the
Company shall pay the commissions provided in Section 3, or such other
amount as may be mutually agreed, on the net invoice proceeds actually
received by the Company during the term of this Agreement.
The Company will take reasonable efforts to preclude but
cannot assure that other distributors or representatives that may be
appointed will not solicit Schedule A Customers for the uses described
therein. Should it be ascertained that other Company distributors or
representatives are selling Product to Customers for the purposes
described in Schedule A, then the Company's only obligation and
liability shall be to make the commission payments on such Product as
provided in Section 3 below.
2. REPRESENTATIVE'S DUTIES.
The Representative agrees:
(a) to devote its best efforts diligently to solicit orders for
Products to the Customer and to provide effective coverage of the
Customer for such purposes;
(b) to provide technical support and assistance where appropriate for
the initial development boards and microprocessors;
(c) to provide technical feedback on suggested upgrades or design
changes to meet customer needs and assist in the implementation of
these recommendations where appropriate;
1
<PAGE> 3
(d) to maintain a regular place of business suitably located to serve
the Customer;
(e) to employ at all times sufficient personnel of sufficient ability
and experience to properly and efficiently discharge the
Representative's obligation under this Agreement;
(f) to provide the Company with such progress reports, monthly
forecasts, lists of customers and prospective customers and other
information with respect to the Customer as the Company may reasonable
request;
(g) at the Company's request, to have Representative's salesman discuss
warranty claims in respect of Products sold by the Company within the
Customer;
(h) to cooperate, at the Company's request, with the Company or with
another representative of the company for the purpose of securing
potential order or contracts for the Company which are commissionable
to the Representative;
(i) to refrain from any action which would effect or tend to effect
acceptance of any order or contract for Products by the Representative
on behalf of the Company it being the intent hereof that all orders for
Products shall be subject to written acceptance by the Company at such
prices and on such terms as the Company may approve;
(j) to refrain from any action which would create or tend to create any
obligation, express or implied, on behalf of the Company, it being the
intent hereof that all activities of the Representative pursuant to
this Agreement shall be as an independent contractor and not as an
agent of the Company.
3. COMMISSION.
(a) As full compensation for the Representative's services hereunder,
the Company agrees to pay to the Representative, and the Representative
agrees to accept, commission payments on the net invoice price of
Products shipped by the Company to the Customer at the rate of 5% for
Purchase Orders entered through the Representative, for purposes of
this agreement, goods shall be deemed to have been shipped when
delivered by the Company to a carrier.
(b) Commissions shall be computed on the net amount of the invoices
rendered after all the following items have been deducted; (i) cash and
trade discounts; (ii) special packing charges, if any, and freight and
transportation or transportation allowances form shipping point; (iii)
sales and excise taxes; (iv) C.O.D. charges; and (v) insurance on
shipments. No commission shall be paid on tooling costs, on charges for
the repair or replacement of damaged Products or returned Products.
(c) Commissions due to the Representative shall be computed by the
Company for each calendar month during the term of the Agreement and
shall be paid by the Company on a monthly basis by the 10th of the
month following the collection of monies by the Company from the
Customer.
4. COMPANY'S DUTIES.
The Company agrees during the term of the agreement to provide the
Representative with copies of invoices, acknowledgments or other
response by the Company to any order from the Customer;
5. PRICES.
The Company reserves the right, without prior notice to change the list
prices for any one or more of the Products.
6. WAIVERS.
Neither party shall by any action, delay omission or otherwise be
deemed to have waived any of its rights or remedies under this
contract. A waive by either parties of any right or remedy under this
any Agreement on one occasion shall not be construed as a bar to or
waiver of occasion, nor shall either party be liable for exercising or
failing to exercise any such right or remedy.
2
<PAGE> 4
7. RESERVATION OF COMPANY'S RIGHTS.
The Representative shall acquire no rights under this Agreement in any
proprietary property or data, or trademarks or trade names of the
Company and agrees to cause employees not to disclose to any other,
either during or after the expiration of the term of this Agreement,
any of the company's confidential information received by it hereunder.
8. NONASSIGNABILITY.
This Agreement may not be assigned, transferred, or subcontracted in
whole or in part by the Representative without the prior written
consent of the Company. In the event of insolvency of either parts,
this contract shall terminate immediately at the election of the other
party.
9. DURATION.
(a) This Agreement shall become effective as of the date first above
written, and shall continue in full force and effect for two years,
subject to Representative producing aggregate orders of at least
$300,000.00 during the first twelve months of this agreement otherwise
this agreement shall terminate.
(b) In the event that either party fails substantially to perform its
duties and obligation, then the other party fails substantially to
perform its duties and obligation, then the other party shall have the
right to terminate this Agreement. Termination shall be made by written
notice by registered letter to the defaulting party. This Agreement
will terminate 60 days after notice by registered letter without
prejudice of any claims for compensation of damages. In the event that
either party shall file a petition of bankruptcy or make a general
assignment for the benefit of creditors or otherwise acknowledge
insolvency or shall be adjudged bankrupt or insolvent or be placed into
a complete liquidation (other than by an amalgamation reorganization or
merger or consolidation of such party), then the other party shall have
the right to terminate this Agreement forthwith upon notice by the
registered letter.
(c) Upon termination, the Representative will be entitled to
commissions as follows:
(1) The Company will pay the Representative and the Representative will
accept commissions equal to those monies due on all product shipped to
date.
10 . APPLICABLE LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
11. NOTICES.
Any notices provided for under this Agreement shall be in writing and
shall be deemed effectively given when delivered in registered or
certified mail addressed to the party to receive such notice at the
address of such party indicated herein or at such different address as
such party may hereafter designate in writing by notice similarly
given.
12 . COMPLETENESS OF AGREEMENT.
This Agreement expresses the complete and final understanding of the
parties, supersedes all previously signed and unsigned contracts,
agreements, understandings and negotiations between the parties and
shall not be subjects to change or modification except in writing duly
signed by both parties .
3
<PAGE> 5
IN WITNESS WHEREOF the parties hereto have executed this agreement as of the day
and year first above written.
Patriot Scientific Corporation
By: /s/ MICHAEL A. CARENZO
----------------------
MICHAEL A. CARENZO
Witness: /s/ LINDA ROMERO
----------------
Don Bernier and Compunetics
By: /s/ DON BERNIER
---------------
DON BERNIER
Witness: /s/ BRUCE SHAW
--------------
- - - - - - - - - - - - - - - - -
SCHEDULE A
The Class of Customers for which Representative is responsible for is as
follows:
Ford Motor Corporation North America, General Motors Corporation North America,
and Chrysler Corporation North America.
Additional prospect customers will be added to Schedule A by written
notification and will be mutually agreed upon.
- - - - - - - - - - - - - - - - -
SCHEDULE B
ShBoom Microprocessor 32-Bit Risc Processor
4
<PAGE> 1
EXHIBIT 10.15
Sales Contractual Agreement with Premier Technical Sales, Inc.
<PAGE> 2
EXHIBIT 10.15
SALES CONTRACTUAL AGREEMENT
AGREEMENT dated this 31st day of July 1996 by and between Patriot
Scientific Corporation the (PRINCIPAL) having its primary office at 12875
Brookprinter Place, Suite 300, Poway, CA 92064 (hereinafter called the
"Company"), and Premier Technical Sales, Inc., having its principal office and
place of business at 3235 Kifer Road, Suite 110, Santa Clara, CA 95051
(hereinafter called the "Representative").
WITNESSETH
In consideration of the mutual promises and agreements herein
contained, the parties agree as follows:
1. DEFINITIONS
"Product" shall mean those products or services described in
Exhibit A attached hereto and all future Company products of the same
general type, including without limitation all substitute or successor
products and services. The products or services may be changed or
abandoned by Company, in it's sole discretion, provided the Company
give ninety (90) days prior written notice to Representative.
"Commission Schedule" is defined in Exhibit B
"Territory" shall mean those areas designated in Exhibit C.
"House Accounts" shall mean these accounts which will be
serviced directly by Company listed in Exhibit D.
"Maintenance Accounts" shall mean those accounts listed in
Exhibit E, which by mutual agreement of Company and
Representative, will be serviced by the Representative at an
agreed to commission rate.
2. APPOINTMENT.
Subject to the terms and conditions of this Agreement, the
Company hereby appoints the Representative as its exclusive
representative in Territory (hereinafter called the "Territory")
described in Exhibit C of this Agreement to promote the sale of, and
solicit orders for the ShBoom Microprocessor (hereinafter called the
"Product") specified in Exhibit A of the Agreement; and the
Representative hereby accepts such appointment. During the term of this
agreement, the Company will not appoint any other person, firm or
corporation to act as its agent or distributor of Products to this
Territory for the uses described in Exhibit A.
Nothing in this agreement shall preclude the Company from
licensing or selling the Product or its patents or the
ShBoom-architecture technology or other Company owned technology to any
company or entity for any use whatsoever. Nothing is this agreement
shall preclude the Company from selling the Product, without commission
to Representative, to any company or entity not listed in Exhibit C or
in good faith selling the Product to those customers listed in Exhibit
C for purposes other than described therein. However, should the
Company sell Product to customers in Exhibit C for other than the
purposes described therein, but it be ascertained that the Product is
being used for the purposes described in Exhibit C, then the Company's
only obligation and liability shall be to make the commission payments
on such Product as provided in Section 5 below.
Should one of the Customers in Territory, Exhibit C, desire to
license or acquire rights to any of the Company's technology during the
term of this agreement, no payments, commissions or finders fees or
other compensation shall be payable to Representative unless agreed to
in advance in writing. However, should the Representative advise the
Company in writing that one of the Customers is desirous of pursuing
licensing or other arrangements (other than product purchases covered
by this agreement), and the Company is not already in discussions with
such satisfactory to the Company directly though your efforts, then the
Company shall pay a commissionmutually agrred to by both parties.
The Company will take reasonable efforts to preclude but
cannot assure that other distributors or representatives that may be
appointed will not solicit Exhibit C Customers for the uses described
therein.
1
<PAGE> 3
Should it be ascertained that other Company distributors or
representatives are selling Product to Customers for the purposes
described in Exhibit A, then the Company's only obligation and
liability shall be to make the commission payments on such Product.
The relationship of Company and Representative established by
this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (I) give either party
the power to direct and control the day-to-day activities of the other,
(ii) constitute the parties as partners, joint ventures, Company owners
or otherwise as participants in a joint undertaking, or (iii) allow
either party to create or assume any obligation on behalf of the other
party for any purpose.
3. SALE OF THE PRODUCT
(a) Prices and terms of sale. Company shall provide Representative with
copies of its current price lists, its delivery schedules, and its
standard terms and conditions of sale, as established from time to
time. company may alter at will the prices, delivery schedule, and
terms and conditions, provided that it gives at least Fifteen (15) days
prior written notice to Representative of any such changes.
(b) Quotations. Representative shall furnish to Company copies of all
quotations submitted to customers.
(c) Orders. All orders for the Products shall be in writing, and the
originals shall be submitted to the Company. Company shall promptly
furnish to Representative informational copies of all orders sent by
Customers in the Territory.
(d) Acceptance. All orders obtained by Representative shall be subject
to acceptance by Company. Representative shall have no authority to
make any acceptance or delivery commitments to Customers. Company
reserves the right to reject any order or any part thereof for any
reason. Company shall send copies to Representative of any written
acceptances or rejections.
(e) Invoices. Company shall render all invoices directly to the
customers and shall send copies of all invoices to Representative.
Payments shall be made directly to Company.
(f) Collection Full responsibility for all collection rests with the
Company.
(g) Product Warranty. Any warranty for the Products shall run directly
from Company to the Customer, and pursuant to the warranty, the
customer shall return any allegedly defective Products to Company.
Representative shall have no obligation to accept any return Products.
4. REPRESENTATIVE'S DUTIES
The Representative agrees:
(a) to devote its best efforts diligently to solicit orders for
Products to the Customer and to provide effective coverage of the
Customer for such purposes;
(b) to provide technical support and assistance where appropriate for
the initial development boards and microprocessors;
(c) to provide technical feedback on suggested upgrades or design
changes to meet customer needs and assist in the implementation of
these recommendations where appropriate;
(d) to maintain a regular place of business suitably located to serve
the Customer;
(e) to employ at all times sufficient personnel of sufficient ability
and experience to properly and efficiently discharge the
Representative's obligation under this Agreement;
(f) to provide the Company with such progress reports, monthly
forecasts, lists of customers and prospective customers and other
information with respect to the Customer as the Company may reasonable
request;
(g) at the Company's request, to have Representative's salesman discuss
warranty claims in respect of Products sold by the Company within the
Customer;
2
<PAGE> 4
(h) to cooperate, at the Company's request, with the Company or with
another representative of the company for the purpose of securing
potential order or contracts for the Company which are commissionable
to the Representative;
(i) to refrain from any action which would effect or tend to effect
acceptance of any order or contract for Products by the Representative
on behalf of the Company it being the intent hereof that all orders for
Products shall be subject to written acceptance by the Company at such
prices and on such terms as the Company may approve;
(j) to refrain from any action which would create or tend to create any
obligation, express or implied, on behalf of the Company, it being the
intent hereof that all activities of the Representative pursuant to
this Agreement shall be as an independent contractor and not as an
agent of the Company.
(k) within the first five (5) days of every month, representative shall
provide Company with a sixty (60) day rolling forecast of Product
orders showing prospective sales by potential Customers, Product model,
intended close date and probability.
(l) to use its commercially best efforts to stimulate demand for the
Products within the Territory by Product promotion and by direct
solicitation.
(m) to submit to Company, for Company's attention and handling, the
originals of all inquiries received by Representative from Customers
outside the Territory.
(n) to promptly forward to Company all order inquiries received by
Representative in the Territory.
5. COMMISSION.
(a) As full compensation for the Representative's services hereunder,
the Company agrees to pay to the Representative, and the Representative
agrees to accept, commission payments on the net invoice price of
Products shipped by the Company to the Customer at the rate of 5% for
Purchase Orders entered through the Representative, for purposes of
this agreement, goods shall be deemed to have been shipped when
delivered by the Company to a carrier.
(b) Commissions shall be computed on the net amount of the invoices
rendered after all the following items have been deducted; (i) cash and
trade discounts; (ii) special packing charges, if any, and freight and
transportation or transportation allowances form shipping point; (iii)
sales and excise taxes; (iv) C.O.D. charges; and (v) insurance on
shipments. No commission shall be paid on tooling costs, on charges for
the repair or replacement of damaged Products or returned Products.
(c) Commissions due to the Representative shall be computed by the
Company for each calendar month during the term of the Agreement and
shall be paid by the Company on a monthly basis by the 10th of the
month following the collection of monies by the Company from the
Customer.
(d) If Representative's efforts in the Territory result in or
contribute to Product sales outside of the Territory (e.g., to
affiliated offices of a customer), Company shall pay Representative a
commission on such sales in accordance with this Agreement.
6. COMPANY'S DUTIES.
(a) The Company agrees during the term of the agreement to provide the
Representative with copies of invoices, acknowledgments or other
response by the Company to any order from the Customer.
(b) Company shall, at its expense, promptly and on an ongoing basis
provide Representative with marketing and technical information
concerning the products as well as reasonable quantities of brochures,
instructional materials, and other Product data.
(c) Company shall, at its expense, assist Representative and its
customers in all reasonable ways in the solution of any technical
problems relating to the functioning and use of the Products.
3
<PAGE> 5
(d) Company shall promptly inform Representative of all new Product
developments, as well as all information regarding any changes in key
personnel, organization, or status of Company and information known to
Company which may effect the competitiveness or salability of the
Products in the Territory.
7. DEMONSTRATION UNITS
Company shall, at its expense, provide Representative with a reasonable
quantity of sample demonstration units ("DEMONSTRATORS") of the
Products. All Demonstrators shall remain the property of Company, which
shall have full responsibility for keeping each Demonstrator in proper
operating condition and shall bear all risk of loss or damage to each
Demonstrator while the unit is in Representative's possession. Within
fifteen (15) days of a written request from Company, Representative
shall return each Demonstrator to Company Company's expense.
8. PRICES.
The Company reserves the right, without prior notice to change the list
prices for any one or more of the Products.
9. WAIVERS.
Neither party shall by any action, delay omission or otherwise be
deemed to have waived any of its rights or remedies under this
contract. A waive by either parties of any right or remedy under this
any Agreement on one occasion shall not be construed as a bar to or
waiver of occasion, nor shall either party be liable for exercising or
failing to exercise any such right or remedy.
10. RESERVATION OF COMPANY'S RIGHTS.
The Representative shall acquire no rights under this Agreement in any
proprietary property or data, or trademarks or trade names of the
Company and agrees to cause employees not to disclose to any other,
either during or after the expiration of the term of this Agreement,
any of the company's confidential information received by it hereunder.
11. NONASSIGNABILITY.
This Agreement may not be assigned, transferred, or subcontracted in
whole or in part by the Representative without the prior written
consent of the Company. In the event of insolvency of either parts,
this contract shall terminate immediately at the election of the other
party.
12. DURATION.
(a) This Agreement shall become effective as of the date first above
written, and shall continue in full force and effect for three years,
subject to Representative producing aggregate orders of at least
$300,000.00 during the first twelve months of this agreement otherwise
this agreement shall terminate.
13. TERMINATION OF AGREEMENT
This Agreement shall be terminated by the Company at its option only
for the following:
(i) This Agreement will terminate 60 days after notice by
registered letter without prejudice of any claims for compensation of
damages.
(ii) In the event that either party fails substantially to
perform its duties and obligation, then the other party fails
substantially to perform its duties and obligation, then the other
party shall have the right to terminate this Agreement. Termination
shall be made by written notice by registered letter to the defaulting
party.
(iii) In the event that either party shall file a petition of
bankruptcy or make a general assignment for the benefit of creditors or
otherwise acknowledge insolvency or shall be adjudged bankrupt or
insolvent or be placed into a complete liquidation (other than by an
amalgamation reorganization or merger or consolidation of such party),
then the other party shall have the right to terminate this Agreement
forthwith upon notice by the registered letter.
4
<PAGE> 6
14. UPON TERMINATION
Upon termination, the Representative will be entitled to commissions as
follows:
(a) The Company will pay the Representative and the Representative will
accept commissions equal to those monies due on all product shipped
within 90 days after the effective date of termination.
15. CONFIDENTIALITY.
The term "Confidential Information" shall mean any information
disclosed by one party to the other pursuant to this Agreement which is
written, graphic, or other tangible form and is marked "Confidential",
"Proprietary" or in some other manner to indicate its confidential
nature. Confidential Information may also include oral information
disclosed by one party to the other pursuant to this Agreement,
providing that such information is designated as confidential at the
time of disclosure and is reduced to writing by the disclosing party
within a reasonable time (not to exceed thirty (30) days after its oral
disclosure, and such writing is marked in a manner to indicate its
confidential nature and delivered to the receiving party.
16. NOTICES.
(a) Any notices provided for under this Agreement shall be in writing
and shall be deemed effectively given when delivered in registered or
certified mail addressed to the party to receive such notice at the
address of such party indicated herein or at such different address as
such party may hereafter designate in writing by notice similarly
given.
(b) Each party shall treat as confidential all Confidential Information
of the other party, shall not use such Confidential Information except
as set forth herein, and shall not disclose such Confidential
Information to any third party. In particular, each of the parties
shall use at least the same degree of care which it uses to prevent
disclosure of its own confidential information of like importance to
prevent the disclosure of Confidential Information to it by the other
under this Agreement.
(c) Not withstanding the above, neither party shall have liability to
the other with regard to any Confidential Information of the other
which:
(i) was in the public domain at the time it was disclosed or
has become in the public domain through no fault of the receiver;
(ii) was known to the receiver, without restriction, at the
time of disclosure;
(iii) is disclosed with the prior written approval of the
disclosure;
(iv) was independently developed by the receiver without any
use of the Confidential Information;
(v) became known to the receiver, without restriction, from a
source other than the disclosure without the breach of this Agreement
by the receiver and otherwise not in violation of the disclosure's
rights;
(vi) is disclosed pursuant to the order or requirement of a
court, administrative agency, or other governmental body, provided,
however, that the receiver shall provide prompt notice thereof to
enable the disclosure to seek a protective order or otherwise prevent
such a disclosure.
17. TRADEMARKS AND TRADE NAMES.
During the term of this Agreement, Representative shall have all the
right to indicate to the public that it is an authorized representative
of Company's Products and to advertise such Products under trademarks,
marks, and trade names that Company may adapt from tine (Company's
Trademarks").
18. ARBITRATION.
Any dispute of claim arising out of, in relation to or in connection
with this contract, or in the interpretation, making, performance,
breach or termination thereof, shall be finally and exclusively settled
by binding arbitration in California under the Commercial Arbitration
Rules of the American Association by one arbitrator appointed in
accordance with said rules. Judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
19. GENERAL PROVISIONS.
This Agreement shall be governed by and construed in accordance under
the laws of the State of California, without reference to conflict of
laws principles. The Federal and State courts within the State of
California
5
<PAGE> 7
shall have exclusive jurisdiction to adjudicate any dispute arising out
of this Agreement which is not subject to arbitration according to
applicable law.
Any notices required or permitted by this Agreement shall be deemed
given if personally delivered or sent by registered mail, postage
prepaid, addressed to the other party at the address shown at the
beginning of this Agreement or at such other address for which party
gives notice hereunder. If mailed, delivery shall be deemed effective
three (3) days after deposit with postal authorities.
Nonperformance of either party shall be excused to the extent that
performance is rendered impossible by strike, fire, flood, governmental
acts, orders or restrictions, or any other reason where failure to
perform is beyond the control and not caused by the negligence of the
non performing party.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original.
20. COMPLETENESS OF AGREEMENT.
This Agreement expresses the complete and final understanding of the
parties, supersedes all previously signed and unsigned contracts,
agreements, understandings and negotiations between the parties and
shall not be subjects to change or modification except in writing duly
signed by both parties .
IN WITNESS WHEREOF the parties hereto have executed this agreement as of the day
and year first above written.
Patriot Scientific Corporation Premier Technical Sales, Inc.
By: /s/ MICHAEL A. CARENZO /s/ VINCE GIACOMINI
---------------------- -------------------
MICHAEL A. CARENZO VINCE GIACOMINI
* * * * * * * * * * * *
EXHIBIT A
The products and services of the Company (referred to as "products" herein)
covered in this Agreement are:
ShBoom Microprocessor PSC1000
Demo Board Kit PSC1001-DB
* * * * * * * * * * * *
EXHIBIT B
COMMISSION SCHEDULE
The Commission rate to be paid to Representative shall be: 5%
Any License or Royalty commission will be reviewed on a case by case basis.
* * * * * * * * * * * *
EXHIBIT C
TERRITORY
The Territory shall consist of the following:
West: California, Washington, Oregon, Nevada, Arizona, Utah, Idaho,
Montana and Wyoming
South West: Texas, New Mexico, Oklahoma, Arkansas, Louisiana,
Mississippi, Alabama, Georgia, Florida
North East: Massachusetts, Connecticut, Maine, New Hampshire, Rhode
Island, Vermont, New York, New Jersey, Delaware
All other states are on a case by case basis.
6
<PAGE> 8
* * * * * * * * * * * *
EXHIBIT D
Direct Accounts.
Exclusions from Territory: All Automotive Accounts
Motorola
Hitachi
Zilog
U.S. Government Agencies and Affiliates
ASIC Design
Labway
Innoware
I.S.S.I.
ESS Technologies
SIPEX
OPTI
M.R.T. Corporation
IBM
* * * * * * * * * * * *
EXHIBIT E
Maintenance Accounts: TBD
7
<PAGE> 1
EXHIBIT 23.1
Consent of BDO Seidman, LLP
<PAGE> 2
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
Poway, California
We hereby consent to the incorporation by reference in this Registration
Statement (File No. 333-00529) of our report dated June 28, 1996, relating to
the financial statements of Patriot Scientific Corporation, appearing in the
Company's Annual Report on Form 10-KSB for the year ended May 31, 1996.
/s/ BDO SEIDMAN, LLP
____________________
BDO Seidman, LLP
Denver, Colorado
August 15, 1996
<PAGE> 3
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
Poway, California
We hereby consent to the incorporation by reference in this Registration
Statement (File No. 333-08291) of our report dated June 28, 1996, relating to
the financial statements of Patriot Scientific Corporation, appearing in the
Company's Annual Report on Form 10-KSB for the year ended May 31, 1996.
/s/ BDO SEIDMAN LLP
------------------------
BDO Seidman, LLP
Denver, Colorado
August 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED MAY 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED MAY 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 838,160
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 145,800
<CURRENT-ASSETS> 1,037,960
<PP&E> 534,846
<DEPRECIATION> 259,927
<TOTAL-ASSETS> 2,080,516
<CURRENT-LIABILITIES> 291,360
<BONDS> 0
0
0
<COMMON> 298
<OTHER-SE> 9,591,870
<TOTAL-LIABILITY-AND-EQUITY> 2,080,516
<SALES> 0
<TOTAL-REVENUES> 30,456
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,408,667
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,378,211)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,378,211)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,378,211)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
