<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PATRIOT SCIENTIFIC CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 84-1070278
(State or other jurisdiction of (IRS Employer
of incorporation or organization) Identification Number)
10989 VIA FRONTERA ROBERT PUTNAM, SECRETARY
SAN DIEGO, CALIFORNIA 92127 PATRIOT SCIENTIFIC CORPORATION
(619) 674-5000 10989 VIA FRONTERA
SAN DIEGO, CALIFORNIA 92127
(619) 674-5000
(Address, including zip code, (Name, address, including
and telephone number, zip code, and telephone number,
including area code, of including area code, of
registrant's principal executive agent for service)
offices and principal place of business)
WITH COPIES TO:
OTTO E. SORENSEN, ESQ.
LUCE, FORWARD, HAMILTON & SCRIPPS LLP, ATTORNEYS AT LAW
600 WEST BROADWAY, #2600, SAN DIEGO, CALIFORNIA 92101
(619) 236-1414
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]______
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Proposed maximum Amount of
Title of each class of Amount to be maximum offering aggregate offering registration
securities to be registered registered (1) price per share (2) price (2) fee (3)
- -------------------------------- -------------------- -------------------- ------------------- -------------
<S> <C> <C> <C> <C>
Common stock issuable
upon conversion of Debentures 4,400,000 $2.00 $ 8,800,000 $ 2,666.67
Common stock issuable
upon exercise of warrants 611,733 $2.00 $ 1,223,466 $ 370.75
------- ----- ----------- ----------
Total $ 3,037.42
==========
</TABLE>
(1) Shares of the Registrant's common stock, $.00001 par value per share, are
being registered for resale on behalf of certain selling security holders
pursuant to Rule 416, this Registration Statement also covers such
indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Company's 5% Convertible Debenture (the
"Notes") and exercise of Warrants issued in connection with the issuance
of the Notes, (i) to prevent dilution resulting from stock splits, stock
dividends or similar transactions or (ii) by reason of changes in the
conversion price of the Debentures and the execution price of the Warrants
in accordance with the terms thereof.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The fee with respect to these shares has been calculated pursuant to Rule
457(c) under the Securities Act of 1933, as amended, and is based upon the
average of the bid and asked prices per share of the Registrant's common
stock on July 11, 1997, as quoted on the OTC Electronic Bulletin Board.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
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SUBJECT TO COMPLETION; JULY 17, 1997
-----------------------
P R O S P E C T U S
-----------------------
PATRIOT SCIENTIFIC CORPORATION
5,011,733 Common Shares
This Prospectus relates to 5,011,733 shares of the Common Stock, $.00001
par value ("Common Stock" or "Common Shares"), of Patriot Scientific
Corporation, a Delaware corporation ("Company"), which will be resold by the
persons listed herein as the Selling Shareholders ("Selling Shareholders" or
"Selling Security Holders"). The Common Shares are being offered hereunder for
the respective accounts of the Selling Shareholders and will be sold from time
to time by the Selling Shareholders in the over-the-counter market or otherwise
at prevailing market prices or in negotiated transactions. All 5,011,733 shares
are issuable by the Company to the Selling Shareholders upon the conversion of
5% Convertible Debentures ("Notes") and on the exercise of Warrants, dated June
2, 1997 ("Warrants") (collectively the "Securities"). As of the date of this
Prospectus, no portion of the Notes had been converted and none of the Warrants
had been exercised. The expenses of preparing and filing the Registration
Statement of which this Prospectus forms a part are being borne by the Company.
Although the Company will receive no proceeds from the sale of the Common Shares
by the Selling Security Holders, the Company has received $2,000,000 of loan
proceeds pursuant to the Notes, an indeterminate amount of which may be retired
upon the conversion of the Notes to shares of Common Stock of the Company. See
"Selling Security Holders."
The number of shares of Common Stock issuable upon conversion of the Notes
is determined by dividing the aggregate principal amount, plus any accrued
interest at 5% per annum and certain other possible obligations, by the lesser
of (i) $1.1646 per share, or (ii) from 75% to 91%, depending on the number of
days the Notes were held after June 2, 1997, of the average of the closing bid
price for the common stock for the ten consecutive trading days ending on the
trading day immediately preceding such conversion date. For purposes of this
Registration Statement the Company has computed the number of shares issuable
pursuant to the Notes by dividing the aggregate principal and interest at
maturity of $2,200,000 by $0.50 or 4,400,000 shares. The $0.50 figure assumes a
75% discount rate and an 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 of $0.666.
The shares of Common Stock offered for resale hereby have been registered
pursuant to the Company's obligations contained in written agreements with the
Selling Security Holders. The Selling Security Holders may elect to sell all, a
portion or none of the Common Stock offered by them hereunder.
The Company has only recently emerged from the development stage and has
had only limited revenues amounting to approximately $1,847,000.
-----------------------
THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
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-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
The Common Shares offered hereby were acquired by the Selling Security
Holders from the Company in private transactions and are "restricted securities"
under the Securities Act of 1933, as amended ("Act"). This Prospectus has been
prepared for the purpose of registering the Common Shares under the Act to allow
for future sales by the Selling Security Holders to the public without
restriction. To the knowledge of the Company, the Selling Security Holders have
made no arrangement with any brokerage firm for the sale of the Common Shares.
The Selling Security Holders may be deemed to be "underwriters" within the
meaning of the Act. Any commissions received by a broker or dealer in connection
with resales of the Common Shares may be deemed to be underwriting commissions
or discounts under the Act. See "Plan of Distribution."
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold, nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these
securities, in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such state.
-----------------------
The Common Stock of the Company is traded in the over-the-counter market
and is quoted on the OTC Electronic Bulletin Board operated by the National
Association of Securities Dealers, Inc. under the symbol "PTSC". On July 11,
1997, the last bid and asked prices per share were $1.98 and $2.02,
respectively.
This Prospectus is dated July 17, 1997
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION,
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING
DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY SELLING
SECURITY HOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO
MAKE SUCH OFFER, SOLICITATION OR SALE. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of Section 13(a)
of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and in
accordance therewith files periodic reports and other information with the
Securities and Exchange Commission ("Commission") as a "small business" issuer
pursuant to Regulation S-B of the Commission. Reports, proxy statements and
other information filed by the Company with the Commission may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: 75 Park Place, New York, New York 10007; and
the Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60621. Copies of such material may be obtained from the Public
Reference Section of the Commission's Washington, D.C. office at prescribed
rates.
The Company has filed with the Commission a registration statement on Form
S-3 of which this Prospectus is a part. This registration statement or any part
thereof may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street N.W., Judiciary Plaza,
Washington, D.C. 20549. Copies of such material may be obtained from the Public
Reference Section of the Commission's Washington, D.C. office at prescribed
rates. The Company's filings under the Exchange Act and its Registration
Statement on Form S-3 may also be accessed through the Commission's web site
(http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference into this Prospectus the
following documents filed with the Commission:
1. The Company's Annual Report on Form 10-KSB for the year ended May 31,
1997 (the "Annual Report").
2. The Company's Report on Form 8-K, filed June 16, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14,
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed incorporated by
reference in this Prospectus and to be a part hereof from the date of the filing
of such documents. See "Additional Information." Any statement contained in a
document incorporated or deemed to be incorporated herein by reference shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon request of any such person, a copy of any or all
of the foregoing documents incorporated herein by reference (other than exhibits
to such documents not specifically incorporated by reference). Written or
telephone requests for such documents should be directed to the Chief Financial
Officer of the Company at its principal executive offices.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, 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 Prospectus, 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.
PROSPECTUS SUMMARY
The following summary is intended only to supply certain facts and
highlights from material contained in the body of this Prospectus and the
documents incorporated by reference herein and is qualified in its entirety by
the detailed information and financial statements (incorporated by reference)
appearing elsewhere below.
THE COMPANY. Patriot Scientific Corporation (the "Company" or "Patriot")
is engaged in the development and marketing of patented microprocessor
technology and high-performance digital communication products. These products
have applications in the Internet and computer, networking and telecommunication
markets. The Company also owns and is developing radar and antenna technology.
The Company's strategy is to exploit its technologies and products through
product sales, licensing, strategic alliances and government contracting.
The markets for digital communication products and microprocessors are
experiencing dramatic growth, in part due to the Internet. The Internet is a
global web of computer networks. Developed over 25 years ago, this "network of
networks" allows any computer connected to the Internet to talk to any other.
The Internet provides organizations and individuals with new means to conduct
business. The growth of the Internet and corporate Intranets is creating a
demand for hardware, software and peripherals. The large number of users
connecting to the Internet is creating a demand for traditional analog modems
and higher speed digital modems. New software, such as Java, is emerging to
serve the requirements of Internet users.
The Java programming language is an object-oriented language for the
Internet. With Java, data and programs do not have to be stored on the user's
computer, they can reside anywhere on the Internet to be called upon as needed.
Java can run on a variety of computer operating systems, thus avoiding the
problem of incompatibility across networks, and Java offers high data security.
Because of Java's useful features, it may also become a popular programming
language for embedded control applications. The growth of Java is also causing a
number of companies to consider it as a basis for a new style of computing
tailored to the Internet using inexpensive Internet computer devices.
A microprocessor is the computer chip providing intelligence for
electronic devices. The Company's microprocessor technology, trade named ShBoom,
uses a proprietary architecture in a high-performance microprocessor integrated
on a single silicon chip manufacturable at a low production cost. The Company's
first ShBoom-architecture microprocessors, the PSC-1000 family, are being
developed and targeted as Java programming language processors, for internally
developed digital communication products and for use as the computer or embedded
controller in sophisticated
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products including laser printers, motion and industrial controllers and digital
communication devices such as cable and satellite modems and television set-top
boxes. The Company believes the PSC1000 family can be competitive based on
factors such as cost, speed and performance with other newly announced
microprocessors targeted for the Internet device market. The Company is also
seeking to license the ShBoom core technology for use by others in
multi-function microprocessors.
Effective on December 26, 1996, in a business combination accounted for as
a pooling-of-interests, the Company acquired 96.9% of Metacomp, Inc.
("Metacomp") a company engaged in designing, manufacturing and marketing
high-performance digital communication products. As a result of the merger, the
Company no longer qualifies as a development stage company. In addition to the
Company's CyberShark digital modem providing consumers with a high-performance
interface between a computer and ISDN telephone lines (Integrated Services
Digital Network, a standard digital communication protocol using existing
telephone lines), the Company's communications division offers OEMs (original
equipment manufacturers), system integrators and VARs (value added resellers)
products for high speed access to the Internet, remote access drivers, video
conferencing equipment and digital telephony. Existing products include
electronic subassemblies used in building hubs and bandwidth-on-demand
applications for satellite and other communications.
The Company has been engaged in developing its radar targeted for ground
penetration applications and new antenna technology. The Company's GPR (ground
penetrating radar) prototype has demonstrated the ability to penetrate multiple
solid objects (walls and barriers); and in certain ground strata, the Company
has been able to resolve objects of six inch size at approximately ten feet in
depth. The Company also has patented new antenna technology for which a small
government contract was awarded in April, 1997 to evaluate and characterize the
antenna's performance. There can be no assurance of future contracts or grants
or alliances to further develop the radar or antenna technology. The Company
does not presently plan to devote any significant resources to further
development except with outside funding or assistance.
The Company has had limited revenues since its inception and, as a result
of the acquisition of Metacomp and initiation of CyberShark sales, has only
recently begun to generate revenues from sales. There can be no assurance the
Company can achieve profitable operations and the Company may need additional
financial resources during the next twelve months. The Company's 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. See "The Company."
SECURITIES OFFERED. No securities will be offered or sold by the Company
pursuant to this Prospectus, which relates solely to the resale of 5,011,733
shares of the Common Stock of the Company held and beneficially owned by persons
listed herein as the Selling Security Holders. The Common Shares are being
offered hereunder for the respective accounts of the Selling Security Holders
and will be sold from time to time by the Selling Security Holders in the
over-the-counter market or otherwise at prevailing market prices or in
negotiated transactions. See "Plan of Distribution", "Selling Security Holders"
and "Description of Securities."
OUTSTANDING SHARES. As of the date of this Prospectus, 33,189,195 of the
Company's Common Shares are outstanding. A total of 5,000,000 of the outstanding
shares are subject to an earnout escrow arrangement which provides for the
release of the shares based on future revenues of the Company. See "Description
of Securities."
COSTS; USE OF PROCEEDS. The expenses of preparing and filing the
Registration Statement of which this Prospectus forms a part are being borne by
the Company. The Company will receive no proceeds from the sale of the Common
Shares by the Selling Security Holders.
RISK FACTORS. The securities offered involve a high degree of risk. See
"Risk Factors."
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RISK FACTORS
The securities offered for sale hereunder by the Selling Security Holders
are speculative in nature, involve a high degree of risk and should be purchased
by persons who can afford to lose the entire sum invested in the Common Shares.
Prospective purchasers of the Common Shares should carefully consider the
following factors relating to the business and prospects of the Company, in
addition to other information concerning the Company and its business contained
in this Prospectus, before purchasing any of the Common Shares.
PREVIOUSLY A DEVELOPMENT STAGE BUSINESS; ABSENCE OF SIGNIFICANT REVENUES
The Company commenced its current operations in 1989, and its activities
have been primarily directed to research and development of its technologies and
administrative activities. The Company only recently emerged from the
development stage as a result of the acquisition of Metacomp and initiation of
CyberShark sales. The Company has had limited revenues and financial results
upon which prospective investors may base an assessment of its potential. There
is no assurance that the Company will become profitable. The Company has
experienced in the past and may experience in the future many of the problems,
delays and expenses encountered by any early stage business, some of which are
beyond the Company's control. These include, but are not limited to, substantial
delays and expenses related to testing and development of new products,
production and marketing problems in connection with new products and
technologies, unexpectedly high manufacturing costs, lack of market acceptance
of such products and technologies, and other unforeseen difficulties. See
"Company."
HISTORY OF LOSSES; UNCERTAIN PROFITABILITY
To date, the Company has incurred significant losses. As of May 31, 1997
its accumulated deficit was $11,344,838. For the fiscal years ended May 31, 1997
and 1996, the Company incurred net losses of $1,463,792 and $557,720
respectively, $612,333 of the loss for each of the years ended May 31, 1997 and
1996 resulted from amortization of purchased technology. The Company expects to
incur additional operating losses in the future until and if it is able to
generate operating revenues sufficient to support expenditures. There is no
assurance that sales of the Company's products will ever generate sufficient
revenues to fund its continuing operations, that the Company will generate
positive cash flow from operations or that the Company will attain or hereafter
sustain profitability in any future period.
NEED FOR ADDITIONAL FINANCING; INSUFFICIENT FUNDS FOR THE NEXT TWELVE MONTHS
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.
TECHNOLOGIES IN VARIOUS STAGES OF DEVELOPMENT; NO ASSURANCE OF COMPLETION; MAY
BE SUBJECT TO ADDITIONAL DELAYS
The Company's technologies and products are in various stages of
development. There can be no assurance that additional products can be
introduced or technologies completed to production or marketability due to the
inherent risks of new product and technology development, limitations on
financing, competition, obsolescence, loss of key personnel and other factors.
Although certain technology of the Company may be licensable at the current
stage of development, there can be no assurance thereof. The Company has
generated limited revenues from its various technologies to date and has no
agreements or arrangements providing any assurance of revenues in the future.
The Company's development projects are high risk in nature, where unanticipated
technical obstacles can arise at any time and result in lengthy and costly
delays or in a determination that further development is not feasible. Discovery
of chip design errors, frequent in the industry prior to and after production,
could result in lengthy and costly redesign, fabrication (production) and
testing in an industry where new technology rapidly eclipses prior innovations.
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The development of the Company's technologies has taken longer than
anticipated by management and could be subject to additional delays. Therefore,
there can be no assurance of timely completion and introduction of improved
ShBoom-architecture microprocessors on a cost-effective basis, or that if
introduced, that they will achieve market acceptance. See "Business - Stage of
Development."
FUTURE DEPENDENT ON MARKET ACCEPTANCE OF THE COMPANY'S TECHNOLOGIES AND PRODUCTS
The future of the Company is dependent upon the success of the current and
future generations of one or more of the Company's technologies and the success
of its digital communication products. There can be no assurance the Company can
introduce any of its technologies or new products or that, if introduced, they
will achieve market acceptance such that in combination with existing products
they will sustain the Company or allow it to achieve profitable operations. See
"Business Business Strategy."
SIGNIFICANT COMPETITION AND POSSIBLE OBSOLESCENCE
Technological competition from other and longer established
microprocessor, digital communication and radar and antenna companies is
significant and expected to increase. Most of the companies with which the
Company compete and expects to compete have far greater capital resources,
research and development staffs, marketing and distribution programs and
facilities, and many of them have substantially greater experience in the
production and marketing of products. The Company's ability to compete
effectively may be adversely affected by the ability of these competitors to
devote greater resources to the sales and marketing of their products than are
available to the Company. In addition, one or more of the Company's competitors
may succeed in developing technologies and products that are more effective than
any of those offered or being developed by the Company, rendering the Company's
technology and products obsolete or noncompetitive. See "Business -
Competition."
PATENTS AND PROPRIETARY RIGHTS SUBJECT TO UNCERTAINTY; POSSIBLE INFRINGEMENT BY
THE COMPANY
The Company relies on a combination of patents, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company currently has four U.S.
patents issued and six U.S. patents pending. The Company has one patent pending
in Europe and Japan and has filed an application for another patent in Europe,
Japan and elsewhere. The Company is considering additional patent applications.
There can be no assurance that any patents held by the Company will not be
challenged and invalidated, that patents will issue from any of the Company's
pending applications or that any claims allowed from existing or pending patents
will be of sufficient scope or strength or be issued in all countries where the
Company's products can be sold so as to provide meaningful protection or any
commercial advantage to the Company. Competitors of the Company may also be able
to design around the Company's patents.
The fiercely competitive semiconductor industry is characterized by
vigorous protection and pursuit of intellectual property rights or positions,
which has resulted in significant and often protracted and expensive litigation.
There is currently no pending intellectual property litigation against the
Company. There is no assurance however, that the Company's technologies or
products do not and will not infringe the patents or proprietary rights of third
parties. Problems with patents or other rights could potentially increase the
cost of the Company's products or delay or preclude new product development and
commercialization by the Company. If infringement claims against the Company are
deemed valid, the Company may seek licenses which might not be available on
acceptable terms or at all. Litigation could be costly and time-consuming but
may be necessary to protect the Company's future patent and/or technology
license positions or to defend against infringement claims. A successful
challenge to the Company's technology could have a materially adverse effect on
the Company and its business prospects. There can be no assurance that any
application of the Company's technologies will not infringe upon the proprietary
rights of others or that licenses required by the Company from others will be
available on commercially reasonable terms, if at all. See "Business - Licenses,
Patents, Trade Secrets and Other Proprietary Rights."
UNCERTAINTY AS TO ROYALTY PAYMENTS AND INDEMNIFICATION RISKS
The Company does not believe it is obligated to pay any royalties on
aspects of the ShBoom technology specified in prior agreements between
nanoTronics Corporation and previous inventors. The Company believes that,
should there be royalties due to previous inventors, the obligation is that of
nanoTronics. However, the Company could become subject to unindemnified claims
relating to any failure by nanoTronics to pay such royalties, if due. Also the
Company could become liable for up to $1,250,000 to nanoTronics under certain
indemnification provisions. Should the Company be required to
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make any royalty payments or indemnification payments, such payments could
adversely impact operating margins and sales volumes.
The Company obtained its rights to the ShBoom technology pursuant to a
chain of agreements from multiple inventors. Accordingly there can be no
assurance the Company will not be subject to claims from prior parties related
to the technology or that any such parties will not attempt to exploit the
technology independently of the Company's rights to do so. Pursuant to the
Assets Purchase Agreement and Plan of Reorganization between the Company,
nanoTronics Corporation and Helmut Falk, the Company was the recipient of a
number of warranties and indemnities related to the ownership of the technology
and other matters. The Company believes nanoTronics Corporation has been
liquidated and, due to Mr. Falk's death in July 1995, the Company may be limited
in its ability to obtain satisfaction from his estate should it have any future
claims pursuant to the Agreement. In January 1996 the Company filed a general
claim against Mr. Falk's estate in an attempt to preserve its ability to avail
itself of indemnification should claims arise against the Company that were
indemnified. However, there can be no assurance that the Company could obtain
indemnification from the estate of Mr. Falk.
PRODUCTION DEPENDENT ON OUTSIDE FOUNDRIES, MANUFACTURERS AND SUPPLIERS
With respect to the production of ShBoom-architecture microprocessors, the
Company is dependent on the availability of contract fabrication facilities. To
produce microprocessors for customers, the Company will be required to locate a
foundry or foundries that can allocate a portion of their foundry capacity
sufficient to meet the Company's needs, to produce products of acceptable
quality and with acceptable manufacturing yields, and to deliver these products
to the Company on time. There can be no assurance the Company can locate a
foundry to meet its needs. The contract fabrication industry has and is expected
to experience capacity shortages from time to time which could adversely impact
the Company. With respect to digital communication products, the Company relies
on contract assembly from standardized components purchased from independent
sources, and it is therefor dependent upon such outside vendors for the
components and assembly of end-products it sells to customers. There can be no
assurance that these manufacturers and suppliers will be able to provide
adequately for the future product needs of the Company's customers. In the event
that any of the targeted suppliers should suffer quality control problems or
financial difficulties, the Company would be required to find alternative
sources, which could result in temporary business dislocations and a decline in
revenues. See "Business - Business Strategy" and "Business Production and
Marketing."
COMPANY PRODUCTS MAY BE DEPENDENT ON THE INTERNET, ISDN, JAVA AND GOVERNMENT
FUNDING
The Company's digital communication products and ShBoom microprocessor
applications in Java processing will depend in large part upon a robust and
growing industry and infrastructure for providing Internet access and carrying
Internet traffic. There can be no assurance that the infrastructure or
complementary products necessary to make the Internet a viable commercial
marketplace will be developed, or, if developed, that the Internet will become a
viable commercial marketplace. Even if the Internet continues robust growth,
there can be no assurance of a market for the Company's ISDN products given
their dependence upon telephone company policies and rates and the intense
competition from other access technologies such as cable modems and satellites.
There can be no assurance that Java will become a widespread programming
language for the Internet or in embedded applications or that a market will
develop for devices to efficiently run Java. If the Internet does not become a
viable commercial marketplace, or if ISDN products become technologically
obsolete or if Java applications for microprocessors do not develop, then the
Company's business, operating results and financial condition will be materially
and adversely affected. See "Business - Internet Growth and the Emergence of the
Java Programming Language."
The Company received its initial contract for characterization of its
antenna technology in April, 1997. The Company is devoting only limited
development and marketing efforts towards its radar and antennae technologies
and is seeking additional government or outside funding to further develop these
technologies. Government defense and other funding is facing serious cutbacks
and accordingly there is less opportunity to exploit new technologies within the
government. Opportunities for funding require significant efforts and long lead
times. The Company has limited experience in obtaining government funding and is
relying on consultants and agents to assist the Company in its efforts. There
can be no assurance the Company will be successful in its efforts to obtain
additional government assistance for any of its projects or technologies.
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<PAGE> 11
PERFORMANCE DEPENDENT ON KEY PERSONNEL; ABSENCE OF KEY PERSON LIFE INSURANCE;
SUCCESS DEPENDENT ON ADDITIONAL PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and key technical employees. Given the Company's early
stage of development, the Company is dependent on its ability to retain and
motivate high quality personnel, especially its management and highly skilled
technical personnel. The Company does not have "key person" life insurance
policies on any of its executive officers or employees. The loss of the services
of any of its executive officers or other technical employees could have a
material adverse effect on the business, operating results or financial
condition of the Company.
The Company's future success and growth also depends on its continuing
ability to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. The
inability to attract and retain the necessary technical and managerial personnel
could have a material adverse effect upon the Company's business, operating
results or financial condition. See "Business - Employees."
POSSIBLE ADVERSE EFFECTS OF FUTURE SALES OF SHARES ON MARKET
Future sales of Common Stock by existing stockholders pursuant to Rule 144
of the Securities Act or pursuant to a concurrent registration on Form SB-2
could have an adverse effect on the price of the Common Stock. In addition to
the 5,011,733 shares being registered herein, an additional 3,172,068 shares may
be registered concurrently on Form SB-2 and a total of an additional 9,240,597
shares of Common Stock currently outstanding and not subject to escrow
restrictions may be deemed "restricted securities" as that term is defined in
the Securities Act of 1933, as amended (the "Act"), and may only be sold
pursuant to a registration statement under the Act, in compliance with Rule 144
under the Act, or pursuant to another exemption therefrom.
GENERAL CONFLICTS OF INTEREST DUE TO PART-TIME MANAGEMENT
Two of the Company's executive officers, devote only part-time services to
the Company and have other employment and business interests to which they
devote significant attention and will continue to do so notwithstanding the fact
that management time should be devoted to the Company's business. Mr. Elwood
Norris, Chairman, and Mr. Robert Putnam, Secretary and Treasurer, presently
devote approximately 10% of their time to the affairs of the Company. These
management members generally expect to devote time to the Company only on an
as-needed basis over the next twelve months. Certain conflicts of interest now
exist and will continue to exist between the Company and Mr. Norris and Mr.
Putnam due to the fact that each Mr. Norris and Mr. Putnam has other employment
or business interests to which he devotes significant attention. The Company has
not established policies or procedures for the resolution of current or
potential conflicts of interest between the Company and its management or
management-affiliated entities. There can be no assurance that Mr. Norris and
Mr. Putnam will resolve all conflicts of interest in the Company's favor.
SPECIAL CONFLICTS OF INTEREST DUE TO RELATIONSHIP OF EXECUTIVES
One of the Company's officers and directors, Mr. Robert Putnam, also acts
as Secretary of Norris Communications, Inc. (NCI), a company in which Mr. Elwood
Norris is the acting chief executive officer and chairman of the board. Mr.
Putnam is also the president and chief executive officer of American Technology
Corporation (ATC), a company in which Mr. Norris is a significant shareholder
and director. In these positions Mr. Putnam is subordinate to Mr. Norris and the
possibility exists that these relationships will affect Mr. Putnam's
independence as a director of the Company.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
The Company's Certificate of Incorporation provides for the
indemnification of its officers, directors, employees and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them and
judgments rendered against them in any litigation to which they become a party
arising from their association with or activities on behalf of the Company. The
Company may also bear the expenses of such litigation for any of its officers,
directors, employees or agents, upon their promise to repay such sums if it is
ultimately determined that they are not entitled to indemnification. This
indemnification policy could result in substantial expenditures by the Company
which it may be unable to recoup even if so entitled.
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<PAGE> 12
EXCLUSION OF DIRECTOR LIABILITY
The Company's Certificate of Incorporation excludes personal liability on
the part of its directors to the Company for monetary damages for breach of
fiduciary duty, except in certain specified circumstances. Accordingly, the
Company will have a much more limited right of action against its directors than
otherwise would be the case. This exclusionary provision does not affect the
liability of any director under federal or applicable state securities laws. See
"Exclusion of Director Liability."
NO DIVIDENDS WILL BE PAID IN FORESEEABLE FUTURE
The Company does not contemplate paying cash dividends in the foreseeable
future. Future dividends will depend on the Company's earnings, if any, and its
financial requirements.
TRADING RISK OF LOW-PRICED STOCKS
The Company's common shares are currently defined as "penny stocks" under
the Exchange Act, and rules of the Securities and Exchange Commission
thereunder. The Exchange Act and such penny stock rules generally impose
additional sales practice and disclosure requirements upon broker-dealers who
sell the Company's securities to persons other than certain "accredited
investors" (generally, institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 jointly with spouse) or in transactions not recommended by
the broker-dealer. For transactions covered by the penny stock rules, the
broker-dealer must make a suitability determination for each purchaser and
receive the purchaser's written agreement prior to the sale. In addition, the
broker-dealer must make certain mandated disclosures in penny stock
transactions, including the actual sale or purchase price and actual bid and
offer quotations, the compensation to be received by the broker-dealer and
certain associated persons, and deliver certain disclosures required by the
Securities and Exchange Commission. Consequently, the penny stock rules may
affect the ability of broker-dealers to make a market in or trade the Company's
shares and thus may also affect the ability of purchasers of shares to resell
those shares in the public markets.
LIMITED ACTIVE TRADING MARKET; MARKET VOLATILITY
The Company's shares are traded on the OTC Electronic Bulletin Board, a
screen-based trading system operated by the National Association of Securities
Dealers, Inc. Securities traded on the Bulletin Board are, for the most part
thinly traded and, as the preceding Risk Factor indicates, subject to special
regulations not imposed on securities listed or traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system or on a
national securities exchange. The Company's shares have experienced in the past
and are expected to experience in the future significant price and volume
volatility, increasing the risk of ownership to investors
MARKET OVERHANG OF REGISTERED STOCK MAY AFFECT MARKET AND TRADING PRICE OF
COMPANY'S SHARES
The purchase price of 1,325,000 shares of the stock being registered
concurrently on Form SB-2 was $0.50 per common share; 75,000 common shares being
registered concurrently on Form SB-2 were issued for services at $0.30 per
common share; 500,000 common shares being registered concurrently on Form SB-2
were issued for technology at $0.38 per share; and 1,272,068 common shares being
registered concurrently on Form SB-2 were issued to shareholders of Metacomp in
exchange for Metacomp shares, many obtained for nominal consideration. The
aforementioned pricings are below the recent trading price of the Company's
Common Stock. Due to the lack of an active trading market and past volatility of
the Company's shares, sales by holders of any of the shares registered herein or
those registered concurrently on Form SB-2 may have an adverse effect on the
trading price of and market for the Company's common shares. Sales of
significant numbers of registered shares into the open market probably will have
a depressive effect on the market for and trading price of the common stock, but
the Company cannot predict the likely timing or extent of any such sales or the
long- or short-term market effect of any sales.
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<PAGE> 13
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.
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. A more technical term is a "terminal adapter," and
a Digital Modem is 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.
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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). 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.
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 owns the technology and has the 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.
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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.
WAFERS - the typically 6" or 8" diameter slices of silicon crystal on which
integrated circuits are fabricated.
WORLD WIDE WEB OR WWW- a portion of the Internet which is a distributed
hypermedia system using hypertext documents which use text with pointers
to other text. The World Wide Web is accessed using browser programs
allowing searches and linking of documents and databases. Allows
non-technical users to exploit the capabilities of the Internet.
THE COMPANY
GENERAL
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.
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<PAGE> 16
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.
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
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.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the securities
offered by the Selling Security Holders.
SELLING SECURITY HOLDERS
An aggregate of 5,011,733 shares of Common Stock are being offered for
resale by certain Security Holders of the Company. Of those shares 4,400,000 are
issuable upon conversion by the holders of $2,000,000 aggregate principal amount
of Notes and accrued interest thereon. Up to 611,733 shares are issuable upon
exercise of Warrants held by either the holders of the Notes or by parties
instrumental in arranging financing for the Company. All shares, to the extent
they are
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<PAGE> 17
being offered, are being offered for the account of the following Security
Holders and their donees or pledgees (the "Selling Security Holders").
The following table sets forth certain information with respect to the
Selling Security Holders for whom the Company is registering the Common Stock
for resale to the public, including: (i) beneficial ownership of common stock as
of the date of this prospectus, (ii) the principal amount of Notes owned by each
Selling Security Holder, (iii) the number of shares issuable upon conversion of
the Notes and accrued interest thereon, (iv) the number of shares issuable upon
exercise of Warrants, (v) the percentage of class owned (assuming the number of
shares were issued upon conversion); and (vi) the number of shares offered by
each Selling Security Holder (assuming the maximum number of shares were issued
upon conversion and exercise). The Company has no knowledge of the intentions of
any Selling Security Holder to actually sell any of the shares listed under the
columns "Shares Issuable Upon Conversion" or "Shares Issuable Upon Exercise of
Warrants." There are no material relationships between any of the Selling
Security Holders and the Company other than as disclosed below. All such persons
have (or will have, upon the conversion or exercise of outstanding Notes or
Warrants) sole voting and investment power with respect to the shares being
offered.
<TABLE>
<CAPTION>
Beneficial
Ownership of Shares Issuable
Common Principal Upon
Stock at Amount of Conversion of
Selling Prospectus Debenture Notes and
Security Holder Date (1) Owned Interest (2)
- ------------------------------ ---------------- ---------------- -----------------------
<S> <C> <C> <C>
CC Investments, LDC - $1,850,000 4,070,000
The Matthew Fund, N.V. - 150,000 330,000
Swartz Family
Partnership, L.P. - - -
Kendrick Family
Partnership, L.P. - - -
Charles Krusen - - -
P. Bradford Hathorn - - -
John Harris - - -
Dunwoody Brokerage
Services - - -
Carlton M. Johnson - - -
Charles Whiteman - - -
- ------------------------------ ---------------- ---------------- -----------------------
Total - $2,000,000 4,400,000
============================== ================ ================ =======================
</TABLE>
<TABLE>
<CAPTION>
Shares Issuable Percent
Selling Upon Exercise Shares of
Security Holder of Warrants (3) Offered (4) Class (5)
- ------------------------------ ---------------------- ------------------ ------------
<S> <C> <C> <C>
CC Investments, LDC 370,000 4,440,000 13.4%
The Matthew Fund, N.V. 30,000 360,000 1.1%
Swartz Family
Partnership, L.P. 76,500 76,500 *
Kendrick Family
Partnership, L.P. 76,500 76,500 *
Charles Krusen 24,648 24,648 *
P. Bradford Hathorn 10,000 10,000 *
John Harris 15,000 15,000 *
Dunwoody Brokerage
Services 2,500 2,500 *
Carlton M. Johnson 3,585 3,585 *
Charles Whiteman 3,000 3,000 *
- ------------------------------ ---------------------- ------------------ ------------
Total 611,733 5,011,733
============================== ====================== ================== ============
</TABLE>
1) The number of Common Shares reported above as beneficially owned by each
Selling Shareholder is based solely on a review of a list of the Company's
shareholders prepared by the Company's transfer agent and registrar as of such
date.
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<PAGE> 18
2) The number of shares of Common Stock issuable upon conversion of the Notes is
determined by dividing the aggregate principal amount, plus any accrued interest
at 5% per annum, by the lesser of (i) $1.1646 ("Fixed Conversion Price") or (ii)
from 75% to 91%, depending on the number of days the Securities were held after
the funding date, 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 the conversion date ("Variable Conversion Price"). The Variable
Conversion Price, assuming a 91% factor, would have been $1.8264 as of July 11,
1997. The calculation assumes conversion based on a conversion price of $.050
per share for the Notes and the maximum accrued interest at 5% per annum, simple
interest, for the issue date of June 2, 1997 to the date of maturity of June 2,
1999. The Company has computed the number of shares issuable pursuant to the
Notes by dividing the aggregate principal and interest at maturity of $2,200,000
by the $0.50 price or 4,400,000 shares. The actual number of shares issuable on
conversion may be more or less depending on the actual Variable Conversion Price
at the time of conversion.
3) Assumes conversion of 100 percent of the Warrants granted to each Note holder
based on the exercise price of $1.69125 per share.
4) Assumes issuance of the shares on conversion of the Notes at a Variable
Conversion Price of $0.50 and the exercise of 100 percent of the Warrants.
5) Represents maximum shares obtainable through conversion or exercise divided
by the current outstanding shares as of the date of this prospectus of
33,189,195 plus shares obtainable through conversion or exercise. An asterisk
(*) represents less than 1%.
PLAN OF DISTRIBUTION
The purpose of the Prospectus is to permit the Selling Security Holders,
if they desire, to offer 5,011,733 shares of Common Stock (the "Selling Security
Holder Shares") at such times and at such places as the Selling Security Holders
choose.
The decision to convert the Notes into shares, to exercise the Warrants,
or to sell any shares, is within the sole discretion of the holders thereof.
There can be no assurance that any of the Notes will be converted or that any of
the Warrants will be exercised, or any shares will be sold by the Selling
Security Holders.
Subsequent to conversion or exercise, if any, each Selling Shareholder is
free to offer and sell his or her Common Shares at such times, in such manner
and at such prices as he or she shall determine. The Selling Security Holders
have advised the Company that sales of Common Shares may be effected from time
to time in one or more types of transactions (which may include block
transactions) in the over-the-counter market, in negotiated transactions through
the writing of options on the Common Shares, settlement of short sales of Common
Shares, or a combination of such methods of sale, at market prices prevailing at
the time of sale, or at negotiated prices. Such transactions may or may not
involve brokers or dealers. The Selling Security Holders have advised the
Company that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities, nor is there an underwriter or coordinating broker acting in
connection with the proposed sale of the Common Shares by the Selling Security
Holders.
The Selling Security Holders may effect such transactions by selling
Common Stock directly to purchasers or to or through broker-dealers, which may
act as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions, or commissions from the Selling Security Holders
and/or the purchasers of Common Shares for whom such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
The Selling Security Holders and any broker-dealers that act in connection
with the sale of Common Shares might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Act, and any commissions received by such
broker-dealers and any profit on the resale of the Common Shares sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions under the Act. The Selling Security Holders may agree to indemnify
any
16
<PAGE> 19
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Shares against certain liabilities including liabilities arising
under the Act.
Because Selling Security Holders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Act, the Selling Security Holders will be
subject to the prospectus delivery requirements of the Act.
The Company has informed the Selling Security Holders that the
anti-manipulative provisals of Rules 10b-6, 10b-7, and Regulation M promulgated
under the Exchange Act may apply to their sales in the market.
Selling Security Holders also may resell all or a portion of the Common
Shares in open market transactions in reliance upon Rule 144 under the Act,
provided they meet the criteria and conform to the requirements of such Rule.
The Company will not receive any proceeds from any sales of the Selling
Security Holder Shares, but will receive the proceeds from the exercise of
certain Warrants held by the Selling Security Holders, which proceeds, if any,
will be used for general corporate purposes.
In connection with this registration by the Company, the Company shall use
its best efforts to prepare and file with the Commission such amendments and
supplements to the registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of the shares covered by the registration statement for the period
required to effect the distribution of such shares.
This Registration Statement is being filed by the Company pursuant to a
Registration Rights Agreement dated June 2, 1997, by and between the Company and
certain Selling Shareholders. The Registration Rights Agreement provides for
indemnities from the Company in favor of certain Selling Shareholders.
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.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 60,000,000 shares
of Common Stock, $.00001 par value per share. At July 11, 1997, a total of
33,189,195 Common Shares were issued and outstanding. The holders of Common
Stock are entitled to one vote for each share held. The affirmative vote of a
majority of votes cast at a meeting which commences with a lawful quorum is
sufficient for approval of most matters upon which shareholders may or must
vote, including the questions presented for approval or ratification at the
Annual Meeting. However, removal of a director from office or repeal of the
certificate of incorporation in its entirety require the affirmative vote of a
majority of the total voting power for approval, and certain other matters (such
as shareholder amendment of the bylaws, and amendment, repeal or adoption of any
provision inconsistent with provisions in the certificate of incorporation
regarding indemnification of directors, officers and others, exclusion of
director liability, and the Company's election not to be governed by statutory
17
<PAGE> 20
provisions concerning business combinations with interested shareholders)
require the affirmative vote of two-thirds of the total voting power for
approval. Common Shares do not carry cumulative voting rights, and holders of
more than 50% of the Common Stock have the power to elect all directors and, as
a practical matter, to control the Company. Holders of Common Stock are not
entitled to preemptive rights, and the Common Stock may only be redeemed at the
election of the Company.
A special meeting of shareholders may be called by or at the request of
the Chairman of the Board, the President or any two directors, and at the
request of persons owning in the aggregate not less than 20% of the issued and
outstanding Common Shares entitled to vote in elections for directors. After the
satisfaction of requirements with respect to preferential dividends, if any,
holders of Common Stock are entitled to receive, pro rata, dividends when and as
declared by the Board of Directors out of funds legally available therefor. Upon
liquidation, dissolution or winding-up of the Company, after distribution in
full of the preferential amount, if any, to be distributed to holders of the
preferred stock, holders of Common Stock are entitled to share ratably in the
Company's assets legally available for distribution to its shareholders.
The Company's board of directors is authorized to issue 5,000,000 shares
of undesignated preferred stock, $.00001 par value, without any further action
by the stockholders. The board of directors may also divide any and all shares
of preferred stock into series and fix and determine the relative rights and
preferences of the preferred stock, such as the designation of series and the
number of shares constituting such series, dividend rights, redemption and
sinking fund provisions, liquidation and dissolution preferences, conversion or
exchange rights and voting rights, if any. Issuance of preferred stock by the
board of directors will result in such shares having dividend and/or liquidation
preferences senior to the rights of the holders of Common Stock and could dilute
the voting rights of the holders of Common Stock. There are currently no shares
of preferred stock issued and outstanding.
The Company has not paid any cash dividends to date, and no cash dividends
will be declared or paid on the Common Shares in the foreseeable future. Payment
of dividends is solely at the discretion of the Company's board of directors.
Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt
Lake City, Utah 84117, acts as transfer agent and registrar for the Common Stock
of the Company. Their telephone number is (801) 272-9294.
LEGAL OPINION
The validity of the Common Stock offered hereby will be passed on for the
Company by Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway Street,
Suite 2600, San Diego, California 92101.
EXPERTS
The financial statements of the Company incorporated by reference in the
Prospectus and Registration Statement for the fiscal years ended May 31, 1997
and 1996, respectively, have been audited by BDO Seidman, LLP, independent
certified public accountants, as set forth in their report incorporated by
reference elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Metacomp, Inc. for the fiscal year ended July
31, 1996 have been audited by Harlan & Boettger, LLP, independent certified
public accountants, as set forth in their report incorporated by reference
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of said firm as experts in accounting and
auditing.
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<PAGE> 21
================================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representation not contained in, or incorporated by reference in,
this Prospectus, and if given or made such information or representation must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained herein is correct as of any time
subsequent to the date hereof, or that there has been no change in the affairs
of the Company since such date.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Information .................................................. 3
Incorporation of Certain Documents
by Reference .......................................................... 3
Disclosure Regarding Forward-Looking
Statements ............................................................ 4
Prospectus Summary ...................................................... 4
Risk Factors ............................................................ 6
The Company ............................................................. 13
Use of Proceeds ......................................................... 14
Selling Security Holders ................................................ 14
Plan of Distribution .................................................... 16
Exclusion of Director Liability ......................................... 17
Description of Securities ............................................... 17
Legal Opinion ........................................................... 18
Experts ................................................................. 18
================================================================================
</TABLE>
================================================================================
5,011,733 Shares
of
Common Stock
offered by
Selling Security Holders
PATRIOT SCIENTIFIC
CORPORATION
PROSPECTUS
July 17, 1997
================================================================================
<PAGE> 22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable in connection with the registration and distribution of the
securities being registered hereunder, all of which will be borne by the
Registrant, are as follows:
<TABLE>
<S> <C>
Registration Fee - Securities and Exchange Commission . $ 3,037
Printing and Engraving ................................ 1,000*
Legal Fees and Expenses ............................... 5,000*
Accounting Fees ....................................... 2,000*
-------
Total ............................................ $11,037
</TABLE>
* Estimated
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to the Company's Certificate of Incorporation, and as permitted
by Section 145 of the General Corporation Law of Delaware, the Company may
indemnify its directors and officers under certain circumstances against
reasonable expenses (including court costs and attorney's fees), judgments,
penalties, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which any of them is a party by
reason of his being a director, officer, employee, or agent of the Company if it
is determined that he acted in accordance with the applicable standard of
conduct set forth in such statutory provisions. Thus, the indemnification
provisions will protect officers and directors from liability only if the
officer or director meets the applicable standard of conduct and the Company has
the financial ability to honor the indemnity.
ITEM 16. EXHIBITS
The following is a list of all exhibits filed as part of the Registration
Statement:
5.1 Opinion of Luce, Forward, Hamilton & Scripps LLP, Attorneys at Law
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Harlan & Boettger, LLP, Certified Public Accountants
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information in this Registration
Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this registration, or any
material change to such information in the Registration Statement.
<PAGE> 23
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment to
this Registration Statement any of the securities being registered which remain
unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the General Corporation Law of Delaware, the Certificate
of Incorporation, or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in such Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or person controlling the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or person controlling the Registrant in connection with any
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
2
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on the date below.
DATED: July 17, 1997 PATRIOT SCIENTIFIC CORPORATION
By /s/LOWELL W. GIFFHORN
---------------------------------------
Lowell W. Giffhorn,
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C> <C>
/s/MICHAEL A. CARENZO President, Director, Chief Executive July 17, 1997
- --------------------------- Officer
Michael A. Carenzo
/s/LOWELL W. GIFFHORN Chief Financial Officer, Principal Financial July 17,1997
- --------------------------- Officer and Principal Accounting Officer
Lowell W. Giffhorn
/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>
3
<PAGE> 1
EXHIBIT 5.1
(Luce, Forward, Hamilton & Scripps, LLP Letterhead)
July 17, 1997
Patriot Scientific Corporation
10989 Via Frontera
San Diego, California 92127
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel for Patriot Scientific Corporation, a Delaware corporation
("Patriot"), in connection with the preparation of a Registration Statement on
Form S-3 of which this opinion is a part, to be filed with the Securities and
Exchange Commission (the "Commission"), for the sale by certain selling
shareholders (the "Selling Shareholders") of 4,400,000 shares of Patriot's
common stock (the "Common Stock") which are issuable upon conversion of
Patriot's Convertible Debentures (the "Notes"), 611,733 shares of Common Stock
issuable upon exercise of Patriot's warrants (the "Warrants"), and an
indeterminate number of additional shares of Common Stock issuable upon
conversion of the Notes and exercise of the Warrants.
In connection with rendering our opinion as set forth below, we have reviewed
and examined originals or copies of such corporate records and other documents
and have satisfied ourselves as to such other matters as we have deemed
necessary to enable us to express our opinion hereinafter set forth.
Based upon the foregoing, it is our opinion that:
The shares of Common Stock being registered for the account of the Selling
Shareholders, when issued in accordance with the terms and conditions set forth
in the Registration Statement, will be validly issued, fully paid, and
non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ LUCE, FORWARD, HAMILTON & SCRIPPS LLP
4
<PAGE> 1
EXHIBIT 23.1
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
San Diego, California
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of 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.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
Denver, Colorado
July 17, 1997
5
<PAGE> 1
EXHIBIT 23.2
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
San Diego, California
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated December
17, 1996 relating to the financial statements of Metacomp, Inc., referred to in
Patriot Scientific Corporation's Annual Report on Form 10-KSB for the year ended
May 31, 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ HARLAN & BOETTGER, LLP
San Diego, California
July 17, 1997
6
