<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 27, 1997
(December 26, 1996)
PATRIOT SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-22182 84-1070278
(State or other jurisdiction of (Commission (I.R.S. Empl. Ident. No.)
incorporation or organization) File Number)
10989 Via Frontera, San Diego, California 92127
(Address of principal executive offices) (Zip Code)
(619) 674-5000
(Registrant's telephone number, including area code)
12875 Brookprinter Place, Suite 300, Poway, California 92064
(Former address, if changed from last report.) (Zip Code)
<PAGE> 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or portions of its Current Report on Form 8-K (Date of
Report: January 9, 1997) as set forth in the pages attached hereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements:
Report of Independent Accountants................................ F-1
Balance Sheets as of July 31, 1996 and 1995...................... F-2
Statements of Operations for the years ended July 31, 1996,
1995 and 1994.................................................... F-3
Statements of Changes in Stockholders' Equity for three years
ended July 31, 1996.............................................. F-4
Statements of Cash Flows for the years ended July 31, 1996, 1995
and 1994..........................................................F-5
Notes to Financial Statements.....................................F-6 -
F-14
Unaudited Financial Statements:
Balance Sheets as of October 31, 1996 (Unaudited)
and July 31, 1996................................................. F-15
Statements of Operations (Unaudited) Three Months Ended
October 31, 1996 and October 31, 1995............................. F-16
Statements of Cash Flows (Unaudited) Three Months Ended
October 31, 1996 and October 31, 1995............................. F-17
Notes to Financial Statements................................... F-18 -
F-19
</TABLE>
2
<PAGE> 3
(b) Pro Forma Financial Information.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Company's Report regarding Pro Forma Financial
Statements (Unaudited)........................................... F-20
Pro Forma Consolidated Balance Sheet (Unaudited) as of
November 30, 1996................................................ F-21
Pro Forma Consolidated Statement of Operations (Unaudited) Year
Ended May 31, 1996............................................... F-22
Pro Forma Consolidated Statement of Operations (Unaudited) Six
Months ended November 30, 1996................................... F-23
Notes to Unaudited Pro Forma Consolidated Financial
Statements....................................................... F-24
(c) Exhibits.
2.3 Form of Exchange Offer dated December 4, 1996 between the
Company and certain shareholders of Metacomp, Inc.
2.4 Letter of Transmittal To Accompany Shares of Common Stock of
Metacomp, Inc. Tendered Pursuant to the Exchange Offer Dated
December 4, 1996.
23.2 Consent of Harlan & Boettger.
99.5 Press Release of the Company dated November 4, 1996.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PATRIOT SCIENTIFIC CORPORATION
Dated: February 27, 1997 By: ROBERT PUTNAM
--------------------------
Robert Putnam
Secretary/ Treasurer
3
<PAGE> 4
(Harlan & Boettger Certified Public Accountants Letterhead)
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
METACOMP, INC.:
We have audited the accompanying balance sheets of METACOMP, Inc. a California
Corporation, as of July 31, 1996 and 1995, and the related statements of
operations, changes in shareholders' equity, and cash flows for the years ended
July 31, 1996, 1995 and 1994. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of July 31, 1996
and 1995, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Harlan & Boettger
San Diego, California
December 17, 1996
F-1
<PAGE> 5
BALANCE SHEETS
AS OF JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 25,784 $ 29,426
Accounts receivable, net of allowances
of $0 and $18,096, respectively 199,401 331,938
Note receivable (Note F) -- 236,120
Inventory (Note C) 465,356 367,854
Other receivables 17,963 1,900
---------- ----------
TOTAL CURRENT ASSETS 708,504 967,238
PROPERTY AND EQUIPMENT, NET (NOTE D) 118,528 101,097
DEPOSITS 11,161 11,161
---------- ----------
$ 838,193 $1,079,496
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 228,315 $ 281,590
Accrued expenses 54,059 65,668
Current portion of bank debt (Note E) 312,306 470,179
Current portion of chapter 11 debt (Note E) -- 1,845,518
Current portion-Capital Lease Obligations (Note G) 8,746 8,039
---------- ----------
TOTAL CURRENT LIABILITIES 603,426 2,670,994
LONG TERM DEBT, (NOTE E)
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION (NOTE G) 5,219 6,870
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES G AND H)
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock, no par, 6,000,000 shares
authorized, 1,103,794 and 2,831,582 shares
issued and outstanding 565,282 558,457
Preferred Stock (Series B), $.01 par, 100,000
shares authorized; 15,000 and 100,000 shares
issued and outstanding 600 1,000
Preferred Stock (Series C), $.01 par, 120,000
shares authorized; no shares and 120,000 shares
issued and outstanding -- 1,200
Stock subscriptions receivable -- (2,200)
Retained deficit (336,334) (2,156,825)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 229,548 (1,598,368)
----------- -----------
$ 838,193 $ 1,079,496
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 6
METACOMP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1996 AND 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 2,224,708 $ 2,084,982 $ 1,994,090
COST OF SALES 796,173 755,392 786,898
----------- ----------- -----------
Gross Profit 1,428,535 1,329,590 1,207,192
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 928,192 946,543 954,964
RESEARCH AND DEVELOPMENT
EXPENSES 432,724 285,109 269,879
----------- ----------- -----------
Income (loss) from operations 67,619 97,938 (17,651)
OTHER INCOME (EXPENSES)
Interest expense (49,342) (63,887) (57,538)
Interest income 23,557 21,851 62,624
----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (25,785) (42,036) 5,086
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION AND EXTRAORDINARY ITEM 41,834 55,902 (12,565)
INCOME TAXES (NOTE P) 800 800 800
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 41,034 55,102 (13,365)
EXTRAORDINARY ITEM (NOTE J) 1,779,457 -- --
----------- ----------- -----------
NET INCOME (LOSS) $ 1,820,491 $ 55,102 $ (13,365)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 7
METACOMP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stock Total
Common Stock Preferred Stock Subscriptions Retained Shareholders'
Shares Amount Shares Amount Receivable Deficit Equity
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 31, 1993 2,831,582 $ 558,457 220,000 $ 2,200 $ (2,200) $ 2,198,562) $(1,640,105)
Net income -- -- -- -- -- (13,365) (13,365)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1994 2,831,582 558,457 220,000 2,200 (2,200) (2,211,927) (1,653,470)
Net income -- -- -- -- -- 55,102 55,102
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1995 2,831,582 558,457 220,000 2,200 (2,200) (2,156,825) (1,598,368)
Issuance of stock prior to
February 16, 1996 820,166 41,008 -- -- -- -- 41,008
Restated issuances of 1 for
4 reverse stock split (2,738,811) -- (165,000) -- -- -- --
Write down of stock
subscriptions receivable -- -- -- -- 2,200 -- 2,200
Issuances of stock after
February 16, 1996 144,904 183,475 -- -- -- -- 183,475
Conversion of Preferred
stock (Series B & C) 200,000 41,600 (40,000) (1,600) -- -- 40,000
Common stock retired (154,047) (259,258) -- -- -- -- (259,258)
Net Income -- -- -- -- -- 1,820,491 1,820,491
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1996 1,103,794 $ 565,282 15,000 $ 600 $ -- $ (336,334) $ 229,548
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 8
METACOMP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $1,820,491 $ 55,102 $ (13,365)
Adjustments to reconcile net loss
to net cash used in operating activities:
Note receivable interest converted to equity (23,138) --
Discharge of short-term debt (1,839,027) -- --
Write down of stock subscriptions receivable 2,200 -- --
Depreciation and amortization 31,796 17,443 12,522
Changes in assets and liabilities:
(Increase) decrease in:
Notes receivable -- (21,850) (62,625)
Accounts receivable 132,537 10,758 (2,159)
Other receivables (16,063) (1,660) 50
Inventories (97,502) 35,396 (3,396)
Other current assets -- 50 (6,778)
Increase (decrease) in:
Accounts payable (59,766) 134,955 112,793
Accrued expenses (11,609) 49,183 768
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (60,081) 279,377 37,810
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (49,227) (76,014) (24,597)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (49,227) (76,014) (24,597)
CASH FLOWS FROM FINANCING ACTIVITIES
Financing from capital lease obligations 8,120 -- 12,150
Stockholder capital contribution 264,483 -- --
Payments on short-term debt (157,873) (162,884) (21,726)
Payments on capital lease obligation (9,064) (7,262) (2,845)
Bank overdraft -- (4,832) (356)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 105,666 (174,978) (12,777)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (3,642) 28,385 436
CASH, BEGINNING OF YEAR 29,426 1,041 605
----------- ----------- -----------
CASH, END OF YEAR $ 25,784 $ 29,426 $ 1,041
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-5
<PAGE> 9
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS
(SEE ACCOUNTANTS' AUDIT REPORT)
A. ORGANIZATION:
METACOMP, Inc. (the "Company"), founded in 1978, is a privately held,
high technology company located in San Diego, California. The Company
designs, manufactures, and sells a wide range of high performance data
and telecommunications solutions for wide area networking and digital
telecommunications requirements.
On December 3, 1990, the Company filed a Chapter 11 bankruptcy
petition. On July 29, 1991, the Bankruptcy Court confirmed the
Company's plan of reorganization.
The Plan provides for 60 monthly payments to creditors with minimum
payment amounts averaging $23,400 per month and a cash flow formula
which provides for larger amounts based on operating results. The total
monthly amount available for payment is apportioned between the secured
and unsecured creditors as follows:
Phase I - 83% to be applied to the interest and principal
amount of the secured creditor and 17% to the payment of
claims of the unsecured creditors. This allocation shall
continue until the principal balance of the secured creditor
is less than 70% of the Company's eligible accounts
receivable. Thereafter, Phase II shall apply.
Phase II - 60% to be applied to the interest and principal
amount of the secured creditor and 40% to the payment of
claims of the unsecured creditors. This phase shall continue
until the secured creditor is paid in full or all 60 payments
have been made.
The secured creditor is Security Pacific National Bank (now Bank of
America) who shall be paid in full with interest at 2% over the Bank's
prime rate. Any balance remaining at July 29, 1996 shall be due and
payable (Notes J and O).
The unsecured creditors shall receive the amounts described above and
any balance remaining after the 60th payment shall be discharged in
full. If only the minimum payments are made, the unsecured creditors
will receive approximately 13% of their approved claims. The projection
included with the Plan anticipates operating results that will pay the
unsecured creditors approximately 53% of their approved claims.
In connection with the Plan of Reorganization, the Company entered into
a Debt Restructure Agreement with Security Pacific National Bank (now
Bank of America). The Bank retained an approved claim in the amount of
$1,132,821 secured mainly by the Company's accounts receivable,
equipment and inventory.
As of July 31, 1996, all unsecured creditors debt has been discharged
and the secured creditor (Bank of America) and the Company have entered
into a forbearance agreement for the remaining balance due of $312,306
(Notes J and O).
F-6
<PAGE> 10
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS
(SEE ACCOUNTANTS' AUDIT REPORT)
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements which conform to generally
accepted accounting principles.
Inventories
Raw materials are stated at average cost not in excess of market value.
Work-in-process and finished goods are stated at standard cost (which
approximates cost on a first-in, first-out basis) not in excess of
market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment is provided using the straight
line method over estimated useful lives ranging from five to seven
years. Upon retirement or disposal of depreciated assets, the cost and
related depreciation are removed and the resulting gain or loss is
reflected in income. Major renewals and betterments are capitalized
while maintenance costs and repairs are expensed in the year incurred.
Income Taxes
Income taxes, are provided for using the liability method of accounting
in accordance with Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting for Income Taxes." A deferred tax asset or
liability is recorded for all temporary differences between financial
and tax reporting. Deferred tax expense (benefit) results from the net
change during the year of deferred tax assets and liabilities.
Investment and other general business tax credits are accounted for
using the flow- through method whereby such credits are reflected as
reductions of current tax expense in the year they are allowed for tax
purposes.
F-7
<PAGE> 11
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS
(SEE ACCOUNTANTS' AUDIT REPORT)
(CONTINUED)
C. INVENTORY:
Inventory at July 31, 1996 and 1995, consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Raw materials $ 311,707 $ 283,575
Work-in-process 73,494 21,725
Finished goods 132,155 103,554
Reserve for inventory (52,000) (41,000)
--------- ---------
$ 465,356 $ 367,854
========= =========
</TABLE>
A portion of the Company's inventory, approximately $100,000, is held
and sold to a select group of government agencies. This inventory is
not considered state of the art; however, it is essential to these
customers. Present management believes that the full value of this
inventory will be realized over the following twenty-four (24) months.
D. PROPERTY AND EQUIPMENT:
Property and equipment at July 31, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Leasehold improvements $ 3,851 $ 3,851
Furniture and fixtures 67,852 61,269
Office equipment 157,853 149,604
Computer equipment 300,712 266,317
530,268 481,041
Less accumulated depreciation and amortization 411,740 379,944
-------- --------
$118,528 $101,097
======== ========
</TABLE>
F-8
<PAGE> 12
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS
(SEE ACCOUNTANTS' AUDIT REPORT)
(CONTINUED)
E. LONG-TERM DEBT:
Long-term debt at July 31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Debt restructure agreement with bank, interest rate of
prime plus 2%, monthly payments of $23,400 or more (83% to
bank during Phase I and 60% thereafter)
to continue until July 29, 1996 $ 312,306 $ 470,179
Unsecured creditors, no interest, monthly payments of 17%
of $23,400 during hase I and 40% of $23,400
thereafter, or more, to continue until July 29, 1996 - 1,845,518
---------- -----------
312,306 2,315,697
Less current portion 312,306 2,315,697
---------- -----------
$ - $ -
========== ===========
</TABLE>
F. NOTE RECEIVABLE; RELATED PARTY
The debtor Michael Wells (former officer) is the maker of a note due
secured party (METACOMP) in the principal amount of one hundred sixteen
thousand dollars ($116,000) dated August 1, 1991. (This note replaces
earlier notes dated January 1, 1988 and August 1, 1990). Annual
interest is calculated using the effective interest method, with
interest thereon at eight and three quarters percent (8ae%) from
January 1, 1988 to July 31, 1990 and nine and three quarters percent
(9ae%) from August 1, 1990 to the due date of the note July 31, 1996.
At July 31, 1996, 154,047 shares of common stock were received
by the Company from Michael Wells in full satisfaction of the
outstanding receivable. At the time these common shares were
received by the Company, the note receivable balance was
$259,258 including accrued interest. Also at this time $2,200
of stock subscriptions receivable have been reclassified to
compensation expense.
F-9
<PAGE> 13
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS
(SEE ACCOUNTANTS' AUDIT REPORT)
(CONTINUED)
G. COMMITMENT AND CAPITAL LEASE OBLIGATIONS
METACOMP, Inc. entered into a eight year operating lease with
Clar-o-wood for its office facilities located in Rancho Bernardo.
The Company also leases its telephone system, copier, 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> <C>
1997 $ 57,540 $ 9,501
1998 62,460 2,387
1999 63,660 2,387
2000 - 944
2001 - -
--------- --------------
Total minimum lease payments 183,660 15,219
Less amount representing interest 1,254
---------
Present value of net minimum lease
payments 13,965
Less current portion 8,746
---------
Total $ 5,219
=========
</TABLE>
H. CONTINGENCIES:
The Company entered into a partnership with an unrelated party dated
December 30, 1994. Pursuant to this agreement, the Company is liable to
its partner for one-half of $59,000 to the extent that the Company has
not paid the partner $105,000 in accordance with a Product Development
and Consulting Agreement dated December 9, 1994. At this time, no claim
has been made by the partner for compensation, although some form of
compensation may be paid in the future. Presently, the Company believes
that the financial impact is not determinable and that any financial
impact attributable to a future settlement would not be material to its
financial position, annual operating results or cash flow.
The Company's former founder and officer resigned on November 13, 1995.
In connection with the resignation agreement, certain issues may be
outstanding between the Company and the officer in regards to certain
rights not specifically dealt with in the agreement. These rights
include, without limitation, the Company's right to proceed against the
former officer and the officer's right to proceed against the Company.
The Company believes any future proceedings or actions occurring with
respect to these rights of either party are remote.
F-10
<PAGE> 14
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS
(SEE ACCOUNTANTS' AUDIT REPORT)
(CONTINUED)
I. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Operating activities for 1996 and 1995 reflect interest and income
taxes paid as follows:
1996 1995 1994
------- ------- -------
Interest $49,342 $63,887 $55,562
======= ======= =======
Income taxes $ 800 $ 800 $ 800
======= ======= =======
Non-cash items:
During the fiscal year July 31, 1996, the Company received 154,047
shares of common stock from Michael Wells (former officer) for full
settlement of the companies $259,258 note receivable which included
$23,138 of interest accrued during the fiscal year. Additionally,
during the fiscal year July 31, 1996 the Company was discharged of all
unsecured creditors debt of $1,779,457, per the debt restructuring
agreement, dated July 29, 1991.
J. EXTRAORDINARY ITEM:
Per the Company's debt restructure agreement all unsecured creditors
debt amounting to $1,779,457 was discharged in full at July 28, 1996.
K. EMPLOYEE BENEFIT PLANS:
The Company has a contributory profit sharing plan as defined under
Sections 401(a) and 501(a) of the Internal Revenue Code. Under the
plan, employees may contribute 1% to 15% of their compensation. At the
discretion of the Board of Directors, the Company may contribute
additional amounts to the plan on behalf of those who actively
participate. Company contributions will vest over a six-year period as
established in the plan. No employer matching contributions were made
to the plan for the years ended July 31, 1996 and 1995.
The Company has a qualified stock option plan for the granting of
Incentive Stock Options (ISO) to employees. The Plan provides for
options to purchase 50,000 shares of unissued common stock for 100% to
110% of fair market value.
Under the ISO plan, 8,887 shares of common stock were exercised at July
31, 1996, 39,375 shares were granted and 2,738 shares were available
for grant.
A new non-qualified stock option plan was adopted by the Board of
Directors on December 15, 1992.
F-11
<PAGE> 15
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS
(SEE ACCOUNTANTS' AUDIT REPORT)
(CONTINUED)
K. EMPLOYEE BENEFIT PLANS: (CONTINUED)
Changes during the twelve months ended July 31, 1996, of common stock
options was as follows:
<TABLE>
<CAPTION>
Shares Price Range
---------- -----------
<S> <C> <C>
Outstanding at July 31, 1995 1,800,000 $ .05
Granted 60,000 $ .05
Expired (500,000) $ .05
1 for 4 reverse stock split (416,875) $ .20
Exercised (805,416) $.05 - $.20
---------- -----------
Outstanding at July 31, 1996 137,709 $ .20
---------- -----------
</TABLE>
L. PREFERRED STOCK:
The Board of Directors authorized the issuance of preferred stock to
certain executive officers as an incentive to remain with the Company
through the balance of the Plan of Reorganization. 25,000 shares of
Series B preferred stock were issued to Michael F. Wells. 15,000 shares
of Series C preferred stock were each issued to Norman J. Dawson and
Jayanta K. Maitra.
During the fiscal year July 31, 1996, 10,000 shares of Series B and
30,000 shares of Series C were converted for 5 shares of common stock
for each share of preferred stock.
M. STOCK OPTION PLAN FOR OUTSIDE DIRECTORS:
Options for 50,000 shares of common voting stock were granted to two
outside directors. The option price is 20 cents per share. 15,000
options were exercised and 10,000 options were forfeited during fiscal
year 1996.
N. ABANDONMENT OF SUBSIDIARY:
In March, 1989, the Company acquired essentially all of the stock of
Advanced Electronics Design, Inc. (AED) in exchange for 769,195 shares
of common stock of METACOMP. Most of the on-going operations of AED
were discontinued in June, 1990. Previous management decided not to
reflect the investment in the METACOMP financial statements although
consolidated income tax returns were filed for each year since the date
of acquisition.
F-12
<PAGE> 16
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS
(SEE ACCOUNTANTS' AUDIT REPORT)
(CONTINUED)
O. RESTRUCTURE OF DEBT:
The Company had current bank debt due and payable at July 29, 1996. The
Company did not meet this obligation and entered into a modification
agreement which requires a "modification fee" of $5,000 due on July 29,
1996. The Company has met this obligation and are currently in
compliance with the banks forbearance agreement.
P. INCOME TAXES:
The provision for income taxes for the years ended July 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current income taxes $ 800 $ 800 $ 800
Deferred income taxes 17,600 22,400 11,500
Benefit from NOL carryforward (17,600) (22,400) (11,500)
-------- -------- --------
Provision for income taxes $ 800 $ 800 $ 800
======== ======== ========
</TABLE>
Included in METACOMP's net operating loss is approximately $1,000,000
in operating losses from a subsidiary acquired in 1989 and subsequently
abandoned by the Company the following year (Note N). The Company has excluded
any net operating loss from AED prior to the acquisition in 1989 and this
subsidiary's net operating loss is not reflected on the Company's balance sheet
presented for the years ended July 31, 1996 and 1995.
The Company's total deferred tax asset as of July 31, 1996 is as
follows:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Net operating loss carryforwards $ 590,000
Valuation allowance (590,000)
----------
Net deferred tax asset $ -
==========
</TABLE>
F-13
<PAGE> 17
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS
(SEE ACCOUNTANTS' AUDIT REPORT)
(CONTINUED)
P. INCOME TAXES: (CONTINUED)
As of July 31, 1996 the Company has the following approximate net
operating loss and general business credit carryforwards. If not
utilized they will expire as follows:
<TABLE>
<CAPTION>
Expiring at
Year Ending Net Operating Loss General Business
July 31, AED METACOMP Credit
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
2000 $ -- $ -- $ 21,000
2001 -- -- 55,000
2002 -- -- 1,000
2003 -- -- 42,000
2004 660,000 -- 24,000
2005 290,000 -- --
2006 -- 218,000 --
2007 4,000 69,000 --
2008 23,000 13,000 --
2009 23,000 -- --
---------- ---------- ----------
$1,000,000 $ 300,000 $ 143,000
========== ========== ==========
</TABLE>
Q. SUBSEQUENT EVENTS:
The Company has signed a letter of intent with Patriot Scientific
Corporation ("Patriot"), dated October 30, 1996, to be acquired by
Patriot. This acquisition will be effected through an "exchange
reorganization" involving the issuance by Patriot of shares of its
Common Stock to certain of the shareholders of METACOMP.
F-14
<PAGE> 18
METACOMP, INC.
BALANCE SHEETS
AS OF OCTOBER 31, 1996 AND JULY 31, 1996
<TABLE>
<CAPTION>
October 31, July 31,
ASSETS 1996 1996
--------- ---------
CURRENT ASSETS (Unaudited)
<S> <C> <C>
Cash $ 486 $ 25,784
Accounts receivable 186,988 199,401
Inventories (Note 3) 460,048 465,356
Other receivables 15,784 17,963
--------- ---------
TOTAL CURRENT ASSETS 663,306 708,504
PROPERTY AND EQUIPMENT, NET 110,980 118,528
DEPOSITS 6,366 11,161
--------- ---------
$ 780,652 $ 838,193
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 258,163 $ 228,315
Accrued expenses 42,855 54,059
Current portion of bank debt 252,306 312,306
Current portion-Capital Lease Obligations 6,639 8,746
--------- ---------
TOTAL CURRENT LIABILITIES 559,963 603,426
LONG TERM DEBT
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 4,725 5,219
--------- ---------
STOCKHOLDERS' EQUITY
Common Stock, no par, 6,000,000 shares
authorized, 1,193,599 and 1,103,794 shares
issued and outstanding 583,243 565,282
Preferred Stock (Series B), $.01 par, 100,000
shares authorized; none and 15,000 shares
issued and outstanding -- 600
Accumulated deficit (367,279) (336,334)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 215,964 229,548
--------- ---------
$ 780,652 $ 838,193
========= =========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-15
<PAGE> 19
METACOMP, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
NET SALES $ 409,871 $ 795,915
COST OF SALES 177,292 305,743
--------- ---------
Gross Profit 232,579 490,172
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 119,376 160,186
RESEARCH AND DEVELOPMENT
EXPENSES 133,093 146,085
--------- ---------
Income (loss) from operations (19,890) 183,901
OTHER EXPENSE
Interest expense 11,055 12,444
--------- ---------
TOTAL OTHER EXPENSE 11,055 12,444
--------- ---------
NET INCOME (LOSS) $ (30,945) $ 171,457
========= =========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-16
<PAGE> 20
METACOMP, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (30,945) $ 171,457
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 7,956 6,590
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 12,413 (102,059)
Other receivables 2,179 1,560
Inventories 5,308 (28,456)
Other assets 4,795 (370)
Increase (decrease) in:
Accounts payable 29,848 (19,697)
Accrued expenses (11,204) 12,247
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,350 41,272
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (408) (14,828)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (408) (14,828)
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options 17,361 40,958
Payments on short-term debt (60,000) (91,158)
Payments on capital lease obligation (2,601) (1,933)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (45,240) (52,133)
--------- ---------
NET DECREASE IN CASH (25,298) (25,689)
CASH, BEGINNING OF YEAR 25,784 29,426
--------- ---------
CASH, END OF YEAR $ 486 $ 3,737
========= =========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-17
<PAGE> 21
METACOMP, INC. NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
METACOMP, Inc. (the "Company"), founded in 1978, is a privately held, high
technology company located in San Diego, California. The Company designs,
manufactures, and sells a wide range of high performance data and
telecommunications solutions for wide area networking and digital
telecommunications requirements.
2. STATEMENT PRESENTATION:
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and footnotes
required by generally accepted accounting principles. The interim
financial statements and notes thereto should be read in conjunction with
the Company's audited financial statements and notes thereto for the year
ended July 31, 1996.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of
the results for interim periods. Operating results for the three month
period are not necessarily indicative of the results that may be expected
for the year.
3. INVENTORIES:
Raw materials are stated at average cost not in excess of market value.
Work-in-process and finished goods are stated at standard cost (which
approximates cost on a first-in, first-out basis) not in excess of market
value.
Inventories at October 31 and July 31, 1996, consist of the following:
<TABLE>
<CAPTION>
October 31
(Unaudited) July 31
------------- ------------
<S> <C> <C>
Raw materials $ 308,239 $ 311,707
Work-in-process 70,825 73,494
Finished goods 132,984 132,155
Reserve for inventory (52,000) (52,000)
------------- ------------
$ 460,048 $ 465,356
============= ============
</TABLE>
4. STOCKHOLDERS' EQUITY:
The following table summarizes equity transactions during the three months
ended October 31, 1996:
<TABLE>
<CAPTION>
Common Shares Dollars
------------- ------------
<S> <C> <C>
Balance at July 31, 1996 1,103,794 $ 565,282
Preferred converted to common 3,000 600
Exercise of stock options 86,805 17,361
------------- ------------
Balance at October 31, 1996 1,193,599 $ 583,243
============= ============
</TABLE>
F-18
<PAGE> 22
METACOMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SUBSEQUENT EVENT:
Pursuant to an Exchange Offer and Letter of Transmittal dated December 4,
1996 (the "Offer"), certain shareholders' of the Company exchanged their
outstanding shares for shares in Patriot Scientific Corporation
("Patriot"). As consideration for the shares tendered pursuant to the
Offer, the shareholders received 1,272,068 unregistered shares of Patriot
in January, 1997. The exchange value was 1.1 shares of Patriot for each
tendered share of the Company. Patriot is a publicly traded San Diego
company engaged in the development of semiconductor microprocessor
technology, Integrated Services Digital Network, ISDN, interface
technology and radar and antenna technology. The Company's product line
will compliment Patriot's ISDN product line.
F-19
<PAGE> 23
PATRIOT SCIENTIFIC CORPORATION
COMPANY'S REPORT REGARDING
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pursuant to an Exchange Offer and Letter of Transmittal dated December 4, 1996
(the "Offer"), Patriot Scientific Corporation, a Delaware corporation, (the
"Company") received 96.89% of the outstanding shares, or 1,156,426 shares, of
Metacomp Inc., a California corporation ("Metacomp") from 38 shareholders of
Metacomp. As consideration for the shares tendered pursuant to the Offer, the
Company issued 1,272,068 unregistered shares of its common stock. The exchange
rate of 1.1 shares of the Company's stock for each share of Metacomp stock
tendered was determined by negotiations. Based on the closing price of the
Company's stock as reported on the OTC Electronic Bulletin Board system on
December 26, 1996 of $1.375, the value of this acquisition is $1,749,094. An
additional $282,796 in acquisition related costs, including $252,796 to a
secured creditor of Metacomp, were incurred. The additional costs were paid from
cash reserves of the Company.
Pro forma adjustments are based upon current estimates, historical information
and certain assumptions that management deems appropriate. The unaudited pro
forma consolidated financial data presented herein are not necessarily
indicative of the results the Company would have obtained had such events
occurred at the dates indicated above or of the future results of the Company.
F-20
<PAGE> 24
Patriot Scientific Corporation
Pro Forma Consolidated Balance Sheet
As of November 30, 1996
(Unaudited)
<TABLE>
<CAPTION> Pro Forma Adjustments
As Historically Reported* --------------------------------
-------------------------- Eliminate Pooling of Pro Forma
Assets Patriot Metacomp Bank Note Interest Acctg Consolidated
-------------------------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,568,762 $ 486 $ (239,691) 2c $ 1,329,557
Accounts receivable 24,866 188,988 - - 211,854
Inventories 142,118 460,048 - - 602,166
Prepaid expenses and other 52,782 15,784 - - 68,566
---------------------------- ------------ ---------- ----------
Total current assets 1,788,528 663,306 (239,691) - 2,212,143
---------------------------- ------------ ---------- ----------
Property and equipment, net 290,646 110,980 - - 401,626
Purchased technology, net 306,167 - - - 306,167
Patents, trademarks and other, net 135,152 6,366 - - 141,518
---------------------------- ------------ ---------- ----------
Total assets $ 2,520,493 $ 780,652 $ (239,691) - 3,061,454
============================ ============ ========== ==========
Liabilities and Shareholders' Equity
- -------------------------------------------------
Current liabilities
Accounts payable and accrued liabilities $ 165,394 $ 301,018 $ - - 466,412
Current portion of bank debt - 252,306 (252,306) 2c - -
Current portion-Capital Lease Obligations - 6,639 - - 6,639
---------------------------- ------------ ---------- ----------
Total current liabilities 165,394 559,963 (252,306) - 473,051
Long-term debt, less current portion - 4,725 - - 4,725
6% Convertible Subordinated Notes 1,050,000 - - - 1,050,000
---------------------------- ------------ ---------- ----------
Total liabilities 1,215,394 564,688 (252,306) - 1,527,776
---------------------------- ------------ ---------- ----------
Minority interest - - - 2a 6,716 6,716
---------------------------- ------------ ---------- ----------
Stockholders' equity
Common stock 304 583,243 - 2a (583,068) 479
Additional paid-in capital 10,310,292 - - 2a 576,352 10,886,644
Accumulated deficit (9,005,497) (367,279) 12,615 2c - (9,360,161)
---------------------------- ------------ ---------- ----------
Total shareholders' equity 1,305,099 215,964 12,615 (6,716) 1,526,962
---------------------------- ------------ ---------- ----------
Total liabilities and shareholders'
equity $ 2,520,493 $ 780,652 $ (239,691) $ - $ 3,061,454
============================ ============ ========== ==========
</TABLE>
* Historical Patriot balance sheet is as of November 30, 1996 and
historical Metacomp balance sheet is as of October 31, 1996.
See accompanying notes to pro forma consolidated financial statements.
F-21
<PAGE> 25
Patriot Scientific Corporation
Pro Forma Consolidated Statement of Operations
For the Year Ended May 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
As Historically Reported* Pro Forma Pro Forma
Patriot Metacomp Adjustment Consolidated
------------------------------ ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ - $ 2,224,708 $ - $ 2,224,708
Cost of sales - 796,173 - 796,173
------------------------------ ------------- --------------
Gross Profit - 1,428,535 - 1,428,535
------------------------------ ------------- --------------
Operating expenses:
Selling, general, and administrative 1,372,422 928,192 - 2,300,614
Research and development 1,036,245 432,724 - 1,468,969
------------------------------ ------------- --------------
Total operating expenses 2,408,667 1,360,916 - 3,769,583
------------------------------ ------------- --------------
Income (loss) from operations (2,408,667) 67,619 - (2,341,048)
Other income (expenses)
Interest expense - (50,142) 39,124 2c (11,018)
Interest income 30,456 23,557 (19,562) 2c 34,451
------------------------------ ------------- --------------
Total other income (expenses) 30,456 (26,585) 19,562 23,433
------------------------------ ------------- --------------
Income (loss) before extraordinary item $ (2,378,211) $ 41,034 $ 19,562 $ (2,317,615)
============================== ============= ==============
Income (loss) per common share before 0
extraordinary item $ (0.10) $ (0.09)
============= ==============
Weighted average common shares
outstanding 23,312,419 24,584,487
============= ==============
</TABLE>
* Historical Patriot results are for the year ended May 31, 1996 and
historical Metacomp results are for the year ended July 31, 1996.
See accompanying notes to pro forma consolidated financial statements.
F-22
<PAGE> 26
Patriot Scientific Corporation
Pro Forma Consolidated Statement of Operations
For the Six Months Ended November 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
As Historically Reported*
------------------------------- Pro Forma Pro Forma
Patriot Metacomp Adjustment Consolidated
--------------------------------- ----------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 19,362 $ 754,840 $ - $ 774,202
Cost of sales 13,583 436,612 - 450,195
--------------------------------- ----------- ---------------
Gross Profit 5,779 318,228 - 324,007
--------------------------------- ----------- ---------------
Operating expenses:
Selling, general, and administrative 776,954 270,547 - 1,047,501
Research and development 449,853 233,070 - 682,923
--------------------------------- ----------- ---------------
Total operating expenses 1,226,807 503,617 - 1,730,424
--------------------------------- ----------- ---------------
Income (loss) from operations (1,221,028) (185,389) - (1,406,417)
Other income (expenses)
Interest expense - (32,180) 15,160 2c (17,020)
Interest income 18,543 5,299 (7,580) 2c 16,262
--------------------------------- ----------- ---------------
Total other income (expenses) 18,543 (26,881) 7,580 (758)
--------------------------------- ----------- ---------------
Income (loss) before extraordinary item $ (1,202,485) $ (212,270) $ 7,580 $ (1,407,175)
================================= =========== ===============
Income (loss) per common share
before extraordinary item $ (0.05) $ (0.05)
=============== ===============
Weighted average common shares
outstanding 24,905,126 26,177,194
=============== ===============
</TABLE>
* Historical Patriot results are for the six months ended November 30,
1996 and historical Metacomp results are for the six months ended
October 31, 1996.
See accompanying notes to pro forma consolidated financial statements.
F-23
<PAGE> 27
PATRIOT SCIENTIFIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA
NOTE 1- BASIS OF PRESENTATION
The accompanying unaudited consolidated pro forma balance sheet
presents the consolidated financial position of Patriot and Metacomp
as of November 30, 1996, assuming that the Merger had occurred as of
June 1, 1995. The accompanying unaudited consolidated pro forma
statements of operations give effect to the Merger by consolidating
the results of operations of the respective companies for the six
months ended November 30, 1996 for Patriot and the six months ended
October 31, 1996 for Metacomp and for the year ended May 31, 1996
for Patriot and July 31, 1996 for Metacomp assuming that the
proposed Merger had occurred as of June 1, 1995.
NOTE 2- PRO FORMA ADJUSTMENTS
(a) To reflect the issuance of 1,272,068 shares of Patriot Common
Stock in exchange for 96.89% of the shares of outstanding
Metacomp Common Stock based upon applying the Exchange Ratio
fixed at 1.1 Patriot shares for each share of Metacomp
tendered.
(b) Nonrecurring costs estimated to be $30,000 will be recorded in
connection with the Merger. These costs consist primarily of
professional fees. Because such costs are nonrecurring, they
have not been recorded in the accompanying unaudited
consolidated pro forma statements of operations. However, such
costs will be charged to income in the first period following
the consummation of the Merger.
(c) At the completion of the Merger, Patriot paid off a secured
loan that Metacomp had with its bank in the amount of
$252,306. Due to the cash reserves of Patriot, the
accompanying pro forma statements reflect as though this loan
had been repaid as of June 1, 1995. The associated interest
expense for Metacomp and interest income for Patriot have been
adjusted to reflect this assumption.
(d) Pro forma consolidated loss per share calculations are based
upon the weighted average common shares outstanding for the
Company for each period plus Metacomp's weighted average
common shares outstanding multiplied by the Exchange Ratio
fixed at 1.1 less the minority interest portion of Metacomp
shares not tendered less a total of 5,000,000 shares of the
Company's outstanding common stock issued as a contingent cost
of the Company's acquisition of its ShBoom Technology which
are subject to an escrow arrangement.
NOTE 3- EXTRAORDINARY ITEM
The pro forma consolidated statements of operations do not include
an extraordinary income amount of $1,779,459. Per Metacomp's debt
restructure agreement with all unsecured creditors, this amount was
discharged as of July 28, 1996.
NOTE 4- DEVELOPMENT STAGE COMPANY
As a result of the merger, the Company will no longer qualify as a
development stage company. Accordingly, the pro forma consolidated
statements of operations do not include development stage cumulative
results.
F-24
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Item Page
- ------- ---- ----
<S> <C>
2.3 Form of Exchange Offer dated December 4, 1996
between the Company and certain shareholders
of Metacomp, Inc. (individual Offers differ as
to the shareholder)................................Previously filed.
2.4 Letter of Transmittal To Accompany Shares of
Common Stock of Metacomp, Inc. Tendered
Pursuant to the Exchange Offer Dated
December 4, 1996 .................................Previously filed.
23.2 Consent of Harlan & Boettger.......................Filed herewith.
99.5 Press Release of the Company dated
November 4, 1996...................................Previously filed.
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 dated January 30, 1996 (No. 333-00529) and July 17, 1996
(No. 333-08291) of Patriot Scientific Corporation of our report dated December
17, 1996, relating to the financial statements of Metacomp, Inc., which appears
in the Current Report on Form 8-K/A Amendment No. 1 of Patriot Scientific Corp.
dated December 26, 1996 (date of earliest event reported).
/s/ Harlan & Boettger
HARLAN & BOETTGER
San Diego, California
February 27, 1997
