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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED MAY 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ___________ to _______________
Commission File Number 0-22182
PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)
Delaware 84-1070278
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(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
10989 Via Frontera, San Diego, California 92127
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(Address of principal executive offices) (Zip Code)
(619) 674-5000
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(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
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(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. [X]
State issuer's revenues for its most recent fiscal year. $1,847,421
The aggregate market value of the voting stock held by non-affiliates of the
registrant on July 1, 1997 was $33,076,473 based on a closing bid price of $1.90
as reported on the OTC Electronic Bulletin Board system.
At July 11, 1997, 33,189,195 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
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PART I
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ITEM 1. Description of Business 6
ITEM 2. Description of Property 19
ITEM 3. Legal Proceedings 19
ITEM 4. Submission of Matters to a Vote of Security Holders 19
PART II
ITEM 5. Market for Common Equity and Related 19
Stockholder Matters
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
ITEM 7. Financial Statements 21
ITEM 8. Changes in and Disagreement with Accountants on 22
Accounting and Financial Disclosure
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; 22
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation 25
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 28
ITEM 12. Certain Relationships and Related Transactions 30
ITEM 13. Exhibits and Reports on Form 8-K 31
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB, including all documents incorporated by
reference, includes "forward-looking" statements within the meaning of Section
27A of the Securities Act and Section 12E of the Exchange Act and the Private
Securities Litigation Reform Act of 1995, and the Company desires to take
advantage of the "safe harbor" provisions thereof. Therefore, the Company is
including this statement for the express purpose of availing itself of the
protections of such safe harbor with respect to all of such forward-looking
statements. The forward-looking statements in this Prospectus reflect the
company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including specifically absence of significant revenues, history of losses, no
assurance that technology can be completed or that it might be delayed,
significant competition, the uncertainty of patent and proprietary rights, the
uncertainty as to royalty payments and indemnification risks, possible adverse
effects of future sales of shares on the market, trading risks of low-priced
stocks and those other risks and uncertainties discussed herein, that could
cause actual results to differ materially from historical results or those
anticipated. In this report, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify forward-looking statements.
Readers are cautioned to consider the specific risk factors described herein and
in "Risk Factors", and not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that may arise after the date hereof. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this section.
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.
AT - The first IBM computer that had a 16 bit computer data bus (connectors for
communication cards.)
BANDWIDTH - the rate or speed at which information can move in a given medium,
such as an electronic wire or the air.
BRI (Basic Rate Interface) - A digital service consisting of 2 B channels and 1
D channel. The B channels are used for data and the D channel is used for
control.
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.
BUS - a group of connectors in a computer system that allow a number of
different cards to communicate.
CENTRAL PROCESSING UNIT (CPU) - the part of a computer that interprets and
executes instructions.
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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."
E1 - The European equivalent of T1.
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.
ISA - (Industry Standard Architecture) - The name given by all the manufacturers
to the BUS used in the IBM AT computer.
JAVA - an object-oriented programming language that operates independent of any
particular operating system and was developed by Sun Microsystems Inc.
Java programs, called applets, can be accessed over a network and run on
any processor whenever needed.
JAVA PROCESSOR - 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.
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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.
PRI - (Primary Rate Interface) - A variation of T1 which consists of 23 B
channels and 1 D channel. The B channels are used to carry data and the D
channel is used for controls. Each B channel has a data rate capacity of
64 kilo bits per second.
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.
PCI - A newer faster BUS which supports 32 or 64 data bit transfers.
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.
T1 - A telephone service which carries digital signals between the customer and
the central office at 1.544 megahertz speeds.
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."
VME - An older BUS system typically used for industrial control systems.
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WAFERS - the typically 6" or 8" diameter slices of silicon crystal on which
integrated circuits are fabricated.
WORLDWIDE 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Patriot Scientific Corporation (the "Company" or "Patriot") 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 10989 Via Frontera, San Diego, California 92127, and its
telephone number is (619) 674-5000. 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 and marketing of patented
microprocessor technology and high-performance digital communication products.
The Company also owns and is developing innovative radar and antenna technology.
The Company's strategy is to exploit its technologies through product sales,
licensing, strategic alliances or government contracting.
The Company has had limited revenues since its inception and, as a
result of the acquisition of Metacomp and initiation of CyberShark sales, only
recently emerged from the development stage. There can be no assurance the
Company can achieve profitable operations, and the Company may need additional
financial resources during the next twelve months.
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 (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. A description of the GPR technology, certain
information about the industry generally, and the Company's operational plans
are discussed below under the caption "Business".
On May 12, 1992, the Company redomiciled itself from Colorado to
Delaware by merging into a wholly-owned Delaware subsidiary (Patriot Scientific
Corporation) organized for that purpose. The reincorporation resulted in a
combination (reverse split) of each three of the Company's common shares, par
value $.00001, into one share of the Delaware corporation, par value $.00001.
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 such warrants remain outstanding.
Effective May 31, 1994, pursuant to an Assets Purchase Agreement and
Plan of Reorganization ("nanoTronics Agreement") between the Company,
nanoTronics Corporation ("nanoTronics") located in Eagle Point, Oregon and
Helmut Falk ("Falk"), the Company issued a total of 10,000,000 restricted common
shares to
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nanoTronics to acquire certain microprocessor technology of nanoTronics. The
technology acquired ("ShBoom technology") is being used to develop a
sophisticated yet low cost microprocessor. 5,000,000 of the shares were issued
on a non-contingent basis and the remaining 5,000,000 shares are subject to the
terms of an earnout escrow arrangement. See "Business."
Effective December 26, 1996, pursuant to an exchange offer and letter of
transmittal, the Company acquired 96.9% of the outstanding shares of Metacomp
Inc., a California corporation ("Metacomp") from 56 shareholders in exchange for
the issuance of 1,272,068 shares of the Company's common stock. Based on the
closing price of the Company's common stock of $1.375 on the date of the
acquisition, the price of the acquisition was $1,749,094. This business
combination has been accounted for as a pooling-of-interests. Sixteen persons
who hold an aggregate of 1,059,574 common shares issued in the Metacomp
acquisition, have agreed to a lock-up arrangement limiting sales by each holder
to 5% of their shares per month through December 1998.
BUSINESS
ORGANIZATION AND CORPORATE DEVELOPMENT
The Company's business is managed as three major technologies/divisions
(1) ShBoom microprocessor technology, (2) digital communications and (3) radar
and antennae technology. The Company anticipates that the PSC1000 family of the
ShBoom microprocessors will benefit the radar and antennae technology and the
digital communications division, in that the ShBoom microprocessor may provide a
low-cost, high performance alternative to existing microprocessors. 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. As a
result of the business combination with Metacomp, the Company is no longer a
development stage company.
During fiscal years 1997 and 1996 the Company focused its efforts on the
ShBoom technology and digital communications technologies. The ShBoom technology
and the Company's initial microprocessors, the PSC1000 family, 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 possible opportunity for its ISDN product.
During 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 being marketed to Internet providers, distributors, value added resalers and
original equipment manufacturers and has been integrated with Metacomp's digital
communication products.
In 1994, during the course of the Company's GPR development, the Company
identified certain antenna technology employing ionized gas as the conducting
element. In April, 1997 the Company obtained a government contract to evaluate
and characterize the gas antenna technology. Management believes this technology
could also have applications in digital communications and radar. However,
Company has no present plans to devote significant resources to this technology
other than from outside funding.
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 varies
widely, a survey conducted by CommerceNet-Nielsen Media Research in December
1996 and January 1997 indicates that 50.6 million persons in the U.S. and Canada
use the Internet, more than twice the usage that occurred in 1995. The Internet
is a rapidly growing market segment impacting computer hardware, software and
peripheral industries. The rapid growth in popularity of the Internet is in
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part due to continuing penetration of computers and modems into U.S. households,
growth of the 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 and 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, and other digital
communication devices such as those produced by Metacomp. 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, although no assurance can be given, 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. The Company's ShBoom technology lends itself to
potential acceptance in this market.
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 such devices have been made by
major companies such as Oracle and Sun Microsystems. There can be no assurance
that any such devices will 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 the ShBoom technology, a 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 from nanoTronics,
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 PSC1008, an
0.8 micron chip). These chips are being employed in demonstrations for
prospective customers and are available for sale. However, prospective customers
are generally awaiting the next generation of the PSC1000 family, the PSC1005, a
0.5 micron production chip which is expected to feature lower cost, reduced size
and improved performance. Future enhancements and generations or modifications
of chips employing the ShBoom technology and architecture are contemplated by
the Company.
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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 designed to be used in a broad array of applications, they may not be
cost effective for specific applications. ASICs are designed to meet the
specific application of one customer. While cost effective for that application,
ASICs require large sales volumes of that application to recover their
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 family. The PSC1000 family provides close
integration of the microprocessor and input/output function with the logic
circuitry, thereby 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
worldwide microcontroller volume. Also, in general use today are 8-bit
architectures, generally costing $1.00 to $10.00 each and accounting for an
additional 40% of worldwide microcontroller volume. To date 16-bit and 32-bit
architectures, with typical costs of over $10.00 each, have offered very high
performance, but are generally considered to be expensive for high-volume
embedded control applications. The use of 16-bit and 32-bit architectures offers
fewer 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.
Electronic system designers, driven by competitive market forces, seek
semiconductor products with more intelligence, functionality and control which
can be used to reduce system costs and improve performance. For these needs, the
ShBoom architecture was designed to be a sophisticated 32-bit RISC (reduced
instruction set computer) microprocessor with advanced features, including the
most commonly needed support logic, but at a low cost; thereby providing
improved performance to existing embedded control applications and creating 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.
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The Company's technology is fundamentally different from most other
microprocessors because it is stack-oriented, in that the data is stored in
groups. The Company's microprocessor further employs certain features of both
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 PSC1008, the 0.8 micron chip, has been designed to operate at a
speed of 50Mhz; and the PSC1005, the 0.5 micron chip, has been designed to
operate at a speed of 100Mhz. They are 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 chips 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 Company believes that the above advanced features
differentiate the PSC1000 family from other 8-bit to 32-bit chips targeted for
embedded control applications. Considering the reduced requirement for support
chips, the PSC1000 family is intended to be available at a high volume price
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 family has been designed to allow high-speed and high-yield fabrication
using generally available wafer fabrication technology and facilities.
THE SHBOOM MICROPROCESSOR AS A JAVA PROCESSOR. The Company believes the
ShBoom microprocessor architecture is capable of being 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 family 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 family to perform most of the other functions required of an
Internet computer device or Java accelerator, 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.
The Company is currently in the process of porting a Java operating
system to the PSC1000 family, which currently utilizes the C programming
language for software support. In June 1997 the Company signed a Technology
License and Distribution Agreement with Sun Microsystems which will enable the
Company to develop and distribute products based on Sun's JavaOS Technology.
Successful implementation of a Java operating system is expected to produce one
of the best price performance chips available in silicon supporting the Java
virtual machine amongst many having been announced, including Sun
Microelectronics' PicoJava chip. The Company believes that, if the
implementation is successfully completed, the PSC1000 family will be competitive
with Java chips announced by competitors. However, there can be no assurance of
successful implementation of a Java operating system or of a market for a
PSC1000 family Java chip.
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. After the May 31, 1994
acquisition, the Company improved the original design, added new features and
performed simulations and tests of the improved designs. In October 1995 a run
of six wafers of second-generation chips (of the same CMOS technology) were
fabricated by a contract fabrication facility. Subsequently, the Company tested
the resultant chips, while completing a C computer language compiler and
preparing application development tools. The compiler and
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application development tools are necessary to enable system designers to
program the PSC1000 family for specific applications. The Company made
corrections to the design from testing the first run and produced an additional
run of second-generation chips from existing wafers. Second run chips (the
PSC1008) 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 December 1996 the Company commenced development efforts aimed at
producing a 0.5 micron chip based on the ShBoom technology. Management
anticipates that a reduction to 0.5 micron double-metal CMOS technology (the
PSC1005) will improve operating speed, reduce power requirements, reduce
physical size and reduce fabrication cost resulting in improved cost-performance
over the PSC1008 and competitors. Management believes, although there can be no
assurance, that the reduction in size and the Java language implementation can
be completed by the end of August, 1997.
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 PSC1008
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 of these products, 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 and the Company's financial condition.
The Company has developed 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 family for specific applications.
Management believes that the PSC1000 family 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 family chips for
customers, when and if orders are obtained. Management also believes the ShBoom
core technology is ready for licensing for use by others to develop custom
multiple function chips. Certain initial licensing discussions and customer
demonstrations have commenced. However, there can be no assurance of market
acceptance of the PSC1000 family 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.
Because of the above factors and competitive conditions, management
intends to focus most of its marketing development efforts on the Java processor
business, a new but highly-competitive field without an established base of
efficient chips and for which management believes the ShBoom architecture has
certain technical advantages.
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 applications will focus on embedded
control.
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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 PSC1000 family and the ShBoom core
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.
Initial fabrications of the PSC1008 were performed by a contract
fabrication facility. The PSC1005 has been delivered for fabrication to a
contract fabrication facility that has agreed to provide production quantities
for the Company's customers. There can be no assurance fabrication facilities
will be available to produce the PSC1000 family in the future. However, since
there are a large number of fabrication facilities with the capability to
produce the PSC1008 or PSC1005, management believes chips can be produced on a
contract basis. Industry shortages of fabrication facilities that may exist and
are predicted to exist in the future are generally limited to the more demanding
architectures. If a shortage of fabrication facilities develop, it could have a
material adverse effect on the Company's profitability.
The Company has appointed Compunetics Incorporated, a private company
controlled by a director of the Company, as its exclusive ShBoom microprocessor
representative to the three major U.S. auto producers and Premier Technical
Sales, Inc. as the primary marketing representative organization in the U.S.
They are responsible for representing the PSC1000 family to a wide range of
prospective embedded control users. The Company has appointed additional
representatives in other markets and/or for other distribution channels. The
Company has also created a full-time Vice President position to lead marketing
of the PSC1000 family.
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
at least as competitive.
While the Company's strategy is to target high-volume licensees and
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 family, 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, and Advanced Micro Devices. As a Java processor, the
Company expects its PSC1000 family 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
significantly greater resources than the Company.
A new entrant, such as the Company, is at a competitive disadvantage
compared to these and other established producers due to a number of factors,
including the lack of product performance experience, lack of experience by
customers in using application development systems, no record of technical
service and support, and limited marketing and sales capabilities.
DIGITAL COMMUNICATIONS
GENERAL BACKGROUND. 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. In
December, 1996 the Company acquired 96.9% of Metacomp Inc. to create a
communications division including engineering, assembly, marketing and
distribution. The acquisition of Metacomp expanded the product line and added a
digital communications revenue and customer base. Digital communication revenues
accounted for substantially all of the Company's revenues for the fiscal year
ended May 31, 1997.
Metacomp, founded in 1978, is a high technology company that designs,
assembles, and sells a wide range of high performance data and
telecommunications solutions for wide area networking and digital communications
requirements. In 1990, Metacomp filed a Chapter 11 bankruptcy petition. In 1991,
the Bankruptcy Court confirmed
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Metacomp's plan of reorganization. As of July 31, 1996, all unsecured creditors
debt had been discharged and one secured creditor had entered into a forbearance
agreement for a balance of $252,796, which was paid in full by the Company in
January 1997.
The business combination with Metacomp is being treated as a
pooling-of-interests, and the Metacomp product line has been combined with the
Company's ISDN product to form the communications division.
ISDN AND DIGITAL COMMUNICATIONS 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 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.
In addition to ISDN products, the Company's communications division is
also engaged in providing solutions in wide area networking for both personal
computers as well as higher speed industrial systems using VME interfaces.
MAJOR COMMUNICATIONS DIVISION PRODUCTS. The Company has a line of ISDN
interface products for high speed, cost effective digital communications through
telephone networks. These products include:
CyberShark Family
CyberShark - This low-cost Basic Rate ISDN (BRI) adapter card for ISA bus
is targeted to allow home users, small businesses, and telecommuters to
access corporate networks and the Internet via ISDN. The card includes an
analog phone jack which allows the user to connect his existing analog
phone or fax machines for simultaneous voice conversation.
This card is designed specifically for Windows/95.
CyberShark/HSET - This BRI adapter card for ISA bus is designed to be used
with a headset/handset as opposed to an analog phone. It offers access to
the D channel and supports domestic as well as European telco switches.
Drivers for Windows/95, Windows/NT, and Linux are available.
CyberShark/BRI - This BRI adapter card for ISA bus is designed for OEM
integrators for the international market. Drivers for Windows/95,
Windows/NT, and Linux are available.
CyberShark/PRI - This Primary Rate ISDN (PRI) adapter card for ISA bus
provides intelligent support of up to 23 simultaneous digital connections
offered by the 23B+D interface. An optional MVIP Bus interface on board
allows easy integration into third-party voice or video codec boards.
Other downloadable firmware engines are available to support
T1/Fractional-T1 services. Drivers for Windows/NT and Linux are available.
FlagShip Family
FlagShip/PRI-2 - This newest member of the Company's ISDN product family
is a dual-span PRI adapter card for PCI bus which supports up to 46
simultaneous digital connections. The MVIP Bus interface is also available
as an option. Firmware engines to support T1/Fractional-T1 services will
be offered. A driver for Windows/NT will be available.
VME Product Line - The Company also offers a line of intelligent high
speed communications engines in a VME form factor. Some of our customers
for these products include the military as well as large satellite based
data communications companies.
ATcomm2/4 Product Line - The Company also markets an intelligent two or
four channel product which is used around the world for high speed data
communications.
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Other - The communications division also obtains revenue from providing
contract engineering and software development for customers. The Company
from time to time is able to retain a proprietary interest in developed
products and in such circumstances retains a license/royalty interest.
The Company's product strategy is to continue to provide data
communication solutions through improving current products and introducing new
products. The Company has seven research and development personnel assigned to
digital communication product development and enhancement. These activities
include customer specific development for OEMs, VARs and others as well as new
proprietary product development and enhancement.
PRODUCTION AND MARKETING STRATEGY. The Company's strategy is to have its
digital communication products manufactured on a sub-contract basis with, in
some instances, final assembly at the Company's facility. Products are tested
and distributed by the Company. Effective February 28, 1996, with respect to
CyberShark, 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.
The Company recently hired a Vice President of Sales and Marketing for
the communications division. The marketing of the Company's digital
communications products is managed by an in-house marketing staff. The Company's
satellite and telecommunication products and ISDN products (other than
CyberShark) are targeted for OEMs, systems integrators, VARs and sophisticated
end users. The CyberShark is more of a consumer product and is targeted for
Internet service providers (businesses that provide individuals and businesses
access to the Internet through a local telephone number), 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.
COMPETITION. There are a number of ISDN terminal adapters competitive to
CyberShark 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 the Company. Although
not all of these companies offer PC plug-in card terminal adapters directly
competitive with the Company's product, there can be no assurance additional
direct competitors will not introduce competitive products.
The Company believes its products are competitive on both features and
price with the products currently 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
most of its digital communication products in development. The Company does rely
on trade secrets and copyrights to protect its digital communications products.
RADAR AND ANTENNA TECHNOLOGY
BACKGROUND. During the period from 1980-1983, Mr. Norris, Chairman of
the Company, 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.
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
communication products, effectively suspending development and most marketing
efforts related to GPR.
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GPR TECHNOLOGY DESCRIPTION. The Company has developed sensors (wave
generators and antennae) and techniques for the processing, conversion,
compression, storage, and visualization (collectively, computer processing) of
GPR data. The Company has developed proprietary techniques for wave generation
and proprietary antennae for the sending and receiving of data. The Company uses
proprietary methods to capture and process returned signals.
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 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 Company'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).
The Company has one U.S. patent on antenna technology for its GPR. Other
aspects of the GPR system are maintained as trade secrets, although additional
patent applications may be filed in the future.
STAGE OF DEVELOPMENT OF GPR TECHNOLOGY. 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.
The Company believes most prospective users will require more
specifically tailored equipment and multiple devices. Commercialization of the
GPR technology will require additional development to improve visualization
software and to replace the current system with specifically designed components
to minimize cost and weight and improve portability.
There can be no assurance that a commercially viable device will or can
be produced, and the Company has no existing users or customers. There can be no
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 gas antenna 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 the U.S. patent issued in January, 1997.
The de-classification allows the Company to exploit the technology for both
governmental and commercial purposes.
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 antennas.
In April, 1997 the Company obtained a small contract to evaluate a
prototype of the gas antenna technology. There can be no assurance that the
Company will obtain additional development funds or that it can successfully
exploit this technology.
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BUSINESS STRATEGY. The Company has limited resources to pursue further
development to commercialize a GPR system for the above markets and 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.
COMPETITION. The segment of the electronics industry which involves the
manufacture and sale of GPR equipment is not 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. It is possible that any such technology owned or 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 have greater financial and other resources than
the Company.
RESEARCH AND DEVELOPMENT
The Company's current development efforts are focused on the
introduction of the PSC1000-family microprocessor and digital communication
products. 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 or successful marketing of the
PSC1000-family or of continued market acceptance of existing and proposed
digital communication products.
The Company incurred research and development expenditures of $1,367,937
and $1,527,759 for the fiscal years ended May 31, 1997 and 1996, respectively.
The majority of the Company's expenditures in fiscal 1997 and 1996 have been
expended on its ShBoom and digital communications technologies. 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 funds on research and development of 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 three U.S. patents issued and has six 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 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 such 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 any assurance that the Company could successfully exploit any potential
patent claims against larger competitors.
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The Company believes that it is not obligated to pay royalties with
regard to the ShBoom Technology. The Company acquired the ShBoom Technology from
nanoTronics for common stock but expressly did not assume any royalty
obligations of nanoTronics. However, pursuant to its agreement with nanoTronics,
the Company could become liable for up to $1,250,000 of indemnification costs if
a court of competent jurisdiction determines that nanoTronics is liable for cash
royalties based on sales by the Company of products incorporating the ShBoom
Technology. nanoTronics has claimed that it is also entitled to indemnification
in the event that it is required to transfer any of its shares of Company common
stock as an up-front license fee to the inventor of the technology. royalty
payment. The Company disputes this claim.
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 one U.S. patent on its gas antenna technology which was
issued in January, 1997. 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 also has one U.S. patent 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 best be 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 and has not received any
notices of claimed infringement, 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 licenses, the Company has created its own software and hardware
designs and uses copyright, trade secrets, software security measures and
nondisclosure agreements to protect its proprietary products, technology and
software. The Company has no patent applications pending with respect to its
digital communication 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 digital communication 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.
Metacomp has licensed a family of chips to Sipex Corporation under a
royalty agreement providing for approximately $100,000 per year. There can be no
assurance that royalties will continue in the future.
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 advantages 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.
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MARKETING AND DISTRIBUTION
The Company's products are marketed through a combination of a direct
sales force and distributors. Approximate sales by principal geographic area (as
a percentage of sales) were for fiscal years ended:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Domestic sales 77% 91%
Foreign sales
North America 13% 6%
Europe 6% 3%
Other 4% -
--- ---
Total sales 100% 100%
=== ===
</TABLE>
All operating assets are located within the United States. While sales
to certain geographic areas generally vary from year to year, the Company does
not expect that changes in the geographic composition of sales will have a
material adverse effect on operations.
DEPENDENCE UPON SINGLE CUSTOMERS
Ten percent (10%) or more of the Company's consolidated net sales for
the fiscal years indicated were derived from shipments to the following
customers:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
A $473,000 $396,000
B $472,000 $450,000
C $212,000
D $330,000
</TABLE>
While the level of shipments to individual customers generally varies
from year to year, the Company does not expect that changes in customer
composition will have a material adverse effect on operations.
EMPLOYEES
The Company currently has twenty-three full-time and three part-time
personnel. Fourteen full-time personnel were employees of Metacomp prior to the
December 1996 acquisition. Ten full-time persons are employed in research and
development, six full-time persons are engaged in manufacturing and assembly,
two full-time persons, and one part-time person are engaged in marketing and
five full-time and two part-time persons are engaged in general and
administrative activities. These persons include Mr. Norris and Mr. Putnam, who
only devote a part of their available time to the affairs of the Company. This
also includes a full-time chief financial officer who was hired in May, 1997 who
had previously been engaged as a consultant. The Company also engages additional
consultants and part-time persons 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.
GOVERNMENT REGULATION
To the Company's knowledge, its 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.
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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 requires FCC approval.
The Company has not incurred costs associated with environmental laws
and does not anticipate such laws will have any significant effect on the future
business of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
Effective January, 1997 the Company merged its operations with Metacomp
and moved its principal executive and operating office to space leased by
Metacomp at 10989 Via Frontera, San Diego, California. This space contains
approximately 7,300 square feet of space, including approximately 5,000 square
feet of improved space for office and technical personnel and approximately
2,300 square feet of unimproved warehouse space. Management believes this
facility is adequate for the present needs of the Company and Metacomp for at
least the next twelve months. 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 party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In June, 1997 the Shareholders approved via an Action by Shareholders
Without a Meeting an increase in the authorized number of shares of $.00001 par
value per share stock from 40,000,000 to 65,000,000. This amount includes
5,000,000 authorized preferred shares.
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, 1997 and 1996.
<TABLE>
<CAPTION>
BID QUOTATIONS
--------------
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended May 31,1997
First Quarter $3.50 $1.75
Second Quarter $2.44 $1.12
Third Quarter $1.83 $0.94
Fourth Quarter $1.62 $0.97
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
</TABLE>
19
<PAGE> 20
The Company had approximately 200 shareholders of record as of May 8,
1997. At July 11, 1997 there were 33,189,195 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 OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's results of operations have and may continue to be subject
to significant variations. The results for a particular period may vary due to a
number of factors, including the overall state of the semiconductor and
communications segments of the economy, the development status of and demand for
the Company's products, economic conditions in the Company's markets, the timing
of orders, the timing of expenditures in anticipation of future sales, the mix
of products sold by the Company, the introduction of new products and product
enhancements by the Company or its competitors and pricing and other competitive
conditions.
As described in Note 1 to the consolidated financial statements of the Company,
effective December 26, 1996, the Company acquired 96.9% of the common stock of
Metacomp. The business combination was accounted for as a pooling-of-interests
and, accordingly, the Company's financial statements have been presented to
include the results of Metacomp as though the business combination occurred as
of June 1, 1995. In addition, Metacomp changed its fiscal year end from July 31
to May 31 to conform to the Company's fiscal year-end. Based on the difference
in fiscal year-ends, results of operations for the two months ended July 31,
1996 have been included in both years ended May 31, 1997 and 1996.
RESULTS OF OPERATIONS
Net sales. Total net sales for the fiscal year ended May 31, 1997 decreased
17.0% to $1,847,421 from $2,224,708 for the fiscal year ended May 31, 1996. This
decrease was due primarily to the completion of a government contract for VME
communications products during fiscal 1996 and the phase out of older product
lines, offset partially by revenues from a new communications product, the
CyberShark.
Cost of sales. Cost of sales as a percentage of net sales increased to 54.3% in
fiscal 1997 compared to 48.0% in fiscal 1996. This increase in the cost of sales
percentage was a result of a write down in inventory values related to the
obsolescence of components and finished parts of the older product lines being
phased out.
Research and development expenses decreased 10.5% from $1,527,759 in fiscal 1996
to $1,367,937 for fiscal 1997. This decrease was due primarily to the completion
of software for the communication products discussed above.
Selling, general and administrative expenses increased 26.9% from $1,358,673 in
fiscal 1996 to $1,723,751 in fiscal 1997. This increase was due primarily to the
costs related to the business combination with Metacomp, the costs of raising
funds, and non-cash compensation arising from the issuance of employee stock
options at an exercise price less than the market price on the date of grant.
Amortization of purchased technology was constant between the two periods at
$612,333.
Other income (expense) was significantly higher for fiscal year 1997 as a result
of the non-cash interest related to discounted Notes discussed in Note 5 to the
consolidated financial statements.
An extraordinary income item of $1,779,457 is included in both periods. This
item is the result of the discharge of debts by Metacomp in July, 1996 as a
result of their successful completion of their Chapter 11 case. The amount is
included in both periods as a result of Metacomp changing its year end to May 31
from July 31 resulting in the months of June and July 1996 being reflected in
both fiscal years. This income was the primary source of income for these two
months.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1997, working capital was $846,741 and cash and cash
equivalents totaled $477,675. In addition, the Company concluded a financing in
early June 1997 for net proceeds of $1,700,000. The Company has funded its
operations primarily through cash flows from operations and the issuance of
securities. The cash and cash equivalents decreased $386,269 during fiscal year
1997. The net cash used in operating activities of $1,733,168, additions to
property and equipment of $238,447, and a payment on Metacomp's line of credit
of $312,306 was offset by a new issuance of convertible debt in the amount of
$1,500,000 and the issuance of common stock and common stock warrants in the
amount of $405,362. The convertible debt was subsequently converted into common
shares of the Company.
The Company's liquidity for the next twelve months is anticipated to be
supplemented by introducing to market and commencing sales and licensing of
ShBoom microprocessors, designing future generations of the ShBoom and
communication product technologies and exploiting the radar and antenna
technology and by expanding the marketing of communication products through its
recent acquisition of Metacomp.
The Company anticipates that it may require additional equipment,
fabrication, components and supplies during the next twelve months to continue
development of the Company's technologies. Product introductions such as those
currently underway for communication products and the ShBoom 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 potential rate of cash operating expenditures and current
plans, management anticipates the cash requirements for the next twelve months
have been satisfied with the June 1997 financing. The Company anticipates that
future cash requirements will be satisfied by improved product sales, the sale
of additional Company equity securities, debt financing and/or the sale or
licensing of certain of the Company's technologies. There can be no assurance
that any future funds required will be generated from operations or from the
aforementioned or other potential sources. The lack of additional capital could
force the Company to substantially curtail or cease operations and would
therefore have a material 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, 1997, the Company has approximately $5,997,000 of tax loss
carryforwards. A valuation allowance has been recorded for the net deferred tax
asset of $3,111,000 arising primarily from tax loss carryforwards because
management can not determine that it is more likely than not that the deferred
tax asset will not be realized.
NEW ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This pronouncement provides a different method of calculating earnings per share
than is currently used in accordance with Accounting Board Opinion ("APB") No.
15, "Earnings Per Share". SFAS 128 provides for the calculation of "Basic" and
"Dilutive" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in 1998 and its implementation is not expected to have a
material effect on the consolidated statements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item begin on page F-1 with
the index to consolidated financial statements.
21
<PAGE> 22
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 58 Chairman and Director August 1989
Michael A. Carenzo 56 President, CEO and Director June 1996
Robert Putnam 39 Secretary, Treasurer, Director August 1989
Norman J. Dawson 56 Vice President, General Manager
and Director January 1997
Jayanta K. Maitra 47 Vice President Engineering n/a
Lowell W. Giffhorn 50 Chief Financial Officer n/a
Donald R. Bernier 55 Director January 1995
Richard D. McDaniel 72 Director December 1995
Peter vR. Cooper 41 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 have 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 until June 1996 when he was appointed Chairman.
Since March 1988 he has been a director of Norris Communications Inc. ("NCI"), 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 NCI, and in January 1997 he was appointed interim CEO. 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.
MICHAEL A. CARENZO. Mr. Carenzo has been the President, CEO and a
Director of the Company since June 1996. He was a Senior Partner of CADWA
Associates, a management consulting group specializing in extended executive
consulting assignments, from July 1994 to December 1996. Prior to joining the
Company in June 1996, he devoted a majority of his consulting efforts to
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.
22
<PAGE> 23
ROBERT PUTNAM. Mr. Putnam has been the Secretary and Treasurer of the
Company since 1989. Since 1988 he has served as Secretary of NCI. 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.
NORMAN J. DAWSON. Mr. Dawson has been the President & CEO of Metacomp
since July, 1995 and was appointed a Director and Vice President and General
Manager of the Company in January 1997. From June, 1990 to July 1995 he was Vice
President-Operations of Metacomp. From 1962 to 1990 he held various executive
positions with several computer companies including NCR and Control Data. In
1962 Mr. Dawson obtained a B.S. in Engineering from Montreal Institute of
Technology.
JAYANTA K. MAITRA. Mr. Maitra has been Vice President of Engineering of
Metacomp since 1990 and was appointed Vice President of Engineering of the
Company in January 1997. From 1985 to 1987 he was Manager of Hardware
Engineering for Systech Corporation, a San Diego based hardware and software
communications company. From 1974 to 1985 he held various engineering positions
with several computer related technology companies. He obtained a B.S. in
Electrical Engineering from the Indian Institute of Technology in 1972 and an
M.S. in Electrical Sciences at State University of New York in 1973.
LOWELL W. GIFFHORN. Mr. Giffhorn was the principal in his own financial
management consulting firm from August 1996 until joining the Company as Chief
Financial Officer in May 1997. Since November 1996, Mr. Giffhorn, in addition to
other consulting engagements, performed the duties of Acting Chief Financial
Officer for the Company. From June 1992 to August 1996 and from September 1987
to June 1990 he was the Chief Financial Officer of Sym-Tek Systems, Inc. and
Vice President of Finance for its successor, Sym-Tek Inc. Sym-Tek Systems, Inc.
was a major supplier of capital equipment to the semiconductor industry which
filed under Chapter 11 of the U.S. Bankruptcy Code in May 1994 while Mr.
Giffhorn was the Chief Financial Officer. He was instrumental in selling the
assets of Sym-Tek Systems, Inc. to Sym-Tek Inc., a wholly owned subsidiary of
Aetrium Inc. He continued with Sym-Tek Inc. as Vice President Finance during the
transition and concluded the liquidation of Sym-Tek Systems, Inc. He has over
twenty-five years of experience in a variety of financial positions, including
eleven years as Controller for Langley Corporation, a publicly traded, San
Diego, defense contractor. In 1975 Mr. Giffhorn obtained an M.B.A. degree from
National University, and in 1969 he obtained a B.S. in Accountancy from the
University of Illinois.
DONALD R. BERNIER. Since 1971, Mr. Bernier has been the owner and
President of Compunetics Incorporated, a Troy, Michigan-based electronics firm
of which he the founder. 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 the
Chairman of McDaniel Enterprises, Inc., a Wilmington, Delaware based family
holding company. In July 1995 he became Chairman of Smart Business Systems, a
copier and facsimile equipment distributor located in Wilmington. 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
Conflicts of interest now exist and will continue to exist between the
Company and certain of its officers and directors due to the fact that certain
officers and directors have other employment or business interests to which they
devote attention. The Company has not established policies or procedures for the
resolution of current or potential
23
<PAGE> 24
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.
It is conceivable that the respective areas of interest of the Company,
ATC and NCI could overlap or conflict. The Company believes that, although each
of the three corporations is involved in the electronics industry, their
respective areas of focus, products and technology are sufficiently distinct
that no conflict in business lines or executive loyalties will result.
Therefore, no steps have been taken to resolve possible conflicts among the
Company, ATC, and NCI; and any such conflicts, should they arise, will be
addressed at the appropriate time.
SPECIAL CONFLICTS OF INTEREST
Officer and director Robert Putnam also acts as Secretary of NCI and
President and Chief Executive Officer of ATC, and both companies are effectively
controlled by Elwood Norris. The possibility exists that these other
relationships could affect Mr. Putnam's independence as a Director of the
Company.
The Company has not provided a method of resolving these conflicts (such
as refusal from voting as directors and obtaining an independent third-party
evaluation of proposed actions) 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.
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 may, 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.
24
<PAGE> 25
Based solely on its review of copies of the reports it has received from
persons required to make such filings and its own records, the Company believes
that from the period June 1, 1996 through July 15, 1997, all persons subject to
the Section 16(a) reporting requirements timely filed the required reports.
ITEM 10. EXECUTIVE COMPENSATION
There is shown below information concerning the compensation of the
Company's chief executive officers (each a "Named Officer") for the fiscal years
ended May 31, 1995, 1996 and 1997. Compensation for the other four most highly
compensated executive officers is neither required nor presented as no such
other executive officer's salary and bonus exceeded $100,000. Information is
also set forth below for two officers (each also a "Named Officer") of Metacomp
for the fiscal year ended May 31, 1997, the year in which Metacomp was acquired
by the Company. No other officer of Metacomp received a salary and bonus
exceeding $100,000 in fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Cash Compensation Long-Term Compensation
------------------------ ----------------------
Name and Fiscal Options All Other
Principal Position Year Salary Bonus (# of Shares) Compensation (6)
- ------------------ ---- ------ ----- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Michael A. Carenzo 1997 $138,000 Nil 900,000 shares None
President and CEO (1)
Elwood G. Norris 1996 $ 60,693 Nil 50,000 shares None
President and CEO (2) 1995 $ 43,599 Nil None None
Helmut Falk 1996 $ 9,231 Nil None None
Chairman, President and 1995 $104,069 Nil None None
CEO (3)
Norman J. Dawson 1997 $128,483 Nil 533,953 $4,241
Vice President and
General Manager (4)
Jayanta K. Maitra 1997 $118,700 Nil 535,753 $2,874
Vice President
Engineering (5)
</TABLE>
(1) Mr. Carenzo has served as President and CEO since June 1, 1996.
(2) 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.
(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.
(4) Mr. Dawson was appointed Vice President and General Manager on
December 26, 1996 as a result of the business combination with Metacomp.
The amounts disclosed reflect his compensation before and after the
acquisition.
(5) Mr. Maitra was appointed Vice President Engineering on December 26,
1996 as a result of the business combination with Metacomp. The amounts
disclosed reflect his compensation before and after the acquisition.
(6) Represents long-term disability insurance payments made by the Company
on behalf of Mr. Dawson and Mr. Maitra during the fiscal year ended May
31, 1997.
25
<PAGE> 26
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,
1997.
OPTION GRANTS
Shown below is information on grants of stock options pursuant to the
Company's 1996 Stock Option Plan to the Named Officers reflected in the Summary
Compensation Table shown above.
OPTION GRANTS TABLE FOR FISCAL YEAR ENDED MAY 31, 1997
<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>
Norman J. Dawson 72,000 3.5% $1.37 12/26/01
428,000 20.8% $1.17 12/26/01
33,953 1.7% $0.18 12/26/01
Jayanta K. Maitra 72,000 3.5% $1.37 12/26/01
428,000 20.8% $1.17 12/26/01
35,753 1.7% $0.18 12/26/01
</TABLE>
Of the above options granted during the fiscal year ended May 31, 1997,
500,000 each of Mr. Dawson's and Mr. Maitra's are subject to shareholders
approval of an increase in the number of shares authorized under the 1996 Stock
Option Plan.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no options exercised by Named Officers during the fiscal year
ended May 31, 1997. The following table provides information on unexercised
options at May 31, 1997:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
May 31, 1997 May 31, 1997
------------ ------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Elwood G. Norris 50,000 - $ - $ -
Michael A. Carenzo 337,500 562,500 $ 213,355 $ 365,625
Norman J. Dawson 83,953 450,000 $ 47,120 $ 121,600
Jayanta K. Maitra 85,753 450,000 $ 49,406 $ 121,600
</TABLE>
(1) Based on the last sale price at the close of business on the last trading
day of the fiscal year of $1.45.
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
26
<PAGE> 27
$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, 1997, pursuant to Mr. Carenzo's
Employment Contract, the Company amended the exercise price of stock options
awarded to Mr. Carenzo on April 23, 1996 from $2.30 for 900,000 shares to $0.94
for 43,000 shares and $0.80 for 857,000 shares. 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 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) would
result 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, and
amended by the Board of Directors on September 23, 1996, with Mr. Carenzo
providing for his employment as President and CEO effective June 1, 1996. The
agreement, as amended, is for a three year term providing for a base salary of
$168,000 per year (for the period November 1, 1996 to May 31, 1997) with an
increase in the second and third years to at least $186,000 as determined by the
Board of Directors. The agreement provides for incentive bonuses in certain
instances of at least 50% of the total yearly base compensation. The Company may
terminate Mr. Carenzo's employment with or without cause, but termination
without cause (other than disability or death) would result 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.
The Company entered into an employment agreement dated January 1, 1997
with Mr. Dawson providing for his employment as Vice President and General
Manager. The agreement is for a three year term providing for a base salary of
$120,000 per year with an increase in the second and third years as recommended
by the President and Chief Executive Officer and approved by the Board of
Directors. The agreement provides for incentive bonuses in certain instances of
up to 50% of the total yearly base compensation. The Company may terminate Mr.
Dawson's employment with or without cause, but termination without cause (other
than disability or death) during either of the first two years of the agreement
would result in a lump sum severance payment equal to twelve months salary. The
Company has granted Mr. Dawson options to purchase 533,953 common shares, 83,953
vesting on December 26, 1996 and the balance vesting one-third per year starting
December 31, 1997 subject to certain performance standards. Options may vest
earlier subject to the discretion of the Board of Directors.
The Company entered into an employment agreement dated January 1, 1997
with Mr. Maitra providing for his employment as Vice President of Engineering.
The agreement is for a three year term providing for a base salary of $104,400
per year with an increase in the second and third years as recommended by the
President and Chief Executive Officer and approved by the Board of Directors.
The agreement provides for incentive bonuses in certain instances of up to 50%
of the total yearly base compensation. The Company may terminate Mr. Maitra's
employment with or without cause, but termination without cause (other than
disability or death) during the first year of the
27
<PAGE> 28
agreement would result in a lump sum severance payment equal to twelve months
salary. The Company has granted Mr. Maitra options to purchase 535,753 common
shares, 85,753 vesting on December 26, 1996 and the balance vesting one-third
per year starting December 31, 1997 subject to certain performance standards.
Options may vest earlier subject to the discretion of the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 11, 1997, 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 over such shares. No person listed below has any
option, warrant or other right to acquire additional securities of the Company,
except as otherwise noted.
<TABLE>
<CAPTION>
Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
- -------- ----- --------- --------
<S> <C> <C> <C> <C>
Common stock Gloria Felcyn, CPA 9,825,000 (1) 28.8%
par value 14395 Saratoga Ave., Suite 110
$.00001 Saratoga, California 95070
SAME nanoTronics Corporation 5,000,000 (2) 14.7%
attn: Gloria Felcyn, CPA
14395 Saratoga Ave., Suite 110
Saratoga, California 95070
SAME Helmut Falk Family Trust 4,825,000 (3) 14.2%
Gloria Felcyn, Trustee
14395 Saratoga Ave., Suite 110
Saratoga, California 95070
SAME Elwood G. Norris 4,645,000 (4) 13.6%
10989 Via Frontera
San Diego, California 92127
SAME Richard D. McDaniel 1,050,000 (4)(5)(6) 3.1%
10989 Via Frontera
San Diego, California 92127
SAME Michael A. Carenzo 427,500 (7) 1.3%
10989 Via Frontera
San Diego, California 92127
SAME Jayanta K. Maitra 273,095 (10) *
10989 Via Frontera
San Diego, California 92127
SAME Norman J. Dawson 201,270 (8) *
10989 Via Frontera
San Diego, California 92127
SAME Lowell W. Giffhorn 30,000 (9) *
10989 Via Frontera
San Diego, California 92127
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C> <C> <C>
SAME Robert Putnam 100,000 (11) *
10989 Via Frontera
San Diego, California 92127
SAME Donald R. Bernier 75,000 (4) *
10989 Via Frontera
San Diego, California 92127
SAME Peter vR. Cooper 50,000 (4) *
10989 Via Frontera
San Diego, California 92127
All directors & officers 6,851,865 (12) 20.1%
as a group (9 persons)
</TABLE>
* Less than 1%.
(1) As trustee of the Helmut Falk Family Trust and executor of the Helmut
Falk estate, Ms. Felcyn effectively controls the shares described in Notes
2 and 3 below.
(2) These shares have been issued but 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.
(3) These shares remain from 5,000,000 non-escrowed shares that were
originally issued to nanoTronics in connection with the ShBoom technology
acquisition and were subsequently transferred to the Helmut Falk Family
Trust.
(4) For each of Messrs. Norris, McDaniel, Bernier 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.
(5) Includes 1,000,000 common shares held by Sea Ltd., a corporation
through which Mr. McDaniel may direct certain investment powers.
(6) 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 Notes 2 and 3). Representatives of
nanoTronics have advised the Company that they believe Mr. McDaniel's
claim relates only to an interest in nanoTronics and that he therefore 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.
(7) Consists entirely of shares issuable upon the exercise of outstanding
stock options. A total of 90,000 options vested 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.
(8) Includes 83,953 shares issuable upon the exercise of outstanding stock
options.
29
<PAGE> 30
(9) Includes 30,000 shares issuable upon the exercise of outstanding stock
options.
(10) Includes 85,753 shares issuable upon the exercise of outstanding
stock options.
(11) Includes 100,000 shares issuable upon the exercise of outstanding
stock options.
(12) Includes 5,955,525 shares issued and outstanding and 896,340 shares
issuable upon exercise of stock options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions, or series of transactions, during fiscal
1996 or 1997, 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 further
development of that technology 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
30
<PAGE> 31
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.
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)
2.3 Form of Exchange Offer dated December 4, 1996 between the
Company and certain shareholders of Metacomp, Inc.
incorporated by reference to Exhibit 2.3 to Form 8-K dated
January 9, 1997 (1)
2.4 Letter of Transmittal to Accompany Shares of Common Stock of
Metacomp, Inc. Tendered Pursuant to the Exchange Offer Dated
December 4, 1996 incorporated by reference to Exhibit 2.4 to
Form 8-K dated January 9, 1997 (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)
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C>
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)
3.3.2 Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Delaware Secretary of State
on June 19,1997 (2)
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)
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)
4.3 Form of 6% Convertible Subordinated Promissory Note due
September 30, 1998 aggregating $1,500,000 to six investors
incorporated by reference to Exhibit 4.3 to Form 10-QSB for
fiscal quarter ended August 31, 1996 (1)
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C> <C>
4.4 Form of 5% Convertible Term Debenture (CC Investments, LDC)
due June 2, 1999 aggregating $2,000,000 to two investors
incorporated by reference to Exhibit 4.4 to Form 8-K dated
June 16, 1997 (1)
4.5 Form of Stock Purchase Warrant (CC Investments, LDC) dated
June 2, 1997 exercisable to purchase an aggregate of 400,000
common shares at $1.69125 per share until June 2, 2002,
granted to two investors in connection with the offering of
securities in Exhibit 4.4 incorporated by reference to
Exhibit 4.5 to Form 8-K dated June 16, 1997 (1)
4.6 Registration Rights Agreement dated June 2, 1997 by and among
the Company and CC Investments, LDC and the Matthew Fund,
N.V. related to the registration of the common stock related
to Exhibits 4.4 and 4.5 incorporated by reference to Exhibit
4.6 to Form 8-K dated June 16, 1997 (1)
4.7 Form of Warrant to Purchase Common Stock (Swartz Family
Partnership, L.P.) dated June 2, 1997 exercisable to purchase
an aggregate of 211,733 common shares at $1.69125 per share
until June 2, 2002, granted to a group of investors in
connection with the offering of securities in Exhibit 4.4
incorporated by reference to Exhibit 4.7 to Form 8-K dated
June 16, 1997 (1)
4.8 Registration Rights Agreement dated June 2, 1997 by and among
the Company and Swartz Investments, LLC related to the
registration of the common stock related to Exhibit 4.7
incorporated by reference to Exhibit 4.8 to Form 8-K dated
June 16, 1997 (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 incorporated by reference to Exhibit 10.2.1
to Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.3 Lease Agreement between the Company's subsidiary Metacomp,
Inc. and Clar-O-Wood Partnership, a California limited
partnership dated April 11, 1991 as amended November 11, 1992
and November 2, 1995 (2)
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)
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C>
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)
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)
10.12.1 First Amendment to Employment Agreement dated May 8, 1996
between the Company and Michael A. Carenzo dated September
23, 1996 (2)
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)
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C> <C>
10.14 Sales Contractual Agreement dated June 20, 1996 between the
Company and Compunetics Incorporated incorporated by
reference to Exhibit 10.14 to Form 10-KSB for fiscal year
ended May 31, 1996 (1)
10.15 Sales Contractual Agreement dated July 31, 1996 between the
Company and Premier Technical Sales, Inc. incorporated by
reference to Exhibit 10.15 to Form 10-KSB for fiscal year
ended May 31, 1996 (1)
10.16 Employment Agreement dated January 1, 1997 between the
Company and Norman J. Dawson (2)
10.17 Employment Agreement dated January 1, 1997 between the
Company and Jayanta K. Maitra (2)
10.18 Technology License and Distribution Agreement dated June 23,
1997 between the Company and Sun Microsystems, Inc. (2)
23.0 CONSENTS OF EXPERTS AND COUNSEL.
23.1 Consent of BDO Seidman, LLP (2)
23.2 Consent of Harlan & Boettger, LLP, Certified Public Accountants (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)
99.5 Press Release of the Company dated November 4, 1996
incorporated by reference to Exhibit 99.5 to Form 8-K dated
January 9, 1997 (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, 1997
(b) The Company filed no reports on Form 8-K during the last fiscal
quarter of the year ended May 31, 1997. The Company did file a
report on Form 8-K on June 17, 1997 which was subsequent to the
fiscal year end.
35
<PAGE> 36
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
July 17, 1997
By: /s/ LOWELL W. GIFFHORN
-------------------------------
Lowell W. Giffhorn
Chief Financial 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/MICHAEL A. CARENZO President, Director, Chief Executive July 17, 1997
---------------------- Officer
Michael A. Carenzo
/s/LOWELL W. GIFFHORN Chief Financial Officer, Principal July 17, 1997
---------------------- Financial Officer and Principal
Lowell W. Giffhorn Accounting Officer
/s/ROBERT PUTNAM Director, Treasurer and Secretary July 17, 1997
----------------------
Robert Putnam
/s/ELWOOD G. NORRIS Chairman and Director July 17, 1997
----------------------
Elwood G. Norris
/s/NORMAN J. DAWSON Vice President, General Manager July 17, 1997
---------------------- and Director
Norman J. Dawson
/s/DONALD BERNIER Director July 17, 1997
----------------------
Donald Bernier
/s/PETER vR. COOPER Director July 17, 1997
----------------------
Peter vR. Cooper
/s/RICHARD D. MCDANIEL Director July 17, 1997
----------------------
Richard D. McDaniel
</TABLE>
<PAGE> 37
Patriot Scientific Corporation
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants................... F-2-
F-3
Consolidated Balance Sheet as of May 31, 1997........................ F-4
Consolidated Statements of Operations for the Years Ended
May 31, 1997 and 1996......................................... F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended May 31, 1997 and 1996.................................. F-6
Consolidated Statements of Cash Flows for the Years ended
May 31, 1997 and 1996......................................... F-7
Summary of Accounting Policies....................................... F-8-
F-11
Notes to Consolidated Financial Statements........................... F-12 -
F-22
F-1
<PAGE> 38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Patriot Scientific Corporation
San Diego, California
We have audited the accompanying consolidated balance sheet of Patriot
Scientific Corporation as of May 31, 1997 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the two
year period ended May 31, 1997. 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. The consolidated
financial statements give retroactive effect to the merger of Patriot Scientific
Corporation and Metacomp, Inc., which has been accounted for as a pooling of
interests as described in Note 1 to the consolidated financial statements. We
did not audit the financial statements of Metacomp Inc., the Company's majority
owned subsidiary for 1996, which statements reflect total assets of $838,193 as
of July 31, 1996 and total revenues of $2,224,708 for the year then ended.
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 and the report of other auditors for 1996 provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors for 1996,
the consolidated financial statements referred to above, present fairly, in all
material respects, the financial position of Patriot Scientific Corporation as
of May 31, 1997, and the results of their operations and their cash flows for
each of the years in the two year period ended May 31, 1997 in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
Denver, Colorado
July 3, 1997
F-2
<PAGE> 39
(Harlan & Boettger, LLP, Certified Public Accountants Letterhead)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of METACOMP, INC.:
We have audited the balance sheet of METACOMP, Inc. a California Corporation, as
of July 31, 1996, and the related statements of operations, changes in
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of July 31,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Harlan & Boettger, LLP
San Diego, California
December 17, 1996
F-3
<PAGE> 40
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
May 31, 1997
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 477,675
Accounts receivable, net of allowance
of $5,000 for uncollectible accounts 260,120
Inventories (Note 2) 529,533
Prepaid expenses 88,353
------------
Total current assets 1,355,681
PROPERTY AND EQUIPMENT, net (Note 3) 380,312
OTHER ASSETS:
Patents and trademarks, net 193,688
Other 6,773
------------
Total other assets 200,461
------------
$ 1,936,454
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 340,983
Accrued liabilities 165,236
Current portion-capital lease obligations (Note 8) 2,721
------------
Total current liabilities 508,940
------------
CAPITAL LEASE OBLIGATIONS (Note 8) 3,534
------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 5, 7 and 10)
Common Stock, $.00001 par value; 40,000,000 shares
authorized: issued and outstanding 33,068,329 331
Additional paid-in capital 12,768,487
Accumulated deficit (11,344,838)
------------
Total stockholders' equity 1,423,980
------------
$ 1,936,454
------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE> 41
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(SEE NOTE 1)
Years Ended May 31, 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 1,847,421 $ 2,224,708
Cost of sales 1,003,445 1,067,190
------------- -------------
Gross profit 843,976 1,157,518
Operating expenses:
Research and development 1,367,937 1,527,759
Selling, general and
administrative 1,723,751 1,358,673
Amortization 612,333 612,333
------------- -------------
3,704,021 3,498,765
------------- -------------
Other income (expenses):
Interest income 39,302 54,013
Interest expense (47,506) (49,943)
Non-cash interest expense
related to convertible
notes (Note 5) (375,000) -
------------- -------------
(383,204) 4,070
------------- -------------
Net loss before taxes on income
and extraordinary item (3,243,249) (2,337,177)
Taxes on income (Note 6) -- --
------------- -------------
Net loss before extraordinary
item (3,243,249) (2,337,177)
Extraordinary income (Note 9) 1,779,457 1,779,457
------------- -------------
Net loss $ (1,463,792) $ (557,720)
============= =============
Net loss per share before
extraordinary item $ (0.12) $ (0.09)
Extraordinary income 0.07 0.07
------------- -------------
Net loss per share $ (0.05) $ (0.02)
============= =============
Weighted average number of
common shares outstanding
during the period (Note 5) 27,188,255 24,601,501
============= =============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE> 42
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (See Note 1)
Years Ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 1, 1995 28,330,569 $283 $ 8,311,818 $ (7,581,626) $ 730,475
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, net of offering costs 700,000 7 349,993 -- 350,000
Issuance of common stock in
private offering for cash at
$1.28, net of offering costs 140,281 2 179,998 -- 180,000
Issuance of common stock in
private offering for cash at
$1.58, net of offering costs 253,166 3 399,997 -- 400,000
Value assigned to warrants issued -- -- 8,400 -- 8,400
Exercise of warrants at $.50
and $1.58 per share 826,583 8 549,992 -- 550,000
Exercise of options at $.20
per share 464,658 4 86,079 -- 86,083
Net loss -- -- -- (557,720) (557,720)
---------- ---- ----------- ------------ ------------
BALANCE, May 31, 1996 30,985,257 310 10,151,024 (8,139,346) 2,011,988
Exercise of warrants at $1.58
per share 154,883 2 239,499 -- 239,501
Common stock issued for services
at $1.28 per share 22,600 -- 28,927 -- 28,927
Exercise of stock options at $.20 to
$.625 per share 380,486 4 165,857 -- 165,861
Non-cash interest expense related to
convertible notes recorded to
additional paid-in capital -- -- 375,000 -- 375,000
Non-cash compensation expense -- -- 291,180 -- 291,180
Conversion of 6% Convertible
Subordinated Notes plus interest
at $.85 to $1.27 per share 1,525,103 15 1,517,000 -- 1,517,015
Adjustment for Metacomp Inc.
pooling of interests from year-
end change (Note 1) -- -- -- (1,741,700) (1,741,700)
Net loss -- -- -- (1,463,792) (1,463,792)
---------- ---- ----------- ------------ ------------
BALANCE, May 31, 1997 33,068,329 $331 $12,768,487 $(11,344,838) $ 1,423,980
========== ==== =========== ============ ===========
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-6
<PAGE> 43
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years Ended May 31, 1997 1996
-------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,463,792) $ (557,720)
Adjustments to reconcile net loss
to cash used in operating activities:
Adjustment for Metacomp Inc. pooling of
interests from year-end change (Note 1) (1,741,700) --
Amortization and depreciation 836,692 770,447
Common stock and warrants issued for services 28,927 269,450
Non-cash interest expense related to
convertible notes 375,000 --
Non-cash compensation expense 291,180 --
Changes in:
Accounts and note receivable (60,719) 109,399
Inventories 81,623 (243,302)
Prepaid and other assets (23,163) (6,322)
Accounts payable and accrued expenses (57,216) 170,107
Chapter 11 debt obligations -- (1,845,518)
-------------- ------------
Net cash used in operating activities (1,733,168) (1,333,459)
-------------- ------------
INVESTING ACTIVITIES:
Purchase of property, equipment and patents (238,447) (343,330)
-------------- ------------
Net cash used in investing activities (238,447) (343,330)
-------------- ------------
FINANCING ACTIVITIES:
Principal payments on notes payable and
long-term debt (320,016) (164,117)
Proceeds from issuance of common stock
and exercise of common stock warrants
and options 405,362 1,569,783
Proceeds from issuance of convertible
notes and accrued interest 1,500,000 --
-------------- ------------
Net cash provided by financing activities 1,585,346 1,405,666
-------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (386,269) (271,123)
CASH AND CASH EQUIVALENTS, beginning of year 863,944 1,135,067
-------------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 477,675 $ 863,944
============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Convertible notes and accrued interest
exchanged for common stock $ 1,500,000 $ --
Cash payments for interest 30,491 49,943
============== ============
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-7
<PAGE> 44
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Patriot Scientific Corporation (the "Company") is engaged in the development and
marketing of patented microprocessor technology and high-performance digital
communication products. The Company also owns and is developing innovative radar
and antenna technology.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the Company
and its majority owned subsidiary, Metacomp Inc. All material intercompany
transactions and balances have been eliminated in consolidation.
As described in Note 1, effective December 26, 1996, the Company acquired 96.9%
of the common stock of Metacomp. The business combination was accounted for as a
pooling-of-interests and, accordingly, the Company's financial statements have
been presented to include the results of Metacomp as though the business
combination occurred as of June 1, 1995.
DEVELOPMENT STAGE COMPANY
As a result of the business combination with Metacomp, the Company no longer
qualifies as a development stage company. Accordingly, the consolidated
statements of operations and statements of cash flows no longer include
development stage cumulative results.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable.
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.
Concentrations of credit risk with respect to accounts receivable are limited
due to the wide variety of customers and markets which comprise the Company's
customer base, as well as their dispersion across many different geographic
areas. The Company routinely assesses the financial strength of its customers
and, as a consequence, believes that its accounts receivable credit risk
exposure is limited. Generally, the Company does not require collateral or other
security to support customer receivable.
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximated fair value because of the immediate or short-term maturity of these
instruments.
F-8
<PAGE> 45
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories consist of raw materials, work in process and finished goods and are
valued at the weighted average cost method, which approximates cost on a
first-in, first-out basis, not in excess of market value.
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 4).
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. The carrying value of
patents and trademarks is periodically reviewed and impairments, if any, are
recognized when the expected future benefit to be derived from individual
intangible assets is less than its carrying value.
REVENUE RECOGNITION
Revenue is recognized upon the shipment of product to the customer. Licensing
and royalty income is recognized when earned.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS 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.
F-9
<PAGE> 46
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 dependent 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 4).
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.
During the quarter ended May 31, 1997, based upon information then available,
the Company revised its estimates regarding the recovery of certain inventories.
As a result, the Company increased existing reserves for obsolescence by
approximately $110,000.
STOCK OPTIONS
The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related Interpretations in accounting for all stock option plans. Under APB
Opinion 25, compensation cost has been recognized for stock options granted to
employees when the option price is less than the market price of the underlying
common stock on the date of grant.
SFAS Statement No. 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income as if compensation
cost for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. To provide the required
pro forma information, the Company estimates the fair value of each stock option
at the grant date by using the Black-Scholes option-pricing model.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
F-10
<PAGE> 47
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128").
This pronouncement provides a different method of calculating earnings per share
than is currently used in accordance with Accounting Board Opinion ("APB") No.
15, "Earnings Per Share." SFAS 128 provides for the calculation of "Basic" and
"Dilutive" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in 1998 and its implementation is not expected to have a
material effect on the consolidated financial statements.
RECLASSIFICATIONS
Certain items included in the 1996 financial statements have been reclassified
to conform to the current year presentation.
F-11
<PAGE> 48
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITION OF METACOMP, INC. COMMON STOCK
On December 26, 1996, the Company acquired 96.9% of the common stock of
Metacomp, Inc. ("Metacomp") in exchange for 1,272,068 shares of the Company's
common stock. Metacomp designs, manufactures, and sells high-performance digital
communication products. The business combination was accounted for as a pooling
of interests. Accordingly, the Company's financial statements have been restated
to include the results of Metacomp for all periods presented. Metacomp's fiscal
year-end has been changed from July 31 to May 31 to conform to the Company's
fiscal year-end. Based on the difference in fiscal year-ends, results of
operations for the two months ended July 31, 1996 have been included in the
consolidated statements of operations for both years ended May 31, 1997 and
1996. For the two months ended July 31, 1996, Metacomp recorded total revenues
of $239,501, a net loss before extraordinary item of $37,759, extraordinary
income of $1,779,457 and net income after extraordinary item of $1,741,700. The
accompanying consolidated statements of stockholders' equity and cash flows for
the year ended May 31, 1997, have also been adjusted to eliminate the net income
after extraordinary item. The extraordinary income was the primary source of
income for these two months.
Separate net sales, net income and related per share amounts of the merged
entities through the date of the business combination are presented in the
following table. In addition, the table includes unaudited pro forma net income
and net income per share amounts as of the date of the business combination
which reflect the elimination of the nonrecurring merger costs and expenses.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales
Patriot $ 19,362 $ --
Metacomp 874,377 2,224,708
----------- -----------
Total $ 893,739 $ 2,224,708
----------- -----------
Net income (loss)
Patriot $(1,202,485) $(2,358,649)
Metacomp before extraordinary income 40,706 1,910
Metacomp extraordinary income 1,779,457 1,779,457
----------- -----------
Pro forma net income (loss) 617,678 (577,282)
Merger costs and expenses (30,000) --
Interest income (6,000) (19,562)
Interest expense 15,625 39,124
----------- -----------
Net income (loss), as reported $ 597,303 $ (557,720)
----------- -----------
Net income (loss) per share
As reported $ 0.02 $ (0.02)
Pro forma $ 0.02 $ (0.02)
</TABLE>
Merger costs and expenses consisted of legal and accounting fees.
F-12
<PAGE> 49
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES Inventories at May 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Component parts $344,334
Work in process 90,086
Finished goods 95,113
--------
$529,533
</TABLE>
3. PROPERTY AND Property and equipment consisted of the following at May 31,
EQUIPMENT 1997:
<TABLE>
<S> <C>
Computer equipment and software $ 737,832
Furniture and fixtures 304,249
Laboratory equipment 193,954
----------
1,236,035
Less accumulated depreciation and amortization 855,723
----------
Net property and equipment $ 380,312
----------
Depreciation expense was approximately $184,055 and
$146,903 for the years ended May 31, 1997 and 1996.
At May 31, 1997 property and equipment includes
certain equipment under capital lease agreements
with an original cost of $36,427 and accumulated
depreciation of $21,310.
</TABLE>
4. 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
F-13
<PAGE> 50
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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, 1997 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 releaseable 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 5,00,000 shares
were released to the director and the escrow agreement was terminated. Effective
May 31, 1994, additional cost totaling $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, 1997 no amounts were due under this agreement; however, an advance of
$17,000 against the royalty was paid at the inception of the agreement.
5. 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
F-14
<PAGE> 51
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the Board of Directors. During fiscal 1997 and 1996, the Company issued
22,600 and 195,000 shares of common stock under the Plan recording compensation
expense of $28,928 and $242,250 for awards valued at an estimated fair market
value 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.
Additionally, in connection with a $250,000 manufacturing line-of-credit
agreement and a sales contractual agreement, the Company granted warrants which
were exercisable into 50,000 shares of the Company's common stock at $1.58 per
share and 25,000 shares at $2.85 per share.
During fiscal 1997, a total of 151,583 shares of the Company's common stock were
issued upon the exercise of outstanding warrants which had been issued in fiscal
1996. The net proceeds from the exercise were $239,501.
During fiscal 1997, the Company issued for cash an aggregate of $1,500,000 of
unsecured 6% Convertible Subordinated Promissory Notes due September 30, 1998
("Notes"). The principal and interest amount of each Note could at the election
of the Note holder be converted one or more times into fully paid and
nonassessable shares of common stock, $.00001 par value, ("Shares") of the
Company, at a price which was the lower of (i) $2.00 per share or (ii) 80% of
the average of the five days market price prior to conversion but not less than
$0.80 per share. As of May 31, 1997 all Notes plus accrued interest had been
converted into 1,525,103 shares of common stock of the Company.
According to the Securities and Exchange Commission, convertible debt
instruments which are convertible at a discount to market should be accounted
for by treating such discount as additional interest expense. The Company
computed the amount of the discount based on the difference between the
conversion price and fair value of the underlying common stock on the date the
Notes were issued. The Company has recorded $375,000 of additional paid-in
capital for the discount related to the embedded interest in the Notes. This
same amount has been expensed during fiscal 1997 under the caption "Non-cash
interest expense related to convertible notes."
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).
F-15
<PAGE> 52
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 on
the date of grant for incentive stock options or not less than 85% of the fair
market value on the date of grant for non-qualified stock options. 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 are granted (five years in the case of a significant stockholder).
During the fiscal year ended May 31, 1997, the Company issued options to
purchase 1,713,000 shares of stock under the non-qualified provisions of the
plan at an exercise price of 85% of the fair market value on the date of grant
and recorded, during the quarter ended May 31, 1997, corresponding non-cash
compensation in the amount of $291,180.
At May 31, 1997, options to purchase 3,290,526 shares of the Company's Common
Stock had been granted under the 1996 Stock Option Plan. Of this amount,
1,875,000 are subject to shareholders' approval to increase the number of shares
reserved for issuance from 1,500,000 to 3,500,000.
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
requires the Company to provide pro forma information regarding net loss and net
loss per share as if compensation costs for the Company's stock option plans and
other stock awards had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. The Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used respectively: dividend
yield of zero percent for all years; expected volatility of 40 percent;
risk-free interest rates of 6.0 to 6.4 percent; and expected lives of 3 to 5
years.
F-16
<PAGE> 53
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the accounting provisions for SFAS No. 123, the Company's net loss per
share would have been increased by the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
As reported
Net loss before extraordinary item $(3,243,249) $(2,337,177)
Extraordinary item 1,779,457 1,779,457
----------- -----------
Net loss $(1,463,792) $ (557,720)
=========== ===========
Proforma
Net loss before extraordinary item $(3,735,409) $(2,549,503)
Extraordinary item 1,779,457 1,779,457
----------- -----------
Net loss $(1,955,952) $ (770,046)
=========== ===========
As reported per share
Net loss before extraordinary item $ (0.12) $ (0.09)
Extraordinary item 0.07 0.07
----------- -----------
Net loss $ (0.05) $ (0.02)
=========== ===========
Proforma per share
Net loss before extraordinary item $ (0.14) $ (0.10)
Extraordinary item 0.07 0.07
----------- -----------
Net loss $ (0.07) $ (0.03)
=========== ===========
</TABLE>
During the initial phase-in period of SFAS 123, the effect on pro forma results
are not likely to be representative of the effects on pro forma results in
future years since options vest over several years and additional awards could
be made each year.
F-17
<PAGE> 54
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock option plans and warrants as of
May 31, 1997 and 1996 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------------
Weighted
Average Range of
Exercise Exercise
Shares Price Shares Prices
--------- -------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 3,077,775 $ 1.08 1,609,713 $ .18 - .88
Granted 1,940,000 1.36 2,724,666 .18 - 2.85
Cancelled (362,375) 2.01 (207,500) .18 - .63
Exercised (532,069) 0.76 (1,049,104) .18 - 1.58
--------- -------- --------- --------------
Outstanding, end of year 4,123,331 $ 1.24 3,077,775 $ .18 - 2.85
========= ======== ========== ==============
--------- -------- ---------- --------------
Exercisable, end of year 1,526,332 $ 0.85 1,190,670 $ .18 - 2.85
========= ======== ========== ==============
Weighted average fair value of options
and warrants granted during the year $ 0.68 $ 1.15
======== ==============
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at May 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 5/31/97 Life Price at 5/31/97 Price
- --------------- ------------ ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.18 113,331 4.56 $0.18 113,331 $ 0.18
0.30 - 0.37 575,000 1.63 0.35 493,750 0.36
0.50 - 0.94 1,315,000 3.11 0.74 524,050 0.68
1.12 - 1.76 1,590,000 4.59 1.22 155,001 1.25
2.28 - 2.30 530,000 3.82 2.30 240,200 2.30
- --------------- --------- ---- ----- --------- --------
$ 0.18 - 2.30 4,123,331 3.61 $1.24 1,526,332 $ 0.85
=============== ========= ==== ===== ========= ========
</TABLE>
F-18
<PAGE> 55
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
As of May 31, 1997, the net deferred tax asset recorded and its approximate tax
effect consisted of the following.
<TABLE>
<S> <C>
Net operating loss carryforwards $ 2,039,000
Purchased technology 642,000
Depreciation and amortization 242,000
Other, net 188,000
-----------
3,111,000
Valuation allowance (3,111,000)
-----------
Net deferred tax asset $ -
===========
</TABLE>
As of May 31, 1997, a valuation allowance equal to the net deferred tax asset
recognized has been recorded, as Management has not determined that it is more
likely than not that the deferred tax asset will be realized.
At May 31, 1997, the Company has net operating loss carryforwards of
approximately $5,997,000 which expire through 2012 and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended.
7. 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. At the Company's discretion, the
Company may match 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 $642 and $1,045 in fiscal 1997 and 1996.
F-19
<PAGE> 56
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENT AND CAPITAL
LEASE OBLIGATIONS
Patriot Scientific Corp. through its subsidiary, Metacomp, entered into an
eight year operating lease for its office and manufacturing facilities located
in San Diego, California.
The Company also leases a copier, computers, and test equipment at interest
rates between (4-18%). Future minimum lease payments required under the
operating and capital leases are as follows:
<TABLE>
<CAPTION>
Operating Capital Leases
------------ --------------
<S> <C> <C>
1998 $ 65,590 $ 3,104
1999 63,460 2,388
2000 10,610 1,393
------------ ---------
Total minimum lease payments 139,660 6,885
Less amount representing interest - 630
------------ ---------
Present value of net minimum
lease payments 139,660 6,255
Less current portion - 2,721
------------ ---------
Total $ 139,660 $ 3,534
============ =========
</TABLE>
Rent expense for fiscal 1997 and 1996 was $80,371 and $89,918,respectively.
9. EXTRAORDINARY INCOME
The extraordinary income is a gain from the discharge of debt as a result of the
completion of Metacomp's Plan of Reorganization under Chapter 11 of the U.S.
Bankruptcy Code as of July, 1996.
In 1990 Metacomp filed a Chapter 11 bankruptcy petition. In 1991 the Bankruptcy
Court confirmed Metacomp's plan of reorganization which provided for 60 monthly
payments to creditors with minimum payments averaging $23,400 per month or
larger depending on operating results. As of July, 1996, the unsecured creditors
were paid approximately 13% of their approved claims and the balance was
discharged. One secured creditor was scheduled to be paid in full as part of the
plan of reorganization. As of July 31, 1996, this secured creditor had a
remaining balance of $312,306. The Company paid to this secured creditor a
remaining balance of $252, 306 plus accrued interest in conjunction with the
business combination with Metacomp.
F-20
<PAGE> 57
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SALES INFORMATION
EXPORT SALES
During the fiscal year ended May 31, 1997, the Company's sales by geographic
area consisted of the following:
<TABLE>
<S> <C>
Domestic sales $1,428,000
Foreign sales:
Canada 244,000
Other 175,000
----------
Total foreign sales 419,000
----------
Total net product sales $1,847,000
==========
</TABLE>
The Company has no foreign assets. During the fiscal year ended May 31, 1996,
the Company's foreign sales were less than 10% of total sales.
SALES TO MAJOR CUSTOMERS
The Company had sales in excess of 10% to the following customers:
<TABLE>
<CAPTION>
1997 1996
---- ----
Customer Sales Percent Sales Percent
-------- ----- ------- ----- -------
<S> <C> <C> <C> <C>
A $473,000 25.6% $396,000 17.8%
B $472,000 25.5% $450,000 20.2%
C $212,000 11.5% - -
D - - $330,000 14.8%
</TABLE>
11. SUBSEQUENT EVENTS
FINANCING
On June 2, 1997, the Company issued to a limited number of investors for cash an
aggregate of $2,000,000 of unsecured 5% Convertible Term Debentures due June 2,
1999 and Stock Purchase Warrants ("Securities") with a right to purchase an
aggregate 611,733 shares of common stock, par value $.00001 per share, at an
exercise price of $1.69125. The principal and interest amount of each Debenture
may, at the election of the holder, be converted in whole or in part and from
time to time into fully paid and nonassessable shares of common stock, $.00001
par value, of the Company, at a price which is the lower of (i) $1.1646 per
share or (ii) depending on the number of days the
F-21
<PAGE> 58
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Debentures have been held after the funding date, from 75% to 91% of the average
of the closing bid prices for the common stock for the ten consecutive trading
days ending on the trading day immediately preceding such conversion date. If
the Debentures have not been converted into common shares of the Company by June
2, 1999, under certain conditions the Debentures will automatically be converted
into shares of the common stock of the Company. Under certain conditions, at the
election of the Company and for a certain period of time, the Company may issue
an additional $1,000,000 of unsecured 5% Convertible Term Debentures due June 2,
1999 and Stock Purchase Warrants with a right to purchase an additional 305,867
shares of common stock.
The Company expects that the net proceeds of the offering, $1,760,000 after
offering costs, will be used for the purchase of software development tools,
chip development, silicon runs, radar and antenna development, development of
communications software, marketing and sales collateral and for general
corporate purposes.
According to the Securities and Exchange Commission, convertible debt
instruments which are convertible at a discount to market should be accounted
for by treating such discount as additional interest expense. The Company
computed the amount of the discount based on the difference between the
conversion price and fair value of the underlying common stock on the date the
Notes were issued. The Company will record in fiscal 1998 $507,300 of additional
paid-in capital for the discount related to the embedded interest in the Notes.
This same amount will be expensed during fiscal 1998 under the caption "Non-cash
interest expense related to convertible notes."
PREFERRED STOCK
On June 19, 1997, a majority of the shareholders of the Company approved an
increase in the authorized shares of capital stock to 65,000,000 shares of which
5,000,000 shares were designated Preferred Stock, par value $.00001, and
60,000,000 shares were designated as Common Stock, par value $.00001. As of July
3, 1997, none of the Preferred Stock was issued or outstanding.
F-22
<PAGE> 59
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended May 31, 1997 Commission File No. 0-22182
--- -- ---- -------
PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)
================================================================================
EX-1
<PAGE> 60
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)
2.3 Form of Exchange Offer dated December 4, 1996 between the Company and
certain shareholders of Metacomp, Inc. incorporated by reference to Exhibit
2.3 to Form 8-K dated January 9, 1997 (1)
2.4 Letter of Transmittal to Accompany Shares of Common Stock of Metacomp, Inc.
Tendered Pursuant to the Exchange Offer Dated December 4, 1996 incorporated
by reference to Exhibit 2.4 to Form 8-K dated January 9, 1997 (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)
3.3.2 Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Delaware Secretary of State
on June 19,1997 (2)
</TABLE>
EX-2
<PAGE> 61
<TABLE>
<S> <C> <C>
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)
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)
4.3 Form of 6% Convertible Subordinated Promissory Note due September 30,
1998 aggregating $1,500,000 to six investors incorporated by reference
to Exhibit 4.3 to Form 10-QSB for fiscal quarter ended August 31, 1996 (1)
4.4 Form of 5% Convertible Term Debenture (CC Investments, LDC) due
June 2, 1999 aggregating $2,000,000 to two investors incorporated
by reference to Exhibit 4.4 to Form 8-K dated June 16, 1997 (1)
4.5 Form of Stock Purchase Warrant (CC Investments, LDC) dated June 2, 1997
exercisable to purchase an aggregate of 400,000 common shares at $1.69125
per share until June 2, 2002, granted to two investors in connection with
the offering of securities in Exhibit 4.4 incorporated by reference to
Exhibit 4.5 to Form 8-K dated June 16, 1997 (1)
4.6 Registration Rights Agreement dated June 2, 1997 by and among the Company
and CC Investments, LDC and the Matthew Fund, N.V. related to the
registration of the common stock related to Exhibits 4.4 and 4.5
incorporated by reference to Exhibit 4.6 to Form 8-K dated June 16, 1997 (1)
4.7 Form of Warrant to Purchase Common Stock (Swartz Family Partnership, L.P.)
dated June 2, 1997 exercisable to purchase an aggregate of 211,733 common
shares at $1.69125 per share until June 2, 2002, granted to a group of
investors in connection with the offering of securities in Exhibit 4.4
incorporated by reference to Exhibit 4.7 to Form 8-K dated June 16, 1997 (1)
</TABLE>
EX-3
<PAGE> 62
<TABLE>
<S> <C> <C>
4.8 Registration Rights Agreement dated June 2, 1997 by and among the Company
and Swartz Investments, LLC related to the registration of the common
stock related to Exhibit 4.7 incorporated by reference to Exhibit 4.8 to
Form 8-K dated June 16, 1997 (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
incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal
year ended May 31, 1996 (1)
10.3 Lease Agreement between the Company's subsidiary Metacomp, Inc. and
Clar-O-Wood Partnership, a California limited partnership dated
April 11, 1991 as amended November 11, 1992 and November 2, 1995 (2)
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)
</TABLE>
EX-4
<PAGE> 63
<TABLE>
<S> <C> <C>
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)
10.12.1 First Amendment to Employment Agreement dated May 8, 1996 between
the Company and Michael A. Carenzo dated September 23, 1996 (2)
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 incorporated by reference to Exhibit 10.14 to
Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.15 Sales Contractual Agreement dated July 31, 1996 between the Company and
Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to
Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.16 Employment Agreement dated January 1, 1997 between the
Company and Norman J. Dawson (2)
10.17 Employment Agreement dated January 1, 1997 between the
Company and Jayanta K. Maitra (2)
10.18 Technology License and Distribution Agreement dated June 23, 1997
between the Company and Sun Microsystems, Inc. (2)
23.0 CONSENTS OF EXPERTS AND COUNSEL.
23.1 Consent of BDO Seidman, LLP (2)
23.2 Consent of Harlan & Boettger, LLP, Certified Public Accountants (2)
27.0 Financial Data Schedule
</TABLE>
EX-5
<PAGE> 64
<TABLE>
<S> <C> <C>
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)
99.5 Press Release of the Company dated November 4, 1996 incorporated by
reference to Exhibit 99.5 to Form 8-K dated January 9, 1997 (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, 1997
</TABLE>
EX-6
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 3.3.2
CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION
OF THE COMPANY
EX-7
<PAGE> 2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION OF
PATRIOT SCIENTIFIC CORPORATION
Patriot Scientific Corporation, a corporation duly organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
The amendment to the Corporation's Certificate of Incorporation set forth below
was duly adopted in accordance with the provisions of Section 242 and has been
consented to in writing by the stockholders, in accordance with Section 228 of
the General Corporation Law of the State of Delaware.
The first paragraph of the FIFTH Article of the Certificate of Incorporation of
the Corporation be amended to read as follows:
FIFTH. The aggregate number of shares of capital stock of all classes which the
Corporation shall have authority to issue is SIXTY-FIVE MILLION (65,000,000),
having a par value of $.00001 per share, of which SIXTY MILLION (60,000,000)
shall be designated Common Stock (the "Common Stock" or "Common Shares"), and
FIVE MILLION (5,000,000) shall be designated Preferred Stock, par value $.00001
per share (the "Preferred Stock"). The Preferred Stock may be issued from time
to time in one or more series. All shares shall be issued for such consideration
or considerations as the Board of Directors of the Corporation may from time to
time determine. All rights, preferences, voting powers, relative, participating,
optional or other special rights and privileges, and qualifications, limitations
or restrictions of the Preferred Stock shall be fixed by the Board of Directors
of the Corporation. The rights, preferences, voting powers, relative,
participating, optional or other special rights and privileges, and
qualifications, limitations or restrictions of the Common Stock shall be
expressly made subject and subordinate to those that may be fixed with respect
to any shares of the Preferred Stock and shall be as follows:
IN WITNESS WHEREOF, Patriot Scientific Corporation has caused this Certificate
to be executed by Michael A. Carenzo, its authorized officer, on this 24th day
of June, 1997.
/s/ MICHAEL A. CARENZO
Michael A. Carenzo, Chief Executive Officer
EX-8
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 10.3
LEASE AGREEMENT BETWEEN THE COMPANY'S SUBSIDIARY METACOMP, INC. AND
CLAR-O-WOOD PARTNERSHIP, A CALIFORNIA LIMITED PARTNERSHIP DATED
APRIL 11, 1991 AS AMENDED NOVEMBER 11, 1992 AND NOVEMBER 2, 1995
EX-9
<PAGE> 2
STANDARD INDUSTRIAL LEASE- MULTI-TENANT
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
(Pertinent Excerpts)
1. PARTIES. This lease, dated, for reference purposes only April 11, 1991 is
made by and between Clar-O-Wood, Partnership, a California limited
partnership (herein called "Lessor") and Metacomp, Inc., a California
Corporation (herein called ("lessee")
2. PREMISES, PARKING AND COMMON AREAS
2.1. PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor
from the term. At the rental, and upon all of the conditions set forth
herein, real property situated in the County of San Diego. State of
California commonly known as 10989 Via Frontera, San Diego and
described as the approximately 5,240 square feet of space herein
referred to as the "premises" as may be outlined on an Exhibit
attached hereto, including rights to the Common Areas as hereinafter
specified but not including any rights to the roof of the Premises or
to any Building in the Industrial Center. The Premises are a portion
of a building, herein referred to as the "Building". The Premises, the
Building, the Common Areas, the land upon which the same are located,
along with all other buildings, and improvements thereon, are herein
collectively referred to as the "Industrial Center".
3. TERM. The term of this Lease shall be for Twenty-four (24) months
commencing on May 1, 1991 and ending on April 30, 1993 unless sooner
terminated pursuant to any provision hereof.
4. RENT.
4.1. BASE RENT. Lessee shall pay to Lessor as Base Rent for the Premises,
without any offset or deduction, except as may be otherwise expressly
provided in this Lease, on the 1st day of each month of the term
hereof, monthly payments in advance of $3,720.40. Lessee shall pay
Lessor upon execution hereof $3,720.40 as Base Rent for May, 1991 Rent
for any period during the term hereof which is for less than one month
shall be a pro rata portion of the Base Rent. Rent shall be payable in
lawful money of the United States to Lessor at the address stated
herein or to such other persons or at such other places or Lessor may
designate in writing.
4.2. OPERATING EXPENSES. Lessee shall pay to Lessor during the term hereof,
in addition to the Base Rent, Lessee's Share, as hereinafter defined,
of all operating Expenses, as hereinafter defined, during each
calendar year of the term of this Lease in accordance with the
following provisions:
a) "Lessee's Share" is defined for purposes of this Lease as 6.63
percent.
b) "Operating Expenses" is defined for purposes of this Lease, as
all costs incurred by Lessor, if any, for:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
EX-10
<PAGE> 3
aa. The Common Areas, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers,
irrigation systems, Common area lighting facilities and
fences and gates.
bb. Trash Disposal Services
cc. Tenant directories
dd. Fire detection
ee. Security Services
ff. Any other services to be provided by Lessor that is
elsewhere in this Lease stated to be an "Operating
Expenses."
(xxix) The cost of water, gas and electricity to service the
Common Areas
a) The inclusion of the improvements, facilities and services set
forth in paragraph 4.2 (b) (i) of the definition of Operating
expenses shall not be deemed to impose an obligation upon Lessor
to either have said improvements or facilities or to provide
those services unless the Industrial center already has the same.
Lessor already provides the services, or Lessor has agreed
elsewhere in this Lease to provide the same of some of them
b) Lessee's Share of Operating Expenses shall be payable by Lessee
within ten (10) days after a reasonably detailed statement of
actual expenses is presented to lessee by Lessor at Lessor's
option, however, an amount may be estimated by Lessor from time
to time of Lessee's Share of annual Operating Expenses and the
same shall be payable monthly or quarterly, as Lessor shall
designate, during each twelve-month period of the Lease term, on
the same day as the Base Rent is due hereunder in the event that
Lessee pays Lessor's estimate of Lessee's Share of Operating
statement showing Lessee's Share of the actual Operating Expenses
incurred during the preceding year if Lessee's payments under
this paragraph 4.2 (d) during said preceding year exceed Lessee's
Share as indicated on said statement. Lessee's Share as indicated
on said statement. Lessee shall be entitled to credit the amount
of such over payment against Lessee's Share of Operating expenses
next falling due if Lessee's payments under this paragraph during
said preceding year were less than Lessee's Share as indicated on
said statement. Lessee shall pay to Lessor the amount of the
deficiency within ten (10) days after delivery by Lessor to
Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
$22,322.40 as security for Lessee's faithful performance of Lessee's
obligations hereunder if Lessee fails to pay rent or other charges due
hereunder or otherwise defaults with respect to any provision of this
Lease. Lessor may use, apply or retain all or any portion of said deposit
for the payment of any rent to other charge in default or for the payment
of any other sum to which Lessor may become obligated by reason of Lessee's
default, or to compensate Lessor for any loss or damage which Lessor may
suffer thereby if Lessor so uses or applies all or any portion of said
deposit, Lessee shall within ten (10) days after written demand therefore
deposit cash with Lessor in an amount sufficient to restore said deposit to
the full amount then required of Lessee if the monthly rent shall from time
to time. Increase during the term of this Lease. Lessee shall at the time
of such
EX-11
<PAGE> 4
increase, deposit with Lessor additional money as a security deposit so
that the total amount of the security deposit held by Lessor shall at all
times bear the same proportion to the then current Base separate from its
general accounts. If Lessee performs all of Lessee's obligations hereunder,
said deposit, or so much thereof as has not therefore been applied by
Lessor, shall be returned, without payment of interest or other increment
for its use, to Lessee (or at Lessor's option to the last assignee, if any,
of Lessee's interest hereunder) at the expiration of the term hereof, and
after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.
6. INSURANCE; INDEMNITY.
6.1. LIABILITY INSURANCE-LESSEE. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of the Lease a policy of combined
Single Limit Bodily Injury and Property Damage insurance insuring
Lessee and Lessor against any liability arising out of the use,
occupancy or maintenance of the Premises and the Industrial Center.
Such insurance shall be an amount not less than $1,000,000.00 per
occurrence. The policy shall insure performance by Lessee of the
indemnity provisions of this paragraph 8. The limits of said insurance
shall not however, limit the liability of Lessee hereunder.
6.2. LIABILITY INSURANCE-LESSOR. Lessor shall, obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily
Injury and Property Damage Insurance, insuring Lessor, but not Lessee,
against any liability arising out of the ownership, use, occupancy or
maintenance of the Industrial Center in an amount not less than
$5,000,000.00 per occurrence.
6.3. PROPERTY INSURANCE. Lessor shall obtain and keep in force during the
term of this Lease a policy or policies of insurance covering loss or
damage to the Industrial Center improvements, but not Lessee's
personal property, fixtures, equipment or tenant improvements, in an
amount not to exceed the full replacement value thereof, as the same
may exist from time to time, providing protection against all perils
included within the classification of fire, extended coverage,
vandalism, malicious mischief, flood (in the event same is required by
a lender having a lien on the Premises) special extended perils ("all
risk", as such term is used in the insurance industry), plate glass
insurance and such other insurance as Lessor deems advisable. In
addition, Lessor shall obtain and keep in force, during the term of
this lease, a policy of rental value insurance covering a period of
one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period.
7. DAMAGE AND DESTRUCTION
7.1. TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor
shall, in addition, return to Lessee so much of Lessee's security
deposit as has not theretofore been applied by Lessor.
8. REAL PROPERTY TAXES.
EX-12
<PAGE> 5
8.1. PAYMENT OF TAX INCREASE. Lessor shall pay the real property tax
applicable to the Industrial Center provided, however, that Lessee
shall pay, in addition to rent, Lessee's Share (as defined in
paragraph 4.2[a]) of the amount, if any, by which real property taxes
applicable to the Premises increase over the fiscal real estate tax
year 1990-1991. Such payment shall be made by Lessee within thirty
(30) days after receipt of Lessor's written statement setting forth
the amount of such increase and the computation thereof. If the term
of this Lessee shall not expire concurrently within the expiration of
the tax fiscal year, Lessee's liability for increased taxes for the
last partial lease year shall be prorated on an annual basis.
9. PERSONAL PROPERTY TAXES
9.1 Lessee shall pay prior to delinquency all taxes assessed against and
levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the premises or elsewhere.
When possible. Lessee shall cause said trade fixtures, furnishings,
equipment and all other personal property t be assessed and billed
separately from the real property of Lessor.
9.2 If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes
attributable to Lessee within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Lessee's property.
10. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises,
together with any taxes thereon. If any such services are not separately
metered to the Premises, Lessee shall pay at lessor's option, either
lessee's Share of a reasonable proportion to be determined by Lessor of all
charges jointly metered with other premises in the Building.
11. DEFAULT; REMEDIES.
11.1. DEFAULT. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
a) The vacating or abandonment of the Premises by Lessee.
b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due,
where such failure shall continue for a period of three (3) days
after written notice thereof from Lessor to Lessee. In the event
that Lessor serves Lessee with a Notice to Pay Rent or Quit
pursuant to applicable Unlawful Detainer statues such Notice to
pay Rent or Quit shall also constitute the notice required by
this subparagraph.
c) Except as otherwise provided in this Lease, the failure by Lessee
to observe or perform any of the covenants, conditions or
provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph (b) above, where such failure
shall continue for a period of thirty (30) days after written
notice thereof from Lessor to Lessee, provided, however, that if
the nature of Lessee's noncompliance is such that more than
thirty (30) day period and thereafter diligently prosecutes such
cure to
EX-13
<PAGE> 6
completion. To the extent permitted by law, such thirty (30) day
notices shall constitute the sole and exclusive notice required
to be given to Lessee under applicable unlawful Detainer statues.
d) (i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors. (ii) Lessee becomes a
"debtor" as defined in 11 U.S.C Section 101 or any successor
statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days; (iii) the
appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or
of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially
all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged
within thirty (30) days. In the event that any provision of this
paragraph 11.1 (d) is contrary to any applicable law, such
provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of
Lessee, any successor in interest of Lessee or any guarantor of
Lessee's obligation hereunder, was materially false.
11.2. REMEDIES. In the event of any such material default by Lessee, Lessor
may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such default.
a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of
the Premises to Lessor. In such event Lessor shall be entitled to
recover from Lessee all damages incurred by Lessor by reason of
Lessee's default including, but not limited to, the cost of
recovering possession of the Premises, expenses of relating,
including necessary renovation and alternation of the Premises,
reasonable attorney's fees, and any real estate commission
actually paid; the worth at the time of award by the court having
jurisdiction thereof the amount by which the unpaid rent for the
balance of the term after the time of such award exceeds the
amount of such rental loss for the same period that Lessee proves
could be reasonably avoided, that portion of the leasing
commission paid by Lessor pursuant to paragraph 15 applicable to
the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have vacated
or abandoned the Premises. In such event Lessor shall be entitled
to enforce all of Lessor's rights and remedies under this Lease,
including the right to recover the rent as it becomes due
hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the
Premises are located. Unpaid installments of rent and other
unpaid monetary obligations of Lessee under the terms of this
Lease shall bear interest from the date due at the maximum rate
then allowable by law.
EX-14
<PAGE> 7
11.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time and
in no event later than thirty (30) days after written notice by Lessee
to lessor and to the holder of any first mortgage or deed of trust
covering the Premises whose name and address shall have theretofore
been furnished to Lessee in writing specifying wherein Lessor has
failed to perform such obligation, provided, however that if the
nature of Lessor's obligation is such that more than thirty (30) days
are required for performance than Lessor shall not be in default if
Lessor commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
11.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of Base Rent. Lessee's Share of Operating Expenses or other
sums due hereunder will cause Lessor to incur costs not contemplated
by this Lease, the exact amount of which will be extremely difficult
to ascertain. Such costs include but are not limited to processing and
accounting charges, and late charges which may be imposed on Lessor by
the terms of any mortgage or trust deed covering the industrial Center
Accordingly, if any installment of Base rent Operating Expense or any
other sum due from Lessee shall not be received by Lessor or Lessor `s
designee within ten (10) days after such amount shall be due then
without any requirement for notice to Lessee. Lessee shall pay to
Lessor a late charge equal to 6% of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default within respect to such overdue
amount nor prevent Lessor from exercising any of the other rights and
remedies granted hereunder in the event that a late charge is payable
hereunder, whether or not collected for three consecutive installments
of any of the aforesaid monetary obligations of Lessee, then Base Rent
shall automatically become due and payable quarterly in advance,
rather than monthly notwithstanding paragraph 4.1 or any other
provision of this Lease to the contrary.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL.
NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL
ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO
THE LEGAL SUFFICIENCY. LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION RELATING THERETO THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS.
LESSOR LESSEE
EX-15
<PAGE> 8
CLAR-O-WOOD PARTNERSHIP METACOMP, INC.
By: /S/ JOHN WOOD, G.P. By: /S/ MIKE WELLS
--------------------------- ---------------------------
John Wood, General Partner Mike Wells, President
EX-16
<PAGE> 9
ADDENDUM TO LEASE
This addendum to lease is physically attached to, made a part of, and
incorporated into that certain written "STANDARD INDUSTRIAL LEASE" made as of
April 11, 1991, by and between CLAR-O-WOOD Partnership and METACOMP, INC.
Monthly Rate for Period:
<TABLE>
<S> <C> <C>
11/01/95 - 07/31/96...........$3,435
08/01/96 - 07/31/97...........$4,795
08/01/97 - 07/31/98...........$5,205
08/01/98 - 07/31/99...........$5,305
</TABLE>
Forty-five month lease plus utilities, includes additional space at 10989 Via
Frontera (adjoining space at 2,300 sq. ft.). Common area is include in the
monthly rent. Allowance for tenant Improvements up to $40,000 with landlord
approval, including a sign similar to Falon's. Tenant has first right to refusal
on remaining adjoining space, with terms to be at .40 cents per sq. ft. plus
Tenant improvements paid by tenant. If space is improved by landlord the rent
will be adjusted upward.
Total leased space is 7,340 sq. ft.
Lessee: Metacomp, Inc. Clar-O-Wood
Partnership
By: /S/ NORM DAWSON By: /S/ JOHN WOOD
--------------------------- ---------------------------
Date: 11/2/95 Date: 11/2/95
EX-17
<PAGE> 10
ADDENDUM TO LEASE
This addendum to lease is physically attached to, made a part of, and
incorporated into that certain written "STANDARD INDUSTRIAL LEASE" made as of
April 11, 1991, by and between CLAR-O-WOOD Partnership and METACOMP, INC.
Annual Basic 1993 Year One= $44,644.80 (.71 per sq. foot per mo.)
1994 Year Two= $47,160.00 (.73 per sq. foot per mo.)
1995 Year Three= $46,904.10 (.75 per sq. foot per mo.)
Three year lease plus utilities. Common area is included in the monthly rent.
Allowance for tenant improvements up to $21,500 with landlord approval. Tenant
shall supply ceiling tile. Tenant has first right of refusal on adjoining space.
Lessee: Metacomp, Inc. Clar-O-Wood
Partnership
By: /S/ NORM DAWSON By: /S/ JOHN WOOD
--------------------------- ---------------------------
Date: 11/2/95 Date: 11/2/95
EX-18
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 10.12.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT DATED MAY 8, 1996
BETWEEN THE COMPANY AND MICHAEL A. CARENZO DATED SEPTEMBER 23, 1996
EX-19
<PAGE> 2
PATRIOT SCIENTIFIC CORPORATION
12875 BROOKPRINTER PLACE, #300
POWAY, CA 92064
(619) 679-4428
October 30, 1996
Mr. Michael A. Carenzo
144 Azalea Drive
Hershey, PA 17033
Dear Mr. Carenzo:
As provided by the resolution passed by the Board of Directors of Patriot
Scientific Corporation (the "Company") at the meeting held on September 23,
1996, the Company hereby agrees to amend your employment agreement dated May 8,
1996 (the "Original Agreement") so that Section 2. Compensation and Benefit
Plans shall now read in its entirety as follows:
2. Compensation and Benefit Plans.
(a) The Executive shall receive a base salary during the
Employment Period which shall be payable in installments at such times
as other employees are paid but in any case at least monthly as follows:
(1) During the remaining period of the first year of the Employment
Period (November 1, 1996 to May 31, 1997) ("Year One"), the Executive
shall receive a base salary of not less than fourteen thousand dollars
($14,000.00) per month; (2) During the second year of the Employment
Period ("Year Two"), the Executive shall receive a base salary of not
less than fifteen thousand five hundred dollars ($15,500.00) per month;
(3) During the third year of the Employment Period ("Year Three"), the
Executive shall receive not less than the base salary received in Year
Two. The base salary received in any year shall be subject to other
upward adjustment by and under the direction of the Board of Directors
in its sole discretion.
(b) The Executive is entitled to an Annual Incentive Bonus of at
least 50 percent of the total yearly base compensation for the
applicable year (the "Annual Incentive Bonus"). The Annual Incentive
Bonus payment will be based upon mutually agreed upon objectives and
levels of performance payable within sixty (60) days of fiscal year end
(May 31).
EX-20
<PAGE> 3
(c) The Executive shall be paid a one time additional special
incentive bonus (the "Special Incentive Bonus") equal to 100 percent of
the annual base salary payable over a six (6) month period in equal
monthly installments beginning on the date that the Executive
successfully completes the following task. The Executive must
successfully enter into any licensing agreement, supply agreement, a
joint venture or similar agreement regarding any of the Company's Key
Technologies on or before December, 31 1997, with any Company or Agency
including, but not limited to Hitachi, Motorola, AMD Corporation, Harris
Semiconductor, Texas Instruments or IBM or their affiliates resulting
from the Executives introduction or efforts. In addition, as long as the
agreement is of significant value to the Company, any unvested options
of the Executive as defined in this Employment Agreement and the
accompanying Stock Option Agreement will become vested options
immediately upon the completion of the above referred task.
(d) The Executive shall be eligible to participate in all
employee benefit programs, if any, maintained by the Company, including,
but not limited to, group life insurance, medical, long-term disability,
short-term disability, retirement and pension plans, any deferred
compensation or profit sharing plan, 401(k) savings plan, and such other
fringe benefits as are or may be made available from time to time to
senior executives of the Company. During the Employment Period, the
Executive is entitled to three weeks vacation per annum in Year One and
four weeks vacation per annum in Year Two and Year Three.
(e) The Company will pay or reimburse the Executive during the
employment period for all expenses normally reimbursed by the Company
and reasonably incurred by the Executive in furtherance of his duties
hereunder and authorized by the Company, including but not limited to,
expenses for entertainment, travel, meals, hotel accommodations and the
like upon the submission by the Executive of vouchers or an itemized
list thereof as the Board of Directors may from time to time adopt and
authorize and as may be required in order to permit such payments as
proper deductions to the Company under the Internal Revenue Code of 1986
and the rules and regulations adopted pursuant thereto now or hereafter
in effect. Further, the Executive's place of employment shall be
considered San Diego County, California (or other mutually agreed upon
location) and it is contemplated that the Executive will relocate to San
Diego County or vicinity within a reasonable period during the
Employment Period. Until the Executive is relocated, the Company shall
pay the lessor of actual costs of travel and lodging for business travel
or the costs if the business travel had originated in San Diego County
should the Executive
EX-21
<PAGE> 4
travel from another location or residence(s). Executive shall be
responsible for all travel expenses to and from other consulting
locations (during the first seven months of the Employment Period
pursuant to the terms and conditions outlined in paragraph (b) of
Section 1 hereof) or from residence(s), Executive shall also be
responsible for all moving, relocation and related expenses of
relocating in San Diego County or vicinity.
It is expressly understood that all other provisions of the Original Agreement
will continue in full force and effect in accordance with its original terms and
conditions to date.
PATRIOT SCIENTIFIC CORPORATION
By: /s/ ELWOOD NORRIS
------------------------------
Elwood G. Norris
Chairman of the Board
Accepted and agreed to
this 25th day of October 1996:
/s/ MICHAEL A. CARENZO
- ----------------------------------
Michael A. Carenzo
EX-22
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 10.16
EMPLOYMENT AGREEMENT DATED JANUARY 1, 1997 BETWEEN THE
COMPANY AND NORMAN J. DAWSON
EX-23
<PAGE> 2
EMPLOYMENT AGREEMENT dated as of January 1, 1997 between PATRIOT SCIENTIFIC
CORPORATION, a Delaware corporation (the "Company"), and NORMAN J.
DAWSON (the "Executive").
W I T N E S S E T H:
1. Term of Employment.
(a) The Company hereby agrees to employ the Executive and the
Executive hereby agrees to accept employment as Vice President and General
Manager of the Company's Communication Division for a three-year period
commencing January 1, 1997, or for such shorter period as may be mutually agreed
by the Company and the Executive ( the "Employment Period"), subject to the
terms and conditions of this Agreement. In his capacity as Vice President and
General Manager of the Company's Communication Division, Executive will be
responsible for supervising the operations and managing all functions of the
Company's Communication Division, and/or such other management duties on behalf
of the Company as may be assigned to him from time to time by the President and
Chief Executive Officer ("C.E.O.") of the Company.
(b) The Executive agrees that, during the Employment Period, he
will serve the Company faithfully and to the best of his abilities, devoting
substantially all his time, energy and skill to the activities of the Company
and the promotion of its interests. It is expressly understood that the
Executive may devote a reasonable amount of time to such charitable, civic and
personal affairs as shall not interfere with the obligation set forth in the
preceding sentence.
2. Compensation and Benefit Plans.
(a) The Executive shall receive a base salary during the
Employment Period which shall be payable in installments at such times as other
employees are paid but in any case at least monthly as follows: (1) During the
first year of the Employment Period ("Year One"), the Executive shall receive a
base salary of not less than ten thousand dollars ($10,000) per month; (2)
During the second and third years of the Employment Period ("Year Two" and "Year
Three" respectively), the Executive shall receive a base salary of not less than
the base salary received in Year One. The base salary received in any year shall
be subject to other upward adjustment as shall be recommended by the President
and C.E.O. of the Company to the Board of Directors of the Company (the "Board")
and as shall be approved by the Board.
(b) The Executive is entitled, at the discretion of the Board, to
an Annual Incentive Bonus up to 50 percent of the total yearly base compensation
for the applicable year (the "Annual Incentive Bonus"). The Annual Incentive
Bonus payment will be based upon mutually agreed upon objectives and levels of
performance.
(c) The Executive shall be eligible to participate in all
employee benefit programs, if any, maintained by the Company, including, but not
limited to, group life insurance, medical, long-term disability, short-term
disability, retirement and pension plans, any deferred compensation or profit
sharing plan, 401(k) savings plan, and such other fringe benefits as are or may
be made available from time to time to senior executives of the Company. During
the Employment Period, the Executive is entitled to four weeks vacation per
annum in Year One, Year Two and Year Three.
EX-24
<PAGE> 3
(d) The Company will pay or reimburse the Executive during the
employment period for all expenses normally reimbursed by the Company and
reasonably incurred by the Executive in furtherance of his duties hereunder and
authorized by the Company, including but not limited to, expenses for
entertainment, travel, meals, hotel accommodations and the like upon the
submission by the Executive of vouchers or an itemized list thereof as the Board
may from time to time adopt and authorize and as may be required in order to
permit such payments as proper deductions to the Company under the Internal
Revenue Code of 1986 and the rules and regulations adopted pursuant thereto now
or hereafter in effect.
3. Stock Options.
(a) The Executive has been granted stock options of five hundred
thousand (500,000) shares at the price of the Company's common stock on December
26, 1996 from the Company's 1996 Stock Option Plan. The Company and the
Executive have signed a Stock Option Agreement memorializing the grant on
December 26, 1996 in the form of the attached Exhibit A.
(b) The Stock Options will vest according to the following
schedule: (i) 50,000 shares will vest immediately; (ii) 150,000 shares will vest
at the end of Year One if, and only if, the performance of the Company's
Communication Division meets a minimum of $3,000,000 in revenue and at least
$500,000 in net income from the sale of all communications products during Year
One; (iii) 150,000 shares will vest at the end of Year Two if, and only if, the
performance of the Company's Communication Division meets set performance
criteria to be established by the President and C.E.O. of the Company, in his
sole discretion, including, but not limited to significant increases in sales
and revenue from Year One to Year Two; (iv) 150,000 shares will vest at the end
of Year Three if, and only if, the performance of the Company's Communication
Division meets set performance criteria to be established by the President and
C.E.O. of the Company, in his sole discretion, including, but not limited to
significant increases in sales and revenue from Year Two to Year Three (v) The
Board, in its sole discretion, may permit any unvested options in any year to
become vested or carried over into the following year if they deem that there
has been significant progress in reaching the performance goals or other changes
in circumstances occur for the respective year; (vi) Regardless of the
performance in any year, all remaining options that have not vested will vest at
the end of Year Four.
(c) The Company agrees to register the 1996 Stock Option Plan to
which the Executive's shares are a part no later than October 31, 1997, subject
to the requirement that the options' value is at least one dollar ($1) on or
before October 31, 1997. If the 1996 Stock Option Plan is not registered by
October 31, 1997, the Company agrees to have all of the Executive's shares
registered no later than January 1, 1998 unless otherwise agreed to by the
parties. In addition, the Company agrees that if it should cause the
registration of any stock options of any senior officers (other than by
registration of the 1992 Stock Option Plans pursuant to an S-8 registration)
that it will include the shares of the Executive, not previously the subject of
a current registration statement, with any such registration on a prorata basis
at no cost to the Executive.
4. Termination of Employment
(a) The employment of the Executive hereunder shall automatically
terminate if the Executive shall die during the Term of Employment. The
Employment of the Executive can be terminated by the Company at its option only
for the following:
EX-25
<PAGE> 4
(i) if the Company chooses to give Executive thirty
(30) days written notice of the termination of
employment; or
(ii) for cause as defined hereafter; or
(iii) the inability of the Executive to render, for a
period of 180 consecutive days, full and effective
services hereunder by reason of permanent
disability, whether resulting from illness,
accident or otherwise, in any case by thirty (30)
days' prior written notice to Executive; provided,
however, that if prior to the date of termination
specified in any notice of termination given
pursuant to this paragraph, Executive's incapacity
shall have terminated and he shall have resumed his
duties hereunder, Executive shall be entitled to
resume his employment hereunder as though such
notice had not been given.
The term "cause" as used herein shall mean any of the following events:
(1) the conviction of the Executive under state or federal
law of a felony or other crime, or the equivalent under foreign law; unless in
any such case Executive performed such act in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the Company;
(2) the material breach by Executive of any provision of
this Agreement, after compliance by the Company with the provision of Section 5
hereof; or
(3) a determination or request by an appropriate
regulatory authority that the Executive be removed or disqualified from acting
as an officer of the Company.
(b) If this agreement is terminated by the Company during Year
One or Year Two, and only during Year One and Year Two, and the Executive's
employment is terminated for other than cause by the Company, then the Executive
shall be entitled to the following:
(i) severance payments equal to twelve (12) months payable
in a lump-sum payment on the last day of the thirty (30) day notice period; and
(ii) all vested options can be exercised by the Executive
for up to six months following the registration of said options by the Company,
which registration will occur no later than January 1, 1998.
(c) Should the Executive die after this agreement is terminated
by the Company and the Executive's employment is terminated by the Company for
other than cause, the Executive's beneficiaries, estate, conservator or other
legal representative shall be entitled to all of the benefits described in
paragraph (b) of this Section 4.
(d) If the Agreement is terminated by the Company and the
Executive's termination is terminated pursuant to subpart (iii) of paragraph (a)
of this Section 4 or if this Agreement is
EX-26
<PAGE> 5
terminated because of the Executive's death, then the Executive or his Estate
shall be entitled to receive his then monthly Base Salary he would otherwise be
entitled to hereunder during the Term of Employment pursuant to Section 2 hereof
for a period of not longer than six (6) months.
(e) The Executive shall have the right at his sole option to
terminate his employment hereunder under the following conditions:
(1) at any time upon ninety (90) days written notice;
(2) upon written notice by the Executive to the Company
within thirty (30) days of and indicating that a change in control of the
Company has occurred and therefore the Executive elects to terminate his
employment as provided herein. A change in control of the Company shall mean a
change in control of a nature that would be required to be reported in response
to Item 5(f) of Schedule 14A promulgated under the Securities and Exchange Act
of 1924, as amended (the "Exchange Act"); provided that, without limitation,
such change in control shall be deemed to have occurred if (i) any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13(d) under the Exchange Act),
directly or indirectly, of securities of the Company representing 25% or more of
the combined voting power of the Company's then outstanding securities; or (ii)
during any period of two (2) consecutive years form the date of this Agreement,
individuals who at the beginning of such period constitute the Board of the
Company cease for any reason to constitute at least a majority thereof unless
the election, or the nomination for election by the Company's stockholders, of
each new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
5. Notice of Breach. The Company and the Executive agree that, prior to
the termination of the Employment Period by reason of any breach of any
provision of this Agreement, the injured party will give the party in breach
written notice specifying such breach and permitting the party in breach to cure
such breach within a period of thirty (30) days after receipt of such notice.
6. Indemnification.
(a) If, after the date of the commencement of the Employment
Period, the Executive is made a party or is threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that he is or was a
director or officer of the Company or is or was serving at the request of the
Company as a director, officer, member, employee or agent of another corporation
or partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether or not the basis of such Proceeding
is an alleged act or failure to act in an official capacity as a director,
officer, member, employee or agent, he shall be indemnified and held harmless by
the Company to the fullest extent authorized by Delaware law, as the same exists
or may hereafter be amended, against all expense, liability and loss (including,
without limitation, attorneys' fees, judgments, fines and amounts paid or to be
paid in settlement) reasonably incurred or suffered by the Executive in
connection therewith, including, without limitation, payment of expenses
incurred in defending a Proceeding prior to the final disposition of such
Proceeding (subject to receipt of an undertaking by the Executive to repay such
amount if it shall ultimately be determined that the Executive is not entitled
to be indemnified by the Company under Delaware law), and such indemnification
shall continue as to the Executive even if he has ceased to be a director,
officer, member, employee or
EX-27
<PAGE> 6
agent of the Company or other enterprise and shall inure to the benefit of his
heirs, executors and administrators.
(b) The right of indemnification and the payment of expenses
incurred in defending a Proceeding in advance of its final disposition conferred
in this Section 6 shall not be exclusive of any other right that the Executive
may have or hereafter may acquire under any statute, provision of the
Certificate of Incorporation or Bylaws of the Company, agreement, vote of
shareholders or disinterested directors or otherwise.
7. Trade Secrets of the Company, Patents and Inventions.
(a) The Executive prior to and during the Term of Employment
under this Agreement has had and will have access to and become acquainted with
various trade secrets, consisting of devices, secret inventions, processes, and
compilations of information, records, and specifications which are owned by the
Company, and which are regularly used or to be used in the operation of the
business of the Company. The Executive shall not disclose any of the aforesaid
trade secrets, directly or indirectly, or use them in any way, either during the
term of this Agreement or at any time thereafter, except as required in the
course of his employment. All files, records, documents, drawings,
specifications, equipment, and similar items relating to the business of the
Company, whether prepared by the Executive or otherwise coming into his
possession, shall remain the exclusive property of the Company and shall not be
removed under any circumstances from the premises of the Company where the work
is being carried on without prior written consent of the Company or consistent
with the Company's normal business practices.
(b) The Executive agrees that as to any inventions made by him
during the term of his employment, solely or jointly with others, which are made
with the equipment, supplies, facilities or trade secret information of the
Company, or which relate at the time of the conception or reduction to purchase
of the invention to the business of the Company or the Company's actual or
demonstrably anticipated research and development, or which result from any work
performed by the Executive for the Company, shall belong to the Company and the
Executive promises to assign such inventions to the Company. The Executive also
agrees that the Company shall have the right to keep such inventions as trade
secrets, if the company chooses. The Executive agrees to assign to the Company
the Executive's rights in any other inventions where the Company is required to
grant those rights to the United States government or any agency thereof. In
order to permit the Company to claim rights to which it may be entitled, the
Executive agrees to disclose to the Company in confidence all inventions which
the Executive makes arising out of the Executive's employment and all patent
application filed by the Executive within one year after the termination of his
employment.
(c) The Executive shall assist the Company in obtaining patents
on all inventions, designs, improvements, and discoveries patentable by the
Company in the United States and in all foreign countries, and shall execute all
documents and do all things necessary to obtain letters
EX-28
<PAGE> 7
patent, to vest the Company with full and extensive title thereto, and to
protect the same against infringement by others.
8. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.
9. Assignment. The rights of the Company (but not its obligations)
under this Agreement may, without the consent of the Executive, be assigned by
the Company to any parent, subsidiary, or a successor of the Company; provided
that such parent, subsidiary or successor acknowledges in writing that it is
also bound by the terms and obligations of this Agreement. Except as provided in
the preceding sentence, the Company may not assign all or any of its rights,
duties or obligations hereunder without the prior written consent of the
Executive. Except as provided for in Section 11 hereunder, the Executive may not
assign all or any of his rights, duties or obligations hereunder without the
prior written consent of the Company.
10. Survivorship. The respective rights and obligations of the Parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations,
including, but not limited to, the rights of the Executive under Sections 2, 3,
4, and 6.
11. Beneficiaries; References. The Executive shall be entitled to select
(and change) a beneficiary or beneficiaries to receive any compensation or
benefit payable following the Executive's death, and may change such election,
in either case, by giving the Company written notice thereof. In the event of
the Executive's death or a judicial determination of his incompetence, reference
in this Agreement to the Executive shall be deemed, where appropriate, to refer
to his beneficiary, estate, committee, conservator or other legal
representative.
12. Notices. All notices, requests, demands and other communications
shall be in writing and shall be defined to have been duly given if delivered or
if mailed by registered mail, postage prepaid:
(a) If to the Executive, addressed to him at the following
address as may be changed in writing from time to time:
Norman J. Dawson
17-207 Grandy Place
San Diego, CA 92128
(b) If to the Company, addressed to:
Patriot Scientific Corporation
12875 Brookprinter Place, #300
Poway, California 92064
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
EX-29
<PAGE> 8
13. Titles and Headings. Titles and headings to paragraphs hereof are
for the purposes of references only and shall in no way limit, define or
otherwise affect the provisions hereof.
14. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
15. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. It shall not be
necessary in making proof of this Agreement to produce or account for more than
one original counterpart.
16. Entire Agreement. This Agreement contains the entire agreement of
the parties hereto and may be modified or amended only by a written instrument
executed by the parties hereto. Effective on the first day of the Employment
Period, any prior employment agreements between the Company and the Executive
shall terminate.
17. Good Faith. Each of the parties hereto agrees that he or it shall
act in good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as of the day
and year first above written.
PATRIOT SCIENTIFIC CORPORATION
BY: /s/ MICHAEL A. CARENZO
-----------------------------------
President and CEO
/s/ NORMAN J. DAWSON
-----------------------------------
Norman J. Dawson
Executive
EX-30
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 10.17
EMPLOYMENT AGREEMENT DATED JANUARY 1, 1997 BETWEEN THE
COMPANY AND JAYANTA K. MAITRA
EX-31
<PAGE> 2
EMPLOYMENT AGREEMENT dated as of January 1, 1997, between PATRIOT
SCIENTIFIC CORPORATION, a Delaware corporation (the "Company"),
and JAYANTA K. MAITRA (the "Executive").
W I T N E S S E T H:
1. Term of Employment.
(a) The Company hereby agrees to employ the Executive and the
Executive hereby agrees to accept employment as Vice President of Engineering of
the Company's Communication Division for a three-year period commencing January
1, 1997, or for such shorter period as may be mutually agreed by the Company and
the Executive (the "Employment Period"), subject to the terms and conditions of
this Agreement. In his capacity as Vice President of Engineering of the
Company's Communication Division, Executive will be responsible for supervising
the operations and managing all engineering functions of the Company's
Communication Division, and/or such other management duties on behalf of the
Company as may be assigned to him from time to time by the Vice President and
General Manager of the Company's Communication Division or by the President and
C.E.O. of the Company.
(b) The Executive agrees that, during the Employment Period, he
will serve the Company faithfully and to the best of his abilities, devoting
substantially all his time, energy and skill to the activities of the Company
and the promotion of its interests. It is expressly understood that the
Executive may devote a reasonable amount of time to such charitable, civic and
personal affairs as shall not interfere with the obligation set forth in the
preceding sentence.
2. Compensation and Benefit Plans.
(a) The Executive shall receive a base salary during the
Employment Period which shall be payable in installments at such times as other
employees are paid but in any case at least monthly as follows: (1) During the
first year of the Employment Period ("Year One"), the Executive shall receive a
base salary of not less than eight thousand seven hundred dollars ($8,700) per
month; (2) During the second and third years of the Employment Period ("Year
Two" and "Year Three" respectively), the Executive shall receive a base salary
of not less than the base salary received in Year One. The base salary received
in any year shall be subject to other upward adjustment as shall be recommended
by the President and C.E.O. of the Company to the Board of Directors of the
Company (the "Board") and as shall be approved by the Board.
(b) The Executive is entitled, at the discretion of the Board, to
an Annual Incentive Bonus up to 50 percent of the total yearly base compensation
for the applicable year (the "Annual Incentive Bonus"). The Annual Incentive
Bonus payment will be based upon mutually agreed upon objectives and levels of
performance.
(c) The Executive shall be eligible to participate in all
employee benefit programs, if any, maintained by the Company, including, but not
limited to, group life insurance, medical, long-term disability, short-term
disability, retirement and pension plans, any deferred compensation or profit
sharing plan, 401(k) savings plan, and such other fringe benefits as are or may
be made available from time to time to senior executives of the Company. During
the Employment Period,
EX-32
<PAGE> 3
the Executive is entitled to three weeks vacation per annum in Year One and four
weeks vacation per annum in Year Two and Year Three.
(d) The Company will pay or reimburse the Executive during the
employment period for all expenses normally reimbursed by the Company and
reasonably incurred by the Executive in furtherance of his duties hereunder and
authorized by the Company, including but not limited to, expenses for
entertainment, travel, meals, hotel accommodations and the like upon the
submission by the Executive of vouchers or an itemized list thereof as the Board
may from time to time adopt and authorize and as may be required in order to
permit such payments as proper deductions to the Company under the Internal
Revenue Code of 1986 and the rules and regulations adopted pursuant thereto now
or hereafter in effect.
3. Stock Options.
(a) The Executive has been granted stock options of five hundred
thousand (500,000) shares at the price of the Company's common stock on December
26, 1996 from the Company's 1996 Stock Option Plan. The Company and the
Executive have signed a Stock Option Agreement memorializing the grant on
December 26, 1996 in the form of the attached Exhibit A.
(b) The Stock Options will vest according to the following
schedule: (i) 50,000 shares will vest immediately; (ii) 150,000 shares will vest
at the end of Year One if, and only if, the performance of the Company's
Communication Division meets a minimum of $3,000,000 in revenue from the sale of
all communications products during Year One; (iii) 150,000 shares will vest at
the end of Year Two if, and only if, the performance of the Company's
Communication Division meets set performance criteria to be established by the
President and C.E.O. of the Company, in his sole discretion, including, but not
limited to significant increases in revenue from Year One to Year Two; (iv)
150,000 shares will vest at the end of Year Three if, and only if, the
performance of the Company's Communication Division meets set performance
criteria to be established by the President and C.E.O. of the Company, in his
sole discretion, including, but not limited to significant increases in revenue
from Year Two to Year Three; (v) The Board, in its sole discretion, may permit
any unvested options in any year to become vested or carried over into the
following year if they deem that there has been significant progress in reaching
the performance goals or other changes in circumstances occur for the respective
year; (vi) Regardless of the performance in any year, all remaining options that
have not vested will vest at the end of Year Four.
(c) The Company agrees to register the 1996 Stock Option Plan to
which the Executive's shares are a part no later than October 31, 1997, subject
to the requirement that the options' value is at least one dollar ($1) on or
before October 31, 1997. If the 1996 Stock Option Plan is not registered by
October 31, 1997, the Company agrees to have all of the Executive's shares
registered no later than January 1, 1998 unless otherwise agreed to by the
parties. In addition, the Company agrees that if it should cause the
registration of any stock options of any senior officers (other than by
registration of the 1992 Stock Option Plans pursuant to an S-8 registration)
that it will include the shares of the Executive, not previously the subject of
a current registration statement, with any such registration on a prorata basis
at no cost to the Executive.
EX-33
<PAGE> 4
4. Termination of Employment
(a) The employment of the Executive hereunder shall automatically
terminate if the Executive shall die during the Term of Employment. The
Employment of the Executive can be terminated by the Company at its option only
for the following:
(i) if the Company chooses to give Executive thirty
(30) days written notice of the termination of
employment; or
(ii) for cause as defined hereafter; or
(iii) the inability of the Executive to render, for a
period of 180 consecutive days, full and effective
services hereunder by reason of permanent
disability, whether resulting from illness,
accident or otherwise, in any case by thirty (30)
days' prior written notice to Executive; provided,
however, that if prior to the date of termination
specified in any notice of termination given
pursuant to this paragraph, Executive's incapacity
shall have terminated and he shall have resumed his
duties hereunder, Executive shall be entitled to
resume his employment hereunder as though such
notice had not been given.
The term "cause" as used herein shall mean any of the following events:
(1) the conviction of the Executive under state or
federal law of a felony or other crime, or the equivalent under foreign law;
unless in any such case Executive performed such act in good faith and in a
manner reasonably believed to be in or not opposed to the best interest of the
Company;
(2) the material breach by Executive of any provision of
this Agreement, after compliance by the Company with the provision of Section 5
hereof; or
(3) a determination or request by an appropriate
regulatory authority that the Executive be removed or disqualified from acting
as an officer of the Company.
(b) If this agreement is terminated by the Company during Year
One, and only during Year One, and the Executive's employment is terminated for
other than cause by the Company, then the Executive shall be entitled to the
following:
(i) severance payments equal to twelve (12) months
payable in a lump-sum payment on the last day of the thirty (30) day notice
period; and
(ii) all vested options can be exercised by the Executive
for up to six months following the registration of said options by the Company,
which registration will occur no later than January 1, 1998.
EX-34
<PAGE> 5
(c) Should the Executive die after this agreement is terminated
by the Company and the Executive's employment is terminated by the Company for
other than cause, the Executive's beneficiaries, estate, conservator or other
legal representative shall be entitled to all of the benefits described in
paragraph (b) of this Section 4.
(d) If the Agreement is terminated by the Company and the
Executive's termination is terminated pursuant to subpart (iii) of paragraph (a)
of this Section 4 or if this Agreement is terminated because of the Executive's
death, then the Executive or his Estate shall be entitled to receive his then
monthly Base Salary he would otherwise be entitled to hereunder during the Term
of Employment pursuant to Section 2 hereof for a period of not longer than six
(6) months.
(e) The Executive shall have the right at his sole option to
terminate his employment hereunder under the following conditions:
(1) at any time upon ninety (90) days written notice;
(2) upon written notice by the Executive to the Company
within thirty (30) days of and indicating that a change in control of the
Company has occurred and therefore the Executive elects to terminate his
employment as provided herein. A change in control of the Company shall mean a
change in control of a nature that would be required to be reported in response
to Item 5(f) of Schedule 14A promulgated under the Securities and Exchange Act
of 1924, as amended (the "Exchange Act"); provided that, without limitation,
such change in control shall be deemed to have occurred if (i) any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13(d) under the Exchange Act),
directly or indirectly, of securities of the Company representing 25% or more of
the combined voting power of the Company's then outstanding securities; or (ii)
during any period of two (2) consecutive years form the date of this Agreement,
individuals who at the beginning of such period constitute the Board of the
Company cease for any reason to constitute at least a majority thereof unless
the election, or the nomination for election by the Company's stockholders, of
each new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
5. Notice of Breach. The Company and the Executive agree that, prior to
the termination of the Employment Period by reason of any breach of any
provision of this Agreement, the injured party will give the party in breach
written notice specifying such breach and permitting the party in breach to cure
such breach within a period of thirty (30) days after receipt of such notice.
6. Indemnification.
(a) If, after the date of the commencement of the Employment
Period, the Executive is made a party or is threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that he is or was a
director or officer of the Company or is or was serving at the request of the
Company as a director, officer, member, employee or agent of another corporation
or partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether or not the basis of such Proceeding
is an alleged act or failure to act in an official capacity as a director,
officer, member, employee or agent, he shall be indemnified and held harmless by
the Company to the fullest extent authorized by Delaware law, as the same exists
or may hereafter be amended, against
EX-35
<PAGE> 6
all expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines and amounts paid or to be paid in settlement) reasonably
incurred or suffered by the Executive in connection therewith, including,
without limitation, payment of expenses incurred in defending a Proceeding prior
to the final disposition of such Proceeding (subject to receipt of an
undertaking by the Executive to repay such amount if it shall ultimately be
determined that the Executive is not entitled to be indemnified by the Company
under Delaware law), and such indemnification shall continue as to the Executive
even if he has ceased to be a director, officer, member, employee or agent of
the Company or other enterprise and shall inure to the benefit of his heirs,
executors and administrators.
(b) The right of indemnification and the payment of expenses
incurred in defending a Proceeding in advance of its final disposition conferred
in this Section 6 shall not be exclusive of any other right that the Executive
may have or hereafter may acquire under any statute, provision of the
Certificate of Incorporation or Bylaws of the Company, agreement, vote of
shareholders or disinterested directors or otherwise.
7. Trade Secrets of the Company, Patents and Inventions.
(a) The Executive prior to and during the Term of Employment
under this Agreement has had and will have access to and become acquainted with
various trade secrets, consisting of devices, secret inventions, processes, and
compilations of information, records, and specifications which are owned by the
Company, and which are regularly used or to be used in the operation of the
business of the Company. The Executive shall not disclose any of the aforesaid
trade secrets, directly or indirectly, or use them in any way, either during the
term of this Agreement or at any time thereafter, except as required in the
course of his employment. All files, records, documents, drawings,
specifications, equipment, and similar items relating to the business of the
Company, whether prepared by the Executive or otherwise coming into his
possession, shall remain the exclusive property of the Company and shall not be
removed under any circumstances from the premises of the Company where the work
is being carried on without prior written consent of the Company or consistent
with the Company's normal business practices.
(b) The Executive agrees that as to any inventions made by him
during the term of his employment, solely or jointly with others, which are made
with the equipment, supplies, facilities or trade secret information of the
Company, or which relate at the time of the conception or reduction to purchase
of the invention to the business of the Company or the Company's actual or
demonstrably anticipated research and development, or which result from any work
performed by the Executive for the Company, shall belong to the Company and the
Executive promises to assign such inventions to the Company. The Executive also
agrees that the Company shall have the right to keep such inventions as trade
secrets, if the company chooses. The Executive agrees to assign to the Company
the Executive's rights in any other inventions where the Company is required to
grant those rights to the United States government or any agency thereof. In
order to permit the Company to claim rights to which it may be entitled, the
Executive agrees to disclose to the Company in confidence all inventions which
the Executive makes arising out of the Executive's employment and all patent
application filed by the Executive within one year after the termination of his
employment.
EX-36
<PAGE> 7
(c) The Executive shall assist the Company in obtaining patents
on all inventions, designs, improvements, and discoveries patentable by the
Company in the United States and in all foreign countries, and shall execute all
documents and do all things necessary to obtain letters patent, to vest the
Company with full and extensive title thereto, and to protect the same against
infringement by others.
8. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.
9. Assignment. The rights of the Company (but not its obligations)
under this Agreement may, without the consent of the Executive, be assigned by
the Company to any parent, subsidiary, or a successor of the Company; provided
that such parent, subsidiary or successor acknowledges in writing that it is
also bound by the terms and obligations of this Agreement. Except as provided in
the preceding sentence, the Company may not assign all or any of its rights,
duties or obligations hereunder without the prior written consent of the
Executive. Except as provided for in Section 11 hereunder, the Executive may not
assign all or any of his rights, duties or obligations hereunder without the
prior written consent of the Company.
10. Survivorship. The respective rights and obligations of the Parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations,
including, but not limited to, the rights of the Executive under Sections 2, 3,
4, and 6.
11. Beneficiaries; References. The Executive shall be entitled to select
(and change) a beneficiary or beneficiaries to receive any compensation or
benefit payable following the Executive's death, and may change such election,
in either case, by giving the Company written notice thereof. In the event of
the Executive's death or a judicial determination of his incompetence, reference
in this Agreement to the Executive shall be deemed, where appropriate, to refer
to his beneficiary, estate, committee, conservator or other legal
representative.
12. Notices. All notices, requests, demands and other communications
shall be in writing and shall be defined to have been duly given if delivered or
if mailed by registered mail, postage prepaid:
(a) If to the Executive, addressed to him at the following
address as may be changed in writing from time to time:
Jayanta K. Maitra
14380 Marianopolis Way
San Diego, CA 92129
(b) If to the Company, addressed to:
Patriot Scientific Corporation
12875 Brookprinter Place, #300
Poway, California 92064
EX-37
<PAGE> 8
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
13. Titles and Headings. Titles and headings to paragraphs hereof are
for the purposes of references only and shall in no way limit, define or
otherwise affect the provisions hereof.
14. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
15. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. It shall not be
necessary in making proof of this Agreement to produce or account for more than
one original counterpart.
16. Entire Agreement. This Agreement contains the entire agreement of
the parties hereto and may be modified or amended only by a written instrument
executed by the parties hereto. Effective on the first day of the Employment
Period, any prior employment agreements between the Company and the Executive
shall terminate.
17. Good Faith. Each of the parties hereto agrees that he or it shall
act in good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as of the day
and year first above written.
PATRIOT SCIENTIFIC CORPORATION
BY: /s/ MICHAEL A. CARENZO
------------------------------------
Michael A. Carenzo
President and CEO
/s/ JAYANTA K. MAITRA
------------------------------------
Jayanta K. Maitra
Executive
EX-38
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 10.18
TECHNOLOGY LICENSE AND DISTRIBUTION AGREEMENT DATED JUNE 23, 1997
BETWEEN THE COMPANY AND SUN MICROSYSTEMS, INC.
EX-39
<PAGE> 2
TECHNOLOGY LICENSE
AND DISTRIBUTION AGREEMENT
This Technology License and Distribution Agreement (the "Agreement") is
entered into this 23rd day of June, 1997 (the "Effective Date") between Sun
Microsystems, Inc., acting by and through its JavaSoft organization ("Sun") with
its principal place of business at 2550 Garcia Avenue, Mountain View, California
94043 and Patriot Scientific Corporation, a Delaware corporation with its
principal place of business at 10989 Via Frontera, San Diego, CA 92127
("Licensee").
RECITALS
WHEREAS Sun wishes to license its JavaOS technology, while maintaining
compatibility among JAVA language-based products; and
WHEREAS Sun wishes to protect and promote certain trademarks used in
connection with its JavaOS and JAVA technologies; and
WHEREAS Licensee wishes to develop and distribute products based upon
Sun's JavaOS technology;
NOW THEREFORE, Sun and Licensee enter into this Technology Licensing and
Distribution Agreement on the following terms.
1. DEFINITIONS
1.1. "Applet Application Programming Interface" or "AAPI" means the
public application programming interface to the JavaOS
Environment reflected in the Technology as identified in Exhibit
A, the bytecode specification in the Documentation entitled
"Java Virtual Machine Specification" and by the Java language
specification in the Documentation entitled "Java Language
Specification" and as modified by JavaSoft during the term of
this Agreement, including all public class libraries and
interfaces.
1.2. "Applet" means a Java application which (i) runs on the AAP I
and (ii) consists of Java byte codes executable by the Java
Runtime Interpreter (but does not include or incorporate the
Java Runtime Interpreter).
1.3. "Derivative Work(s)" means: (i) for material subject to
copyright or mask work right protection, any work which is based
upon one or more pre-existing works of the Technology, such as a
revision, modification, translation, abridgment, condensation,
expansion, collection, compilation or any other form in which
such pre-existing works may be recast, transformed or adapted,
(ii) for patentable or patented materials, any adaptation,
subset, addition, improvement or combination of the Technology,
and (iii) for material subject to trade secret protection, any
new material, information or data relating to and derived from
the Technology, including new material which may be protectable
by copyright, patent or other proprietary rights, and, with
respect to each of the above, the preparation, use and/or
distribution of which, in the absence of this Agreement or other
authorization from the owner, would constitute infringement
under applicable law. Notwithstanding the above, Derivative Work
shall not mean or include changes, modifications, revisions,
alterations, additions, improvements, or the like, to the PSC
1000 family of processor chips or related hardware of Licensee,
or any other processor chip or hardware listed on Exhibit B
hereto, made by Licensee to accommodate the Technology.
1.4. "Documentation" means the documentation which JavaSoft provides
for use with the Technology, as more particularly identified in
Exhibit A.ll.
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1.5. "Field of Use" means the relevant market segments and/or product
areas identified in Exhibit B.
1.6. "JavaOS Classes" means the JavaOS classes listed in Exhibit
A.l.a.
1.7. "JavaOS Environment' means the combination of the JavaOS Runtime
Interpreter and the JavaOS Classes.
1.8. "JavaOS Runtime Interpreter" means the program which implements
the Java Virtual Machine, as specified in the Java Virtual
Machine Specification, without the need for a desktop-style
operating system, i.e., directly on bare silicon. The JavaOS
Runtime Interpreter consists of the Shared Part and the Platform
- Dependent Part.
1.9. "Licensee Open Classes" means additional Java classes developed
by Licensee which represent extensions to the AAPI, and which
are made available to third parties in either source or binary
form to use in the development of additional software which
outputs Java bytecodes and/or runs on a Java compatible Runtime
Interpreter.
1.10. "Permitted Derivative Work(s)" means Derivative Works made by or
for Licensee that constitute Product(s), Licensee Open Classes,
Licensee-implemented modifications to the Platform Dependent
Part of the Technology and Licensee-implemented modifications to
the Shared Part of the Technology to the extent authorized in
Exhibit G.
1.11. "Platform Dependent Part" means those Source Code files and
corresponding binary code of the JavaOS Environment which are
not in a "share" directory or subdirectory thereof.
1.12. "Product(s)" means a Licensee product into which the Technology
is integrated in whole or in part. A "Product" must: (i) have a
principal purpose which is substantially different from that of
the stand - alone JavaOS Environment; (ii) represent a
significant functional and value enhancement to the JavaOS
Environment; (iii) operate in conjunction with the JavaOS
Environment; and (iv) not be marketed as a technology which
replaces or substitutes for the JavaOS Environment. A current
list of Product(s) is specified in Exhibit B, which may be
amended by Licensee to add Product(s) from time to time. A
microprocessor with the binary of the JavaOS software burned
into the memory thereof shall qualify as a Product for purposes
of this Agreement.
1.13. "Shared Part" means those Source Code files and corresponding
binary code of the JavaOS Environment which are in any 'share"
directory or subdirectory thereof.
1.14. "Source Code" means the human readable version, in whole or in
part, of the Technology whether supplied by JavaSoft or any
other entity, and any corresponding comments and annotations.
1.15. "Technology" means the JavaOS Runtime Interpreter, and the
JavaOS Classes developed by Sun, as more particularly identified
in Exhibit A, and Updates thereto to the extent that Licensee is
entitled to receive them hereunder.
1.16. "Trademarks" means all names, logos, designs, characters, and
other designations or brands used by JavaSoft in connection with
the Technology.
1.17. "Updates" means bug fixes, modifications, variations,
enhancements, to the extent included in a patch or dot release
of the Technology which JavaSoft generally licenses as part of
the Technology.
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2. LICENSE GRANTS
2.1.Source Code License.
Subject to the terms and conditions contained in this Agreement and
subject to Licensee's payments specified in Exhibit C, Sun hereby
grants to Licensee, under and to the extent of Sun's Intellectual
Property Rights and solely for the Field(s) of Use specified in
Exhibit B, a perpetual, worldwide, non-exclusive, non-transferable
license, without the right to sublicense (except as specified in
Section 2.1b(iii)), to: (i) use the Source Code for internal
development and porting purposes, (ii) modify the Source Code to
create Derivative Works (provided that Licensee shall be limited
solely to creating Derivative Works that constitute product(s),
Licensee Open Classes, and Licensee - implemented modifications to
the Platform Dependent Part ("Permitted Derivative Works")), and
(iii) compile the Source Code and Permitted Derivative Works thereof.
Licensee shall have no right to modify or subset the AAPI or to modify
the functional behavior of the JavaOS Runtime Interpreter. Licensee
may use the Source Code of the Shared Part of the JavaOS Environment
to develop Product(s), Licensee Open Classes, and Licensee -
implemented modifications to the Platform Dependent Part, but if it
uses such Source Code, it must use all of it without modification,
except as set forth in Exhibit G.
Except as specified in Section 2.1b(iii), Licensee shall have no right
to distribute the Source Code of the Technology or of Derivative
Works.
Porting.
Licensee may port the Platform Dependent Part to platforms other than
those specified in Exhibit C.
Sun will work with Licensee to identify any changes which are necessary
to the Shared Part of the JavaOS Runtime Interpreter to allow porting
it to other platforms, and Sun will use reasonable efforts to
evaluate the feasibility of implementing such changes or
reclassifying the necessary code as Platform Dependent. Licensee may
sublicense and deliver a copy of the Source Code of the Technology to
third parties (i) only in association with the delivery and
sublicensing of Licensee Products, (ii) solely for the purpose of
enabling such third party to port or localize Products for Licensee,
and (iii) only with Sun's prior written approval. Any such sublicense
shall be made subject to terms and conditions relating to ownership,
use, compatibility, and confidentiality of the Technology
substantially similar to those contained herein.
Bug Fixes. Licensee will inform Sun promptly, and no later than it
informs any third party, of any bugs identified in the Technology,
and to the extent that Licensee elects to correct such bugs, Licensee
will make the Source Code of such bug fixes promptly available to Sun
free of all restrictions as they are implemented.
2.2. Binary Code License.
Sun hereby grants Licensee, under and to the extent of Sun's
Intellectual Property Rights, a non-exclusive, worldwide, fully paid
up license to make, use and reproduce an unlimited number of copies
of the Technology in binary form, for Licensee's internal use during
the term of this Agreement.
Worldwide Distribution. Sun hereby grants Licensee a worldwide,
nonexclusive license to distribute the Product(s) incorporating
the Technology solely in binary form. Licensee may use such
distribution channels as Licensee deems appropriate, including
distributors, resellers, dealers and sales representatives
(collectively, "Distributors"), provided however, that such
Distributors shall not modify the Technology (other than the
drivers thereof), and shall be obligated to abide by the relevant
terms in this Agreement governing use, distribution,
compatibility, and confidentiality.
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2.3.Documentation.
Sun hereby grants to Licensee, under and to the extent of Sun's
Intellectual Property Rights, a non-exclusive, non-transferable
license to: (I) use the Documentation for internal development
purposes, (ii) copy, use and modify the Documentation to create
technically accurate Licensee documentation (which must include
all the relevant Sun copyrights, notices, and marks), (iii)
translate the Documentation into other languages, and (iv)
distribute such translated or modified Documentation in
connection with distribution of the Product(s). Licensee may also
use a pointer to the Sun Documentation on the Internet in
connection with distribution of the Product(s).
2.4.Compatibility.
JavaOS Compatibility.
From time to time, Sun will make available test suites at no cost for
validating that the portion of Licensee's Product which
interprets Java bytecodes complies with the then - current
Specification of the JavaOS Technology as defined by Sun as of
the date of that test suite ("JavaOS Test Suite"). Sun shall use
reasonable efforts to review any changes to such JavaOS Test
Suites as much in advance as possible with Licensee, but failure
of Sun to do so shall not constitute a breach of this Agreement
and shall not invalidate any such JavaOS Test Suite published by
Sun.
Each revision of a Product released by Licensee must pass a JavaOS
Test Suite that was current within one hundred twenty (120) days
before First Customer Shipment of such revision of such Product.
Licensee shall not release or distribute to any third party the
portion of Licensee's Product that interprets Java bytecodes,
which does not successfully pass such JavaOS Test Suite. In the
event that Licensee elects to use a version of the Technology
that is newer than that which is required under this Section,
Licensee agrees to pass the JavaOS Test Suite that corresponds to
such newer version.
If Licensee provides Sun with written notice of the existence of a
bug in a current JavaOS Test Suite, Licensee shall be released
from compatibility with the minimum portion of such JavaOS Test
Suite necessary to avoid the impact of such bug, until such time
as Sun provides to Licensee a corrected or new JavaOS Test Suite.
Applet Tag Compatibility. Any Product that reads or writes hypertext
markup language (HTML) or standard generalized markup language
(SGML) shall use the Document Type Definition ("DTD") as
specified in Exhibit E when referencing the Applet tag, unless
another DTD is defined for the Applet tag by an industry
standard.
Branding and Trademarks. Licensee shall use a logo specified by Sun
that indicates compatibility with the JavaOS Test Suites (the
"Compatibility Logo") in a trademark manner on all Licensee
Product(s) distributed hereunder. The terms and conditions
governing the parties' agreement as to trademarks, logos, and
branding shall be governed by the Trademark License entered into
herewith, attached as Exhibit F hereto, and incorporated by
reference herein.
2.5.Licensee Open Classes.
Licensee shall deliver to Sun free of all restrictions the
specification for the application programming interface for each
Licensee Open Class as early as is reasonably possible but in no
event later than the date on which it first provides such
specification or an implementation thereof to any third party.
Included in such specification shall be an appropriate test suite
sufficiently detailed to allow Sun and third parties to produce
implementations compatible with the
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<PAGE> 6
specification. Licensee shall use its reasonable commercial
efforts to clarify and correct the specification or the test
suite upon written request by Sun and failure to do so within
sixty (60) days after such request shall constitute breach of
this Agreement.
Licensee shall notify Sun as soon as it has made any general
disclosure (i.e., not subject to confidentiality obligations) of
such specification, or first releases a Product implementing such
specification, after which Sun shall have no obligation of
confidentiality whatsoever with respect to such specification.
Licensee agrees that it will take no steps whatsoever to prevent
Sun or any third party from creating independent and compatible
implementations based on such specification, provided that such
implementations do not violate Licensee's patents, copyrights or
trade secrets in Licensee's implementation of the Licensee Open
Classes (i.e., Licensee agrees that it will not enforce copyright
or patent claims that relate to interface or compatibility with
such specification).
Licensee shall confine the names of all Licensee Open Classes to
names beginning with "COM. Licensee" or such other convention as
Sun may reasonably require and shall not modify or extend the
names of public class or interface declarations whose names begin
with "Java", "COM.sun" or their equivalents in any subsequent
naming convention. Licensee will make reasonable commercial
efforts to ensure that other commercial software packages which
it redistributes conform to this convention.
Licensee hereby grants Sun a non-exclusive, worldwide, fully - paid -
up license to use an unlimited number of copies of the Licensee
Open Classes, in binary form, for Sun's internal use, such use
including but not limited to demonstration rights. Licensee
agrees to reasonably negotiate in good faith with Sun the terms
of a commercial license for the source code of the Licensee Open
Classes. The parties agree that the FEES and other terms and
conditions of this Agreement are a reasonable standard against
which to judge such a license on a proportionate basis comparing
the scope and complexity of the portion of the Licensee Open
Class being licensed to the scope and complexity of the
Technology.
2.6. Ownership.
Ownership by Sun. Sun retains all right, title and interest in the
Technology, Documentation, Updates, bug fixes, Trademarks, and
Derivative Works, (except for Permitted Derivative Works) and
associated Intellectual Property Rights. Licensee agrees to
execute (in recordable form where appropriate) any instruments
and/or documents as Sun may reasonably request to verify and
maintain Sun's ownership rights, or to transfer any part of the
same which may vest in Licensee for any reason. Licensee further
agrees to promptly deliver to Sun any in source code form
Derivative Works (except for Permitted Derivative Works) of the
Technology created by Licensee pursuant to and during the term of
this Agreement. Sun shall have no obligations of confidentiality
to Licensee for such Derivative Works, nor shall Sun be obligated
to incorporate any such Derivative Works into the Technology.
Ownership by Licensee. Licensee retains all right, title and interest
in Permitted Derivative Works created by Licensee pursuant to and
during the term of this Agreement, subject to Sun's underlying
rights in the Technology and associated Intellectual Property
Rights identified in Section 2.6a. Licensee further retains all
right, title and interest in all changes, modifications,
revisions, alterations, additions, improvements, or the like, to
the PSC 1000 family of processor chips or related hardware of
Licensee, or any other processor chip or hardware listed on
Exhibit B hereto, made by Licensee to accommodate the Technology.
2.7. Protection of Sun's Rights. Licensee shall use, modify and practice
the Technology and manufacture, market, distribute and sell
Product(s), Licensee Open Classes, and Licensee - implemented
modifications to the Platform - Dependent Part of the JavaOS Runtime
Interpreter only in a manner consistent with the terms of this
Agreement, and only in a manner reasonably
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<PAGE> 7
designed not to jeopardize or prejudice Sun's Intellectual Property
Rights, including trademarks, trade dress and service marks, and
other proprietary rights.
2.8. No Other Grant. Each party agrees that this Agreement does not grant
any right or license, under any Intellectual Property Rights of the
other party, or otherwise, except as expressly provided in this
Agreement, and no other right or license is to be implied by or
inferred from any provision of this Agreement or by the conduct of
the parties.
2.9. Pre - Release. Licensee may release Product(s) based on the pre - FCS
Technology licensed by Sun hereunder only for beta testing purposes.
3.0 SUPPORT AND UPDATES
3.1 During the Support Period (as defined below), Sun shall provide
to Licensee under the terms and conditions of this Agreement, Updates
for the platforms specified in Exhibit C when and if any such Updates
are made available by Sun to any commercial licensee similarly
situated.
3.2 Subject to payment of the fee specified in Exhibit C (3b), Sun
shall assign the equivalent of one (1) half-time engineer to be
available via phone, electronic mail and/or scheduled appointment
during regular business hours to support Licensee, from the Effective
Date through the fifth (5th) anniversary of the Sun FCS Date (as
defined below) (the "Support Period"). The selection of the support
engineer shall be at Sun's sole discretion. Licensee may designate a
maximum of three (3) contacts to interface with the Sun support
engineer.
3.3 Upon the request of Licensee, Sun agrees to reasonably negotiate
in good faith for additional support through a separate support
agreement.
4.0 PAYMENT
4.1 License and Support Fees and Royalties. Licensee shall pay to Sun
the license and support fees and royalties set forth in Exhibit C
within thirty (30) days from the Effective Date of this Agreement,
unless otherwise specified in Exhibit C. Thereafter, and for the term
of the Agreement, Licensee shall pay the Support Fee on or before the
anniversary of the Effective Date.
4.2 Taxes. All payments required by this Agreement shall be made in
United States dollars, are exclusive of taxes, and Licensee agrees to
bear and be responsible for the payment of all such taxes, including,
but not limited to, all sales, use, rental receipt, personal property
or other taxes and their equivalents which may be levied or assessed
in connection with this Agreement (excluding only taxes based on
Sun's net income).
4.3 Records. Licensee shall maintain account books and records
consistent with Generally Accepted Accounting Principles appropriate
to Licensee's domicile, as may be in effect from time to time,
sufficient to allow the correctness of the royalties required to be
paid pursuant to this Agreement to be determined.
4.4 Audit Rights. Sun shall have the right to audit such accounts
upon reasonable prior notice. The right to audit may be exercised
through an independent auditor of Sun's choice (the "Auditor"). The
Auditor shall be bound to keep confidential the details of the
business affairs of Licensee and to limit disclosure of the results
of any audit to only the sufficiency of the accounts and the amount,
if any, of any additional payment or other payment adjustment that
should be made. Such audits shall not occur more than once each year
(unless discrepancies are discovered in excess of the five percent
(5%) threshold set forth in Section 4.5, in which case two
consecutive quarters per year may be audited). Except as set forth in
Section 4.5 below, Sun shall bear all costs and expenses associated
with the exercise of its rights to audit.
4.5 Payment Errors. In the event that any errors in payments shall be
determined, such errors shall be corrected by appropriate adjustment
in payment for the quarterly period during which the error is
discovered. In the event of an underpayment of more than five percent
(5%) of the proper amount
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<PAGE> 8
owed, upon such underpayment being properly determined by the
Auditor, Licensee shall reimburse Sun the amount of said underpayment
and the reasonable charges of the Auditor in performing the audit
that identified said underpayment, and interest on the overdue amount
at the maximum allowable interest rate from the date of accrual of
such obligation.
5.0 ADDITIONAL AGREEMENT OF PARTIES
5.1 Notice of Breach or Infringement. Each party shall notify the
other immediately in writing when it becomes aware of any breach or
violation of the terms of this Agreement, or when Licensee becomes
aware of any potential or actual infringement by a third party of the
Technology or Sun's Intellectual Property Rights therein.
5.2 Notices. Licensee shall not remove any copyright notices,
trademark notices or other proprietary legends of Sun or its
suppliers contained on or in the Technology or Documentation. Each
unit of Product(s) containing the Technology distributed by Licensee
shall include in Licensee's documentation, or in other terms and
conditions of sale, notices substantially similar to those contained
on and in the Technology. Licensee or its Distributors shall require
an end user license agreement for each unit of Product(s) shipped and
Licensee shall provide Sun with a copy of such form agreement for
review and approval. If Licensee or its Distributors use a package
design or label for the Product(s), such package design or label
shall include an acknowledgment of Sun as the source of the
Technology and such other notices as specified in Exhibit F. In
addition, Licensee shall comply with all reasonable requests by Sun
to include Sun's copyright and/or other proprietary rights notices on
the Product(s), documentation or related materials, including but not
limited to the notices and acknowledgments as specified in Exhibit F.
5.3 End User Support. Licensee shall provide technical and
maintenance support service for its distributors and end user
customers in accordance with Licensee's standard support practices.
Sun shall not be responsible for providing any support to Licensee's
distributors or customers for the Technology or the Product(s).
5.4 Marketing. Licensee will cooperate with Sun on mutually agreeable
marketing and promotional activities relating to the Technology.
Licensee's initial press announcement concerning execution of this
Agreement must be reviewed and approved by Sun prior to its release.
5.5 Use of Licensee's name. Licensee hereby authorizes Sun to
identify Licensee as a user of the Technology in advertising,
marketing, collateral, customer lists and customer success stories
prepared by or on behalf of Sun for the Technology, provided that
Licensee will have the right to approve the use of its name, such
approval not to be unreasonably withheld or delayed.
6.0 LIMITED WARRANTY AND DISCLAIMER
6.1 Limited Warranty. Sun represents and warrants that the media on
which the Technology is recorded will be free from defects in
materials and workmanship for a period of ninety (90) days after
delivery. Sun's sole liability with respect to breach of this
warranty is to replace the defective media. Except as expressly
provided in this Section 6.1, Sun licenses the Technology and
Documentation to Licensee on an "AS IS" basis.
6.2 General Disclaimer. EXCEPT AS SPECIFIED IN THIS AGREEMENT, ALL
EXPRESS OR IMPLIED REPRESENTATIONS AND WARRANTIES, INCLUDING ANY
IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE
OR NON - INFRINGEMENT, ARE HEREBY DISCLAIMED.
6.3 Logo Disclaimer. SUN MAKES NO WARRANTIES OF ANY KIND RESPECTING
THE COMPATIBILITY LOGO(s), INCLUDING THE VALIDITY OF SUN'S RIGHTS IN
THE COMPATIBILITY LOGO(s) IN ANY COUNTRY, AND DISCLAIMS ANY AND ALL
WARRANTIES THAT MIGHT OTHERWISE BE IMPLIED BY APPLICABLE LAW,
INCLUDING WARRANTIES AGAINST INFRINGEMENT OF THIRD PARTY TRADEMARKS.
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6.4 Limitation. The warranties set forth in this Article 6.0 are
expressly subject to Section 9.0 (Limitation of Liability).
7.0 CONFIDENTIAL INFORMATION
7.1 Confidential Information. For the purposes of this Agreement,
"Confidential Information" means the Technology and that information
which relates to (i) Sun hardware or software, (ii) Licensee hardware
or software, (iii) the customer lists, business plans and related
information of either party, and (iv) any other technical or business
information of the parties, including the terms and conditions of
this Agreement. In all cases, information which a party wishes to be
treated as "Confidential Information" shall be marked as
"confidential" or "proprietary" (or with words of similar import) in
writing by the disclosing party on any tangible manifestation OF the
information transmitted in connection with the disclosure, or, if
disclosed orally, designated as "confidential" or "proprietary" (or
with words of similar import) at the time of disclosure. Sun has no
obligation of confidentiality to Licensee with respect to Derivative
Works (except for Permitted Derivative Works) and the specifications
of the Licensee Open Classes.
7.2 Preservation of Confidentiality. The parties agree that all
disclosures of Confidential Information (as defined under Section 7.1
above) shall be governed by and treated in accordance with the terms
of the Confidential Disclosure Agreement (the "CDA") attached hereto
as Exhibit D and incorporated herein by reference, modified as
follows:
the definition of "Confidential information" shall be as set forth
in Section 7.1 above notwithstanding any definition set forth
in the CDA;
the use of Confidential Information shall be limited to the scope
of the licenses provided in this Agreement; and
the obligations of confidentiality expressed in the CDA shall
extend three (3) years beyond termination of this Agreement,
except with respect to Sun Source Code which shall be held in
confidence in perpetuity; and
the CDA shall remain in effect for the term of this Agreement.
8.0 LIMITED INDEMNITY
8.1 Licensee acknowledges that Sun shall not be liable for any
defects or deficiencies in the Technology or in any Product, process
or design created by, with or in connection with the Technology
whether or not such defects and/or deficiencies are caused, in whole
or in part, by defects or deficiencies in the design or
implementation of the Technology. Upon delivery of the Technology by
Sun pursuant to this Agreement, Sun will provide to Licensee a
limited indemnity as described in Sections 8.2 - 8.5 below.
8.2 Sun will defend, at its expense, any legal proceeding brought
against Licensee, to the extent it is based on a claim that use of
the Technology is an infringement of a trade secret or copyright in
any country that is a signatory to the Berne Convention, and will pay
all damages awarded by a court of competent jurisdiction attributable
to such claim, provided that Licensee: (i) provides notice of the
claim promptly to Sun; (ii) gives Sun sole control of the defense and
settlement of the claim; (iii) provides to Sun, at Sun's expense, all
available information, assistance and authority to defend; and (iv)
has not compromised or settled such proceeding without Sun's prior
written consent.
8.3 Should any Technology or any portion thereof become, or in Sun's
opinion be likely to become, the subject of a claim of infringement
for which indemnity is provided under Section 8.2, Sun shall, as
Licensee's sole and exclusive remedy for ongoing infringement, elect
to: (i) obtain for Licensee the right to use such Technology; (ii)
replace or modify the Technology so that it becomes non - infringing;
or (iii) accept the return of the Technology and grant Licensee a
refund of the License Fee and royalties, as depreciated on a five
year straight-line basis.
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<PAGE> 10
8.4 Sun shall have no liability for any infringement or claim which
results from: (i) use of other than a current unaltered version of
the Technology, if such version was made available to Licensee; (ii)
use of the Technology in combination with any non -Sun-provided
equipment, software or data; or (iii) Sun's compliance with designs
or specifications of Licensee.
8.5 THIS ARTICLE STATES THE ENTIRE LIABILITY OF SUN WITH RESPECT TO
INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS BY THE TECHNOLOGY.
SUN SHALL HAVE NO OTHER LIABILITY WITH RESPECT TO INFRINGEMENT OF
INTELLECTUAL PROPERTY RIGHTS OF LICENSEE OR ANY THIRD PARTY AS A
RESULT OF USE, LICENSE, OR SALE OF TECHNOLOGY.
8.6 Indemnity by Licensee. Except for claims for which Sun is
obligated to indemnify Licensee under Section 8.2, Licensee shall
defend and indemnify Sun from any and all claims brought against Sun
by third parties, and shall hold Sun harmless from all corresponding
damages, liabilities, costs and expenses, (including reasonable
attorneys' fees) incurred by Sun arising out of or in connection with
Licensee's use, reproduction or distribution of the Technology,
Product(s) or Licensee Open Classes. Licensee's obligation to provide
indemnification under this Section shall arise provided that Sun: (i)
gives notice of the claim promptly to Licensee; (ii) gives Licensee
sole control of the defense and settlement of the claim; (iii)
provides to Licensee, at Licensee's expense, all available
information, assistance and authority to defend; and (iv) has not
compromised or settled such proceeding without Licensee's prior
written consent.
9.0 LIMITATION OF LIABILITY
9.1 Limitation of Liability. Except for express undertakings to
indemnify under this Agreement and/or breach of Sections 2.4, 2.5,
7.0 or 9.2:
Each party's liability to the other for claims relating to this
Agreement, whether for breach or in tort, shall be limited to
the license fees and royalties paid by Licensee for the
Technology related to the claims.
b. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INDIRECT,
INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION
WITH OR ARISING OUT OF THIS AGREEMENT (INCLUDING LOSS OF PROFITS,
USE, DATA, OR OTHER ECONOMIC ADVANTAGE), NO MATTER WHAT THEORY OF
LIABILITY, EVEN IF THE EXCLUSIVE REMEDIES PROVIDED FOR IN THIS
AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE AND EVEN IF EITHER PARTY
HAS BEEN ADVISED OF THE POSSIBILITY OR PROBABILITY OF SUCH DAMAGES.
FURTHER, LIABILITY FOR SUCH DAMAGE SHALL BE EXCLUDED, EVEN IF THE
EXCLUSIVE REMEDIES PROVIDED FOR IN THIS AGREEMENT FAIL OF THEIR
ESSENTIAL PURPOSE. The provisions of this Section 9.0 allocate the
risks under this Agreement between Sun and Licensee and the parties
have relied upon the limitations set forth herein in determining
whether to enter into this Agreement. 9.2 High Risk Activities. The
Technology is not designed or intended for use in online control of
aircraft, air traffic, aircraft navigation or aircraft
communications; or in the design, construction, operation or
maintenance of any nuclear facility. Sun disclaims any express or
implied warranty of fitness for such uses. Licensee agrees that it
will not knowingly use or license the Technology for such purposes,
and that it will ensure that its customers and end users of the
Technology are provided with a copy of the foregoing notice.
10.0 TERM AND TERMINATION
10.1 Term. The term of this Agreement shall begin on the Effective
Date and shall continue for a period of three (3) years, or until
terminated as provided below. Each year for five (5) consecutive
years following expiration of the initial three (3) year term, at
Licensee's sole option, Licensee may extend the term of this
Agreement for one (1) additional year. Licensee shall indicate its
intent to extend the Agreement by written notice to Sun within thirty
(30) days prior to the expiration of the preceding term. Termination
is permitted either for breach of this Agreement, upon thirty (30)
days written notice to the other party and an opportunity to cure
within such thirty (30) day period, or upon
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any action for infringement of any patent relating to the Technology
by Licensee against Sun or any of Sun's licensees of the Technology.
(Notwithstanding the above, Licensee reserves and retains to itself
the exclusive right to all of its pre - existing technology related
to the PSC 1000 family of processor chips and related hardware of
Licensee, and any other processor chip or hardware listed on Exhibit
B hereto, and shall have the right to enforce any copyright or patent
claims relating thereto.) In addition, at any time after the initial
twelve months of the term of this Agreement, termination is also
permitted upon sixty (60) days written notice by Licensee to Sun
stating that Licensee is terminating the making, importing, use, sale
and distribution of Licensee's Products, in which event all Support
and Update Fees set forth in Exhibit C shall be prorated to the date
of termination.
10.2 Effect of Expiration. Upon expiration of this Agreement, Sun
shall retain use, under the terms of this Agreement, of the
Intellectual Property Rights received hereunder, and Licensee shall
be authorized to: (i) distribute Product(s) containing the version of
the Technology incorporated therein at the time of expiration,
subject to Licensee's continued compliance with the Test Suites
current at the time of expiration, and payment of royalties, and (ii)
retain one (1) copy of the Technology in Source Code form to support
customers having copies of Product(s) distributed by Licensee prior
to the expiration hereof. All other rights of Licensee shall
terminate upon such expiration.
10.3 Effect of Termination. In the event of termination of this
Agreement by Sun in accordance with Section 10.1 above, Licensee
shall promptly: (i) return to Sun all copies of the Technology and
Derivative Works thereof in tangible or electronic form,
Documentation, and Confidential Information (collectively "Sun
Property") (excluding Licensee Open Classes and Licensee -
implemented modifications to the Platform Dependent Part) in
Licensee's possession or control; or (ii) permanently destroy or
disable all copies of the Sun Property in Licensee's possession or
control, except as specifically permitted in writing by Sun; and
(iii) provide Sun with a written statement certifying that Licensee
has complied with the foregoing obligations. All rights and licenses
granted to Licensee shall terminate upon such termination.
10.4 No Liability for Expiration or Lawful Termination. Neither party
shall have the right to recover damages or to indemnification of any
nature, whether by way of lost profits, expenditures for promotion,
payment for goodwill or otherwise made in connection with the
business contemplated by this Agreement, due to the expiration or
permitted or lawful termination of this Agreement. EACH PARTY WAIVES
AND RELEASES THE OTHER FROM ANY CLAIM TO COMPENSATION OR INDEMNITY
FOR TERMINATION OF THE BUSINESS RELATIONSHIP UNLESS TERMINATION IS A
MATERIAL BREACH OF THIS AGREEMENT.
10.5 No Waiver. The failure of either party to enforce any provision
of this Agreement shall not be deemed a waiver of that provision. The
rights of Sun under this Section 10.0 are in addition to any other
rights and remedies permitted by law or under this Agreement.
10.6 Survival. The parties' rights and obligations under Sections
2.0, 4.0, 5.2, 5.3, 6.0, 7.0, 8.0, 9.0, 10.0, and 11.0 shall survive
expiration or termination of this Agreement, excluding in the event
of breach by Licensee, Licensee's rights under Section 2.0, which
shall terminate.
10.7 Irreparable Harm. The parties acknowledge that breach of
Sections 2.0, 5.2, 5.3, 7.0, 9.2, or 11.6 may cause irreparable harm,
the extent of which would be difficult to ascertain. Accordingly,
they agree that, in addition to any other legal remedies to which a
non-reaching party might be entitled, such party may seek immediate
injunctive relief in the event of a breach of the provisions of such
Articles.
11.0 MISCELLANEOUS
11.1 Notices. All notices must be in writing and delivered either in
person or by certified mail or registered mail, postage prepaid,
return receipt requested, to the person(s) and address specified
below. Such notice will be effective upon receipt.
EX-49
<PAGE> 12
Sun Licensee
Sun Microsystems, Inc. Patriot Scientific Corporation
2550 Garcia Avenue, UCUP01-05 10989 Via Frontera
Cupertino, California 95014 - 2233 San Diego, CA 92127
Attn: JavaSoft General Counsel Attn:
11.2 Partial Invalidity. If any term or provision of this Agreement
is found to be invalid under any applicable statute or rule of law
then, that provision notwithstanding, this Agreement shall remain in
full force and effect and such provision shall be deleted unless such
a deletion would frustrate the intent of the parties with respect to
any material aspect of the relationship established hereby, in which
case, this Agreement and the licenses and rights granted hereunder
shall terminate.
11.3 Complete Understanding. This Agreement and the Exhibits hereto
constitute and express the final, complete and exclusive agreement
and understanding between the parties with respect to its subject
matter and supersede all previous communications, representations or
agreements, whether written or oral, with respect to the subject
matter hereof. No terms of any purchase order or similar document
issued by Licensee shall be deemed to add to, delete or modify the
terms and conditions of this Agreement. This Agreement may not be
modified, amended, rescinded, canceled or waived, in whole or part,
except by a written instrument signed by the parties.
11.4 Language. This Agreement is in the English language only, which
language shall be controlling in all respects, and all versions of
this Agreement in any other language shall be for accommodation only
and shall not be binding on the parties to this Agreement. All
communications and notices made or given pursuant to this Agreement,
and all documentation and support to be provided, unless otherwise
noted, shall be in the English language.
11.5 Governing Law. This Agreement is made under and shall be
governed by and construed under the laws of the State of California,
regardless of its choice of laws provisions. 11.6 Compliance with
Laws. The Technology, including technical data, is subject to U.S.
export control laws, including the U.S. Export Administration Act and
its associated regulations, and may be subject to export or import
regulations in other countries. Licensee agrees to comply strictly
with all such regulations and acknowledges that it has the
responsibility to obtain such licenses to export, re-export or import
the Technology or Product(s) as may be required after delivery to
Licensee.
Licensee shall make reasonable efforts to notify and inform its
employees having access to the Technology of Licensee's obligation to
comply with the requirements stated in this Article.
11.7 Disclaimer of Agency. Licensee is not authorized to make any
representation or warranty on behalf of Sun to its end users or third
parties. The relationship created hereby is that of licensor and
licensee and the parties hereby acknowledge and agree that nothing
herein shall be deemed to constitute Licensee as a franchisee of Sun.
Licensee hereby waives the benefit of any state or federal statutes
dealing with the establishment and regulation of franchises.
11.8 Delivery. As soon as practicable after the Effective Date, Sun
shall deliver to Licensee one (1) copy of each of the deliverables
set forth in Exhibit A. Licensee acknowledges that certain of the
deliverables are in various stages of completion and agrees to accept
the deliverables as and to the extent completed as of the date of
delivery and "AS IS." In the event any deliverable is already in the
possession or custody of Licensee, such item(s) shall, to the extent
used in connection with the rights granted in Section 2.0 above, be
subject to the terms of this Agreement, notwithstanding any
pre-existing agreement or understanding between Licensee and Sun with
respect to such items.
11.9 Assignment and Change in Control. This Agreement may not be
assigned by either party without the prior written consent of the
other party, which consent shall not be unreasonably withheld or
delayed, except that Sun may assign this Agreement to a majority -
owned subsidiary.
EX-50
<PAGE> 13
11.10 Construction. This Agreement has been negotiated by Sun and
Licensee and by their respective counsel. This Agreement will be
fairly interpreted in accordance with its terms and without any
strict construction in favor of or against either party.
11.11 Force Majeure. Except for the obligation to pay money, neither
party shall be liable to the other party for non-performance of this
Agreement, if the non-performance is caused by events or conditions
beyond that party's control and the party gives prompt notice under
Section 11.1 and makes all reasonable efforts to perform.
11.12 Exhibits:
The following are included herein by reference as integral parts of
this Agreement:
Exhibit A - Description of Technology and Documentation
Exhibit B - Identification of Licensee Product(s)
Exhibit C - Schedule of Fees and Royalties
Exhibit D - Confidential Disclosure Agreement
Exhibit E - Document Type Definition
Exhibit F - Trademark License
Exhibit G - Shared Part Exceptions
11.13 Section References. Any reference contained herein to an
article of this agreement shall be meant to refer to all subsections
of the article.
11.14 No Competitive Restrictions. The Parties agree that nothing in
this Agreement is intended to prohibit Licensee from independently
developing or acquiring technology that is the same as or similar tot
he Technology, provided that Licensee does not do so in breach of
Exhibit D to this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
Sun Microsystems, Inc. Licensee:
By: /S/ ALAN E BARATZ By: /S/ M.A. CARENZO
---------------------------- ----------------------------
Name: Alan E. Baratz Name: M.A. Carenzo
Title: President, JavaSoft Title: President & CEO
Date: 6/23/97 Date: 6/30/97
EX-51
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 23.1
CONSENT OF BDO SEIDMAN, LLP
EX-52
<PAGE> 2
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
San Diego, California
We hereby consent to the incorporation by reference in this Registration
Statement of our report dated July 3, 1997, relating to the consolidated
financial statements of Patriot Scientific Corporation, appearing in the
Company's Annual Report on Form 10-KSB for the year ended May 31, 1997.
/s/ BDO SEIDMAN, LLP
Denver, Colorado
July 17, 1997
EX-53
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 23.2
CONSENT OF HARLAN & BOETTGER, LLP, CERTIFIED PUBLIC ACCOUNTANTS
EX-54
<PAGE> 2
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
San Diego, California
We hereby consent to the incorporation by reference in this Registration
Statement of our report dated December 17, 1996, relating to the financial
statements of Metacomp, Inc., appearing in Patriot Scientific Corporation's
Annual Report on Form 10-KSB for the year ended May 31, 1997.
/s/ HARLAN & BOETTGER, LLP
San Diego, California
July 17, 1997
EX-55
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
STATEMENTS FOR THE FISCAL YEAR ENDED MAY 31, 1997; AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
MAY 31, 1997.
</LEGEND>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
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