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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _______________
Commission File Number 0-22182
PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)
Delaware 84-1070278
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(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
10989 Via Frontera, San Diego, California 92127
(Address of principal executive offices) (Zip Code)
(619) 674-5000
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.00001 par value
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(Title of Class)
Check whether the issuer (1 ) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $1,902,874
The aggregate market value of the voting stock held by non-affiliates of the
registrant on August 14, 1998 was $10,988,978 based on a closing bid price of
$0.47 as reported on the OTC Electronic Bulletin Board system.
At August 14, 1998, 38,248,110 shares of common stock, par value $.00001 per
share (the registrant's only class of voting stock) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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TABLE OF CONTENTS
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PART I
ITEM 1. Description of Business 6
ITEM 2. Description of Property 19
ITEM 3. Legal Proceedings 19
ITEM 4. Submission of Matters to a Vote of Security Holders 19
PART II
ITEM 5. Market for Common Equity and Related
Stockholder Matters 19
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
ITEM 7. Financial Statements 22
ITEM 8. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure 22
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 22
ITEM 10. Executive Compensation 26
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 29
ITEM 12. Certain Relationships and Related Transactions 31
ITEM 13. Exhibits and Reports on Form 8-K 33
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB, including all documents incorporated by
reference, includes "forward-looking" statements within the meaning of Section
27A of the Securities Act and Section 21E 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 Report 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 the absence of significant revenues, a history of losses,
no assurance that technology can be completed or that its completion might be
delayed, significant competition, the uncertainty of patent and proprietary
rights, the uncertainty as to royalty payments and indemnification risks,
possible adverse effects of future sales of shares on the market, trading risks
of low-priced stocks and those other risks and uncertainties discussed herein,
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions identify certain of the
forward-looking statements. Readers are cautioned not to place undue reliance on
the forward-looking statements contained herein, which speak only as of the date
hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that may arise
after the date hereof. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by this section.
GLOSSARY OF TECHNICAL TERMS
ASIC (Application Specific Integrated Circuit) - a microprocessor built to meet
the specific application of one customer, requiring large volumes to
recover the high development costs.
ASSP (Application Specific Standard Product) - a microprocessor designed for a
particular market application rather than a single customer, e.g. a
keyboard controller that can be used by many customers.
AT - THE first IBM computer that had a 16 bit computer data bus (connectors
for communication cards).
BANDWIDTH - the rate or speed at which information can move in a given medium,
such as an electronic wire or the air.
BRI (Basic Rate Interface) - A digital service consisting of 2 B channels and 1
D channel. The B channels are used for data and the D channel is used for
control.
BIT - a binary digit, the smallest unit of digital information - either an "on"
(1) or "off" (0) signal. Microprocessors are generally 4-bit to 32-bit
referring to the amount of data they can process.
BROWSER OR WEB BROWSER - user interface software used to navigate the Internet.
It integrates many Internet functions such as Web searching and transfer,
file transfers, news group communications and electronic mail under one
simple easy-to-learn and use interface.
BUS - a group of connectors in a computer system that allow a number of
different cards to communicate.
CENTRAL PROCESSING UNIT (CPU) - the part of a computer that interprets and
executes instructions.
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CHIP (DIE) - the small piece of a silicon wafer containing the microscopic
electrical components and wiring for an integrated circuit -- the
integrated circuit without a package surrounding it.
CMOS - (Complementary Metal-Oxide Semiconductor) a structure for building
transistors using pairs of positively and negatively charged areas within
the silicon. It is the dominant semiconductor manufacturing process because
of its high-density and low-power attributes.
COMPUTER - a programmable electronic machine that performs high-speed
mathematical and logical operations or otherwise processes information.
CYBERSHARK - the Company's tradename for its ISDN digital modem product.
DIGITAL MODEM - Allows non ISDN devices, e.g. computers, to be connected to ISDN
telephone lines. In computer use it operates comparable to modems for
analog telephone lines. More technical term is a "terminal adapter" and
sometimes called an "ISDN modem."
E1 - The European equivalent of T1.
EMBEDDED CONTROL SYSTEMS (Embedded systems, embedded controller, embedded
control microprocessor) - products that contain computers, but are not
necessarily used as computers. Used for control applications such as laser
printer controllers, graphics controllers, accelerator cards, motion
controllers, digital communication devices and video terminal controllers.
GROUND PENETRATING RADAR (GPR) - a technique employing microwave radiation
(radar) to penetrate the earth's surface. Devices using this technique may
also be used to penetrate walls and other objects.
INTEGRATED CIRCUIT - A device that incorporates many transistors in a small area
or "chip" of silicon, which is encapsulated in plastic, ceramic or other
forms of packaging and connected to a circuit board.
INTERNET - a worldwide cooperative interconnection of smaller public and private
computer networks (an interconnected network of networks) consisting of an
estimated seven million linked computers. The World Wide Web is a portion
of the Internet.
INTERNET COMPUTER - a portable computer-based device specifically designed to
access the Internet or the World Wide Web. Also referred to as an 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.
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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 that consists of 23 B
channels and 1 D channel. The B channels are used to carry data and the D
channel is used for controls. Each B channel has a data rate capacity of 64
kilo bits per second.
PROPRIETARY - means that the Company is the sole owner of the technology and has
the sole right to economically exploit the technology.
PSC1000 - The Company's first proprietary RISC-based 32-bit microprocessor that
is based on the ShBoom technology and architecture and is integrated on a
single microprocessor using a 0.35 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 that supports 32 or 64 data bit transfers.
REGISTER - a directly addressable location for storing data within a computer.
Most microprocessors are register based. Also see Stack/Register
Architecture.
RISC (Reduced Instruction Set Computer) - a computer whose instructions are much
simpler than Complex Instruction Set Computers (CISC). These, 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 an advantage in certain applications over
the vast majority of computers that 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 microprocessor design using transistors smaller than 1.0
micron. The smaller the transistor size, the more functionality can be
contained on a microprocessor of a given physical dimension The PSC1000 is
currently designed in 0.35 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.
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TRANSISTOR - a small electronic device containing a semiconductor. It is the
lowest level element in an integrated circuit that 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Patriot Scientific Corporation (the "Company" or "Patriot") was
organized under Delaware law on March 24, 1992 as the successor by merger to
Patriot Financial Corporation, a Colorado corporation incorporated on June 10,
1987. Its address is 10989 Via Frontera, San Diego, California 92127, and its
telephone number is (619) 674-5000. The Company's home page can be located on
the World Wide Web at http://www.ptsc.com.
The Company is engaged in the development and marketing of patented
microprocessor technology and high speed data 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.
In 1997, the Company emerged from the development stage primarily as a
result of the acquisition of Metacomp Inc. ("Metacomp") as discussed further
below under the caption "Background." There can be no assurance the Company can
achieve profitable operations, and the Company may need additional financial
resources during the next twelve months.
BACKGROUND
In February of 1989, the Company completed its initial public offering
pursuant to a Registration Statement on Form S-18 under the Securities Act of
1933 (the "Act"), raising gross proceeds of $50,000 and net proceeds of
approximately $28,640 upon the sale of 2,500,000 units at $.02 per unit. Each
unit sold in the public offering consisted of one Common Share and one Class A
common stock purchase warrant exercisable to acquire one share of common stock
and one Class B common stock purchase warrant. All Class A and Class B warrants
have since been exercised or have lapsed.
On August 10, 1989, the Company acquired its GPR technology from the
inventor, Mr. Elwood G. Norris, now the Company's Chairman. The details of that
acquisition and certain related agreements are described in more detail in
"Certain Transactions" below. A description of the GPR technology, certain
information about the industry generally, and the Company's operational plans
are discussed below under the caption "Business".
On May 12, 1992, the Company redomiciled itself from Colorado to
Delaware by merging into a wholly-owned Delaware subsidiary (Patriot Scientific
Corporation) organized for that purpose. The reincorporation resulted in a
combination (reverse split) of each three of the Company's common shares, par
value $.00001, into one share of the Delaware corporation, par value $.00001.
The reincorporation also effected a change in the Company's charter and bylaws
and a name change to Patriot Scientific Corporation.
In May of 1993, the Company registered under the Act a total of
7,631,606 shares issuable upon the exercise of outstanding Class A and Class B
common stock purchase warrants. The Company received net proceeds of
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$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 were
subject to the terms of an earnout escrow arrangement of which 500,000 shares
have been released from escrow as of May 31, 1998. 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, a
California corporation, 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 was accounted for
as a pooling-of-interests. Sixteen persons who held an aggregate of 1,059,574
common shares issued in the Metacomp acquisition, agreed to a lock-up
arrangement limiting sales by each holder to 5% of their shares per month
through December 1998.
BUSINESS
ORGANIZATION AND CORPORATE DEVELOPMENT
The Company's business is managed as three major technologies/divisions
(1) PSC1000 microprocessor technology, (2) high-speed data communications and
(3) radar and antennae technology. The Company anticipates that the PSC1000
family of microprocessors will benefit the radar and antennae technology and the
high-speed data communications division, in that the PSC1000 microprocessor may
provide a low-cost, high performance alternative to existing microprocessors.
Due to the Company's small size and staffing overlaps among the divisions,
certain personnel work on more than one of the technologies from time to time.
As a result of the business combination with Metacomp and initial revenue from
the sale of microprocessors, the Company is no longer a development stage
company.
During fiscal years 1998 and 1997, the Company focused the majority of
its efforts on the PSC1000 and high-speed data communications technologies. The
PSC1000 technology and the Company's initial microprocessors, the PSC1000
family, are targeted for the embedded controller and Java language processor
marketplaces.
In reviewing markets for the PSC1000 technology, the Company identified
within the communications markets a possible opportunity for its ISDN product.
During fiscal 1995, the Company initiated the development of a computer
compatible plug-in card allowing high-speed, cost-effective digital ISDN access
to the Internet and other networks. This product, the CyberShark high-speed data
modem, is being marketed to Internet providers, distributors, value-added
resellers and original equipment manufacturers and has been integrated with
Metacomp's high speed data communication products.
In 1994, during the course of the Company's GPR development, the Company
identified certain antenna technology employing ionized gas as the conducting
element. The Company has obtained two government contracts to evaluate and
characterize the gas antenna technology. Management believes this technology
could have applications in commercial as well as military communications and
radar. However, the Company has no present plans to devote significant resources
to this technology other than from outside funding.
INTERNET GROWTH AND THE EMERGENCE OF THE JAVA PROGRAMMING LANGUAGE
The Internet is a rapidly growing global web of computer networks.
Developed over 25 years ago, this "network of networks" allows any computer
connected to the Internet to talk to any other using the Internet Protocol. The
Internet provides organizations and individuals with new means to conduct
business. Commercial uses of the Internet include business-to-business and
business-to-consumer transactions, product marketing, advertising,
entertainment, electronic publishing, electronic services and customer support.
The Company believes that
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organizations will also increasingly use the Internet and private Intranet
networks to improve communications, distribute information, lower operating
costs and change operations.
Use of the Internet has grown rapidly since its commercialization in the
early 1990's, impacting computer hardware, software and peripheral industries.
The rapid growth in popularity of the Internet is in part due to continuing
penetration of computers and modems into U.S. households, growth of the
informational, entertainment and commercial applications and resources of the
Internet and the growing awareness of such resources among individuals, and
increasing availability of user-friendly navigational and utility tools which
enable easier access to the Internet's resources.
The growth of the Internet and corporate Intranets is creating a demand
for hardware, software and peripherals. The large and growing number of users
connecting to the Internet is creating a demand for traditional analog and ISDN
digital modems, such as the Company's CyberShark, and other high speed data
communication devices. New software, such as Java, is emerging to serve the
requirements of Internet users.
The Java programming language was originally developed for personal
digital assistant devices (PDA's) and television set top boxes. It was formally
announced as an object-oriented language for the Internet in May 1995 by Sun
Microsystems Inc. It was launched on the Internet through the free offer of a
Java programming software developer's kit and Java related browser, a form of
Internet software interface. A large number of major computer, software, browser
and on-line service provider companies have licensed the Java language.
Accordingly, although no assurance can be given, Java appears to be emerging as
the fundamental platform for distributed, network-centric applications. There is
a growing list of Java applications, or applets, now available on the Internet
that not only enhance Web pages but also perform many functions of traditional
computer software programs. The Company's PSC1000 technology lends itself to
potential acceptance in this market.
With Java, data and programs do not have to be stored on the user's
computer, but can reside anywhere on the Internet to be called upon as needed,
sometimes referred to as just-in-time software. Among its various attributes,
two key features of Java are (1) its ability to run on a variety of computer
operating systems thus avoiding the problem of incompatibility across networks,
and (2) security, because Java enables the construction of virus-free,
tamper-free systems by using resource-access control and public-key encryption.
Because of Java's useful features, it may also become a popular programming
language for embedded applications.
Since Java is designed to run on multiple types of devices and operating
systems, it allows developers to write a program once for many types of
operating systems, instead of having to write new versions for each type. Java
does this by interpreting a program's commands into something a particular type
of computer can understand. This interpretive design runs programs slower than
if they were tailored for each type of computer and is resulting in a need for
specialized microprocessors and compilers to increase Java's speed.
The growth of Java is causing a number of companies to consider it as a
basis for a new style of computing tailored to the Internet and not encumbered
by the limitations of, or requiring, traditional operating systems (such as
Microsoft DOS or Windows, UNIX or Macintosh). The concept is to design
inexpensive access devices to communicate via the Internet. Public announcements
of such devices have been made by major companies such as Oracle and Sun
Microsystems Inc. There can be no assurance that any such devices will become
successful or that any will use the PSC1000 technology in the future.
SHBOOM MICROPROCESSOR TECHNOLOGY
GENERAL BACKGROUND. nanoTronics Corporation was formed in 1991 and
acquired the ShBoom technology, a base technology for an advanced microprocessor
integrated on a single chip. nanoTronics subsequently engaged in substantial
technical development and fabricated a first-generation microprocessor in early
1994.
Since the acquisition of the ShBoom technology from nanoTronics,
effective May 31, 1994, the Company has been engaged in correcting errors in the
microprocessor design, adding additional technical features to further modernize
the design, and improving and testing the new design. The Company obtained the
first run of prototype microprocessors in late May 1996, a 0.8 micron
microprocessor. The next generation of the PSC1000 family was a 0.5 micron
microprocessor that was delivered in September 1997. The 0.5 micron
microprocessor is being employed in
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demonstrations for prospective customers and is currently being shipped to
customers as an embedded microprocessor. A 0.35 micron production microprocessor
will be available for sale featuring a reduced size and improved performance.
Future enhancements and generations or modifications of microprocessors
employing the ShBoom technology and architecture are contemplated by the
Company.
INDUSTRY BACKGROUND. The semiconductor logic market has three major
sectors: (1) Standard Logic Products, (2) Application Specific Standard Products
(ASSPs), and (3) Application Specific Integrated Circuit (ASICs). Standard logic
products, such as the Intel 80X86 and Motorola 680X0 microprocessor families,
are neither application nor customer specific. They are intended to be utilized
by a large group of systems designers for a broad range of applications. Because
they are designed to be used in a broad array of applications, they may not be
cost effective for specific applications. ASICs are designed to meet the
specific application of one customer. While cost effective for that application,
ASICs require large sales volumes of that application to recover their
development costs. ASSPs are developed for one or more applications but are not
generally proprietary to one customer. Examples of ASSP applications include
modems, cellular telephones, wireless communications, multimedia applications,
facsimile machines and local area networks. The Company's microprocessor is
designed to be combined with application-specific software to serve as an
embedded control product for the ASSP market sector.
ASSPs are typically used in embedded control systems by manufacturers to
provide an integrated solution for application specific control requirements.
Such systems usually contain a microprocessor or microcontroller, logic
circuitry, memory and input/output circuitry. Electronic system manufacturers
combine one or more of these elements to fit a specific application. The
microprocessor provides the intelligence to control the system. The logic
circuitry provides functions specific to the end application. The input/output
circuitry may also be application specific or an industry standard component.
The memory element, if not on the microprocessor, is usually a standard product
used to store program instructions and data. In the past, these functions have
been executed through multiple integrated circuits assembled on a printed
circuit board. The requirements for reduced cost and improved system performance
have created market opportunities for semiconductor suppliers to integrate some
or all of these elements into a single ASSP microprocessor or chip set, such as
the ShBoom-architecture PSC1000 family. The PSC1000 family provides close
integration of the microprocessor and input/output function with the logic
circuitry, thereby providing an advanced ASSP.
Embedded control systems enable manufacturers to differentiate their
products, replace less efficient electromechanical control devices, add product
functionality and reduce product costs. In addition, embedded control systems
facilitate the emergence of completely new classes of products. Embedded control
systems have been incorporated into thousands of products and subassemblies
worldwide including automotive systems, remote controls, appliances, portable
computers and devices, cordless and cellular telephones, motor controls and many
other systems.
Microcontrollers are generally available in 4-bit through 32-bit
architectures, which refers to the amount of data they can process. Although
4-bit microcontrollers are relatively inexpensive, typically less than $1.00
each, they lack performance and features but account for more than 40% of
worldwide microcontroller volume. Also, in general use today are 8-bit
architectures, generally costing $1.00 to $10.00 each and accounting for an
additional 40% of worldwide microcontroller volume. To date 16-bit and 32-bit
architectures, with typical costs of over $10.00 each, have offered very high
performance, but are generally considered to be expensive for high-volume
embedded control applications. The use of 16-bit and 32-bit architectures offers
fewer internal limitations, making programming easier and providing higher
performance. Although generally more expensive per unit and requiring more
support logic and memory, these devices offer many advantages for more
sophisticated embedded control systems.
Electronic system designers, driven by competitive market forces, seek
semiconductor products with more intelligence, functionality and control that
can be used to reduce system costs and improve performance. For these needs, the
ShBoom architecture was designed to be a sophisticated 32-bit RISC (reduced
instruction set computer) microprocessor with advanced features, including the
most commonly needed support logic, but at a low cost; thereby providing
improved performance to existing embedded control applications and creating the
opportunity for the development of new, cost-effective applications.
TECHNOLOGY DESCRIPTION. Conventional high-performance microprocessors
are register-based with large register sets. These registers are directly
addressable storage locations requiring a complex architecture that consumes
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costly silicon. This conventional architecture provides processing power for
computer applications but complicates and slows the execution of individual
instructions and increases silicon size, thereby increasing chip cost.
The Company's technology is fundamentally different from most other
microprocessors because it is stack-oriented, in that the data is stored in
groups. The Company's microprocessor further employs certain features of both
register and stack designs. The resultant merged stack-register architecture
improves program execution for a wide range of embedded applications. The
Company's design combines two processors in one highly-integrated package, a
microprocessing unit (MPU) for performing conventional processing tasks, and an
input-output processor (IOP) for performing input-output functions. The IOP
replaces many dedicated peripheral functions supplied with other processors. The
microprocessor's design simplifies the manipulation of data. ShBoom's
architecture employs instructions that are shrunk from 32-bits to 8-bits. This
simplified instruction scheme improves execution speed for computer
instructions. The Company's architecture incorporates many on-chip system
functions, thus eliminating the requirement of support microprocessors and
reducing system cost to users.
The 0.8 micron microprocessor has been designed to operate at a speed of
50Mhz; the 0.5 micron microprocessor at a speed of 100Mhz; and the 0.35 micron
microprocessor at 150 MHz . They are all compatible with a wide range of memory
technology from low cost DRAM (dynamic random-access memory) to high speed SRAM
(static random access memory). The microprocessors can be packaged in various
surface-mount and die-form packaging. There can be no assurance that the
designed speed will be achieved with production microprocessors or future
versions or that all of the desired functions will perform as anticipated.
The ShBoom technology is not designed or targeted to compete with
high-end processors for use in personal computers. It is targeted for embedded
control applications. The Company believes that the above advanced features
differentiate the PSC1000 family from other 8-bit to 32-bit microprocessors
targeted for embedded control applications. Considering the reduced requirement
for support microprocessors, the PSC1000 family is intended to be available at a
high volume price that should be price competitive with high-end 8-bit
microprocessor and general 16-bit microprocessor systems but with higher
performance (speed and functional capability). The PSC1000 family has been
designed to allow high-speed and high-yield fabrication using generally
available wafer fabrication technology and facilities.
THE PSC1000 MICROPROCESSOR AS A JAVA PROCESSOR. The Company believes the
PSC1000 microprocessor architecture is capable of being a highly efficient and
cost-effective Java programming language processor. This is because Java is
designed to run on a stack-oriented architecture and the stack-oriented ShBoom
architecture is very efficient for executing the virtual stack machine internal
to Java. Many Java bytecodes (byte or 8-bit sized operation codes or
instructions) require only a single 8-bit PSC1000 family instruction to be
executed, providing a performance advantage over other more expensive processors
that require six or more 32-bit instructions to do the same task. This is an
important advantage for executing Java programs with increased speed and reduced
code size enabling lower system memory costs. In addition, the incorporation of
many on-chip system functions is expected to allow the PSC1000 family to perform
most of the other functions required of an Internet computer device or Java
accelerator, thereby eliminating components. Since Internet computers are
designed to be inexpensive appliances for Internet access, cost, speed and
performance are expected to be key requirements for designers. The Company
believes the ShBoom technology can compete favorably on the basis of such
requirements, although there can be no assurance the Company can successfully
exploit Java related applications or that competitors will not create superior
Java processors.
The Company has ported the Java operating environment to the PSC1000
family, which currently utilizes the C programming language for software
support. The Company is a licensee of Sun Microsystems Inc. which enables the
Company to develop and distribute products based on Sun's JavaOS Technology. The
Company recently exercised an option to license from Sun Microsystems Inc.,
Personal Java, a platform on which to run Java applications; licensed from Wind
River VXWorks, an operating system; and entered into a relationship with Forth
Inc. whereby Forth will provide software support and operating system
development tools for the Forth Programming language. Successful implementation
of this software is expected to produce one of the best price performance
microprocessors available in silicon supporting the Java virtual machine and
embedded applications. The Company believes that, if the implementation is
successfully completed, the PSC1000 family will be competitive with Java
microprocessors announced by competitors. However, there can be no assurance of
successful implementation of this package of software or of a market for a
PSC1000 family Java microprocessor.
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STAGE OF DEVELOPMENT. An initial first-generation production of wafers
was fabricated in early 1994 at a contract fabrication facility using 6-inch
wafers employing 0.8 micron double-metal CMOS technology. After the May 31, 1994
acquisition, the Company improved the original design, added new features and
performed simulations and tests of the improved designs. In October 1995, a run
of six wafers of second-generation microprocessors (of the same CMOS technology)
were fabricated by a contract fabrication facility. Subsequently, the Company
tested the resultant microprocessors, while completing a C computer language
compiler and preparing application development tools. The compiler and
application development tools are necessary to enable system designers to
program the PSC1000 family for specific applications. The Company made
corrections to the design from testing the first run and produced an additional
run of second-generation microprocessors from existing wafers. Second run
microprocessors (the 0.8 micron microprocessor) were received in May 1996. In
July 1996, the Company commenced employing these microprocessors in
demonstration boards for use by developers and prospective customers and
licensees.
In December 1996, the Company commenced development efforts aimed at
producing a 0.5 micron microprocessor based on the PSC1000 technology. A
reduction to 0.5 micron double-metal CMOS technology improved operating speed,
reduced power requirements, reduced physical size and reduced fabrication cost
resulting in improved cost-performance over the 0.8 micron microprocessor and
competitors. In May 1998, the Company commenced production run of a 0.35 micron
microprocessor that management anticipates will further increase operating speed
and cost-performance over the previous generations of the PSC1000 family of
microprocessors.
At each stage of development, microprocessors require extensive testing
to ascertain performance limitations and the extent and nature of errors (bugs),
if any. When significant limitations or errors are discovered, additional rounds
of design modifications and fabrication are required prior to having functional
and demonstrable microprocessors for prospective customers and licensees.
Although the 0.5 micron microprocessor version has been sent to prospective
customers in anticipation of production quantity orders, there can be no
assurance that the Company, during its continued testing of these products, will
not identify errors requiring additional rounds of design and fabrication prior
to commercial production. Additional delays could have an adverse effect on the
marketability of the Company's technology and the Company's financial condition.
The Company has developed marketing materials, product manuals and
application development tools for use by prospective licensees and customers.
The manuals and tools are necessary to enable system designers to quickly and
easily program the PSC1000 family for specific applications.
Management believes that the PSC1000 family is ready for licensing or
sale and that any additional changes encountered in current testing will be
minor and can be made during initial production runs of PSC1000 family
microprocessors for customers, when and if orders are obtained. Management also
believes the ShBoom core technology is ready for licensing for use by others to
develop custom multiple function microprocessors. Certain initial licensing
discussions and customer demonstrations have commenced. However, there can be no
assurance of market acceptance of the PSC1000 family or the Company's ShBoom
technology.
In April 1998 the Company received its first major contract
incorporating the PSC1000 microprocessor. The PSC1000 will be used as a main
component on a digital video disk (DVD) controller card used in a kiosk
application for the travel industry. The value of the contract was in excess of
$3 million with deliveries scheduled for fiscal year 1999.
BUSINESS STRATEGY. The increasing demand for embedded control has made
the market for microcontrollers one of the largest segments of the semiconductor
logic market. The Company's strategy does not entail competing directly with
suppliers who have multiple microprocessors in various market segments, but on
identifying certain market niches that would benefit from the advanced features
of the ShBoom-architecture embedded microprocessors and its corresponding low
system cost.
Because of the above factors and competitive conditions, management
intends to focus the majority of its initial efforts on the Java processor
business, a new but highly-competitive field without an established base of
microprocessors and for which management believes the ShBoom architecture has
certain technical advantages.
Management believes that the ShBoom architecture is suited for
controller applications requiring high-performance and low system cost, such as
kiosks, laser printers, dot-matrix printers, video terminals, robotics, motion
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<PAGE> 12
controllers, industrial controllers, digital communication devices, video games,
cable and satellite modems and TV set-top boxes. The Company expects that early
licensing of the technology and product applications will focus on embedded
control.
The Company has appointed eight international distributors for foreign
markets. The Company has a full-time Vice President of Sales and Marketing to
lead marketing of the PSC1000 family.
Management believes the appropriate approach for the Company initially
lies in a balanced effort of cultivating licensees and developing specific
product enhancement partnerships, producing OEM products, developing innovative
in-house products, and providing technical support to third parties on a
contract basis. The overall balance of these approaches will be monitored and
modified as management attempts to ascertain and capitalize on the highly
dynamic and competitive embedded microprocessor market. There can be no
assurance that the Company can successfully exploit its ShBoom microprocessor
technology.
Subject to the availability of financial and personnel resources, while
the Company is commercializing the PSC1000 family and the ShBoom core
technology, the Company's strategy is to also design and develop future versions
of the microprocessor with more demanding sub-micron technology and with more
features. However, the Company's resources are limited, and there can be no
assurance the Company will be able to continue microprocessor enhancement.
Initial fabrications of the 0.8 micron and 0.5 micron processors were
performed by contract fabrication facilities. The 0.35 micron microprocessor has
been delivered for fabrication to a contract fabrication facility that has
agreed to provide production quantities for the Company's customers. There can
be no assurance fabrication facilities will be available to produce the PSC1000
family in the future. However, since there are a large number of fabrication
facilities with the capability to produce the PSC1000 family of microprocessors,
management believes microprocessors can be produced on a contract basis.
Industry shortages of fabrication facilities that may exist and are predicted to
exist in the future are generally limited to the more demanding architectures.
If a shortage of fabrication facilities develop, it could have a material
adverse effect on the Company's profitability.
COMPETITION. The semiconductor industry is intensely competitive and has
been characterized by price erosion, rapid technological change and foreign
competition in many markets. The industry consists of major domestic and
international semiconductor companies, most of which have greater financial,
technical, marketing, distribution, development and other resources than the
Company. The market for microprocessors and for embedded control applications is
at least as competitive.
While the Company's strategy is to target high-volume licensees and chip
customers requiring more sophisticated but low-cost devices, the Company can
still expect significant competition. The Company may also elect to develop
embedded control system products utilizing the ShBoom architecture for itself or
by contract for other manufacturers.
The Company expects that the PSC1000 family, if successfully
commercialized in the embedded controller market, will compete with a variety of
16/32-bit microprocessors including ARM, MIPS and the PowerPC. As a Java
processor, the Company expects its PSC1000 family will compete with a broad
range of microprocessors including licensees of Sun Microsystems, Inc.'s
PicoJava. These companies have significantly greater resources than the Company.
A new entrant, such as the Company, is at a competitive disadvantage
compared to these and other established producers due to a number of factors,
including the lack of product performance experience, lack of experience by
customers in using application development systems, no record of technical
service and support, and limited marketing and sales capabilities.
HIGH SPEED DATA COMMUNICATIONS
GENERAL BACKGROUND. Starting in fiscal 1995 the Company initiated the
development of a computer compatible plug-in card allowing high-speed,
cost-effective digital ISDN access to the Internet and other networks. In
December 1996, the Company acquired 96.9% of Metacomp to create a communications
division including
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engineering, assembly, marketing and distribution. The acquisition of Metacomp
expanded the product line and added a high-speed data communications revenue and
customer base. High-speed data communication revenues accounted for
substantially all of the Company's revenues for the fiscal year ended May 31,
1998.
Metacomp, founded in 1978, is a high technology company that designs,
assembles, and sells a wide range of high performance data and
telecommunications solutions for wide area networking and high speed data
communications requirements.
The business combination with Metacomp was treated as a
pooling-of-interests, and the Metacomp product line was combined with the
Company's ISDN product to form the communications division.
ISDN AND DIGITAL COMMUNICATIONS DESCRIPTION. The Integrated Services
Digital Network (ISDN) is a set of digital transmission protocols that virtually
all of the world's communications carriers have adopted as a standard. ISDN
brings the digital network to the individual user by turning the twisted-pair
copper telephone line into a high-speed, high-capacity ISDN line with the
capacity for two transmissions (one voice, fax or computer conversations and one
data conversation) to happen at the same time. Further, up to eight separate
devices (telephones, computers, fax machines, etc.) can be connected to the same
ISDN line and each given separate telephone numbers. In many home and business
applications, the use of an ISDN line provides dramatically increased speed and,
by allowing multiple uses of one line, improved economics over multiple lines.
ISDN service is easily connected by local telephone companies.
In addition to ISDN products, the Company's communications division is
also engaged in providing solutions in wide area networking for both personal
computers as well as higher speed industrial systems using VME interfaces.
MAJOR COMMUNICATIONS DIVISION PRODUCTS. The Company has a line of ISDN
interface products for high speed, cost effective digital communications through
telephone networks.
These products include:
CyberShark Family
CyberShark - This low-cost Basic Rate ISDN (BRI) adapter card for ISA bus
is targeted to allow small businesses and telecommuters to access
corporate networks and the Internet via ISDN. The card includes an analog
phone jack that allows the user to connect his existing analog phone or
fax machines for simultaneous voice conversation.
CyberShark/HSET - This BRI adapter card for ISA bus is designed to be used
with a headset/handset used by distributed call centers and remote agents.
It offers access to the D channel and supports domestic as well as
European telco switches. Drivers for Windows/95, Windows/NT, and Linux are
available.
CyberShark/PRI - This Primary Rate ISDN (PRI) adapter card for ISA bus
provides intelligent support of up to 23 simultaneous digital connections
offered by the 23B+D interface. An optional MVIP Bus interface on board
allows easy integration into third-party voice, analog modem, or video
codec boards. Other downloadable firmware engines are available to support
T1/Fractional-T1, E1 and ETSI PRI services. Drivers for Windows/NT are
available.
FlagShip Family
FlagShip/PRI-2 - This newest member of the Company's ISDN product family
is a dual-span PRI adapter card for PCI bus that supports up to 46
simultaneous digital connections. The MVIP Bus interface is standard.
Firmware engines to support T1/Fractional-T1, E1 and ETSI PRI services
will be offered. A driver for Windows/NT is available.
VME Product Line - The Company also offers a line of intelligent high
speed communications engines in a VME form factor. Some of our customers
for these products include the military as well as large satellite based
data communications companies.
ATcomm2/4 Product Line - The Company also markets an intelligent two or
four channel product that is used around the world for high speed data
communications.
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Other - The communications division also obtains revenue from providing
contract engineering and software development for customers. The Company
from time to time is able to retain a proprietary interest in developed
products and in such circumstances retains a license/royalty interest.
The Company's product strategy is to continue to provide data
communication solutions through improving current products and introducing new
products. The Company has three research and development personnel assigned to
high speed data communication product development and enhancement. These
activities include customer specific development for OEMs, VARs and others as
well as new proprietary product development and enhancement.
PRODUCTION AND MARKETING STRATEGY. The Company's strategy is to have its
high-speed data communication products manufactured on a sub-contract basis
with, in some instances, final assembly at the Company's facility. Products are
tested and distributed by the Company. An in-house marketing staff manages the
marketing of the Company's high-speed data communications products. The
Company's telecommunication products and ISDN products (other than CyberShark)
are targeted for OEMs, systems integrators, VARs and sophisticated end users.
COMPETITION. There are a number of ISDN board-level products competitive
to CyberShark offered by competitors including NetAccess, ISDN-tek, Inc., Zyxel,
Digi International and U.S. Robotics. These companies have substantially greater
resources than the Company. Although not all of these companies offer PC plug-in
card terminal adapters directly competitive with the Company's product, there
can be no assurance additional direct competitors will not introduce competitive
products.
The Company believes its products are competitive on both features and
price with the products currently in the marketplace or those known by
management to have been announced. ISDN modems also compete with traditional
analog modems and with other interface technologies such as cable modems.
Accordingly this field is subject to rapid technological change and fierce
competition.
The Company does not believe it can avail itself of patent protection on
most of its high-speed data communication products in development. The Company
does rely on trade secrets and copyrights to protect its high-speed data
communications products.
RADAR AND ANTENNA TECHNOLOGY
BACKGROUND. During the period from 1980-1983, Mr. Norris, Chairman of
the Company, developed a technique employing microwave radiation to penetrate
the earth's surface. This radar technology relates to "ground penetrating radar"
or "GPR." GPR technology is one of many of a family of geophysical tools and
sensing technologies that include seismic, electromagnetics, gravity, borehole
sampling and other techniques. GPR is a technique for producing profiles of
subsurface strata and features by emitting radar waves and recording the
reflected signals.
The Company commenced active development of its GPR technology in April
1992. By May 1993 the Company was able to demonstrate the sensing, processing
and crude visualization of images from its technology, and by May 1994 the
Company had completed its prototype device. Since May 1994 the Company has
focused its efforts and limited financial resources on the PSC1000 technology
and communication products, effectively suspending development and most
marketing efforts related to GPR.
GAS ANTENNA TECHNOLOGY. In September 1994, the Company filed a patent
application on certain gas antenna technology invented during its radar
development. Immediately upon receiving notice of allowance in June, 1995, the
invention was classified secret by the U.S. Department of Commerce at the
request of a defense agency. This technology is not currently used in and is
separate and apart from the GPR technology, although it may be employed in the
GPR technology in the future.
In January 1996, the Company filed an application seeking
declassification of the technology, and in June 1996, was advised that
de-classification had been approved and the U.S. patent issued in January 1997.
The de-classification allows the Company to exploit the technology for both
governmental and commercial purposes.
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The Company's gas antenna technology employs ionized gas as the
conducting element of an antenna. This is a fundamental change from traditional
antenna design that generally employs solid wires as the conducting element.
Management believes ionized gas is an efficient conducting element with a number
of advantages. Since the gas is ionized only for the precise time of
transmission or reception, ringing and associated effects of solid wire antenna
design is reduced. The design allows for extremely short pulses, important to
many forms of digital communication and radar. The design further provides the
opportunity to construct an antenna that can be dynamically reconfigured for
frequency, direction, bandwidth, gain and beamwidth. Management believes
antennas can be designed that are low in weight, small in size and with lower
power consumption than traditional solid wire antennas.
The Company has obtained two government contracts to evaluate a
prototype of the gas antenna technology. There can be no assurance that the
Company will obtain additional development funds or that it can successfully
exploit this technology.
GPR TECHNOLOGY DESCRIPTION. The Company has developed sensors (wave
generators and antennae) and techniques for the processing, conversion,
compression, storage, and visualization (collectively, computer processing) of
GPR data. The Company has developed proprietary techniques for wave generation
and proprietary antennae for the sending and receiving of data. The Company uses
proprietary methods to capture and process returned signals.
The Company has assembled a mobile prototype version of its GPR
technology. This prototype encompasses a blending of laboratory equipment (with
internal software and hardware custom configured and modified to function as
desired) and specialized components including antennae, power generators and
amplifiers. The prototype has demonstrated the ability to penetrate multiple
solid objects (walls and barriers) and identify return signals from additional
objects such as walls, persons and manmade barriers. In certain ground strata,
the Company has been able to resolve objects of six inch size at approximately
ten feet in depth. The Company's device does not require contact with the ground
providing enhanced mobility, extended area coverage and the ability to look
sideways (for example through walls and in mine shafts).
The Company has one U.S. patent on antenna technology for its GPR. Other
aspects of the GPR system are maintained as trade secrets, although additional
patent applications may be filed in the future.
STAGE OF DEVELOPMENT OF GPR TECHNOLOGY. The Company's prototype system
is used for limited prospective customer and user evaluations of the technology.
The Company has demonstrated using the technology to detect plastic mines, side
viewing through walls and solid structures for detection of bodies or other
objects, and viewing of plastic pipes and other underground objects.
The Company believes most prospective users will require more
specifically tailored equipment and multiple devices. Commercialization of the
GPR technology will require additional development to improve visualization
software and to replace the current system with specifically designed components
to minimize cost and weight and improve portability.
There can be no assurance that a commercially viable device will or can
be produced, and the Company has no existing users or customers. There can be no
assurance any prospective users will select the Company's device over
competitive devices (See "Competition").
BUSINESS STRATEGY. The Company has limited resources to pursue further
development to commercialize a GPR system for the above markets and to exploit
the gas antenna technology. The Company's strategy is to use its GPR and gas
antenna prototypes to demonstrate to prospective users the Company's
capabilities and to seek partnering arrangements to develop custom commercial
devices for specific applications. The Company's marketing activities to date
have been very limited and are focused primarily towards governmental agencies.
The strategy is to seek sponsorship to assist in further development and
commercialization of the present technology. There can be no assurance that the
Company can obtain any outside assistance or successfully complete development
and commercially exploit its GPR or gas antenna technology.
COMPETITION. The segment of the electronics industry that involves the
manufacture and sale of GPR equipment is not large or cohesive enough to be
referred to as an "industry" but is more a specialized subset of geophysical
tools that include seismic equipment and other geophysical and scientific
instruments. The antenna
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industry is very competitive and consists of a large number of companies with
substantial resources, a large installed base, established government and
commercial relationships, and large research and development staffs. It is
possible that any such technology owned or developed by others may be further
advanced than the Company's technology.
The Company has not yet developed a commercially marketable prototype of
its GPR or gas antenna technology. Most of the Company's potential competitors
are actively engaged in operations and have had time to develop product
recognition and market share and have greater financial and other resources than
the Company.
RESEARCH AND DEVELOPMENT
The Company's current development efforts are focused on the
introduction of the PSC1000-family microprocessor and high speed data
communication products. The development of the Company's technologies has taken
longer than anticipated by management and could be subject to additional delays.
Therefore, there can be no assurance of timely or successful marketing of the
PSC1000-family or of continued market acceptance of existing and proposed high
speed data communication products.
The Company incurred research and development expenditures of $1,607,828
and $1,367,937 for the fiscal years ended May 31, 1998 and 1997, respectively.
The majority of the Company's expenditures in fiscal 1998 and 1997 have been
expended on its PSC1000 and high-speed data communications technologies. To
date, the Company has expensed internal software development costs as incurred.
The Company believes that technical advances are essential to its success and
expects that it will continue to expend substantial funds on research and
development of its technologies; however, there can be no assurance that such
research and development efforts will result in the design and development of
competitive technologies in a timely manner.
LICENSES, PATENTS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of patents, copyright and trademark
laws, trade secrets, software security measures, license agreements and
nondisclosure agreements to protect its proprietary technologies. The Company
pursues a policy of seeking the issuance of patents that it considers important
to its business to protect inventions and technology that support the Company's
microprocessor and radar and antennae technologies.
The Company has four U.S. patents issued and has three U.S. patents
pending, most dating back to 1989, on the ShBoom microprocessor technology. The
Company has one ShBoom technology patent pending in five European countries and
Japan and may file additional applications under international treaties
depending on an evaluation of the costs and anticipated benefits that may be
obtained by expanding possible patent coverage.
In addition to such factors as innovation, technological expertise and
experienced personnel, the Company believes that a strong patent position is
becoming increasingly important to compete effectively in the semiconductor
industry. It may become necessary or desirable in the future for the Company to
obtain patent and technology licenses from other companies relating to certain
technology that may be employed in future products or processes. To date, the
Company has not received notices of claimed infringement of patents with any
existing processes or products; but, due to the nature of the industry, the
Company may receive such claims in the future. Likewise, the Company believes
that it may have claims against other semiconductor companies should certain of
its pending patents be favorably granted, but there can be no assurance thereof
nor any assurance that the Company could successfully exploit any potential
patent claims against larger competitors.
The Company acquired the basic ShBoom technology from nanoTronics
Corporation in return for 10,000,000 shares of the Company's common stock in
1994. 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 a previous inventor. The Company believes, should
there be royalties due to the previous inventor, that the obligation is that of
nanoTronics. The Company has been informed by nanoTronics that a tender of a
part of the consideration paid by the Company to nanoTronics for the basic
ShBoom technology has initially been rejected by the inventor and that the
inventor has proposed that he is entitled to royalties and the basic technology
be returned by nanoTronics and licensed back to the Company. nanoTronics has
rejected this proposal and the Company and nanoTronics are continuing
discussions with the inventor in an effort to resolve these issues. However, if
it is ultimately determined that the
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inventor is entitled to royalties, the Company could be subject to
indemnification claims by nanoTronics of up to $1,250,000 pursuant to its
agreement with nanoTronics. See Item 12, "Certain Relationships and Related
Transactions," for further discussion.
Pursuant to the Assets Purchase Agreement and Plan of Reorganization
(Agreement) between the Company, nanoTronics and Falk, the Company was the
recipient of a number of warranties and indemnities. The Company believes
nanoTronics has been or is in the process of liquidation and due to Mr. Falk's
death in July 1995, the Company may be limited in its ability to obtain
satisfaction should it have any future claims pursuant to the Agreement.
The Company has one U.S. patent on its gas antenna technology. The
Company's ability to obtain protection in other countries may be limited due to
the time delay caused by the secrecy order. The Company also has one U.S. patent
on antennae technology directly related to its GPR technology. No foreign
application was made. Although plans in this regard are not definite, the
Company's intention is to apply for patents only as to selected aspects of the
Company's GPR and gas antenna technology in order to reduce the risk of
infringement or duplication by competitors. Considering the rapid advancements
in the field of electronics generally, the Company believes that its interests
will best be served by treating as trade secrets non-patented components or
instrumentation groups used in some of its technologies. There are a large
number of patents owned by others in the radar and antenna fields generally and
in the field of GPR specifically. Accordingly, although the Company is not aware
of any possible infringement and has not received any notices of claimed
infringement, the Company may receive claims in the future.
A third party has licensed certain ISDN software technology to the
Company. In addition to the protection afforded the Company through the ISDN
technology licenses, the Company has created its own software and hardware
designs and uses copyright, trade secrets, software security measures and
nondisclosure agreements to protect its proprietary products, technology and
software. The Company has one U.S. patent on its high-speed data communication
technology. Despite the Company's precautions, it may be possible for
unauthorized third parties to copy aspects of, or otherwise obtain and use, the
Company's high-speed data communication technology and software without
authorization. In addition, the Company cannot be certain that others will not
develop substantially equivalent or superseding proprietary technology thereby
substantially reducing the value of the Company's proprietary rights.
Metacomp has licensed a family of interface chips to Sipex Corporation
under a royalty agreement providing for a minimum of $50,000 per year through
calendar year 1998 after which time it becomes a royalty free license.
There can be no assurance that any patents will issue from pending or
future applications or that any patents that are issued will provide meaningful
protection or other commercial advantages to the Company. Although the Company
intends to protect its rights vigorously, there can be no assurance that these
measures will be successful.
The Company generally requires all its employees and consultants,
including its management, to sign a non-disclosure and invention assignment
agreement upon employment with the Company.
MARKETING AND DISTRIBUTION
The Company's products are marketed through a combination of a direct
sales force and distributors. Approximate sales by principal geographic area (as
a percentage of sales) were for fiscal years ended:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Domestic sales 96% 77%
Foreign sales
North America 1% 13%
Europe 3% 6%
Other - 4%
---- ----
Total sales 100% 100%
==== ====
</TABLE>
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All operating assets are located within the United States. While sales
to certain geographic areas generally vary from year to year, the Company does
not expect that changes in the geographic composition of sales will have a
material adverse effect on operations.
DEPENDENCE UPON SINGLE CUSTOMERS
Ten percent (10%) or more of the Company's consolidated net sales for
the fiscal years indicated were derived from shipments to the following
customers:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
A $578,000 $473,000
B $478,000 $472,000
C - $212,000
D $207,000 -
</TABLE>
While the level of shipments to individual customers generally varies
from year to year, the Company does not expect that changes in customer
composition will have a material adverse effect on operations.
EMPLOYEES
The Company currently has twenty full-time and two part-time personnel.
Ten full-time persons are employed in research and development, four full-time
persons are engaged in manufacturing and assembly, two full-time persons are
engaged in marketing and four full-time and two part-time persons are engaged in
general and administrative activities. These persons include Mr. Norris and Mr.
Putnam, who only devote a part of their available time to the affairs of the
Company. The Company also engages additional consultants and part-time persons
as needed from time to time.
The Company's future success depends in significant part upon the
continued service of its key technical and senior management personnel. The
competition for highly qualified personnel is intense, and there can be no
assurance that the Company will be able to retain its key managerial and
technical employees or that it will be able to attract and retain additional
highly qualified technical and managerial personnel in the future. None of the
Company's employees is represented by a labor union and it considers its
relations with its employees to be good. None of the Company's employees is
covered by key man life insurance policies.
GOVERNMENT REGULATION
To the Company's knowledge, its products are not subject to governmental
regulation by any federal, state or local agencies that would affect the
manufacture, sale or use of its products. The Company cannot, of course, predict
what sort of regulations of this type may be imposed in the future but does not
anticipate any unusual difficulties in complying with governmental regulations
which may be adopted in the future. If any technical or rating standards of
professional bodies (such as UL or SAE) are applicable to any equipment or
components produced by the Company, it is management's intention to comply with
such standards.
The Company's proposed GPR device and antenna technology uses microwave
radio waves. The use of such waves are regulated by the Federal Communications
Commission ("FCC") and, should the Company elect to sell such devices, their
operation would have to meet applicable FCC rules and regulations. Management
does not believe that the operation of the GPR prototype on contract analysis
projects requires FCC approval.
The Company has not incurred costs associated with environmental laws
and does not anticipate such laws will have any significant effect on the future
business of the Company.
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ITEM 2. DESCRIPTION OF PROPERTY
Effective January, 1997 the Company merged its operations with Metacomp
and moved its principal executive and operating office to space leased by
Metacomp at 10989 Via Frontera, San Diego, California. This space contains
approximately 10,000 square feet of space, including approximately 7,500 square
feet of improved space for office and technical personnel and approximately
2,500 square feet of unimproved warehouse space. Management believes this
facility is adequate for the present needs of the Company and Metacomp for at
least the next twelve months. Four research and development personnel are
located in the Los Gatos, California area, and one research and development
person is located in the Austin, Texas area. Each of these individuals
telecommutes from their respective home offices with the San Diego facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the NASD OTC Bulletin Board system maintained by the National
Association of Securities Dealers, Inc. Prices reported represent prices between
dealers, do not include markups, markdowns or commissions and do not necessarily
represent actual transactions. The market for the Company's shares has been
sporadic and at times very limited.
The following table sets forth the high and low bid quotations for the
Common Stock for the fiscal years ended May 31, 1998 and 1997.
<TABLE>
<CAPTION>
BID QUOTATIONS
--------------
HIGH LOW
<S> <C> <C>
Fiscal Year Ended May 31,1998
First Quarter $2.31 $1.36
Second Quarter $1.78 $1.00
Third Quarter $1.15 $ 0.53
Fourth Quarter $1.36 $ 0.72
Fiscal Year Ended May 31, 1997
First Quarter $3.50 $1.75
Second Quarter $2.44 $1.12
Third Quarter $1.83 $0.94
Fourth Quarter $1.62 $0.97
</TABLE>
The Company had approximately 226 shareholders of record as of May 31,
1998. At August 14, 1998, there were 38,248,110 shares of Common Stock issued
and outstanding. The Company has never paid a cash dividend on its Common Stock
and does not expect to pay one in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's results of operations have and may continue to be subject
to significant variations. The results for a particular period may vary due to a
number of factors, including the overall state of the semiconductor and
communications segments of the economy, the development status of and demand for
the Company's products,
19
<PAGE> 20
economic conditions in the Company's markets, the timing of orders, the timing
of expenditures in anticipation of future sales, the mix of products sold by the
Company, the introduction of new products and product enhancements by the
Company or its competitors and pricing and other competitive conditions.
As described in Note 1 to the consolidated financial statements of the Company,
effective December 26, 1996, the Company acquired 96.9% of the common stock of
Metacomp. The business combination was accounted for as a pooling of interests
and, accordingly, the Company's financial statements have been presented to
include the results of Metacomp as though the business combination occurred as
of June 1, 1995. In addition, Metacomp changed its fiscal year-end from July 31
to May 31 to conform to the Company's fiscal year-end. Based on the difference
in fiscal year-ends, results of operations for the two months ended July 31,
1996 were included in both years ended May 31, 1997 and 1996.
RESULTS OF OPERATIONS
Net sales. Total net sales for the fiscal year ended May 31, 1998 increased 3.0%
to $1,902,874 from $1,847,421 for the fiscal year ended May 31, 1997. This
increase was due primarily to the initial sales for the microprocessor and
radar/antenna product lines.
Cost of sales. Cost of sales as a percentage of net sales increased to 61.2% in
fiscal 1998 compared to 54.3% in fiscal 1997. This increase in the cost of sales
percentage was a result of a write down in inventory values related to the
obsolescence of components and finished parts of the older product lines being
phased out.
Research and development expenses increased 17.5% from $1,367,937 in fiscal 1997
to $1,607,828 for fiscal 1998. This increase was due primarily to an increase in
licensed software support and update fees.
Selling, general and administrative expenses increased 43.3% from $1,723,751 in
fiscal 1997 to $2,470,937 in fiscal 1998. This increase was due primarily to the
costs of two financings, which financings were in the total amount of
$3,000,000, an increase in personnel costs related to the Company's addition of
two executives, one marketing and one financial, the compensation costs related
to the release from escrow of 500,000 shares of common stock as discussed in
Note 4 to the consolidated financial statements, and the increase in marketing
costs related to introducing the Company's products to the marketplace.
Amortization of purchased ShBoom technology was $612,333 for fiscal 1997. The
technology was totally amortized during fiscal year 1997 and, accordingly, there
was no corresponding expense for the comparable period of fiscal year 1998.
Other income (expense) was significantly higher for fiscal 1998 as a result of
the non-cash interest related to the discount on the convertible term debentures
as discussed in Note 5 to the consolidated financial statements and the interest
on the same notes.
An extraordinary income item of $1,779,457 was included in fiscal 1997. This
item was the result of the discharge of debts by Metacomp in July, 1996 as a
result of their successful completion of their Chapter 11 case.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1998, working capital was $1,011,329 and cash and cash
equivalents totaled $602,456. The Company has funded its operations primarily
through the issuance of securities. Cash and cash equivalents increased $124,781
during fiscal year 1998. Net cash used in operating activities of $2,423,080 and
additions to property and equipment of $417,225 were offset by the net proceeds
from a new issuance of convertible debt in the amount of $2,720,000 and the
proceeds from stock option exercises of $247,807. Of the convertible debt
amount, $2,445,000 was subsequently converted into common shares of the Company.
The Company's liquidity for the next twelve months is anticipated to be
supplemented by sales, including sales derived from a major contract for a DVD
controller card in a kiosk application, and licensing of PSC1000
microprocessors.
20
<PAGE> 21
The Company anticipates that it may require additional equipment,
fabrication, components and supplies during the next twelve months to continue
development of the Company's technologies. Product introductions such as those
currently underway for communication products and the PSC1000 microprocessor may
require significant inventory and other expenditures not presently estimable by
management. Further, if expanded development is commenced or new generations of
microprocessors or radar are accelerated beyond current plans, additional
expenditures, not currently estimable by management, may be required. It is
possible therefore, that higher levels of expenditures may be required than
currently contemplated by management resulting from changes in development plans
or as required to support new developments or commercialization activities or
otherwise.
Based on the potential rate of cash operating expenditures and current
plans, management anticipates the cash requirements for the next twelve will be
satisfied by improved product sales, the sale of additional Company equity
securities, debt financing and/or the sale or licensing of certain of the
Company's technologies. There can be no assurance that any future funds required
will be generated from operations or from the aforementioned or other potential
sources. The lack of additional capital could force the Company to substantially
curtail or cease operations and would therefore have a material adverse effect
on the Company's business. Further, there can be no assurance that any such
required funds, if available, will be available on attractive terms or that they
will not have a significantly dilutive effect on existing shareholders of the
Company.
TAX LOSS CARRYFORWARDS
As of May 31, 1998, the Company has approximately $8,677,000 of tax loss
carryforwards. A valuation allowance has been recorded for the net deferred tax
asset of $4,131,000 arising primarily from tax loss carryforwards because
management can not determine that it is more likely than not that the deferred
tax asset will not be realized. See Note 8 to the Consolidated Financial
Statements.
YEAR 2000 COMPLIANCE
The Company, like most owners of computer software, will be required to
modify significant portions of its software so that it will function properly in
the year 2000. Preliminary estimates of the total costs to be incurred by the
Company to resolve this problem range from $20,000 to $30,000. Since the Company
mainly uses third party "off-the-shelf" software, it does not anticipate a
problem in resolving the year 2000 problem in a timely manner. Maintenance or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that displays with the same
prominence as other financial statements. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of the standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of the
standards.
21
<PAGE> 22
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal periods beginning after June 15, 1999. Management believes
the adoption of this statement will have no material impact on the Company's
financial statements.
FOURTH QUARTER ADJUSTMENTS
The Company recorded in the fourth quarter certain adjustments relative to
non-cash interest expense related to convertible debt and associated debenture
costs and a write-down of inventory due to obsolescence amounting to an
aggregate of $2,100,000 which are discussed in Notes 5 and 6 to the
consolidated financial statements. Of the aggregate amount, $1,000,000 and
$1,100,000 related to the third and fourth quarters, respectively. The Company
plans to file an amended Form 10-QSB for the quarter ended February 28, 1998.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item begin on page F-1 with
the index to consolidated financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Registrant, their
ages, positions held in the Company and duration as such, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES DIRECTOR SINCE
<S> <C> <C> <C>
Elwood G. Norris 59 Chairman and Director August 1989
James T. Lunney 43 President, CEO and Director April 1998
Donald R. Bernier 56 Director January 1995
Michael A. Carenzo 57 Director June 1996
Norman J. Dawson 57 Vice President, General Manager
and Director January 1997
Helmut Falk, Jr 42 Director December 1997
Richard D. McDaniel 73 Director December 1995
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES DIRECTOR SINCE
<S> <C> <C> <C>
Lowell W. Giffhorn 51 Chief Financial Officer n/a
Jayanta K. Maitra 48 Vice President Engineering n/a
Philip Morettini 41 Vice President Sales & Marketing n/a
Robert Putnam 40 Secretary n/a
</TABLE>
The terms of all directors will expire at the next annual meeting of the
Company's shareholders, or when their successors are elected and have qualified.
Directors are elected each year, and all directors serve one-year terms.
Officers serve at the pleasure of the Board of Directors. No family relationship
exists among the Company's management members.
BIOGRAPHICAL INFORMATION
ELWOOD G. NORRIS. Mr. Norris has been a director of Patriot since 1989
and served as Chairman and CEO until June 1994. In June 1995, he was again
appointed President and CEO until June 1996 when he was appointed Chairman.
Since March 1988, he has been a director of Norris Communications Inc. ("NCI"),
a public company engaged in electronic product development, distribution and
sales. Until October 1995, when he became Chief Technology Officer, he was also
President of NCI, and in January 1997 he was appointed interim CEO. Since August
1980, he has also been a director of American Technology Corporation ("ATC"), a
publicly held consumer electronics products company, and served as its President
and CEO until February 1994. Mr. Norris is an inventor with over twenty U.S.
patents primarily in the fields of electrical and acoustical engineering. He
invented the base GPR technology and the gas antenna technology owned by the
Company. Mr. Norris devotes only part-time services to the Company.
JAMES T. LUNNEY. Mr. Lunney has been the President and Chief Executive
Officer since March, 1998 and was appointed as a director in April, 1998. From
February, 1997 to March, 1998, he was the President of Signal Processing
Systems, a San Diego manufacturer of signal processing technologies. From
November, 1992 to February, 1997, he was Manager of Production Programs and Vice
President and Business Area Manager for Signal Processing which until August,
1996 was a division of Scientific Atlanta before it was acquired by Global
Associates Ltd. Previously, he held various managerial positions with GE
Aerospace, Defense Systems Division and Ordnance Systems Division. In 1977, he
obtained a B.S. in Electrical Engineering from Worcester Polytechnic Institute.
DONALD R. BERNIER. Since 1971, Mr. Bernier has been the owner and
President of Compunetics Incorporated, a Troy, Michigan-based electronics firm
of which he the founder. Compunetics engages in contract research and
development, specializing in microelectronics primarily for the automotive
industry.
MICHAEL A. CARENZO. Mr. Carenzo was the President and CEO of the Company
from June 1996 to March 1998. He continues to be a director of the Company.
Previously, he was a Senior Partner of CADWA Associates, a management consulting
group from July 1994 to December 1996. From February 1992 to June 1994, he
served as President and Director of Datakey Inc., a Minnesota public company
engaged in semiconductor-based manufacturing of portable memory devices. Prior
to February 1992, Mr. Carenzo served 22 years with the DuPont Co. Mr. Carenzo is
a 1966 graduate of American International College where he received a B.S.
degree in Business.
NORMAN J. DAWSON. Mr. Dawson has been the President & CEO of Metacomp
since July, 1995 and was appointed a Director and Vice President and General
Manager of the Company in January 1997. From June, 1990 to July 1995, he was
Vice President-Operations of Metacomp. From 1962 to 1990, he held various
executive positions with several computer companies including NCR and Control
Data. In 1962, Mr. Dawson obtained a B.S. in Engineering from Montreal Institute
of Technology.
HELMUT FALK, JR. For the past five years, Dr. Falk has been the Director
of Anesthesia for the Johnson Memorial Hospital in Franklin, Indiana. Dr. Falk
received his D.O. from the College of Osteopathic Medicine of the Pacific in
1987 and his B.S. in Biology from the University of California, Irvine in 1983.
Dr. Falk is the son of the late Helmut Falk, who was the sole shareholder of
nanoTronics and the Chairman and Chief Executive Officer of the
23
<PAGE> 24
Company until his death in July, 1995. Dr. Falk is also an heir in the Helmut
Falk Estate which is the beneficial owner of the Company's shares held by the
Helmut Falk Family Trust and nanoTronics Corporation.
RICHARD D. MCDANIEL. Mr. McDaniel retired as Chairman and CEO of The
First National Bank of North East, Maryland in 1987. He is presently engaged in
private investment banking and personal investments. Since 1960, he has been the
Chairman of McDaniel Enterprises, Inc., a Wilmington, Delaware based family
holding company. In July 1995, he became Chairman of Smart Business Systems, a
copier and facsimile equipment distributor located in Wilmington. He graduated
with a degree in Business from the University of Delaware in 1950.
LOWELL W. GIFFHORN. Mr. Giffhorn was the principal in his own financial
management consulting firm from August 1996 until joining the Company as Chief
Financial Officer in May 1997. Since November 1996, Mr. Giffhorn, in addition to
other consulting engagements, performed the duties of Acting Chief Financial
Officer for the Company. From June 1992 to August 1996 and from September 1987
to June 1990, he was the Chief Financial Officer of Sym-Tek Systems, Inc. and
Vice President of Finance for its successor, Sym-Tek Inc. Sym-Tek Systems, Inc.
was a major supplier of capital equipment to the semiconductor industry that
filed under Chapter 11 of the U.S. Bankruptcy Code in May 1994 while Mr.
Giffhorn was the Chief Financial Officer. He was instrumental in selling the
assets of Sym-Tek Systems, Inc. to Sym-Tek Inc., a wholly owned subsidiary of
Aetrium Inc. He continued with Sym-Tek Inc. as Vice President Finance during the
transition and concluded the liquidation of Sym-Tek Systems, Inc. He has over
twenty-five years of experience in a variety of financial positions, including
eleven years as Controller for Langley Corporation, a publicly traded, San
Diego, defense contractor. In 1975, Mr. Giffhorn obtained a M.B.A. degree from
National University, and in 1969 he obtained a B.S. in Accountancy from the
University of Illinois.
JAYANTA K. MAITRA. Mr. Maitra has been Vice President of Engineering of
Metacomp since 1990 and was appointed Vice President of Engineering of the
Company in January 1997. From 1985 to 1987, he was Manager of Hardware
Engineering for Systech Corporation, a San Diego based hardware and software
communications company. From 1974 to 1985 he held various engineering positions
with several computer related technology companies. He obtained a B.S. in
Electrical Engineering from the Indian Institute of Technology in 1972 and a
M.S. in Electrical Sciences at State University of New York in 1973.
PHILIP MORETTINI. Mr. Morettini has been the Vice President of Sales and
Marketing since July, 1997. From September, 1995 to April, 1997, he was the
President and CEO of Adept Computer Solutions, a San Diego software company.
From December, 1993 to September, 1995, he was the principal in his own
management consulting firm and from March, 1990 to September, 1993, he held
several positions, including Division Manager, for Horizons Technology, a San
Diego software and services company. Previously, he held various marketing and
product development positions with Spectragraphics and Hewlett-Packard. In 1981
Mr. Morettini received a M.B.A. degree from the University of Detroit, and in
1979 he obtained a B.S. in Engineering form the University of Illinois.
ROBERT PUTNAM. Mr. Putnam has been the Secretary and Treasurer of the
Company since 1989 and was a director of the Company from 1989 to April 1998.
Since 1988 he has served as Secretary of NCI. Since 1984 he has been a director
of ATC, where he served as Secretary/Treasurer from 1984 and as President and
CEO from February 1994 until September 1997. He received a B.A. degree in Mass
Communication/Advertising from Brigham Young University in 1983. Mr. Putnam
devotes only part-time services to the Company.
GENERAL CONFLICTS OF INTEREST
Conflicts of interest now exist and will continue to exist between the
Company and certain of its officers and directors due to the fact that certain
officers and directors have other employment or business interests to which they
devote attention. The Company has not established policies or procedures for the
resolution of current or potential conflicts of interest between the Company and
its management or management-affiliated entities. There can be no assurance that
members of management will resolve all conflicts of interest in the Company's
favor.
It is conceivable that the respective areas of interest of the Company,
ATC and NCI could overlap or conflict. The Company believes that, although each
of the three corporations is involved in the electronics industry, their
respective areas of focus, products and technology are sufficiently distinct
that no conflict in business lines or
24
<PAGE> 25
executive loyalties will result. Therefore, no steps have been taken to resolve
possible conflicts among the Company, ATC, and NCI; and any such conflicts,
should they arise, will be addressed at the appropriate time.
SPECIAL CONFLICTS OF INTEREST
Robert Putnam also acts as Secretary of NCI and ATC. Both of these
companies are effectively controlled by Elwood Norris. The possibility exists
that these other relationships could affect Mr. Putnam's independence as an
officer of the Company.
The Company has not provided a method of resolving these conflicts (such
as refusal from voting as directors and obtaining an independent third-party
evaluation of proposed actions) and probably will not do so, partly due to
inevitable extra expense and delay any such measures would occasion and partly
because Mr. Norris does not represent a majority of the Board of Directors and
does not control the outside directors. Mr. Norris is obligated to perform his
duties in good faith and to act in the best interest of the Company and its
shareholders, and any failure on his part to do so would constitute a breach of
his fiduciary duties and expose him to damages and other liability under
applicable law.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
As permitted by Delaware law, the Company's Certificate of Incorporation
provides that the Company will indemnify its officers, directors, employees and
agents against attorneys' fees and other expenses and liabilities they incur to
defend, settle or satisfy any civil or criminal action brought against them
arising out of their association with or activities on behalf of the Company
unless, in any such action, they are adjudged to have acted with gross
negligence or to have engaged in willful misconduct. The Company may also bear
the expenses of such litigation for any such persons upon their promise to repay
such sums if it is ultimately determined that they are not entitled to
indemnification. Such expenditures could be substantial and may not be recouped,
even if the Company is so entitled. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in that
Act and may, therefore, unenforceable.
EXCLUSION OF DIRECTOR LIABILITY
Pursuant to the General Corporation Law of Delaware, the Company's
Certificate of Incorporation excludes personal liability on the part of its
directors to the Company for monetary damages based upon any violation of their
fiduciary duties as directors, except as to liability for any breach of the duty
of loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, acts in violation of Section 174 of
the General Corporation Law of Delaware, or any transaction from which a
director receives an improper personal benefit. This exclusion of liability does
not limit any right which a director may have to be indemnified and does not
affect any director's liability under federal or applicable state securities
laws.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Act")
requires the Company's officers, directors and persons who own more than 10% of
a class of the Company's securities registered under Section 12(g) of the Act to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10%
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of copies of the reports it has received from
persons required to make such filings and its own records, the Company believes
that from the period June 1, 1997 through July 15, 1998, all persons subject to
the Section 16(a) reporting requirements timely filed the required reports.
25
<PAGE> 26
ITEM 10. EXECUTIVE COMPENSATION
There is shown below information concerning the compensation of the
Company's chief executive officers and each of the other four most highly
compensated executive officers whose salary and bonus exceeded $100,000 (each a
"Named Officer") for the fiscal years ended May 31, 1996, 1997 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Cash Compensation Long-Term Compensation
------------------------- ----------------------
Name and Fiscal Options All Other
Principal Position Year Salary Bonus (# of Shares) Compensation(7)
- ------------------ ------ ------ ----- ------------- ---------------
<S> <C> <C> <C> <C> <C>
James T. Lunney 1998 $ 26,385 Nil 350,000 shares None
President and CEO (1)
Michael A. Carenzo 1998 $164,133 Nil 525,691 shares None
President and CEO (2) 1997 $138,000 Nil 900,000 shares None
Elwood G. Norris 1996 $ 60,693 Nil 50,000 shares None
President and CEO (3)
Helmut Falk 1996 $ 9,231 Nil None None
President and CEO (4)
Norman J. Dawson 1998 $114,169 Nil 425,000 None
Vice President and 1997 $128,483 Nil 533,953 $4,241
General Manager (5)
Jayanta K. Maitra 1998 $104,500 Nil 485,753 None
Vice President 1997 $118,700 Nil 535,753 $2,874
Engineering (6)
</TABLE>
(1) Mr. Lunney has served as President and CEO since March 23, 1998.
(2) Mr. Carenzo served as President and CEO from June 1, 1996 to March
1998 when Mr. James T. Lunney was appointed President and CEO.
(3) Mr. Norris served as CEO from 1989 to June 1994, when Mr. Falk
became Chairman, President and CEO. He was reappointed President and CEO
on June 5, 1995 due to Mr. Falk's illness and served in such capacity
until June 1, 1996, when Mr. Carenzo was appointed President and CEO.
(4) Mr. Falk served as Chairman from June 1994 until his death on July
6, 1995. He also served as President and CEO from June 1994 to June 5,
1995.
(5) Mr. Dawson was appointed Vice President and General Manager on
December 26, 1996 as a result of the business combination with Metacomp.
The amounts disclosed reflect his compensation before and after the
acquisition.
(6) Mr. Maitra was appointed Vice President Engineering on December 26,
1996 as a result of the business combination with Metacomp. The amounts
disclosed reflect his compensation before and after the acquisition.
(7) Represents long-term disability insurance payments made by the
Company on behalf of Mr. Dawson and Mr. Maitra during the fiscal year
ended May 31, 1997.
26
<PAGE> 27
The Company maintains employee benefits that are generally available to
all Company employees, including medical, dental and life insurance benefits and
a 401(k) retirement savings plan. There was no Company matching contributions
under the 401(k) plan to the Named Officers during the fiscal year ended May 31,
1998.
OPTION GRANTS
Shown below is information on grants of stock options pursuant to the
Company's 1996 Stock Option Plan to the Named Officers reflected in the Summary
Compensation Table shown above.
OPTION GRANTS TABLE FOR FISCAL YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
Percent of Total
Number of Options Granted Exercise Expiration
Name Options Granted to Employees in Fiscal Year Price Date
---- --------------- --------------------------- -------- ----------
<S> <C> <C> <C> <C>
James T. Lunney 350,000 23.2% $ 0.86 2/22/2003
Michael A. Carenzo 50,000 3.3% $ 0.59 1/26/2003
Elwood G. Norris 50,000 3.3% $ 0.59 1/26/2003
Norman J. Dawson 50,000 3.3% $ 0.59 1/26/2003
Jayanta K. Maitra 25,000 1.7% $ 0.59 1/26/2003
</TABLE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
Shown below is information on exercises of stock options and fiscal
year-end values pursuant to the Company's 1996 and 1992 Stock Option Plans to
the Named Officers reflected in the Summary Compensation Table shown above.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
Shares May 31, 1998 May 31, 1998(1)
Acquired Value ------------ ---------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Michael A. Carenzo 40,200 $53,466 525,691 -- $8,000 $ -
Norman J. Dawson 54,600 $61,666 50,000 375,000 $ - $ -
Elwood G. Norris -- -- 100,000 -- $8,000 $ -
James T. Lunney -- -- 116,667 233,333 $ - $ -
Jayanta Maitra -- -- 110,753 375,000 $24,379 $ -
</TABLE>
(1) Based on the last sale price at the close of business on the last trading
day of the fiscal year of $.75.
The Company has not awarded stock appreciation rights to any employee of
the Company and has no long-term incentive plans, as that term is defined in SEC
regulations (other than a $50,000 demonstration bonus payable to Mr. Norris upon
successful demonstration of a prototype GPR device meeting specified performance
criteria, see "Certain Transactions").
During the fiscal year ended May 31, 1998, pursuant to Mr. Dawson's and
Mr. Mairta's Employment Contracts, the Board of Directors of the Company
cancelled 75,000 previously granted stock options to each and reset the vesting
schedule on an additional 75,000 previously granted stock options to each as a
result of the Company not meeting certain performance goals. As a result of Mr.
Carenzo's resignation in March, 1998, 337,500 previously granted stock options
were cancelled. The Company has no defined benefit or actuarial plans covering
any person.
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<PAGE> 28
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by the
Company to the directors in their capacity as directors other than the granting
of stock options. It is anticipated that during the next twelve months the
Company will not pay any direct or indirect remuneration to any directors of the
Company in their capacity as directors other than in the form of stock option
grants or the reimbursement of expenses of attending directors' or committee
meetings.
EMPLOYMENT CONTRACTS
Mr. Norris may be entitled to future compensation pursuant to agreements
described in "Certain Transactions". The Company has an employment agreement
dated November 20, 1995 and amended on July 14, 1997 with Mr. Norris, the
Company's Chairman, for a three year term providing for a base salary of
$31,500. The Company may terminate Mr. Norris' employment with or without cause,
but termination without cause (other than disability or death) would result in a
lump sum severance payment of 24 months salary. Likewise upon a change in
control, as defined in the agreement, Mr. Norris may elect to terminate
employment and obtain a lump sum severance payment of 24 months salary.
The Company entered into an employment agreement dated as of February
23, 1998 and approved by the Company's directors on March 24, 1998, with Mr.
Lunney providing for his employment as President and CEO effective March 23,
1998. The agreement is for a three year term providing for a base salary of
$130,000 per annum for the first year with an increase in the second year to at
least $140,000 per annum. The base salary may be increased at the discretion of
the Board of Directors. The agreement provides for a guaranteed bonus of 25% at
the end of the first year or on certain changes in control as defined in the
agreement. During subsequent years, Mr. Lunney is eligible for a bonus equal to
25% of the base salary conditioned on Mr. Lunney meeting certain objectives
established by the Board of Directors. In addition, the agreement provides a
$600 per month car allowance. The Company may terminate Mr. Lunney's employment
with or without cause, but termination without cause (other than disability or
death) would result in a lump sum severance payment ranging, depending on length
of service, from six to twelve months salary plus any prorated earned bonuses.
Also, upon a change of control, as defined in the agreement, Mr. Lunney may
elect to terminate employment and obtain a lump sum severance payment equal to
the base salary for the remaining months of the agreement. The Company has
granted Mr. Lunney options to purchase 350,000 common shares, 116,667 vesting on
March 23, 1998 and the balance vesting equally at the end of twelve and
twenty-four months from the date of the agreement subject to earlier vesting in
the event of a change in control of the Company.
The Company entered into an employment agreement dated as of July 28,
1997 and approved by the Company's directors on August 18, 1997, with Mr.
Morettini providing for his employment as Vice President of Sales and Marketing.
The agreement is for a three year term providing for a base salary of $110,000
per annum for the first year and not less than $110,000 per annum during the
second and third years of the agreement. The base salary may be increased at the
discretion of the Board of Directors. The agreement provides for a bonus up to
50% of the annual base consideration for the applicable year. The Company may
terminate Mr. Morettini's employment with or without cause, but termination
without cause (other than disability or death) would result in a lump sum
severance payment equal to four months of the then current base salary. If
within twelve months of a change in control, as defined in the agreement, Mr.
Morettini's employment is terminated for other than cause or if Mr. Morettini
refuses to accept or voluntarily resigns from a position other than a qualified
position, as that term is defined in the agreement, then he will receive a lump
sum severance payment equal to twelve months of his then current salary. Under
the agreement, the Company granted Mr. Morettini options to purchase 300,000
common shares, 30,000 vesting on July 28, 1997 and the balance vesting one-third
per year starting July 28, 1998, subject to certain performance standards.
Options may vest earlier subject to the discretion of the Board of Directors.
The Company entered into an employment agreement dated as of July 23,
1998 with Mr. Giffhorn providing for his employment as the Chief Financial
Officer. The agreement is for a three year term providing for a base salary of
$110,000 per annum for the first year and not less than $110,000 per annum
during the second and third years of the agreement. The base salary may be
increased at the discretion of the Board of Directors. The agreement provides
for a bonus up to 50% of the annual base consideration for the applicable year.
The Company may terminate Mr. Giffhorn's employment with or without cause, but
termination without cause (other than disability or death) would result in a
lump sum severance payment equal to four months of the then current base salary.
If within twelve months
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<PAGE> 29
of a change in control, as defined in the agreement, Mr. Giffhorn's employment
is terminated for other than cause or if Mr. Giffhorn refuses to accept or
voluntarily resigns from a position other than a qualified position, as that
term is defined in the agreement, then he will receive a lump sum severance
payment equal to twelve months of his then current salary.
The Company entered into an employment agreement dated January 1, 1997
with Mr. Dawson providing for his employment as Vice President and General
Manager. The agreement is for a three year term providing for a base salary of
$120,000 per year with an increase in the second and third years as recommended
by the President and Chief Executive Officer and approved by the Board of
Directors. The agreement provides for incentive bonuses in certain instances of
up to 50% of the total yearly base compensation. The Company may terminate Mr.
Dawson's employment with or without cause, but termination without cause (other
than disability or death) during either of the first two years of the agreement
would result in a lump sum severance payment equal to twelve months salary. The
Company originally granted Mr. Dawson under the agreement options to purchase
500,000 common shares, 50,000 vesting on December 26, 1996 and the balance
vesting one-third per year starting December 31, 1997 subject to certain
performance standards. As a result of not meeting the performance standards, the
Board of Directors cancelled 75,000 of such options and reset the vesting date
on an additional 75,000 options from December 31, 1997 to December 31, 1998.
Options may vest earlier subject to the discretion of the Board of Directors.
The Company entered into an employment agreement dated January 1, 1997
with Mr. Maitra providing for his employment as Vice President of Engineering.
The agreement is for a three year term providing for a base salary of $104,400
per year with an increase in the second and third years as recommended by the
President and Chief Executive Officer and approved by the Board of Directors.
Mr. Maitra's salary was increased to $120,000 for the second year. The agreement
provides for incentive bonuses in certain instances of up to 50% of the total
yearly base compensation. The Company may terminate Mr. Maitra's employment with
or without cause, but termination without cause (other than disability or death)
during the first year of the agreement would result in a lump sum severance
payment equal to twelve months salary. The Company originally granted Mr. Maitra
under the agreement options to purchase 500,000 common shares, 50,000 vesting on
December 26, 1996 and the balance vesting one-third per year starting December
31, 1997 subject to certain performance standards. As a result of not meeting
the performance standards, the Board of Directors cancelled 75,000 of such
options and reset the vesting date on an additional 75,000 options from December
31, 1997 to December 31, 1998. Options may vest earlier subject to the
discretion of the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 13, 1998, the stock ownership
of each officer and director of the Company, of all officers and directors of
the Company as a group, and of each person known by the Company to be a
beneficial owner of 5% or more of its Common Stock. Except as otherwise noted,
each person listed below is the sole beneficial owner of the shares and has sole
investment and voting power over such shares. No person listed below has any
option, warrant or other right to acquire additional securities of the Company,
except as otherwise noted.
<TABLE>
<CAPTION>
Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
- -------- ----- --------- --------
<S> <C> <C> <C>
Common stock Gloria Felcyn, CPA 9,092,535 (1) 23.0%
par value 14395 Saratoga Ave., Suite 110
$.00001 Saratoga, California 95070
SAME Helmut Falk Family Trust 4,592,535 (3) 11.6%
Gloria Felcyn, Trustee
14395 Saratoga Ave., Suite 110
Saratoga, California 95070
</TABLE>
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<PAGE> 30
<TABLE>
<CAPTION>
Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
- -------- ----- --------- --------
<S> <C> <C> <C>
SAME Elwood G. Norris 4,572,500 (4) 11.6%
10989 Via Frontera
San Diego, California 92127
SAME nanoTronics Corporation 4,500,000 (2) 11.4%
attn: Gloria Felcyn, CPA
14395 Saratoga Ave., Suite 110
Saratoga, California 95070
SAME Richard D. McDaniel 1,000,000 (4)(5)(6) 2.5%
10989 Via Frontera
San Diego, California 92127
SAME Michael A. Carenzo 525,691 (7) 1.3%
10989 Via Frontera
San Diego, California 92127
SAME Jayanta K. Maitra 298,095 (4) *
10989 Via Frontera
San Diego, California 92127
SAME Norman J. Dawson 163,929 (4) *
10989 Via Frontera
San Diego, California 92127
SAME Donald R. Bernier 125,000 (4) *
10989 Via Frontera
San Diego, California 92127
SAME Philip Morettini 121,000 (4) *
10989 Via Frontera
San Diego, California 92127
SAME Lowell W. Giffhorn 120,000 (7) *
10989 Via Frontera
San Diego, California 92127
SAME James T. Lunney 116,667 (7) *
10989 Via Frontera
San Diego, California 92127
SAME Robert Putnam 75,000 (4) *
10989 Via Frontera
San Diego, California 92127
SAME Helmut Falk, Jr. 50,000 (7) *
10989 Via Frontera
San Diego, California 92127
All directors & officers 7,167,882 (8) 18.1%
as a group (11 persons)
</TABLE>
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<PAGE> 31
* Less than 1%.
1 As trustee of the Helmut Falk Family Trust and executor of the Helmut
Falk estate, Ms. Felcyn effectively controls the shares described in Notes
2 and 3 below.
2 These shares have been issued but are subject to an escrow arrangement
as described in "Certain Transactions" below. The shares were originally
issued to nanoTronics in connection with the ShBoom technology
acquisition.
3 These shares remain from 5,000,000 non-escrowed originally issued shares
plus 500,000 shares released from escrow and issued to nanoTronics in
connection with the ShBoom technology acquisition. These shares were
subsequently transferred to the Helmut Falk Family Trust.
4 For each of Messrs. Norris and McDaniel the amount includes 100,000
shares, for each of Mssrs. Bernier, Dawson and Putnam the amount includes
50,000 shares, for Mr. Maitra the amount includes 110,753 shares, and for
Mr. Morettini the amount includes 120,000 shares issuable upon the
exercise of immediately exercisable outstanding stock options granted
pursuant to the 1996 and 1992 Stock Option Plans.
5 Includes 900,000 common shares held by Sea Ltd., a corporation through
which Mr. McDaniel may direct certain investment powers.
6 Mr. McDaniel is pursuing a claim against the Falk estate based on a
written agreement with Mr. Falk pursuant to which he believes he is
entitled to 5% of Patriot common shares (representing 275,000 shares held
outside of escrow and 225,000 shares held in escrow for a total of 500,000
common shares) held by nanoTronics (see Notes 2 and 3). Representatives of
nanoTronics have advised the Company that they believe Mr. McDaniel's
claim relates only to an interest in nanoTronics and that he therefore has
no direct interest in nanoTronics' Patriot common shares until and if the
claim is resolved. The additional 500,000 shares claimed by Mr. McDaniel
are not included in Mr. McDaniel's holdings described herein since he
cannot presently exert investment or voting control over the shares and
there can be no assurance he will prevail in his claim.
7 Consists entirely of shares issuable upon the exercise of outstanding
stock options.
8 Includes 5,774,771 shares issued and outstanding and 1,393,111 shares
issuable upon exercise of stock options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions, or series of transactions, during fiscal
1997 or 1998, nor are there any currently proposed transactions, or series of
transactions, to which the Company is a party, in which the amount exceeds
$60,000, and in which to the knowledge of the Company any director, executive
officer, nominee, five percent or greater shareholder, or any member of the
immediate family of any of the foregoing persons, have or will have any direct
or indirect material interest other than described below.
Pursuant to an Assets Purchase Agreement and Plan of Reorganization
("Purchase Agreement") dated June 22, 1994 between the Company, nanoTronics
Corporation ("nanoTronics") and Helmut Falk ("Falk"), the Company issued a total
of 10,000,000 restricted common shares to nanoTronics, 5,000,000 of which were a
contingent payment subject to the terms of an earnout escrow. These shares were
issued in consideration of technology acquired.
nanoTronics was formed in 1991 and acquired certain base technology for
a RISC-based (Reduced Instruction Set Computing) 32-bit microprocessor
integrated on a single microprocessor with merged stack/register architecture
from the co-inventor of the technology. nanoTronics expended in excess of $1.9
million (unaudited) while engaged in further development of that technology and
produced from the basic architecture an enhanced microprocessor
(ShBoom-architecture microprocessor). In connection with the acquisition, the
Company also acquired certain fixed
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<PAGE> 32
assets including a Sun Sparc 2 Work Station and various terminals, peripheral
devices and software. A majority of the expenditures by nanoTronics consisted of
microprocessor and related software development costs. The result of these
efforts was a successful initial fabrication of the microprocessor in early 1994
demonstrating technical feasibility of the ShBoom architecture. nanoTronics also
expended funds on the preparation and prosecution of patent applications.
The shares were issued to nanoTronics of which Falk was the sole
shareholder. Although 4,500,000 of the shares issued remain subject to the terms
of an earnout escrow, as more fully described below, all of the shares are
issued for the purpose of dividends and voting. Prior to the transaction, Mr.
Falk was not affiliated person with the Company. At the time of issuance, the
10,000,000 common shares represented approximately 36% of the total issued and
outstanding shares of the Company.
Although the transaction did not result in a change in a majority of the
board of directors of the Company or a change in majority stock ownership of
Company, the issuance of the new stock resulted in a large percentage ownership
controlled by one entity with the ability to have significant influence over the
Company's future affairs.
Pursuant to the terms of the Purchase Agreement, 5,000,000 of the common
shares were issued to nanoTronics pursuant to an earnout escrow arrangement as a
contingent purchase price. The terms of the escrow arrangement, as defined in
the Purchase Agreement, provide for the release from escrow of 500,000 common
shares for each $500,000 of Patriot revenues commencing June 1, 1994 and ending
May 31, 1999. The Purchase Agreement also provides for a release of shares in
the event of other major corporate events, including a sale of substantially all
the assets of the Company, certain mergers, combinations or consolidations,
certain tender offers and upon a liquidation or dissolution. Any shares not
earned by May 31, 1999 would be canceled. The shares may be sold, assigned or
transferred within the escrow arrangement but would still be subject to the
escrow terms. As of May 31, 1998, 500,000 shares have been released from escrow,
an additional 2,000,000 shares may have been earned but remain in escrow pending
the outcome of continuing discussions between the Company, nanoTronics and one
of the co-inventors of the technology, and 2,500,000 shares are held in escrow
contingent on the future revenue of the Company.
In March 1998, the Company received a draft complaint prepared on behalf
of the co-inventor of the ShBoom technology naming as defendants the Company,
nanoTronics, and Gloria Felcyn, as trustee of the Helmut Falk Family Trust.
Among other things, the complaint alleged that the transfer of the technology by
nanoTronics to the Company was made with an intent to defraud the co-inventor
and without receiving a reasonably equivalent value in exchange. The first cause
of action sought, among other things, a declaration from the San Diego County
Superior Court that the Company and nanoTronics are obligated to pay royalties
to the co-inventor and that the Assets Purchase Agreement was fraudulent as to
the co-inventor. The second cause of action sought rescission of the Technology
Transfer Agreement and restitution of the ShBoom technology to the co-inventor.
The third cause of action sought to impose a constructive trust on the Company
in favor of the co-inventor. The Company disputes each of these claims on the
basis that the only consideration due from nanoTronics to the co-inventor has
been tendered in full, that the Asset Purchase Agreement was not fraudulent, and
that the equitable remedies of recission and restitution are not available given
the Company's investment in the development of the ShBoom technology. The
Company continues to be liable however, under its indemnification in favor of
nanoTronics, for up to $1,250,000 of costs if a court of competent jurisdiction
determines that nanoTronics is liable to the co-inventor for cash royalties
based on sales by the Company of products incorporating the ShBoom technology.
In April 1998, the Company, nanoTronics, and the co-inventor entered
into an agreement to toll any applicable statutes of limitations for a period of
up to one year for the purpose of attempting to resolve the claim.
In June 1998, the Company, nanoTronics, and the co-inventor entered into
a nonbinding agreement in principle to settle the dispute in consideration of
mutual full releases and the Company assigning patents on the ShBoom technology
back to the co-inventor in exchange for the co-inventor granting a fully-paid,
worldwide, subliceneable license to use the ShBoom technology patents exclusive
in the Company's existing and future fields of use. In addition, nanoTronics
agreed to release any obligation of the Company to deliver a number of shares of
the Company's stock pursuant to the Assets Purchase Agreement, which stock will
be retired. Settlement documentation has been exchanged between the parties,
although disputes remain concerning terms contained within the documents. The
Company is unable at this time to determine whether such disputes will be
resolved.
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<PAGE> 33
The Company has granted certain registration and information rights with
respect to the shares issued to nanoTronics, such rights being assignable to
Falk and the co-inventor (who has certain rights to become a shareholder in
nanoTronics). The Company has been advised that nanoTronics has been liquidated
with the 10,000,000 shares being transferred to the Helmut Falk Family Trust
which is entitled to the same registration rights. The Company is obligated to
use its best efforts to effect a registration upon written request up to two
times subject to certain limitations. The Company is also obligated to include
the shares, subject to certain limitations, in any underwriting and in any other
registration filed by the Company. The Company registered 500,000 of these
shares on a Form SB-2 registration that became effective September 11, 1997.
Under the terms of an Agreement to Exchange Technology for Stock dated
August 8, 1989 between Mr. Norris and the Company, Mr. Norris is entitled to a
royalty equal to two and one-half percent (2.5%) of the gross revenues received
by the Company directly or indirectly from exploitation of its GPR technology
(up to a maximum royalty of $400,000), against which an advance royalty payment
of $17,000 already has been made. Mr. Norris also is entitled to a cash bonus of
$50,000 within 45 days after the Company successfully demonstrates a working
prototype of a GPR unit meeting specified performance criteria and a request for
such bonus is made to the Board of Directors and approved.
In June 1996, the Company appointed Compunetics Incorporated, a private
company controlled by Mr. Bernier, as its exclusive ShBoom microprocessor
representative to the three major U.S. auto producers.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list and index of Exhibits required by Item 601 of
Regulation S-B along with an indication of the location of the Exhibit:
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exh.No. Document No.
- ------- -------- ---
<S> <C> <C>
2.0 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION.
2.1 Agreement to Exchange Technology for Stock in Patriot Scientific
Corporation, incorporated by reference to Exhibit 2.1 to Form 8-K
dated August 10, 1989 (1)
2.2 Assets Purchase Agreement and Plan of Reorganization dated June 22,
1994, among the Company, nanoTronics Corporation and Helmut Falk,
incorporated by reference to Exhibit 10.4 to Form 8-K dated July 6, 1994 (1)
2.2.1 Amendment to Development Agreement dated April 23, 1996
between the Company and Sierra Systems, incorporated by
reference to Exhibit 2.2.1 to Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2 dated April 29, 1996 (1)
2.3 Form of Exchange Offer dated December 4, 1996 between the Company and
certain shareholders of Metacomp, Inc. incorporated by reference to
Exhibit 2.3 to Form 8-K dated January 9, 1997 (1)
2.4 Letter of Transmittal to Accompany Shares of Common Stock of Metacomp,
Inc. Tendered Pursuant to the Exchange Offer Dated December 4, 1996
incorporated by reference to Exhibit 2.4 to Form 8-K dated January 9,
1997 (1)
3.0 ARTICLES AND BYLAWS.
3.1 Original Articles of Incorporation of the Company's predecessor,
Patriot Financial Corporation, incorporated by reference to
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C>
Exhibit 3.1 to registration statement on Form S-18, file no.
33-23143-FW (1)
3.2 Articles of Amendment of Patriot Financial Corporation, as filed
with the Colorado Secretary of State on July 21, 1988, incorporated
by reference to Exhibit 3.2 to registration statement on Form S-18,
File No. 33-23143-FW (1)
3.3 Certificate of Incorporation of the Company, as filed with the
Delaware Secretary of State on March 24, 1992, incorporated by
reference to Exhibit 3.1 to Form 8-K dated May 12, 1992 (1)
3.3.1 Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Delaware Secretary of State
on April 18, 1995, incorporated by reference to Exhibit 3.3.1
to Form 10-KSB for the fiscal year ended May 31, 1995 (1)
3.3.2 Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Delaware Secretary of State
on June 19,1997, incorporated by reference to Exhibit 3.3.2
to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
3.4 Articles and Certificate of Merger of Patriot Financial Corporation
into the Company dated May 1, 1992, with Agreement and Plan of
Merger attached thereto as Exhibit A, incorporated by reference to
Exhibit 3.2 to Form 8-K dated May 12, 1992 (1)
3.5 Certificate of Merger issued by the Delaware Secretary of State on
May 8, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K
dated May 12, 1992 (1)
3.6 Certificate of Merger issued by the Colorado Secretary of State on
May 12, 1992, incorporated by reference to Exhibit 3.4 to Form 8-K
dated May 12, 1992 (1)
3.7 Bylaws of the Company, incorporated by reference to Exhibit 3.5 to
Form 8-K dated May 12, 1992 (1)
4.0 INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.
4.1 Specimen common stock certificate, incorporated by reference to
Exhibit 4.1 Form 8-K dated May 12, 1992 (1)
4.2 Form of Stock Purchase Warrant (Labway Corporation) dated February 29,
1996, exercisable to purchase 253,166 common shares at $1.58 per share
until August 31, 1996, granted to investors in connection with an
offering of securities made in reliance upon Regulation S, incorporated
by reference to Exhibit 4.2 to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
4.3 Form of 6% Convertible Subordinated Promissory Note due September 30,
1998 aggregating $1,500,000 to six investors incorporated by reference
to Exhibit 4.3 to Form 10-QSB for fiscal quarter ended August 31, 1996 (1)
4.4 Form of 5% Convertible Term Debenture (CC Investments, LDC) due
</TABLE>
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<PAGE> 35
<TABLE>
<S> <C> <C>
June 2, 1999 aggregating $2,000,000 to two investors incorporated
by reference to Exhibit 4.4 to Form 8-K dated June 16, 1997 (1)
4.5 Form of Stock Purchase Warrant (CC Investments, LDC) dated
June 2, 1997 exercisable to purchase an aggregate of 400,000 common
shares at $1.69125 per share until June 2, 2002, granted to two investors
in connection with the offering of securities in Exhibit 4.4 incorporated
by reference to Exhibit 4.5 to Form 8-K dated June 16, 1997 (1)
4.6 Registration Rights Agreement dated June 2, 1997 by and among
the Company and CC Investments, LDC and the Matthew Fund, N.V.
related to the registration of the common stock related to Exhibits
4.4 and 4.5 incorporated by reference to Exhibit 4.6 to Form 8-K
dated June 16, 1997 (1)
4.7 Form of Warrant to Purchase Common Stock (Swartz Family
Partnership, L.P.) dated June 2, 1997 exercisable to purchase an
aggregate of 211,733 common shares at $1.69125 per share until
June 2, 2002, granted to a group of investors in connection with
the offering of securities in Exhibit 4.4 incorporated by reference to
Exhibit 4.7 to Form 8-K dated June 16, 1997 (1)
4.8 Registration Rights Agreement dated June 2, 1997 by and among the
Company and Swartz Investments, LLC related to the registration of
the common stock related to Exhibit 4.7 incorporated by reference to
Exhibit 4.8 to Form 8-K dated June 16, 1997 (1)
4.9 Form of 5% Convertible Term Debenture (CC Investments, LDC) due
June 2, 1999 aggregating $1,000,000 to two investors (2)
4.10 Form of Stock Purchase Warrant (CC Investments, LDC) dated
November 24, 1997 exercisable to purchase an aggregate of 200,000 common
shares at $1.50 per share until June 2, 2002, granted to two investors
in connection with the offering of securities in Exhibit 4.9 (2)
4.11 Form of Warrant to Purchase Common Stock (Swartz Family
Partnership, L.P.) dated November 24, 1997 exercisable to purchase an
aggregate of 105,867 common shares at $1.50 per share until
June 2, 2002, granted to a group of investors in connection with
the offering of securities in Exhibit 4.9 (2)
4.12 Form of Warrant to Purchase Common Stock (Investor Communications Group,
Inc.) dated June 16, 1997 exercisable to purchase an aggregate of
130,000 common shares at prices ranging from $2.50 to $7.50 per share
until June 15, 1999 (2)
4.13 Warrant to Purchase Common Stock issued to Spellcaster Telecommunications,
Inc. dated April 28, 1998 exercisable to purchase an aggregate of 100,000
common shares at $1.25 per share until April 28, 2000 (2)
10.0 MATERIAL CONTRACTS.
10.1 1992 Incentive Stock Option Plan of the Company, incorporated
by reference to Exhibit 10.1 to Form 8-K dated May 12, 1992 (1)
</TABLE>
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<TABLE>
<S> <C> <C>
10.1.1 Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17,
1996 (1)
10.2 1992 Non-Statutory Stock Option Plan of the Company, incorporated by
reference to Exhibit 10.2 to Form 8-K dated May 12, 1992 (1)
10.2.1 Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995
incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal
year ended May 31, 1996 (1)
10.3 Lease Agreement between the Company's subsidiary Metacomp, Inc. and
Clar-O-Wood Partnership, a California limited partnership dated April
11, 1991 as amended November 11, 1992 and November 2, 1995, incorporated
by reference to Exhibit 10.3 to Form 10-KSB for the fiscal year ended
May 31, 1997 (1)
10.4 Stock Purchase Agreement dated November 29 and 30, 1995,
between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4 to Form 8-K dated December 11, 1995 (1)
10.4.1 Letter Amendment to Stock Purchase Agreement dated February 21,
1996, between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
10.5 1995 Employee Stock Compensation Plan of the Company, incorporated by
reference to Exhibit 10.5 to Form 10-QSB for fiscal quarter ended 11/30/95 (1)
10.6 Letter Stock and Warrant Agreement dated January 10, 1996 between the
Company and Robert E. Crawford, Jr., incorporated by reference to
Exhibit 10.6 to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
10.7 Non-Exclusive Manufacturing and Line of Credit Agreement dated
February 28, 1996, between the Company and Labway Corporation,
incorporated by reference to Exhibit 10.7 to Form 10-QSB for
fiscal quarter ended 2/29/96 (1)
10.8 Distribution and Representation Agreement dated February 28,
1996, between the Company and Innoware, Inc., incorporated by
reference to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
10.9 Employment Agreement dated November 20, 1995 between the
Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9
to Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.9.1 First Amendment to Employment Agreement dated May 17, 1996 between the
Company and Elwood G. Norris, incorporated by reference to Exhibit
10.9.1 to Pre-Effective Amendment No. 2 to Registration Statement on
Form SB-2 dated May 23, 1996 (1)
10.10 Employment Agreement dated November 20, 1995 between the
Company and Robert Putnam, incorporated by reference to Exhibit 10.10
to Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.11 Sales Contractual Agreement dated March 19, 1996 between the
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C> <C>
Company and Evolve Software, Inc., incorporated by reference to
Exhibit 10.11 to Pre-Effective Amendment No. 1 to Registration
Statement on Form SB-2 dated April 29, 1996 (1)
10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve
Software, Inc. Providing for the Purchase of up to 50,000 Common Shares
at $2.85, incorporated by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2 dated April 29, 1996 (1)
10.12 Employment Agreement dated as of May 8, 1996 between the Company and
Michael A. Carenzo, including Schedule A - Stock Option Agreement,
incorporated by reference to Pre-Effective Amendment No. 2 to
Registration Statement on Form SB-2 dated May 23, 1996 (1)
10.12.1 First Amendment to Employment Agreement dated May 8, 1996 between the
Company and Michael A. Carenzo dated September 23, 1996, incorporated by
reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal year ended
May 31, 1997 (1)
10.13 1996 Stock Option Plan of the Company dated March 25, 1996 and approved
by the Shareholders on May 17, 1996, incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996 (1)
10.14 Sales Contractual Agreement dated June 20, 1996 between the Company
and Compunetics Incorporated incorporated by reference to Exhibit 10.14 to
Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.15 Sales Contractual Agreement dated July 31, 1996 between the Company and
Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to
Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.16 Employment Agreement dated January 1, 1997 between the Company and
Norman J. Dawson, incorporated by reference to Exhibit 10.16 to Form 10-KSB
for the fiscal year ended May 31, 1997 (1)
10.17 Employment Agreement dated January 1, 1997 between the
Company and Jayanta K. Maitra, incorporated by reference to Exhibit 10.17
to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
10.18 Technology License and Distribution Agreement dated June 23, 1997
between the Company and Sun Microsystems, Inc., incorporated by reference
to Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
10.19 Employment Agreement dated March 23, 1998 between the Company
and James Lunney (2)
10.20 Employment Agreement dated July 28, 1997 between the Company
and Philip Morettini (2)
10.21 Employment Agreement dated July 23, 1998 between the Company
and Lowell W. Giffhorn (2)
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C>
23.0 CONSENTS OF EXPERTS AND COUNSEL.
23.1 Consent of BDO Seidman, LLP (2)
23.2 Consent of Harlan & Boettger, Certified Public Accountants (2)
99.0 ADDITIONAL EXHIBITS.
99.1 Form of ISO Plan Option (Gaspar) dated May 29, 1992,
incorporated by reference to Exhibit 28.2 to registration
statement on Form SB-2, file no. 33-57858 (1)
99.2 Form of NSO Plan Option (Berlin) dated May 29, 1992,
incorporated by reference to Exhibit 28.3 to registration
statement on Form SB-2, file no. 33-57858 (1)
99.3 Form of Incentive Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreements differ as to number of shares, dates,
prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
99.4 Form of NonQualified Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreement differ as to number of shares, date,
prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
99.5 Press Release of the Company dated November 4, 1996 incorporated by
reference to Exhibit 99.5 to Form 8-K dated January 9, 1997 (1)
(1) Previously filed in indicated registration statement or report.
(2) Exhibit filed herewith this Annual Report on Form 10-KSB for the fiscal year ended May 31, 1998
</TABLE>
(b) The Company filed a report on Form 8-K on February 27, 1998.
38
<PAGE> 39
Patriot Scientific Corporation
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Reports of Independent Certified Public Accountants.................................. F-2-
F-3
Consolidated Balance Sheet as of May 31, 1998........................................ F-4
Consolidated Statements of Operations for the Years Ended
May 31, 1998 and 1997...................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended May 31, 1998 and 1997................................................ F-6
Consolidated Statements of Cash Flows for the Years ended
May 31, 1998 and 1997...................................................... F-7
Summary of Accounting Policies....................................................... F-8-
F-11
Notes to Consolidated Financial Statements........................................... F-12 -
F-23
</TABLE>
F-1
<PAGE> 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Patriot Scientific Corporation
San Diego, California
We have audited the accompanying consolidated balance sheet of Patriot
Scientific Corporation as of May 31, 1998 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the two
year period ended May 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of Patriot Scientific
Corporation and Metacomp, Inc., which has been accounted for as a pooling of
interests as described in Note 1 to the consolidated financial statements. As
discussed in Note 1 to the consolidated financial statements, we did not audit
the financial statements of Metacomp, Inc., the Company's majority owned
subsidiary for its fiscal year ended July 31, 1996, of which total revenues of
$239,501 are included in the consolidated financial statements for the year
ended May 31, 1997. In addition, we did not audit the extraordinary item of
$1,741,700 as discussed in Notes 1 and 11 to the consolidated financial
statements. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
incurred for Metacomp, Inc. for the year ended May 31, 1997 is based solely on
the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above, present fairly, in all
material respects, the financial position of Patriot Scientific Corporation as
of May 31, 1998, and the results of their operations and their cash flows for
each of the years in the two year period ended May 31, 1998 in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
Denver, Colorado
July 17, 1998
F-2
<PAGE> 41
(Harlan & Boettger Certified Public Accountants Letterhead)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of METACOMP, INC.:
We have audited the balance sheet of METACOMP, Inc. a California Corporation, as
of July 31, 1996, and the related statements of operations, changes in
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of July 31,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Harlan & Boettger
San Diego, California
December 17, 1996
F-3
<PAGE> 42
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
May 31, 1998
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 602,456
Accounts receivable, net of allowance
of $5,000 for uncollectible accounts 593,542
Inventories (Note 2) 230,417
Prepaid expenses 109,365
------------
Total current assets 1,535,780
PROPERTY AND EQUIPMENT, net (Note 3) 453,211
OTHER ASSETS:
Patents and trademarks, net 196,942
Other 3,721
------------
Total other assets 200,663
------------
$ 2,189,654
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 391,184
Accrued liabilities 131,088
Current portion-capital lease obligations (Note 10) 2,179
------------
Total current liabilities 524,451
------------
LONG-TERM LIABILITIES:
Capital lease obligations (Note 10) 1,355
5% Convertible term debentures (Note 5) 507,000
------------
Total liabilities 1,032,806
------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 6, 9 and 11):
Preferred stock, $.00001 par value; 5,000,000 shares
authorized: none outstanding --
Common Stock, $.00001 par value; 40,000,000 shares
authorized: issued and outstanding 37,880,776 379
Additional paid-in capital 18,396,092
Accumulated deficit (17,239,623)
------------
Total stockholders' equity 1,156,848
------------
$ 2,189,654
============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE> 43
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(SEE NOTE 1)
Years Ended May 31, 1998 1997
------------ ------------
<S> <C> <C> <C>
Net sales (Note 12) $ 1,902,874 $ 1,847,421
Cost of sales 1,163,688 1,003,445
------------ ------------
Gross profit 739,186 843,976
Operating expenses:
Research and development 1,607,828 1,367,937
Selling, general and
administrative 2,470,937 1,723,751
Amortization -- 612,333
------------ ------------
4,078,765 3,704,021
------------ ------------
Operating loss (3,339,579) (2,860,045)
------------ ------------
Other income (expenses):
Interest income 61,610 39,302
Interest expense (24,370) (30,491)
Non-cash interest expense
related to convertible
notes (Note 5) (2,592,446) (392,015)
------------ ------------
(2,555,206) (383,204)
------------ ------------
Net loss before extraordinary
item (5,894,785) (3,243,249)
Extraordinary income (Note 11) -- 1,779,457
------------ ------------
Net loss $ (5,894,785) $ (1,463,792)
============ ===========
Basic and diluted income (loss) per
common share (Note 7):
Before extraordinary item $ (0.20) $ (0.12)
Extraordinary income -- 0.07
------------ ------------
Basic and diluted (loss)
per common share $ (0.20) $ (0.05)
============ ===========
Weighted average number of
common shares outstanding
during the period (Note 7) 30,079,456 27,188,255
============ ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE> 44
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (See Note 1)
Years Ended May 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 1996 30,985,257 $ 310 $ 10,151,024 $ (8,139,346) $ 2,011,988
Exercise of warrants at $1.58
per share 154,883 2 239,499 -- 239,501
Common stock issued for services
at $1.28 per share 22,600 -- 28,927 -- 28,927
Exercise of stock options at $.18 to
$.625 per share 380,486 4 165,857 -- 165,861
Non-cash interest expense related to
convertible notes recorded to
additional paid-in capital (Note 6) -- -- 375,000 -- 375,000
Non-cash compensation expense (Note 6) -- -- 291,180 -- 291,180
Conversion of 6% Convertible
Subordinated Notes plus interest
at $.85 to $1.27 per share (Note 6) 1,525,103 15 1,517,000 -- 1,517,015
Adjustment for Metacomp Inc.
pooling of interests from year-
end change (Note 1) -- -- -- (1,741,700) (1,741,700)
Net loss -- -- -- (1,463,792) (1,463,792)
------------ ------------ ------------ ------------ ------------
Balance, May 31, 1997 33,068,329 331 12,768,487 (11,344,838) 1,423,980
============ ============ ============ ============ ============
Common stock released from escrow
for purchased technology at $.75
per share (Note 4) -- -- 375,000 375,000
Exercise of stock options at $.18 to
$.875 per share 478,854 5 247,802 247,807
Non-cash interest expense related to
convertible notes recorded to additional
paid-in capital (Note 5) -- -- 2,018,111 2,018,111
Unamortized debt issuance costs
related to convertible notes -- -- (114,100) (114,100)
Conversion of 5% Convertible
term debentures plus interest
at $.50 to $1.09 per share (Note 5) 4,333,593 43 2,523,292 2,523,335
Value of warrants issued (Note 6) -- -- 577,500 577,500
Net loss -- -- -- (5,894,785) (5,894,785)
------------ ------------ ------------ ------------ ------------
Balance, May 31, 1998 37,880,776 $ 379 $ 18,396,092 $(17,239,623) $ 1,156,848
============ ============ ============ ============ ============
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-6
<PAGE> 45
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years Ended May 31, 1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,894,785) $(1,463,792)
Adjustments to reconcile net loss
to cash used in operating activities:
Adjustment for Metacomp Inc. pooling of
interests from year-end change (Note 1) -- (1,741,700)
Amortization and depreciation 341,072 836,692
Provision for doubtful accounts 41,761 5,000
Provision for inventory obsolescence 203,000 162,000
Common stock and warrants issued for services 33,500 28,927
Non -cash interest expense related to
convertible notes 2,096,446 392,015
Non-cash interest expense related to warrants 496,000 --
Amortization of debt issuance costs 140,000 45,000
Non -cash compensation expense 375,000 291,180
Changes in:
Accounts receivable (375,183) (65,719)
Inventories 96,116 (80,377)
Prepaid and other assets 7,940 (23,163)
Accounts payable and accrued expenses 16,053 (74,231)
----------- -----------
Net cash used in operating activities (2,423,080) (1,688,168)
----------- -----------
INVESTING ACTIVITIES -
Purchase of property, equipment and patents (417,225) (238,447)
FINANCING ACTIVITIES:
Principal payments on notes payable and
long-term debt (2,721) (320,016)
Proceeds from issuance of common stock
and exercise of common stock warrants
and options 247,807 405,362
Proceeds from issuance of convertible notes 3,000,000 1,500,000
Payments for debenture costs (280,000) (45,000)
----------- -----------
Net cash provided by financing activities 2,965,086 1,540,346
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 124,781 (386,269)
CASH AND CASH EQUIVALENTS, beginning of year 477,675 863,944
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 602,456 $ 477,675
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Convertible notes and accrued interest
exchanged for common stock $ 2,409,236 $ 1,500,000
Cash payments for interest 383 30,491
----------- -----------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-7
<PAGE> 46
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Patriot Scientific Corporation (the "Company") is engaged in the development and
marketing of patented microprocessor technology and high-performance high-speed
data communication products. The Company also owns and is developing innovative
radar and antenna technology.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Company, its majority owned subsidiaries, Metacomp, Inc. ("Metacomp") and Plasma
Scientific Corporation. All material intercompany transactions and balances have
been eliminated in consolidation.
As described in Note 1, effective December 26, 1996, the Company acquired 96.9%
of the common stock of Metacomp. The business combination was accounted for as a
pooling of interests and, accordingly, the Company's financial statements have
been presented to include the results of Metacomp as though the business
combination occurred as of June 1, 1995. The minority interest is not shown
separately in the Consolidated Financial Statements as it is not material.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable.
The Company's cash equivalents are placed in high quality money market accounts
with major financial institutions and high grade short-term commercial paper.
The investment policy limits the Company's exposure to concentrations of credit
risk. Money market accounts are federally insured; however, commercial paper is
not insured. The Company has not experienced any losses in such accounts.
Concentrations of credit risk with respect to accounts receivable are limited
due to the wide variety of customers and markets which comprise the Company's
customer base, as well as their dispersion across many different geographic
areas. The Company routinely assesses the financial strength of its customers
and, as a consequence, believes that its accounts receivable credit risk
exposure is limited. Generally, the Company does not require collateral or other
security to support customer receivables. As of May 31, 1998, the Company had
approximately 35% and 27% in accounts receivable from two customers.
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, capital
leases and convertible debt approximated fair value because of the immediate or
short-term maturity of these instruments.
INVENTORIES
Inventories consist of raw materials, work in process and finished goods and are
valued at the weighted average cost method, which approximates cost on a
first-in, first-out basis, not in excess of market value.
F-8
<PAGE> 47
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful life of three to five years using the straight line method.
Property and equipment is assessed periodically for impairment. The amount of
impairment, if any, is charged to operations.
PURCHASED TECHNOLOGY
In accordance with the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 4, "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method", purchased
semiconductor microprocessor technology that is determined to have alternative
future uses is capitalized at cost. Effective June 1, 1994, the Company began
amortizing such technology using the straight-line method over its estimated
useful life of three years (See Note 4). As of May 31, 1998, the purchased
technology was fully amortized.
Purchased technology is assessed periodically for impairment. The amount of
impairment, if any, is charged to operations. The Company recovers its
investments in purchased technology based upon net cash flows from future sales
and license agreements.
PATENTS AND TRADEMARKS
Patents and trademarks are carried at cost less accumulated amortization and are
amortized over their estimated useful lives of four years. The carrying value of
patents and trademarks is periodically reviewed and impairments, if any, are
recognized when the expected future benefit to be derived from individual
intangible assets is less than its carrying value.
REVENUE RECOGNITION
Revenue is recognized upon the shipment of product to the customer. Licensing
and royalty income is recognized when earned.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109. Temporary differences are differences between the
tax basis of assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future years.
NET LOSS PER SHARE
At May 31, 1998, the Company implemented SFAS No. 128, "Earnings Per Share."
SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings per
share. Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to fully diluted earnings per share. All prior earnings per share data
has been restated to reflect the
F-9
<PAGE> 48
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
requirements of SFAS No.128. The adoption of SFAS No. 128 had no effect on the
Company's previously reported earnings per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
During the quarter ended May 31, 1998, based upon information then available,
the Company revised its estimates regarding the recovery of certain inventories.
As a result, the Company increased existing reserves for obsolescence by
approximately $203,000.
STOCK OPTIONS
The Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
all stock option plans. Under APB Opinion 25, compensation cost has been
recognized for stock options granted to employees when the option price is less
than the market price of the underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net income as if compensation cost for
the Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owner
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
displays with the same prominence as other financial statements. SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards on the way that public companies
report financial information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosure regarding
F-10
<PAGE> 49
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and require comparative information for earlier years to
be restated. Because of the recent issuance of the standards, management has
been unable to fully evaluate the impact, if any, the standards may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of these standards.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal periods beginning after June 15, 1999. Management believes
the adoption of this statement will have no material impact on the Company's
financial statements.
RECLASSIFICATIONS
Certain items included in the 1997 financial statements have been reclassified
to conform to the current year presentation.
F-11
<PAGE> 50
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITION OF METACOMP, INC. COMMON STOCK
On December 26, 1996, the Company acquired 96.9% of the common stock of Metacomp
in exchange for 1,272,068 shares of the Company's common stock. Metacomp
designs, manufactures, and sells high-performance high-speed data communication
products. The business combination was accounted for as a pooling of interests.
Accordingly, the Company's financial statements were restated to include the
results of Metacomp for all periods presented. Metacomp's fiscal year-end was
changed from July 31 to May 31 to conform to the Company's fiscal year-end.
Based on the difference in fiscal year-ends, results of operations for the two
months ended July 31, 1996 were included in the consolidated statements of
operations for both years ended May 31, 1997 and 1996. For the two months ended
July 31, 1996, Metacomp recorded total revenues of $239,501, a net loss before
extraordinary item of $37,759, extraordinary income of $1,779,457 and net income
after extraordinary item of $1,741,700. The accompanying consolidated statements
of stockholders' equity and cash flows for the year ended May 31, 1997, have
also been adjusted to eliminate the net income after extraordinary item. The
extraordinary income was the primary source of income for these two months.
Separate net sales, net income and related per share amounts of the merged
entities through the date of the business combination are presented in the
following table. In addition, the table includes unaudited pro forma net income
and net income per share amounts as of the date of the business combination
which reflect the elimination of the nonrecurring merger costs and expenses.
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Net sales
Patriot $ 19,362
Metacomp 874,377
-----------
Total $ 893,739
-----------
Net income (loss)
Patriot $(1,202,485)
Metacomp before extraordinary income 40,706
Metacomp extraordinary income 1,779,457
-----------
Pro forma net income 617,678
Merger costs and expenses (30,000)
Interest income (6,000)
Interest expense 15,625
-----------
Net income, as reported $ 597,303
-----------
Basic income per common share
As reported $ 0.02
Pro forma $ 0.02
Merger costs and expenses consisted of legal and accounting fees
</TABLE>
F-12
<PAGE> 51
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES Inventories at May 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Component parts $ 418,502
Work in process 60,136
Finished goods 116,779
------------------
595,417
Reserve for obsolescence (365,000)
------------------
$ 230,417
==================
</TABLE>
3. PROPERTY AND Property and equipment consisted of the following at May
EQUIPMENT 31, 1998:
<TABLE>
<S> <C>
Computer equipment and software $ 1,101,418
Furniture and fixtures 286,732
Laboratory equipment 197,534
-----------------------
1,585,684
Less accumulated depreciation and amortization 1,132,473
-----------------------
Net property and equipment $ 453,211
=======================
Depreciation expense was approximately $281,130
and $184,055 for the years ended May 31, 1998
and 1997.
At May 31, 1998, property and equipment
includes certain equipment under capital lease
agreements with an original cost of $36,427 and
accumulated depreciation of $28,084.
</TABLE>
4. PURCHASED TECHNOLOGY
SEMICONDUCTOR MICROPROCESSOR TECHNOLOGY
Effective May 31, 1994, the Company acquired certain proprietary semiconductor
microprocessor technology (the "ShBoom Technology") and related computer
software from a corporation in exchange for 10,000,000 restricted shares of the
Company's common stock (5,000,000 of which were originally placed in escrow
subject to release as discussed below).
F-13
<PAGE> 52
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cost of this technology of $1,875,000 was based upon the estimated current
fair market value of the 5,000,000 non-contingent shares of the Company's common
stock issued under this agreement and was amortized over its estimated useful
life of three years. The remaining 5,000,000 shares issued for this technology
were subject to an earnout escrow arrangement. As such, when the escrowed shares
are earned, they are charged to compensation in a manner similar to a variable
stock option plan. The terms of the escrow arrangement provide for the release
from escrow of 500,000 shares for each $500,000 of revenues earned by the
Company during the period from June 1, 1994 through May 31, 1999. Additionally,
this agreement also provides for the release of these shares upon the occurrence
of certain defined major corporate events. Any of the contingent shares not
released by May 31, 1999 would be returned to the Company and canceled.
During the year ended May 31, 1998, 500,000 shares were released from escrow and
$375,000 was charged to compensation costs. At May 31, 1998, 4,500,000 shares
remain in escrow of which 2,000,000 shares may have been earned but remain in
escrow pending the outcome of continuing discussions between the Company, the
seller of the ShBoom Technology and one of the co-inventors of the technology as
discussed in Note 14 to the Consolidated Financial Statements.
RADAR TECHNOLOGY
Effective August 8, 1989, the Company acquired certain proprietary ground
penetrating radar ("GPR technology") from a current director of the Company,
primarily in exchange for 5,000,000 shares of the Company's common stock. Such
shares were subject to an escrow agreement and were releaseable to the director
under various specified conditions including the Company's subsequent merger or
business combination with any third party.
As a result of the Company's acquisition of the ShBoom, these 5,000,000 shares
were released to the director and the escrow agreement was terminated. Effective
May 31, 1994, additional costs totaling $1,875,000 of this previously purchased
GPR technology was recorded as compensation expense due to the release of the
5,000,000 shares. Such cost was based upon the estimated current fair market
value of the Company's common stock.
Additionally, under the terms of the agreement to acquire the GPR technology,
the director is to be paid a royalty equal to 2.5% of all gross revenues
received from the GPR technology, up to a maximum of $400,000. The director also
is to receive a $50,000 bonus upon the successful demonstration of a working
prototype of the technology meeting specified performance criteria. As of May
31, 1998, no amounts were due under this agreement; however, an advance of
$17,000 against the royalty was paid at the inception of the agreement.
5.5% CONVERTIBLE TERM DEBENTURES
In June 1997, the Company issued to a limited number of investors for cash an
aggregate of $2,000,000 of unsecured 5% Convertible Term Debentures due June 2,
1999 ("Debentures") and Stock Purchase Warrants ("Warrants") with a right to
purchase an aggregate 611,733 shares of common stock, par value $.00001 per
share, at an exercise price of $1.69125. In November 1997,
F-14
<PAGE> 53
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company issued to the same investors for cash an aggregate of $1,000,000 of
Debentures due June 2, 1999 and Warrants with a right to purchase an aggregate
305,867 shares of common stock, par value $.00001 per share, at an exercise
price of $1.50. The principal and interest amount of each Debenture may, at the
election of the holder, be converted in whole or in part and from time to time
into fully paid and nonassessable shares of common stock, $.00001 par value, of
the Company, at a price which is the lower of (i) $1.1646 per share or (ii)
depending on the number of days the Debentures have been held after June 2,
1997, from 75% to 91% of the average of the closing bid prices for the common
stock for the ten consecutive trading days ending on the trading day immediately
preceding such conversion date. If the Debentures have not been converted into
common shares of the Company by June 2, 1999, under certain conditions, the
Debentures will automatically be converted into shares of the common stock of
the Company. As of May 31, 1998, $2,445,000 of the Debentures and $78,335 of the
accrued interest thereon had been converted into 4,333,593 common shares of the
Company.
Convertible debt instruments which are convertible at a discount to market are
accounted for by treating such discount as additional interest expense. The
Company computed the amount of the discount based on the difference between the
conversion price and fair value of the underlying common stock on the dates the
Debentures were issued. The Company recorded $2,018,111 of additional paid-in
capital for the discount related to the embedded interest in the Debentures
during fiscal 1998. The same amount, $2,018,111, was expensed for fiscal 1998
and is included under the caption "Non-cash interest expense related to
convertible notes" in the accompanying Consolidated Statements of Operations.
The warrants to purchase 917,600 shares of common stock were valued at $544,000.
Such amount was originally recorded as a reduction of the carrying amount of the
Debentures with an offset to Paid-In Capital. The discount is amortized as
additional interest expense over the term of the Debentures. In the fourth
quarter of fiscal 1998, $496,000 had been recorded as interest expense. The
balance of $48,000 is reflected as a reduction of the Debenture balance of
$555,000.
6. STOCKHOLDERS' EQUITY
PRIVATE OFFERINGS AND WARRANTS
During fiscal 1997, a total of 154,883 shares of the Company's common stock were
issued upon the exercise of outstanding warrants which had been issued in fiscal
1996. The net proceeds from the exercise were $239,501.
During fiscal 1997, the Company issued for cash an aggregate of $1,500,000 of
unsecured 6% Convertible Subordinated Promissory Notes due September 30, 1998
("Notes"). The principal and interest amount of each Note could at the election
of the noteholder be converted one or more times into fully paid and
nonassessable shares of common stock, $.00001 par value, ("Shares") of the
Company, at a price which was the lower of (i) $2.00 per share or (ii) 80% of
the average of the five days market price prior to conversion but not less than
$0.80 per share. As of May 31, 1997, all
F-15
<PAGE> 54
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes plus accrued interest had been converted into 1,525,103 shares of common
stock of the Company.
Convertible debt instruments which are convertible at a discount to market
should be accounted for by treating such discount as additional interest
expense. The Company computed the amount of the discount based on the difference
between the conversion price and fair value of the underlying common stock on
the date the Notes were issued. In 1997, the Company recorded $375,000 of
additional paid-in capital for the discount related to the embedded interest in
the Notes. This same amount was expensed during fiscal 1997 under the caption
"Non-cash interest expense related to convertible notes" in the accompanying
Consolidated Statements of Operations.
During fiscal 1998, the Company issued warrants to purchase 1,147,600 common
shares of stock with exercise prices ranging from $1.25 to $7.50 per share. All
warrants were outstanding at May 31, 1998. Included in this amount are warrants
to purchase 917,600 common shares related to the Debentures discussed in Note 5
to the Consolidated Financial Statements. The Company valued warrants issued in
fiscal 1998 at $577,500.
1992 INCENTIVE STOCK OPTION PLAN ("ISO")
The Company has an ISO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the Company's common stock. The ISO Plan provides for grants
to either full or part time employees, at the discretion of the Board of
Directors, options to purchase common stock of the Company at a price not less
than the fair market value of the shares on the date of grant. In the case of a
significant stockholder, the option price of the share is not less than 110
percent of the fair market value of the share on the date of grant. Any options
granted under the ISO Plan must be exercised within ten years of the date they
were granted (five years in the case of a significant stockholder).
1992 NON-STATUTORY STOCK OPTION PLAN("NSO")
The Company has an NSO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the Company's common stock. The NSO Plan provides for grants
to either full or part time employees, at the discretion of the Board of
Directors, options to purchase common stock of the Company at a price not less
than the fair market value of the shares on the date of grant. Any options
granted under the NSO Plan must be exercised within ten years of the date they
were granted.
1995 EMPLOYEE STOCK COMPENSATION PLAN ("ESC")
Effective October 1995, the Company adopted the ESC Plan, expiring September 30,
1998, reserving for issuance 250,000 shares of the Company's common stock. The
ESC Plan provides for compensation awards of the Company's common stock to
employees (as defined), at the discretion of the Board of Directors. During
fiscal 1997, the Company issued 22,600 shares of common stock under the Plan
recording compensation expense of $28,927 for awards valued at an estimated fair
market value of $1.28 per share. During fiscal 1998, no shares were issued under
this plan. As of May 31, 1998, 32,400 shares remain available for granting under
this plan.
F-16
<PAGE> 55
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 STOCK OPTION PLAN
Effective March 1996, the Company adopted the 1996 Stock Option Plan, which was
amended by the Stockholders in December 1997, expiring March 24, 2006, reserving
for issuance 4,000,000 shares of the Company's common stock. The 1996 Stock
Option Plan provides for grants to either full or part time employees, at the
discretion of the Board of Directors, options to purchase common stock of the
Company at a price not less than the fair market value on the date of grant for
incentive stock options or not less than 85% of the fair market value on the
date of grant for non-qualified stock options. In the case of a significant
stockholder, the option price of the share is not less than 110 percent of the
fair market value of the shares on the date of grant. Any option granted under
the 1996 Stock Option Plan must be exercised within ten years of the date they
are granted (five years in the case of a significant stockholder). During the
fiscal year ended May 31, 1997, the Company issued options to purchase 1,713,000
shares of stock under the non-qualified provisions of the plan at an exercise
price of 85% of the fair market value on the date of grant and recorded
corresponding non-cash compensation in the amount of $291,180. During the fiscal
year ended May 31, 1998, the Company issued options to purchase 1,511,000 shares
of stock at market value.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net loss and net loss per share as if
compensation costs for the Company's stock option plans and other stock awards
had been determined in accordance with the fair value based method prescribed in
SFAS No. 123. The Company estimates the fair value of each stock award at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used respectively: dividend yield of zero percent
for all years; expected volatility of 50 percent; risk-free interest rates of
5.6 to 6.1 percent; and expected lives of 3 to 5 years.
Under the accounting provisions for SFAS No. 123, the Company's net loss per
share would have been increased by the pro forma amounts indicated below:
F-17
<PAGE> 56
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
As reported
Net loss before extraordinary item $ (5,894,785) $ (3,243,249)
Extraordinary item -- 1,779,457
------------- -------------
Net loss $ (5,894,785) $ (1,463,792)
============= =============
Pro forma
Net loss before extraordinary item $ (6,831,147) $ (3,735,409)
Extraordinary item -- 1,779,457
------------- -------------
Net loss $ (6,831,147) $ (1,955,952)
============= =============
As reported per share
Basic loss before extraordinary item $ (0.20) $ (0.12)
Extraordinary item -- 0.07
------------- -------------
Basic loss $ (0.20) $ (0.05)
============= =============
Pro forma per share
Basic loss before extraordinary item $ (0.23) $ (0.14)
Extraordinary item -- 0.07
------------- -------------
Basic loss $ (0.23) $ (0.07)
============= =============
</TABLE>
During the initial phase-in period of SFAS 123, the effect on pro forma results
are not likely to be representative of the effects on pro forma results in
future years since options vest over several years and additional awards could
be made each year.
F-18
<PAGE> 57
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock option plans and warrants as of
May 31, 1998 and 1997 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding, beginning of year 4,123,331 $1.24 3,077,775 $1.08
Granted 2,658,600 1.39 1,940,000 1.36
Cancelled (1,059,407) 1.11 (362,375) 2.01
Exercised (478,854) 0.52 (532,069) 0.76
---------- ----- --------- -----
Outstanding, end of year 5,243,670 $1.26 4,123,331 $1.24
========== ===== ========= =====
Exercisable, end of year 3,430,836 $1.32 1,526,332 $0.85
========== ===== ========= =====
Weighted average fair value of options
and warrants granted during the year $0.61 $0.68
========== ===== ========= =====
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at May 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------- --------- --- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.18 - 0.37 519,379 2.48 $ 0.32 511,379 $ 0.32
0.50 - 0.59 545,000 4.18 0.57 425,000 0.57
0.80 - 1.17 2,024,691 4.11 1.16 765,691 0.81
1.25 - 1.76 1,594,600 3.68 1.52 1,237,100 1.56
2.28 - 2.50 460,000 1.50 2.31 391,666 2.31
5.00 - 7.50 100,000 0.93 6.25 100,000 6.25
------------- --------- ---- -------- --------- --------
$ 0.18 - 7.50 5,243,670 4.23 $ 1.26 3,430,836 $ 1.32
------------- --------- ---- -------- --------- --------
</TABLE>
F-19
<PAGE> 58
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EARNINGS (LOSS) PER SHARE
In February 1997, SFAS No. 128, "Earnings per Share," was issued, which required
the Company to change the method used to calculate earnings per share. Under
SFAS No. 128, basic earnings (loss) per share is calculated as income (loss)
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings (loss) per share is calculated as
net income (loss) divided by the diluted weighted average number of common
shares. The diluted weighted average number of common shares is calculated using
the treasury stock method for common stock issuable pursuant to outstanding
stock options, common stock warrants, and debt convertible into common stock.
Common stock options of 880,989 and 1,438,980 and debt convertible into
1,748,134 and 160,118 common shares of stock were not included in diluted
earnings (loss) per share in 1998 or 1997, respectively, as the effect was
antidilutive due to the Company recording losses in each of those years.
In addition, 2,000,000 shares of common stock in diluted escrow that may have
been earned as of May 31, 1998 were not considered outstanding for diluted
earnings (loss) per share because the Company is currently negotiating whether
they will be released. See Note 14 to the Consolidated Financial Statements.
Options and warrants to purchase 2,989,604 shares of common stock at exercise
prices from $0.80 to $7.50 per share were outstanding at May 31, 1998 but were
not included in the computation of diluted earnings (loss) per share because the
exercise prices were greater than the average market price of the common shares.
Options and warrants to purchase 822,750 shares of common stock at exercise
prices from $1.37 to $2.30 per share were outstanding at May 31, 1997 but were
not included in the computation of diluted earnings (loss) per share because the
exercise prices were greater than the average market price of the common shares.
8. INCOME TAXES As of May 31, 1998, the net
deferred tax asset recorded and its
approximate tax effect consisted of the
following:
<TABLE>
<S> <C>
Net operating loss carryforwards $ 2,950,000
Purchased technology 566,000
Depreciation and amortization 279,000
Warrants valuation 180,000
Other, net 156,000
-------------------
4,131,000
Valuation allowance 4,131,000
-------------------
Net deferred tax asset $ -
===================
</TABLE>
As of May 31, 1998, a valuation allowance equal to the net deferred tax asset
recognized has been recorded, as Management has not determined that it is more
likely than not that the deferred tax
F-20
<PAGE> 59
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
asset will be realized. No current tax provision was recorded for fiscal 1998
and 1997 due to reported losses.
At May 31, 1998, the Company has net operating loss carryforwards of
approximately $8,677,000 that expire through 2013 and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended.
9. PROFIT-SHARING PLAN
Effective July 1, 1993, the Company adopted a savings and profit-sharing plan
that allows participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. At the Company's discretion, the
Company may match contributions at 20% of the employee's contribution up to 6%
of the employee's salary. The Company contributions are vested 20% per year
beginning with the first year of service. The Company's contributions to the
plan were $642 in fiscal 1997. The Company made no matching contribution in
fiscal 1998.
10. COMMITMENT AND CAPITAL The Company, through its subsidiary, Metacomp,
LEASE OBLIGATIONS entered into an eight year operating lease for its
office and manufacturing facilities located in San
Diego, California.
The Company also leases a copier, computers, and
test equipment at interest rates between (4-18%).
Future minimum lease payments required under the
operating and capital leases are as follows:
<TABLE>
<CAPTION>
Operating Capital Leases
----------------- -----------------
<S> <C> <C>
1999 $ 96,940 $ 2,387
2000 16,190 1,393
----------------- -----------------
Total minimum lease payments 113,130 3,780
Less amount representing interest - 246
----------------- -----------------
Present value of net minimum
lease payments 113,130 3,534
Less current portion - 1,355
----------------- -----------------
Total $ 113,130 $ 2,179
================= =================
</TABLE>
Rent expense for fiscal 1998 and 1997 was $85,120 and $80,371,respectively.
F-21
<PAGE> 60
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EXTRAORDINARY INCOME
The extraordinary income is a gain from the discharge of debt as a result of the
completion of Metacomp's Plan of Reorganization under Chapter 11 of the U.S.
Bankruptcy Code as of July, 1996.
In 1990, Metacomp filed a Chapter 11 bankruptcy petition. In 1991, the
Bankruptcy Court confirmed Metacomp's plan of reorganization which provided for
60 monthly payments to creditors with minimum payments averaging $23,400 per
month or larger depending on operating results. As of July 1996, the unsecured
creditors were paid approximately 13% of their approved claims and the
balance was discharged. One secured creditor was scheduled to be paid in full as
part of the plan of reorganization. As of July 31, 1996, this secured creditor
had a remaining balance of $312,306. The Company paid to this secured creditor a
remaining balance of $252,306 plus accrued interest in conjunction with the
business combination with Metacomp.
12. SALES INFORMATION
EXPORT SALES
During the fiscal year ended May 31, 1998, the Company's foreign sales were less
than 10% of total sales. During the fiscal year ended May 31, 1997, the
Company's sales by geographic area consisted of the following:
<TABLE>
<S> <C>
Domestic sales $1,428,000
Foreign sales:
Canada 244,000
Other 175,000
----------
Total foreign sales 419,000
----------
Total net product sales $1,847,000
==========
</TABLE>
The Company has no foreign assets
F-22
<PAGE> 61
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SALES TO MAJOR CUSTOMERS
The Company had sales in excess of 10% to the following customers:
<TABLE>
<CAPTION>
1998 1997
---- ----
Customer Sales Percent Sales Percent
-------- ----- ------- ----- -------
<S> <C> <C> <C> <C>
A $578,000 30.3% $473,000 25.6%
B $478,000 25.1% $472,000 25.5%
C -- -- $212,000 11.5%
D $207,000 10.9% -- --
</TABLE>
13. FOURTH QUARTER ADJUSTMENTS
The Company recorded in the fourth quarter certain adjustments relative to
non-cash interest expense related to convertible debt and associated debenture
costs and a write-down of inventory due to obsolescence amounting to an
aggregate of $2,100,000 which are discussed in Notes 5 and 6 to the Consolidated
Financial Statements. Of the aggregate amount, $1,000,000 and $1,100,000 related
to the third and fourth quarters, respectively. The Company plans to file an
amended Form 10-QSB for the quarter ended February 28, 1998.
14. SUBSEQUENT EVENT
In June 1998, the Company, the seller of the ShBoom technology and the
co-inventor entered into a nonbinding agreement in principle to settle the
dispute in consideration of mutual releases and the Company assigning patents on
the ShBoom technology back to the co-inventor in exchange for the co-inventor
granting a fully-paid, worldwide, sublicensable license to use the ShBoom
technology patents exclusive in the Company's existing and future fields of use.
In addition, nanoTronics agreed to release any obligation of the Company to
deliver a number of shares of the Company's stock pursuant to the original
acquisition agreement as discussed in Note 4 to the Consolidated Financial
Statements. Any stock not delivered will be retired. Settlement documentation
has been exchanged between the parties, although disputes remain concerning
terms contained within the documents. The Company is unable at this time to
determine whether such disputes will be resolved. The Company's Consolidated
Financial Statements do not include any adjustments that might result from the
outcome of this uncertainty.
F-23
<PAGE> 62
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PATRIOT SCIENTIFIC CORPORATION
August 17, 1998
By: /s/ LOWELL W. GIFFHORN
-----------------------
Lowell W. Giffhorn
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/JAMES T. LUNNEY President, Director, Chief Executive August 17, 1998
------------------ Officer
James T. Lunney
/s/LOWELL W. GIFFHORN Chief Financial Officer, Principal August 17, 1998
--------------------- Financial Officer and Principal
Lowell W. Giffhorn Accounting Officer
/s/ELWOOD G. NORRIS Chairman and Director August 17, 1998
-------------------
Elwood G. Norris
/s/MICHAEL A. CARENZO Director August 17, 1998
---------------------
Michael A. Carenzo
/s/NORMAN J. DAWSON Vice President, General Manager August 17, 1998
------------------- and Director
Norman J. Dawson
/s/DONALD BERNIER Director August 17, 1998
-----------------
Donald Bernier
/s/HELMUT FALK JR. Director August 17, 1998
------------------
Helmut Falk Jr.
/s/RICHARD D. MCDANIEL Director August 17, 1998
----------------------
Richard D. McDaniel
</TABLE>
<PAGE> 63
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended May 31, 1998 Commission File No. 0-22182
PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)
- --------------------------------------------------------------------------------
EX-1
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exh.No. Document No.
- ------- -------- ---
<S> <C> <C>
2.0 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION.
2.1 Agreement to Exchange Technology for Stock in Patriot Scientific
Corporation, incorporated by reference to Exhibit 2.1 to Form 8-K
dated August 10, 1989 (1)
2.2 Assets Purchase Agreement and Plan of Reorganization dated June 22,
1994, among the Company, nanoTronics Corporation and Helmut Falk,
incorporated by reference to Exhibit 10.4 to Form 8-K dated July 6, 1994 (1)
2.2.1 Amendment to Development Agreement dated April 23, 1996
between the Company and Sierra Systems, incorporated by
reference to Exhibit 2.2.1 to Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2 dated April 29, 1996 (1)
2.3 Form of Exchange Offer dated December 4, 1996 between the Company and
certain shareholders of Metacomp, Inc. incorporated by reference to
Exhibit 2.3 to Form 8-K dated January 9, 1997 (1)
2.4 Letter of Transmittal to Accompany Shares of Common Stock of Metacomp,
Inc. Tendered Pursuant to the Exchange Offer Dated December 4, 1996
incorporated by reference to Exhibit 2.4 to Form 8-K dated January 9,
1997 (1)
3.0 ARTICLES AND BYLAWS.
3.1 Original Articles of Incorporation of the Company's predecessor,
Patriot Financial Corporation, incorporated by reference to
Exhibit 3.1 to registration statement on Form S-18, File no.
33-23143-FW (1)
3.2 Articles of Amendment of Patriot Financial Corporation, as filed
with the Colorado Secretary of State on July 21, 1988, incorporated
by reference to Exhibit 3.2 to registration statement on Form S-18,
File No. 33-23143-FW (1)
3.3 Certificate of Incorporation of the Company, as filed with the
Delaware Secretary of State on March 24, 1992, incorporated by
reference to Exhibit 3.1 to Form 8-K dated May 12, 1992 (1)
3.3.1 Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Delaware Secretary of State
on April 18, 1995, incorporated by reference to Exhibit 3.3.1
to Form 10-KSB for the fiscal year ended May 31, 1995 (1)
3.3.2 Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Delaware Secretary of State
on June 19,1997, incorporated by reference to Exhibit 3.3.2
to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
</TABLE>
EX-2
<PAGE> 65
<TABLE>
<S> <C> <C>
3.4 Articles and Certificate of Merger of Patriot Financial Corporation
into the Company dated May 1, 1992, with Agreement and Plan of
Merger attached thereto as Exhibit A, incorporated by reference to
Exhibit 3.2 to Form 8-K dated May 12, 1992 (1)
3.5 Certificate of Merger issued by the Delaware Secretary of State on
May 8, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K
dated May 12, 1992 (1)
3.6 Certificate of Merger issued by the Colorado Secretary of State on
May 12, 1992, incorporated by reference to Exhibit 3.4 to Form 8-K
dated May 12, 1992 (1)
3.7 Bylaws of the Company, incorporated by reference to Exhibit 3.5 to
Form 8-K dated May 12, 1992 (1)
4.0 INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.
4.1 Specimen common stock certificate, incorporated by reference to
Exhibit 4.1 Form 8-K dated May 12, 1992 (1)
4.2 Form of Stock Purchase Warrant (Labway Corporation) dated February 29,
1996, exercisable to purchase 253,166 common shares at $1.58 per share
until August 31, 1996, granted to investors in connection with an
offering of securities made in reliance upon Regulation S, incorporated
by reference to Exhibit 4.2 to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
4.3 Form of 6% Convertible Subordinated Promissory Note due September 30,
1998 aggregating $1,500,000 to six investors incorporated by reference
to Exhibit 4.3 to Form 10-QSB for fiscal quarter ended August 31, 1996 (1)
4.4 Form of 5% Convertible Term Debenture (CC Investments, LDC) due
June 2, 1999 aggregating $2,000,000 to two investors incorporated
by reference to Exhibit 4.4 to Form 8-K dated June 16, 1997 (1)
4.5 Form of Stock Purchase Warrant (CC Investments, LDC) dated
June 2, 1997 exercisable to purchase an aggregate of 400,000 common
shares at $1.69125 per share until June 2, 2002, granted to two investors
in connection with the offering of securities in Exhibit 4.4 incorporated
by reference to Exhibit 4.5 to Form 8-K dated June 16, 1997 (1)
4.6 Registration Rights Agreement dated June 2, 1997 by and among
the Company and CC Investments, LDC and the Matthew Fund, N.V.
related to the registration of the common stock related to Exhibits
4.4 and 4.5 incorporated by reference to Exhibit 4.6 to Form 8-K
dated June 16, 1997 (1)
4.7 Form of Warrant to Purchase Common Stock (Swartz Family
Partnership, L.P.) dated June 2, 1997 exercisable to purchase an
aggregate of 211,733 common shares at $1.69125 per share until
June 2, 2002, granted to a group of investors in connection with
</TABLE>
EX-3
<PAGE> 66
<TABLE>
<S> <C> <C>
the offering of securities in Exhibit 4.4 incorporated by reference to
Exhibit 4.7 to Form 8-K dated June 16, 1997 (1)
4.8 Registration Rights Agreement dated June 2, 1997 by and among the
Company and Swartz Investments, LLC related to the registration of
the common stock related to Exhibit 4.7 incorporated by reference to
Exhibit 4.8 to Form 8-K dated June 16, 1997 (1)
4.9 Form of 5% Convertible Term Debenture (CC Investments, LDC) due
June 2, 1999 aggregating $1,000,000 to two investors (2)
4.10 Form of Stock Purchase Warrant (CC Investments, LDC) dated
November 24, 1997 exercisable to purchase an aggregate of 200,000 common
shares at $1.50 per share until June 2, 2002, granted to two investors
in connection with the offering of securities in Exhibit 4.9 (2)
4.11 Form of Warrant to Purchase Common Stock (Swartz Family
Partnership, L.P.) dated November 24, 1997 exercisable to purchase an
aggregate of 105,867 common shares at $1.50 per share until
June 2, 2002, granted to a group of investors in connection with
the offering of securities in Exhibit 4.9 (2)
4.12 Form of Warrant to Purchase Common Stock (Investor Communications Group,
Inc.) dated June 16, 1997 exercisable to purchase an aggregate of
130,000 common shares at prices ranging from $2.50 to $7.50 per share
until June 15, 1999 (2)
4.13 Warrant to Purchase Common Stock issued to Spellcaster Telecommunications,
Inc. dated April 28, 1998 exercisable to purchase an aggregate of 100,000
common shares at $1.25 per share until April 28, 2000 (2)
10.0 MATERIAL CONTRACTS.
10.1 1992 Incentive Stock Option Plan of the Company, incorporated
by reference to Exhibit 10.1 to Form 8-K dated May 12, 1992 (1)
10.1.1 Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17,
1996 (1)
10.2 1992 Non-Statutory Stock Option Plan of the Company, incorporated by
reference to Exhibit 10.2 to Form 8-K dated May 12, 1992 (1)
10.2.1 Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995
incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal
year ended May 31, 1996 (1)
10.3 Lease Agreement between the Company's subsidiary Metacomp, Inc. and
Clar-O-Wood Partnership, a California limited partnership dated April
11, 1991 as amended November 11, 1992 and November 2, 1995, incorporated
by reference to Exhibit 10.3 to Form 10-KSB for the fiscal year ended
May 31, 1997 (1)
10.4 Stock Purchase Agreement dated November 29 and 30, 1995,
between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4 to Form 8-K dated December 11, 1995 (1)
</TABLE>
EX-4
<PAGE> 67
<TABLE>
<CAPTION>
<S> <C> <C>
10.4.1 Letter Amendment to Stock Purchase Agreement dated February 21,
1996, between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
10.5 1995 Employee Stock Compensation Plan of the Company, incorporated by
reference to Exhibit 10.5 to Form 10-QSB for fiscal quarter ended 11/30/95 (1)
10.6 Letter Stock and Warrant Agreement dated January 10, 1996 between the
Company and Robert E. Crawford, Jr., incorporated by reference to
Exhibit 10.6 to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
10.7 Non-Exclusive Manufacturing and Line of Credit Agreement dated
February 28, 1996, between the Company and Labway Corporation,
incorporated by reference to Exhibit 10.7 to Form 10-QSB for
fiscal quarter ended 2/29/96 (1)
10.8 Distribution and Representation Agreement dated February 28,
1996, between the Company and Innoware, Inc., incorporated by
reference to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
10.9 Employment Agreement dated November 20, 1995 between the
Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9
to Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.9.1 First Amendment to Employment Agreement dated May 17, 1996 between the
Company and Elwood G. Norris, incorporated by reference to Exhibit
10.9.1 to Pre-Effective Amendment No. 2 to Registration Statement on
Form SB-2 dated May 23, 1996 (1)
10.10 Employment Agreement dated November 20, 1995 between the
Company and Robert Putnam, incorporated by reference to Exhibit 10.10
to Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.11 Sales Contractual Agreement dated March 19, 1996 between the
Company and Evolve Software, Inc., incorporated by reference to
Exhibit 10.11 to Pre-Effective Amendment No. 1 to Registration
Statement on Form SB-2 dated April 29, 1996 (1)
10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve
Software, Inc. Providing for the Purchase of up to 50,000 Common Shares
at $2.85, incorporated by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2 dated April 29, 1996 (1)
10.12 Employment Agreement dated as of May 8, 1996 between the Company and
Michael A. Carenzo, including Schedule A - Stock Option Agreement,
incorporated by reference to Pre-Effective Amendment No. 2 to
Registration Statement on Form SB-2 dated May 23, 1996 (1)
10.12.1 First Amendment to Employment Agreement dated May 8, 1996 between the
Company and Michael A. Carenzo dated September 23, 1996, incorporated by
reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal year ended
May 31, 1997 (1)
</TABLE>
EX-5
<PAGE> 68
<TABLE>
<CAPTION>
<S> <C> <C>
10.13 1996 Stock Option Plan of the Company dated March 25, 1996 and approved
by the Shareholders on May 17, 1996, incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996 (1)
10.14 Sales Contractual Agreement dated June 20, 1996 between the Company
and Compunetics Incorporated incorporated by reference to Exhibit 10.14 to
Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.15 Sales Contractual Agreement dated July 31, 1996 between the Company and
Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to
Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.16 Employment Agreement dated January 1, 1997 between the
Company and Norman J. Dawson, incorporated by reference to Exhibit 10.16
to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
10.17 Employment Agreement dated January 1, 1997 between the
Company and Jayanta K. Maitra, incorporated by reference to Exhibit 10.17
to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
10.18 Technology License and Distribution Agreement dated June 23, 1997
between the Company and Sun Microsystems, Inc., incorporated by reference
to Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
10.19 Employment Agreement dated March 23, 1998 between the Company
and James Lunney (2)
10.20 Employment Agreement dated July 28, 1997 between the Company
and Philip Morettini (2)
10.21 Employment Agreement dated July 23, 1998 between the Company
and Lowell W. Giffhorn (2)
23.0 CONSENTS OF EXPERTS AND COUNSEL.
23.1 Consent of BDO Seidman, LLP (2)
23.2 Consent of Harlan & Boettger, Certified Public Accountants (2)
99.0 ADDITIONAL EXHIBITS.
99.1 Form of ISO Plan Option (Gaspar) dated May 29, 1992,
incorporated by reference to Exhibit 28.2 to registration
statement on Form SB-2, file no. 33-57858 (1)
99.2 Form of NSO Plan Option (Berlin) dated May 29, 1992,
incorporated by reference to Exhibit 28.3 to registration
statement on Form SB-2, file no. 33-57858 (1)
99.3 Form of Incentive Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreements differ as to number of shares, dates,
prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
</TABLE>
EX-6
<PAGE> 69
<TABLE>
<CAPTION>
<S> <C> <C>
99.4 Form of NonQualified Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreement differ as to number of shares, date,
prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
99.5 Press Release of the Company dated November 4, 1996 incorporated by
reference to Exhibit 99.5 to Form 8-K dated January 9, 1997 (1)
(1) Previously filed in indicated registration statement or report.
(2) Exhibit filed herewith this Annual Report on Form 10-KSB for the fiscal year ended May 31, 1998
</TABLE>
EX-7
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10K-SB
Annual Report
EXHIBIT NO. 4.9
Form of 5% Convertible Term Debenture
EX-8
<PAGE> 2
[EXECUTION COPY]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES
ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR AN OPINION OF COUNSEL,
IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933, AS AMENDED OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF
1933, AS AMENDED.
CONVERTIBLE TERM DEBENTURE
November 24, 1997 $925,000
FOR VALUE RECEIVED, PATRIOT SCIENTIFIC CORPORATION, a Delaware
corporation (hereinafter called the "Borrower" or the "Company"), hereby
promises to pay to the order of CC Investments, LDC or registered assigns or
transferees of all or any portion hereof (each a "Holder" and, collectively,
"Holders") the aggregate sum of Nine Hundred Twenty-five Thousand Dollars
($925,000) on June 2, 1999 (the "Scheduled Maturity Date"), and to pay interest
on the unpaid principal balance hereof at the rate of five percent (5%) per
annum from the date hereof (hereinafter called the "Issue Date") until the same
becomes due and payable (which interest shall accrue on a daily basis based on a
360 day year), whether at maturity or upon acceleration or otherwise. Interest
shall commence accruing on the Issue Date and shall be payable on the date the
principal amount in respect of which it has accrued is paid, whether at
maturity, upon acceleration or conversion or by prepayment or otherwise. All
payments shall be made at such address as Holders shall hereafter give to the
Borrower by written notice made in accordance with the provisions of this
Debenture. As used herein, "First Closing Date" means June 2, 1997.
ARTICLE I
PREPAYMENT
1.1 Limited Right to Prepay. Upon the occurrence of an Event of Failure
(as defined herein), this Debenture shall be prepaid by the Borrower at the
option of the Holder in accordance with the provisions of Article VI hereof.
Except as provided in Section 1.2 of this Article I and Article VI hereof, this
Debenture may not be prepaid without the prior written consent of all Holders.
EX-9
<PAGE> 3
1.2 Prepayment at Borrower's Option.
(a) So long as no Event of Failure shall have occurred and
provided the Borrower is not in material violation of any of its obligations
under that certain Securities Purchase Agreement, dated as of June 2, 1997,
between Borrower and the other signatories thereto (the "Securities Purchase
Agreement"), the Registration Rights Agreement, dated as of June 2, 1997, among
the Company and the other signatories thereto (the "Registration Rights
Agreement"), the Patriot Scientific Corporation Stock Purchase Warrant, dated as
of June 2, 1997 and as of November 24, 1997, or the Convertible Term Debentures
dated June 2, 1997 and as of November 24, 1997, then the Borrower shall have the
right to prepay ("Prepayment at Borrower's Election") all or any portion of the
then outstanding Debentures (other than Debentures which are the subject of a
Notice of Conversion delivered prior to the delivery date of the Optional
Prepayment Notice (as herein defined)) for the Optional Prepayment Amount (as
herein defined), which right shall be exercisable any time during the term of
this Debenture by the Borrower in increments of Five Hundred Thousand Dollars
($500,000) (provided that such right may be exercised for less than such amount
if the outstanding principal amount of this Debenture is less than such amount
and the Company is electing to effect redemption of the full amount remaining)
by delivery of an Optional Prepayment Notice in accordance with the prepayment
procedures set forth below. Any Prepayment at Borrower's Election pursuant to
this Section 1.2 shall be made ratably among Holders in proportion to the
principal amount of Debentures then outstanding. Holders may convert all or any
part of their Debentures selected for prepayment hereunder into Common Stock at
the Conversion Price by delivering a Notice of Conversion to the Borrower at any
time prior to the Effective Time of Prepayment (as herein defined). The
"Optional Prepayment Amount" with respect to each Debenture means the greater of
(a) the Benefit of the Bargain (as herein defined) as of the delivery date of
the Optional Prepayment Notice and (b) the Applicable Prepayment Percentage (as
herein defined) multiplied by the sum of the principal amount being prepaid plus
all accrued and unpaid interest thereon and accrued and unpaid Conversion
Failure Payments (if any) through the Effective Time of Prepayment.
(i) The "Benefit of the Bargain" means an amount equal to:
A x M
--
CP
where:
"A" means the principal amount of this Debenture being prepaid
plus all accrued and unpaid interest thereon and accrued and unpaid
Conversion Failure Payments (if any) through the Effective Time of
Prepayment;
"CP" means the Conversion Price in effect on the delivery date of
the Optional Prepayment Notice; and,
"M" means the average Closing Bid Price of the Company's Common
Stock during the ten trading day period ending on the day immediately
preceding the date on which the Optional Prepayment Notice is delivered
to Holder.
EX-10
<PAGE> 4
(ii) The "Applicable Prepayment Percentage" means (A) 130% if the
Effective Time of Prepayment is prior to the date which is 545 days
following the First Closing Date (the "First Redemption Price
Termination Date") and (B) 125% if the Effective Time of Prepayment
follows the First Redemption Price Termination Date but is prior to the
Scheduled Maturity Date.
(b) The Borrower may not deliver an Optional Prepayment Notice to
a Holder unless on or prior to the date of delivery of such Optional Prepayment
Notice, the Borrower shall have deposited with an escrow agent reasonably
satisfactory to such Holder, as a trust fund, cash sufficient in amount to pay
all amounts to which Holders are entitled upon such prepayment pursuant to
Subsection (a) of this Section 1.2, with irrevocable instructions and authority
to such escrow agent to complete the prepayment thereof in accordance with this
Section 1.2. Any Optional Prepayment Notice delivered in accordance with the
immediately preceding sentence shall be accompanied by a statement executed by a
duly authorized officer of its escrow agent, certifying the amount of funds
which have been deposited with such transfer agent or escrow agent and that the
transfer agent or escrow agent has been instructed and agrees to act as
prepayment agent hereunder.
(c) The Borrower shall effect the Prepayment at Borrower's
Election under this Section 1.2 by giving prior written notice (the "Optional
Prepayment Notice"), which notice may only be delivered on a business day during
the period commencing 395 days following the First Closing Date, of the date on
which such prepayment is to become effective (the "Effective Time of
Prepayment") to Holders of Debentures selected for prepayment at the address and
facsimile number of such Holder appearing in the Borrower's register for the
Debentures. The Optional Prepayment Notice shall indicate the Debentures
selected for prepayment and the Optional Prepayment Amount. The Optional
Prepayment Notice shall be deemed to have been delivered to a Holder: (i) if
such fax is received by such holder on or prior to 3:00 p.m. Chicago time, on
the time and date of transmission of Borrower's fax; and (ii) if such fax is
received by Holder after 3:00 p.m. Chicago time, on the next business day
following the date of transmission of Borrower's fax; provided that, for any
notice required under this subsection 1.2(c) to be valid, a copy of such notice
must be sent to the Holders on the same day by overnight courier.
(d) The Optional Prepayment Amount shall be paid to each Holder
whose Debentures are being prepaid at the Effective Time of Prepayment;
provided, however, that the Borrower shall not be obligated to deliver any
portion of the Optional Prepayment Amount until either the Debentures being
prepaid are delivered to the office of the Borrower or the transfer agent as
provided in this subsection, or such Holder notifies the Borrower or the
transfer agent that such Debentures have been lost, stolen or destroyed and
delivers documentation in accordance with Section 8.8 hereof. Notwithstanding
anything herein to the contrary, in the event that the Debentures being prepaid
are not delivered to the Borrower or the transfer agent prior to the second
business day following the Effective Time of Prepayment, the prepayment of the
Debentures pursuant to this Section 1.2 shall still be deemed effective as of
the Effective Time of Prepayment and the Optional Prepayment Amount shall be
paid to each Holder whose Debentures are being prepaid by 5:00 p.m., Chicago
time, on the next business day following the date on which the Debentures are
actually delivered to the Borrower or the transfer agent.
EX-11
<PAGE> 5
(e) If the Borrower fails to pay, when due and owing, any
Optional Prepayment Amount, then each Holder entitled to receive such Optional
Prepayment Amount shall have the right, at any time and from time to time, to
require the Borrower, upon written notice, to immediately convert (in accordance
with the terms of Section 3.1) any or all of the Debentures which are the
subject of Prepayment at Borrower's Election into shares of Common Stock at the
lowest Conversion Price in effect during the twenty trading days following the
Effective Time of Prepayment. In addition, if the Borrower fails to pay an
Optional Prepayment Amount when due and owing, the Borrower shall thereafter
forfeit its rights under this Article I to effect Prepayment at Borrower's
Election.
ARTICLE II
CERTAIN DEFINITIONS
2.1 The following terms shall have the following meanings:
(a) "Closing Bid Price" means, for any security as of any date,
the closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to Holders of a majority of
the aggregate principal amount represented by the then outstanding Debentures
("Majority Holders") if Bloomberg Financial Markets is not then reporting
closing bid prices of such security (collectively, "Bloomberg"), or if the
foregoing does not apply, the last reported sale price of such security in the
over-the-counter market on the electronic bulletin board of such security as
reported by Bloomberg, or, if no sale price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value as reasonably determined by an investment banking firm
selected by the Company and reasonably acceptable to the Majority Holders, with
the costs of such appraisal to be borne by the Company.
(b) "Conversion Amount" means (i) the portion of the principal
amount of this Debenture elected by Holder to be converted (the "Selected
Amount"), which amount may be all or any portion of the principal amount of this
Debenture plus (ii) accrued and unpaid Conversion Failure Payments relating
thereto (if any) plus (iii) an amount equal to the product of (A) N divided by
365 times (B) .05 times (C) the Selected Amount.
(c) "Conversion Date" means, for any Optional Conversion, the
date specified in the Notice of Conversion, or if no date is specified therein,
the date the Notice of Conversion is faxed or otherwise delivered to the
Company; provided, however, that the Conversion Date shall not be prior to the
date of delivery of the Notice of Conversion and any Notice of Conversion
delivered to the Company after 5:00 p.m. San Diego time shall be deemed
delivered as of the next following business day.
(d) "Conversion Percentage" shall have the following meaning and
shall be subject to adjustment as provided herein:
EX-12
<PAGE> 6
<TABLE>
<CAPTION>
If the Conversion Date is a Then the
Number of Days after the First Conversion
Closing Date within the Following Range: Percentage is:
---------------------------------------- --------------
<S> <C>
121-180 91%
181-270 85%
271-360 79%
361-450 76%
more than 450 75%
</TABLE>
(e) "Conversion Price" means the lesser of the Fixed Conversion
Price and the Variable Conversion Price.
(f) "Fixed Conversion Price" means $1.16460, subject to
adjustment as provided herein.
(g) "N" means the number of days from the First Closing Date to
and including the Conversion Date, subject to Section 3.2 hereof, as specified
in the notice of conversion in the form attached hereto (the "Notice of
Conversion").
(h) "Variable Conversion Price" means, as of any Conversion Date,
the amount obtained by multiplying the Conversion Percentage then in effect by
the average of the Closing Bid Prices for the Common Stock for the ten (10)
consecutive trading days ending on the trading day immediately preceding such
Conversion Date (subject to equitable adjustment for any stock splits, stock
dividends, reclassifications or similar events during such ten (10) trading day
period), subject to adjustment as provided herein.
ARTICLE III
CONVERSION
3.1 Conversion at the Option of the Holder. Subject to the
limitations on conversions contained in Section 3.7 hereof, the Holder may, at
any time and from time to time, convert (an "Optional Conversion") a Conversion
Amount into a number of fully paid and nonassessable shares of Common Stock
determined by dividing such Conversion Amount by the Conversion Price.
3.2 Mechanics of Conversion. In order to effect an Optional
Conversion, a Holder (a "Converting Holder") shall: (x) fax (or otherwise
deliver) a copy of the fully executed Notice of Conversion to the Company for
the Common Stock and (y) surrender or cause to be surrendered, this Debenture,
duly endorsed, along with a copy of the Notice of Conversion, as soon as
practicable thereafter. Upon receipt by the Company of a facsimile copy of a
Notice of Conversion from a Converting Holder, the Company shall immediately
send, via facsimile, a confirmation to the Converting Holder stating that the
Notice of Conversion has been received, the date upon which the Company expects
to deliver the Common Stock upon conversion and the name and telephone number of
a contact person at the Company regarding the conversion.
EX-13
<PAGE> 7
3.3 Delivery of Common Stock Upon Conversion. Subject to Section 3.6
hereof, upon the delivery of a Notice of Conversion, the Company shall, not
later than the later of (a) the day that is three business days following the
Conversion Date and (b) the day that is the first business day following the
date of surrender of this Debenture (or delivery of documentation in accordance
with Section 8.8) (the "Delivery Period"), issue and deliver to the Converting
Holder (x) that number of shares of Common Stock issuable upon conversion of the
portion of this Debenture being converted and (y) a new Debenture in the form
hereof representing the balance of the principal amount hereof not being
converted, if any. Delivery under this Section may be made personally or by
reputable overnight courier.
3.4 Taxes. The Company shall pay any and all taxes (other than
transfer taxes) which may be imposed upon it with respect to the issuance and
delivery of the shares of Common Stock upon the conversion of this Debenture.
3.5 No Fractional Shares. No fractional shares of Common Stock are to
be issued upon the conversion of this Debenture, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Conversion Price of a
share of Common Stock (as determined for conversion of this Debenture into whole
shares of Common Stock).
3.6 Conversion Disputes. In the case of any dispute with respect to a
conversion, the Company shall promptly issue such number of shares of Common
Stock as are not disputed in accordance with Sections 3.1 and 3.3 hereof. If
such dispute only involves the calculation of the Conversion Price, the Company
shall submit the disputed calculations to an independent accounting firm of
national standing (selected by the Converting Holder; provided that the
Converting Holder currently does not have a client relationship with such
accounting firm) via facsimile within two (2) business days of receipt of the
Notice of Conversion. The accountant shall audit the calculations and notify the
Company and the Converting Holder of the results no later than two (2) business
days from the date it receives the disputed calculations. The accountant's
calculation shall be deemed conclusive, absent manifest error. The Company shall
then issue the appropriate number of shares of Common Stock in accordance with
Section 3.3 above.
3.7 Limitations on Conversions. The conversion of this Debenture
shall be subject to the following limitations (each of which limitations shall
be applied independently):
(a) Holding and Increment Restrictions. No Holder may effect an
Optional Conversion prior to the date which is 120 days following the
First Closing Date. Optional Conversions must be effected in increments
of Ten Thousand Dollars ($10,000); provided that Optional Conversions
may be effected for less than such amount if the sum of all outstanding
principal of this Debenture plus all accrued interest thereon and
Conversion Failure Payments (if any) through the Conversion Date is less
than such amount and the Converting Holder is electing to effect the
Optional Conversion of the full amount remaining.
(b) No Five Percent Holders. Notwithstanding anything to the
contrary contained herein, the Debentures shall not be convertible by a
Holder to the extent (but only to the
EX-14
<PAGE> 8
extent) that, if convertible by such Holder, such Holder would
beneficially own in excess of 4.9% of the shares of Common Stock. To the
extent the above limitation applies, the determination of whether
Debentures shall be convertible (vis-a-vis other securities owned by
such Holder) and of which Debentures shall be convertible shall be in
the sole discretion of the Holder and submission of the Debentures for
conversion shall be deemed to be the Holder's determination of whether
such Debentures are convertible and of which Debentures are convertible,
subject to such aggregate percentage limitation. No prior inability to
convert Debentures pursuant to this paragraph shall have any effect on
the applicability of the provisions of this subsection with respect to
any subsequent determination of convertibility. For the purposes of this
subsection, beneficial ownership and all calculations, including without
limitation, with respect to calculations of percentage ownership shall
be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D and G thereunder.
The provisions of this subsection may be waived and/or implemented in a
manner otherwise than strictly in conformity with the foregoing
provisions of this subsection 3.7(b) with the approval of the Board of
Directors of the Corporation and the holders of a majority in interest
in the then outstanding Debentures and Warrants (voting together as a
single class): (i) with respect to any matter to cure any ambiguity
herein, to correct this subsection (or any portion thereof) which may be
defective or inconsistent with the intended 4.9% beneficial ownership
limitation herein contained or to make changes or supplements necessary
or desirable to properly give effect to such 4.9% limitation; and (ii)
with respect to any other matter, with the further consent of the
holders of majority of the then outstanding shares of Common Stock. The
limitations contained in this subsection shall apply to a successor
Holder of Debenture if, and to the extent, elected by such successor
Holder concurrently with its acquisition of such Debentures, such
election to be promptly confirmed in writing to the Company (provided no
transfer or series of transfers to a successor Holder or holders shall
be used by a Holder to evade the limitations contained in this
subsection).
3.8. Required Conversion at Maturity. Provided all shares of Common
Stock issuable upon conversion of all outstanding Debentures are then (i)
authorized and reserved for issuance, (ii) registered under the Securities Act
for resale by all Holders thereof and (iii) eligible to be traded on the OTC
Bulletin Board, the Nasdaq Small Cap Market ("NASDAQ"), the Nasdaq National
Market System ("NMS"), the New York Stock Exchange ("NYSE") or the American
Stock Exchange ("AMEX"), each Debenture outstanding on the Scheduled Maturity
Date automatically shall be converted into shares of Common Stock on such date
in accordance with the conversion formulas set forth in Section 3.1 (the
"Required Conversion at Maturity"). If the Required Conversion at Maturity
occurs, the Borrower and the Holders shall follow the applicable conversion
procedures set forth in Article III; provided, however, that a Notice of
Conversion shall be deemed to be delivered to the Borrower or its transfer agent
on the Scheduled Maturity Date. If Borrower fails to effect the Required
Conversion at Maturity in accordance with the terms hereof, then each Holder
shall have the right, at any time and from time to time, to require the
Borrower, upon written notice, to immediately effect a repayment of all or any
part of their Debentures (in accordance with the terms of Article VI).
ARTICLE IV
RESERVATION OF SHARES OF COMMON STOCK
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4.1 Reserved Amount. At Closing, the Company shall have authorized
and reserved and keep available for issuance 4,000,000 shares of Common Stock
(the "Reserved Amount") solely for the purpose of effecting the conversion of
the Debentures and exercise of the warrants to acquire Common Stock (the
"Warrants"), in the form attached to the Securities Purchase Agreement as
Exhibit B, issued or to be issued pursuant to the terms of the Securities
Purchase Agreement (collectively, all such Debentures and Warrants, the
"Securities Purchase Agreement Securities"). The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock a sufficient number of shares of Common Stock to provide for the full
conversion of all outstanding Debentures and issuance of the shares of Common
Stock in connection therewith and the full exercise of the Warrants and issuance
of the shares of Common Stock in connection therewith.
4.2 Share Authorization. The board of directors of the Company shall
approve and shall use its best efforts to obtain authorization by the
shareholders of the Company of an increase of the number of authorized shares of
capital stock of the Company (the "Share Authorization") to sixty million
(60,000,000) shares by the earlier of September 30, 1997 and the date of the
Company's next annual meeting of shareholders. Immediately following the Share
Authorization (as herein defined), the Reserved Amount shall be one and one-half
(1.5) times the number of shares of Common Stock issuable upon conversion of
this Debenture and exercise of the Warrants.
4.3 Increases to Reserved Amount. Without limiting any other
provision of this Article IV, following the Share Authorization, if the Reserved
Amount for any three (3) consecutive trading days (the last of such three (3)
trading days being the "Authorization Trigger Date") shall be less than 125% of
the number of shares of Common Stock issuable upon conversion or exercise, as he
case may be, of the Securities Purchase Agreement Securities on such trading
days, the Company shall immediately notify all Holders of such occurrence and
shall take action as soon as possible, but in any event within sixty (60) days
after an Authorization Trigger Date (including, if necessary, seeking
shareholder approval to authorize the issuance of additional shares of Common
Stock) to increase the Reserved Amount to 150% of the number of shares of Common
Stock then issuable upon conversion or exercise, as the case may be, of the
Securities Purchase Agreement Securities.
4.4 Reduction of Reserved Amount Under Certain Circumstances. Prior
to complete conversion of this Debenture, the Company shall not reduce the
number of shares required to be reserved for issuance under this Article IV
without the written consent of all Holders except for a reduction proportionate
to a reverse stock split effected for a business purpose other than affecting
the obligations of Borrower under this Article IV, which reverse stock split
affects all shares of Common Stock equally. Following complete conversion of
this Debenture, the Company may, with fifteen (15) days prior written notice to
Holder, reduce the Reserved Amount to 125% of the number of shares of Common
Stock issuable upon the full exercise of the Warrants; provided, however, that
the Reserved Amount shall continue to be subject to increase pursuant to Section
4.3 hereof.
4.5 Allocation of Reserved Amount. Each increase to the Reserved
Amount shall be allocated pro rata among the Holders based on the number of
Debentures and Warrants held by each Holder at the time of the establishment of
or increase in the Reserved Amount. In the event a Holder shall sell or
otherwise transfer any of such Holder's Debentures or Warrants, each transferee
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shall be allocated a pro rata portion of such transferor's Reserved Amount. Any
portion of the Reserved Amount which remains allocated to any person or entity
which does not hold any Debentures shall be allocated to the remaining Holders,
pro rata based on the number of Debentures and Warrants then held by such
Holders.
ARTICLE V
FAILURE TO SATISFY CONVERSIONS
5.1 Conversion Failure Payments. If, at any time, (x) a Holder
submits a Notice of Conversion (or is deemed to submit such notice pursuant to
Section 3.8 hereof) and the Company fails for any reason to deliver, on or prior
to the expiration of the Delivery Period for such conversion, such number of
shares of Common Stock to which such Converting Holder is entitled upon such
conversion, or (y) the Company provides notice to Holder at any time of its
intention not to issue shares of Common Stock upon exercise by Holder of its
conversion rights in accordance with the terms of the Debentures (each of (x)
and (y) being a "Conversion Failure"), then the Company shall pay to such Holder
damages in an amount equal to the lower of: (i) the product of (A) the Damages
Amount times (B) D times (C) .01 and (ii) the highest interest rate permitted by
applicable law, where:
"D" means the number of days beginning the date of the Conversion
Failure through and including the Cure Date with respect to such Conversion
Failure;
"Damages Amount" means the amount of the Debenture subject to conversion
plus all accrued and unpaid interest thereon as of the first day of the
Conversion Failure.
"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of the
portion of this Debenture submitted for conversion and (ii) with respect to a
Conversion Failure described in clause (y) of its definition, the date the
Company undertakes in writing to issue Common Stock in satisfaction of all
conversions of Debentures in accordance with their terms.
The payments to which a Holder shall be entitled pursuant to this
Section are referred to herein as "Conversion Failure Payments." A Holder may
elect to receive accrued Conversion Failure Payments in cash or to convert all
or any portion of such accrued Conversion Failure Payments, at any time, into
Common Stock at the lowest Conversion Price in effect during the period
beginning on the date of the Conversion Failure through the Cure Date for such
Conversion Failure. In the event a Holder elects to receive any Conversion
Failure Payments in cash, it shall so notify the Company in writing. In the
event a Holder elects to convert all or any portion of the Conversion Failure
Payments, such Holder shall indicate on a Notice of Conversion such portion of
the Conversion Failure Payments which such Holder elects to so convert and such
conversion shall otherwise be effected in accordance with the provisions of
Article III.
5.2 Buy-In Cure. Unless a Conversion Failure described in clause (y)
of Section 5.1 hereof has occurred with respect to such a Holder, if (i) the
Company fails for any reason to deliver during the Delivery Period shares of
Common Stock to a Holder upon a conversion of this Debenture and (ii) after the
applicable Delivery Period with respect to such conversion, a Holder
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purchases (in an open market transaction or otherwise) shares of Common Stock to
make delivery upon a sale by a Holder of the shares of Common Stock (the "Sold
Shares") which such Holder anticipated receiving upon such conversion (a
"Buy-In"), the Company shall pay such Holder (in addition to any other remedies
available to Holder) the amount by which (x) such Holder's total purchase price
(including brokerage commission, if any) for the shares of Common Stock so
purchased exceeds (y) the net proceeds received by such Holder from the sale of
the Sold Shares. For example, if a Holder purchases shares of Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect to
shares of Common Stock sold for $10,000, the Company will be required to pay
such Holder $1,000. A Holder shall provide the Company written notification
indicating any amounts payable to Holder pursuant to this Section 5.2. The
Company shall make any payments required pursuant to this Section 5.2 in
accordance with and subject to Section 8.10.
5.3 Adjustment to Conversion Price. If a Holder has not received
certificates for all shares of Common Stock within two business days following
the expiration of the Delivery Period with respect to a conversion of any
portion of any of such Holder's Debentures for any reason, then the Fixed
Conversion Price shall thereafter be the lesser of (i) the Fixed Conversion
Price on the Conversion Date specified in the Notice of Conversion which
resulted in the Conversion Failure and (ii) the lowest Conversion Price in
effect during the period beginning on, and including, such Conversion Date
through and including the Cure Date. If there shall occur a Conversion Failure
of the type described in clause (y) of Section 5.1, then the Fixed Conversion
Price with respect to any conversion thereafter shall be the lowest Conversion
Price in effect at any time during the period beginning on, and including, the
date of the occurrence of such Conversion Failure through and including the Cure
Date. The Fixed Conversion Price shall thereafter be subject to further
adjustment for any events described in Article VII.
ARTICLE VI
EVENTS OF FAILURE
6.1 Holder's Option to Demand Prepayment. Upon the occurrence of an
Event of Failure (as herein defined), each Holder shall have the right to elect
at any time and from time to time prior to the cure by Borrower of such Event of
Failure to have all or any portion of such Holder's then outstanding Debentures
prepaid by the Company for an amount equal to the Holder Demand Prepayment
Amount (as herein defined).
(a) The right of a Holder to elect prepayment shall be exercisable
upon the occurrence of an Event of Failure by such Holder in its sole
discretion by delivery of a Demand Prepayment Notice (as herein defined)
in accordance with the procedures set forth in this Article VI.
Notwithstanding the exercise of such right, the Holder shall be entitled
to exercise all other rights and remedies available under the provisions
of this Debenture and at law or in equity.
(b) A Holder shall effect each demand for prepayment under this
Article VI by giving at least two (2) business days prior to written
notice (the "Demand Prepayment Notice") of the date which such
prepayment is to become effective (the "Effective Date of Demand of
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Prepayment"), the Debentures selected for prepayment and the Holder
Demand Prepayment Amount to the Borrower at the address and facsimile
number provided in Section 8.2, which Demand Prepayment Notice shall be
deemed to have been delivered on the business day after the date of
transmission of Holder's fax (with a copy sent by overnight courier to
the Borrower) of such notice.
(c) The Holder Demand Prepayment Amount shall be paid to a Holder
whose Debentures are being prepaid within one (1) business day following
the Effective Date of Demand of Prepayment; provided, however, that the
Borrower shall not be obligated to deliver any portion of the Holder
Demand Prepayment Amount until one (1) business day following either the
date on which the Debentures being prepaid are delivered to the office
of the Borrower or the transfer agent, or the date on which the Holder
notifies the Borrower or the transfer agent that such Debentures have
been lost, stolen or destroyed and delivers the documentation required
in accordance with Section 8.8 hereof.
6.2 Holder Demand Prepayment Amount. The "Holder Demand Prepayment
Amount" means the greater of: (a) 1.5 times the aggregate amount of the
principal amount of this Debenture for which demand is being made (the "Stated
Value"), plus all accrued and unpaid interest thereon and accrued and unpaid
Conversion Failure Payments (if any) through the date of prepayment and (b) the
product of (1) the highest price at which the Common Stock is traded on the date
of the Event of Failure (or the most recent highest closing bid price if the
Common Stock is not traded on such date) divided by the Conversion Price as of
the date of the Event of Failure, and (2) the sum of the Stated Value plus all
accrued and unpaid interest thereon and all accrued and unpaid Conversion
Failure Payments (if any) through the date of prepayment.
6.3 Events of Failure. An "Event of Failure" means any one of the
following:
(a) a Conversion Failure described in Section 5.1 hereof occurs and
is not cured by the Company within two (2) business days after its occurrence;
(b) the Company fails, and such failure continues uncured for three
(3) business days after the Company has been notified thereof in writing by a
Holder, to satisfy the requirements of Article IV hereof;
(c) the Company fails to maintain an effective registration statement
as required by Section 2.1 and Section 3.1 of the Registration Rights Agreement
except where such failure lasts no longer than three consecutive trading days
and is caused solely by failure of the Securities and Exchange Commission to
timely review the customary submission of or respond to the customary requests
of the Company;
(d) for three consecutive trading days or for an aggregate of ten
(10) trading days in any nine (9) month period, the Common Stock (including any
of the shares of Common Stock issuable upon conversion of this Debenture and
exercise of the Warrants) is (i) suspended from trading on any of NASDAQ, NMS,
NYSE, AMEX or the OTC Bulletin Board, or (ii) is not qualified for trading on at
least one of, NASDAQ, NMS, NYSE, AMEX or the OTC Bulletin Board;
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(e) the Company fails, and such failure continues uncured for three
(3) business days after the Company has been notified thereof in writing by a
Holder, to remove any restrictive legend on any certificate for any shares of
Common Stock issued to a Holder upon conversion or exercise, as the case may be,
of the Securities Purchase Agreement Securities as and when required by the
Debentures, the Warrants, the Securities Purchase Agreement or the Registration
Rights Agreement;
(f) the Company breaches, and such breach continues uncured for three
(3) business days after the Company has been notified thereof in writing by a
Holder, any significant covenant or other material term or condition of any
Securities Purchase Agreement Securities, the Securities Purchase Agreement or
the Registration Rights Agreement;
(g) any representation or warranty of the Company made herein or in
any agreement, statement or certificate given in writing pursuant hereto or in
connection herewith (including, without limitation, the Securities Purchase
Agreement and the Registration Rights Agreement), shall be false or misleading
in any material respect when made;
(h) the Company or any subsidiary of the Company shall make an
assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business, or such a receiver or trustee shall otherwise be
appointed; or
(i) bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Company or any
subsidiary of the Company (and such proceedings shall continue unstayed for
thirty (30) days).
6.4 Failure to Pay Damages Amount. If the Company fails to pay the
Holder Demand Prepayment Amount within five (5) business days of its receipt of
a Demand Prepayment Notice, then such Holder shall have the right, at any time
and from time to time prior to the payment of the Holder Demand Prepayment
Amount, to require the Company, upon written notice, to immediately convert (in
accordance with the terms of Section 3.1) all or any portion of the Holder
Demand Prepayment Amount, into shares of Common Stock at the then current
Conversion Price, provided that if the Company has not delivered the full number
of shares of Common Stock issuable upon such conversion within two (2) business
days after Holder delivers written notice of such conversion, the Conversion
Price with respect to such Holder Demand Prepayment Amount shall thereafter be
deemed to be the lower of the Variable Conversion Price on the date of the Event
of Failure and the Variable Conversion Price on the date on which the Company
delivers to the Holder the full number of freely tradable shares of Common Stock
issuable upon such conversion. In the event the Company is not able to pay all
amounts due and payable with respect to all Debentures subject to Holder Demand
Prepayment Notices, the Company shall pay the Holders such amounts pro rata,
based on the total amounts payable to such Holder relative to the total amounts
payable to all Holders.
ARTICLE VII
ADJUSTMENTS TO THE CONVERSION PRICE
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The Conversion Price shall be subject to adjustment from time to time as
follows:
7.1 Stock Splits, Stock Dividends, Etc. If at any time after the
First Closing Date, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification or
other similar event, the Fixed Conversion Price shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is decreased by
a reverse stock split, combination or reclassification of shares, or other
similar event, the Fixed Conversion Price shall be proportionately increased. In
such event, the Company shall notify the Company's transfer agent of such change
on or before the effective date thereof.
7.2 Major Transactions. If the Company shall consolidate with or
merge into any corporation or reclassify its outstanding shares of Common Stock
(other than by way of subdivision or reduction of such shares) (each a "Major
Transaction"), then each Holder shall thereafter be entitled to receive
consideration, in exchange for such Debenture, equal to the greater of, as
determined in the sole discretion of such Holder: (i) the number of shares of
stock or securities or property of the Company, or of the entity resulting from
such consolidation or merger (the "Major Transaction Consideration"), to which a
Holder of the number of shares of Common Stock delivered upon conversion of such
Debenture would have been entitled upon such Major Transaction had the Holder of
such Debenture exercised its right of conversion (without regard to any
limitations on conversion herein contained) on the trading date immediately
preceding the public announcement of the transaction resulting in such Major
Transaction and had such Common Stock been issued and outstanding and had such
Holder been the holder of record of such Common Stock at the time of such Major
Transaction, and the Company shall make lawful provision therefor as a part of
such consolidation, merger or reclassification; and (ii) 125% of the principal
amount of such Debenture in cash. No sooner than ten (10) days nor later than
five (5) days prior to the consummation of the Major Transaction, but not prior
to the public announcement of such Major Transaction, the Company shall deliver
written notice ("Notice of Major Transaction") to each Holder, which Notice of
Major Transaction shall be deemed to have been delivered one (1) business day
after the Company's sending such notice by telecopy (provided that the Company
sends a confirming copy of such notice on the same day by overnight courier) of
such Notice of Major Transaction. Such Notice of Major Transaction shall
indicate the amount and type of the Major Transaction Consideration which such
Holder would receive under clause (i) of this Section 7.2. If the Major
Transaction Consideration does not consist entirely of United States currency,
such Holder may elect to receive United States currency in an amount equal to
the value of the Major Transaction Consideration in lieu of the Major
Transaction Consideration by delivering notice of such election to the Company
within five (5) days of the Holder's receipt of the Notice of Major Transaction.
7.3 Adjustment Due to Distribution. If the Company shall declare or
make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a partial liquidating dividend, by way of return of capital
or otherwise (including any dividend or distribution to the Company's
shareholders in cash or shares (or rights to acquire shares) of capital stock of
a subsidiary) (a "Distribution") any time after the First Closing Date, then the
Holder shall be entitled, upon any conversion of this Debenture after the date
of record for determining shareholders entitled to such Distribution, to receive
the amount of such assets (or rights) which would have been payable to the
Holder had Holder with respect to the shares of Common Stock issuable upon such
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conversion and the shares of Common Stock issuable upon exercise of the Warrants
(in each case without regard to any limitations on conversion or exercise herein
or elsewhere contained) been the holder of such shares of Common Stock on the
record date for the determination of shareholders entitled to such Distribution.
7.4 Purchase Rights. If the Company issues any Convertible Securities
or rights to purchase stock, warrants, securities or other property (the
"Purchase Rights") pro rata to the record holders of any class of Common Stock,
then the Holders will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which each Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Debenture (without regard to any limitations on
conversion or exercise herein or elsewhere contained) immediately before the
date on which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for the grants, issue or sale of such
Purchase Rights.
7.5 No Adjustment for Certain Warrants. Anything in this Article VII
to the contrary notwithstanding, no adjustment shall be made to the Conversion
Price upon any issuance to Swartz Investments, LLC of warrants to purchase
Common Stock in consideration of its services in connection with the Securities
Purchase Agreement and the transactions contemplated thereby so long as such
warrants are not exercisable, in the aggregate, for more than 220,000 shares of
Common Stock.
7.6 Notices of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Conversion Price, then, and in each such case,
the Company shall give notice thereof to all Holders, which notice shall state
the Conversion Price resulting from such adjustment and the increase or decrease
in the number of shares of Common Stock purchasable at such price upon
conversion, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
ARTICLE VIII
MISCELLANEOUS
8.1 Failure or Indulgency Not Waiver. No failure or delay on the part
of a Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.
8.2 Notice. Any notice herein required or permitted to be given shall
be in writing and may be personally served or delivered by courier or by
confirmed telecopy and shall be deemed to have been given at the time and date
of receipt (which shall include telephone line facsimile transmission). The
addresses for such communications shall be:
If to the Company:
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Patriot Scientific Corporation
10989 Via Frontera
San Diego, California 92127
Telecopy: (619) 674-5005
Attention: Lowell W. Giffhorn
with a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
Telecopy: (619) 232-8311
Attention: Otto E. Sorensen
and with a copy to:
Robert Putnam
13112 Evening Creek Drive South
San Diego, California 92128
Telecopy: (619) 679-0545
If to Holder:
CC Investments, LDC
Corporate Centre, West Bay Road
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
with a copy to:
Castle Creek Partners, LLC
333 West Wacker Drive
Suite 1410
Chicago, IL 60606
Telecopy: (312) 435-2636
Attention: John D. Ziegelman
and with a copy to:
Altheimer & Gray
10 South Wacker Drive
Suite 4000
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Chicago, IL 60606
Telecopy: (312) 715-4800
Attention: Kenneth M. Crane
If to any other Holder, to such address set forth under Holder's name on
the signature page hereto executed by Holder.
8.3 Amendment Provision. Except as provided in Section 3.7(b) hereof,
this Debenture and any provision hereof may only be amended by an instrument in
writing signed by the Company and the Majority Holders. The term "Debenture" and
all references thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented.
8.4 Assignability. This Debenture shall be binding upon the Company
and its successors and assigns and shall inure to the benefit of each Holder and
its successors and assigns. The Holder shall notify the Company upon the
assignment of this Debenture.
8.5 Cost of Collection. If default or failure is made in any manner
with respect to this Debenture, the Company shall pay the Holder hereof costs of
collection, including reasonable attorneys' fees.
8.6 Governing Law. This Debenture shall be governed by and construed
in accordance with the laws of the State of Delaware applicable to contracts
made and to be performed in the State of Delaware. The Company irrevocably
consents to the jurisdiction of the United States federal courts located in the
County of New Castle in any suit or proceeding based on or arising under this
Agreement and irrevocably agrees that all claims in respect of such suit or
proceeding may be determined in such courts. The Company irrevocably waives the
defense of an inconvenient forum to the maintenance of such suit or proceeding.
The Company further agrees that service of process upon the Company, mailed by
first class mail shall be deemed in every respect effective service of process
upon the Company in any such suit or proceeding. Nothing herein shall affect
each Holder's right to serve process in any other manner permitted by law. The
Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
8.7 Denominations. At the request of a Holder, upon surrender of this
Debenture, the Company shall promptly issue new Debentures in the aggregate
outstanding principal amount hereof, in the form hereof, in such denominations
as such Holder shall request.
8.8 Lost or Stolen Debentures. Upon receipt by the Company of (i)
evidence of the loss, theft, destruction or mutilation of this Debenture and
(ii) (y) in the case of loss, theft or destruction, or an indemnity reasonably
satisfactory to the Company, or (z) in the case of mutilation, upon surrender
and cancellation of this Debenture, the Company shall execute and deliver new
Debentures, in the form hereof, in such denominations as a Holder may request.
However, the Company shall not be obligated to reissue such lost or stolen
Debentures if such Holder contemporaneously requests the Company to convert this
Debenture.
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8.9 Statements of Available Shares. Upon request, the Company shall
deliver to a Holder a written report notifying such Holder of any occurrence
which prohibits the Company from issuing Common Stock upon any such conversion.
The report shall also specify (i) the total principal amount of all outstanding
Debentures as of the date of the request, (ii) the total number or shares of
Common Stock issued upon all conversions of Debentures through the date of the
request, (iii) the total number of shares of Common Stock issued upon exercise
of all Warrants through the date of the request, (iv) the total number of shares
of Common Stock which are reserved for issuance upon conversion of Debentures
and exercise of Warrants as of the date of the request and (v) the total number
of shares of Common Stock which may thereafter be issued by the Company upon
conversion of Debentures and exercise of Warrants before the Company would
exceed the Reserved Amount. The Company shall provide, within fifteen (15) days
after delivery to the Company of a written request by Holder, all of the
information enumerated in clauses (i) - (v) of this Section 8.9.
8.10 Status as Debenture Holder. Upon submission of a Notice of
Conversion by Holder, the principal amount of this Debenture and the interest
thereon covered thereby shall be deemed converted into shares of Common Stock
and the holder's rights with respect thereto shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to Holder because of a failure by the Company to comply with the terms of this
Debenture. Notwithstanding the foregoing, if Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion for
any reason, then (unless Holder otherwise elects to retain its status as a
Holder of Common Stock) the portion of the principal amount and interest thereon
subject to such conversion shall be deemed outstanding under this Debenture and
the Company shall, as soon as practicable, return this Debenture to the Holder.
In all cases, Holder shall retain all of its rights and remedies for the
Company's failure to convert this Debenture.
8.11 Remedies Cumulative. The remedies provided in this Debenture
shall be cumulative and in addition to all other remedies available under this
Debenture, at law or in equity (including a decree of specific performance
and/or other injunctive relief), and nothing herein shall limit Holder's right
to pursue actual damages for any failure by the Company to comply with the terms
of this Debenture. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees, in the event of any such breach or threatened breach, the Holder shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, with the necessity of showing economic loss and without
any bond or other security being required.
* * *
EX-25
<PAGE> 19
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in
its name by its duly authorized officer as of the date first written above.
PATRIOT SCIENTIFIC CORPORATION
By: /s/ ELWOOD G. NORRIS
--------------------
Name: Elwood G. Norris
Title: Chairman and a Director
By: /s/ MICHAEL A. CARENZO
----------------------
Name: Michael A. Carenzo
Title: President, Chief Executive Officer and a
Director
EX-26
<PAGE> 20
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert (the "Conversion")
$__________ principal amount of the Debenture plus all accrued and unpaid
interest on such principal amount (i.e., $_________) plus all accrued and unpaid
Conversion Failure Payments relating thereto (if any) (each as defined in the
Convertible Term Debenture dated November 24, 1997 (the "Debenture")), into
shares of common stock ("Common Stock") of Patriot Scientific Corporation (the
"Company") according to the conditions of the Debenture, as of the date written
below. If securities are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto. No fee will be charged to the Holder for any conversion except as
provided herein.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of
this Debenture shall be made pursuant to registration of the Common Stock under
the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption
from registration under the Act.
In the event of partial exercise, please reissue an appropriate Debenture(s) for
the principal balance which shall not have been converted.
Date of Conversion: __________________
Applicable Conversion Price:____________
Amount of Conversion Failure Payments
to be Converted, if any: ________________
Number of Shares of
Common Stock to be Issued: ____________
Signature: ___________________________
Name: ______________________________
Address: ___________________________
ACKNOWLEDGED AND AGREED:
PATRIOT SCIENTIFIC CORPORATION
BY:__________________________________
NAME:________________________________
TITLE:_______________________________ DATE: ______________
EX-27
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
Annual Report
EXHIBIT NO. 4.10
Form of Stock Purchase Warrant
EX-28
<PAGE> 2
[EXECUTION COPY]
VOID AFTER 5:00 P.M. SAN DIEGO
TIME ON JUNE 2, 2002
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS
THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933, AS AMENDED
Right to Purchase 185,000 Shares of
Common Stock, par value $.00001 per share
Date: November 24, 1997
PATRIOT SCIENTIFIC CORPORATION
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, CC Investments, LDC or its
registered assigns or transferees is entitled to purchase from Patriot
Scientific Corporation, a Delaware corporation (the "Company"), at any time or
from time to time during the period specified in Section 2 hereof, One Hundred
Eighty-five Thousand (185,000) fully paid and nonassessable shares of the
Company's common stock, par value $.00001 per share (the "Common Stock"), at an
exercise price of 1.50 per share (the "Exercise Price") (equal to 125% of the
average of the Closing Bid Prices (as herein defined) of the Common Stock for
the ten (10) consecutive trading days ending on the trading day immediately
preceding the Second Closing (as defined in that certain Securities Purchase
Agreement (the "Securities Purchase Agreement") dated as of June 2, 1997 among
the Company, CC Investments, LDC and The Matthew Fund, N.V.). The number of
shares of Common Stock purchasable hereunder (the "Warrant Shares") and the
Exercise Price are subject to adjustment as provided in Section 4 hereof. The
term "Warrants" means this Warrant and the other warrants, if any, of the
Company issued pursuant to the terms of the Securities Purchase Agreement. The
term "Closing Bid Price" means, for any security as of any date, the closing bid
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg Financial
Markets or a comparable reporting service of national reputation selected by the
Company and reasonably acceptable to the holder hereof (the "Holder") if
Bloomberg Financial Markets is not then reporting closing bid prices of such
security (collectively, "Bloomberg"), or if the foregoing does not apply, the
last reported sale price of such security in the
EX-29
<PAGE> 3
over-the-counter market on the electronic bulletin board of such security as
reported by Bloomberg, or, if no sale price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value as reasonably determined by an investment banking firm
selected by the Company and reasonably acceptable to the Holder with the costs
of such appraisal to be borne by the Company. As used herein, "First Closing
Date means June 2, 1997.
This Warrant is subject to the following terms, provisions, and
conditions:
1. Mechanics of Exercise. Subject to the provisions hereof, including,
without limitation, the limitations contained in Section 7(f) hereof, this
Warrant may be exercised as follows:
(a) Manner of Exercise. This Warrant may be exercised by the Holder,
in whole or in part, by the surrender of this Warrant (or evidence of loss,
theft, destruction or mutilation thereof in accordance with Section 7(c)
hereof), together with a completed exercise agreement in the form of Exercise
Agreement attached hereto as Exhibit 1 (the "Exercise Agreement"), to the
Company at the Company's principal executive offices (or such other office or
agency of the Company as it may designate by notice to the Holder), and a
written calculation of the number of shares of Common Stock to be issued upon
such exercise in accordance with the terms hereof (a "Cashless Exercise"). In
lieu of paying the Exercise Price in cash, the Holder shall surrender this
Warrant for the number of shares of Common Stock determined by multiplying the
number of Warrant Shares to which it would otherwise be entitled by a fraction,
the numerator of which shall be the difference between the then current Market
Price per share of the Common Stock and the Exercise Price, and the denominator
of which shall be the then current Market Price per share of Common Stock. The
Warrant Shares so purchased shall be deemed to be issued to the Holder or
Holder's designees, as the record owner of such shares, as of the date on which
this Warrant shall have been surrendered, the completed Exercise Agreement shall
have been delivered, and payment (or notice of an election to effect a Cashless
Exercise) shall have been made for such shares as set forth above.
(b) Issuance of Certificates. Subject to Section 1(c), Certificates for
the Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the Holder within a
reasonable time, not exceeding three (3) business days, after this Warrant shall
have been so exercised (the "Delivery Period"). The certificates so delivered
shall be in such denominations as may be requested by the Holder and shall be
registered in the name of Holder or such other name as shall be designated by
Holder. If this Warrant shall have been exercised only in part, then, unless
this Warrant has expired, the Company shall, at its expense, at the time of
delivery of such certificates, deliver to the Holder a new Warrant representing
the number of shares with respect to which this Warrant shall not then have been
exercised.
(c) Exercise Disputes. In the case of any dispute with respect to an
exercise, the Company shall promptly issue such number of shares of Common Stock
as are not disputed in accordance with this Section. If such dispute only
involves the calculation of the Exercise Price, the Company shall submit the
disputed calculations to an independent accounting firm of national
EX-30
<PAGE> 4
standing (selected by the Holder; provided that the Holder currently does not
have a client relationship with such accounting firm) via facsimile within two
(2) business days of receipt of the Exercise Agreement. The accountant shall
audit the calculations and notify the Company and the Converting Holder of the
results no later than two (2) business days from the date it receives the
disputed calculations. The accountant's calculation shall be deemed conclusive,
absent manifest error. The Company shall then issue the appropriate number of
shares of Common Stock in accordance with this Section.
(d) Fractional Shares. No fractional shares of Common Stock are to be
issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Exercise Price of a share of
Common Stock (as determined for exercise of this Warrant into whole shares of
Common Stock).
(e) Buy-In. If (i) the Company fails for any reason to deliver during
the Delivery Period shares of Common Stock to a Holder upon an exercise of this
Warrant and (ii) after the applicable Delivery Period with respect to such an
exercise, a Holder purchases (in an open market transaction or otherwise) shares
of Common Stock to make delivery upon a sale by a Holder of the shares of Common
Stock (the "Sold Shares") which such Holder anticipated receiving upon such
exercise (a "Buy-In"), the Company shall pay such Holder (in addition to any
other remedies available to Holder) the amount by which (x) such Holder's total
purchase price (including brokerage commission, if any) for the shares of Common
Stock so purchased exceeds (y) the net proceeds received by the such Holder from
the sale of the Sold Shares. For example, if a Holder purchases shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
shares of Common Stock sold for $10,000, the Company will be required to pay
such Holder $1,000. A Holder shall provide the Company written notification
indicating any amounts payable to Holder pursuant to this subsection.
2. Period of Exercise. This Warrant is exercisable at any time or
from time to time on or after the date hereof and before Midnight, San Diego
time, June 2, 2002 (the "Exercise Period").
3. Certain Agreements of the Company. The Company hereby covenants
and agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, claims and encumbrances.
(b) Reservation of Shares. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
(c) Listing. Subject to the remainder of this Section 3(c), the
Company shall ensure that its shares of Common Stock (including all Warrant
Shares) are listed and available for trading on the OTC Bulletin Board. The
Company shall promptly following the First Closing use its best efforts to
satisfy the listing requirements of, and secure the listing of the Common Stock
EX-31
<PAGE> 5
(including, without limitation, with respect to the Warrant Shares) upon, the
Nasdaq Small Cap Market ("NASDAQ"). Thereafter, the Company shall (i) use its
best efforts to continue the listing and trading of its Common Stock on the
NASDAQ, or on the Nasdaq National Market System ("NMS"), the New York Stock
Exchange ("NYSE") or the American Stock Exchange ("AMEX"); (ii) take all action
necessary to continue the listing and trading of its Common Stock on the OTC
Bulletin Board if the Common Stock is not listed and traded on NASDAQ, NMS, NYSE
or AMEX; and (iii) comply in all respects with the Company's reporting, filing
and other obligations under the by-laws or rules of the National Association of
Securities Dealers ("NASD") and such exchanges, as applicable.
(d) Certain Actions Prohibited. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such actions as may reasonably be requested by the Holder
of this Warrant in order to protect the exercise privilege of the Holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, and (ii) will take all such actions as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.
4. Antidilution Provisions. During the Exercise Period, the
Exercise Price and the number of Warrant Shares shall be subject to adjustment
from time to time as provided in this Section 4. In the event that any
adjustment of the Exercise Price as required herein results in a fraction of a
cent, such Exercise Price shall be rounded up or down to the nearest cent.
(a) Adjustment of Exercise Price and Number of Shares upon
Issuance of Common Stock. Except as otherwise provided in Section 4(c) and 4(e)
hereof, if and whenever after the First Closing Date, the Company issues or
sells, or in accordance with Section 4(b) hereof is deemed to have issued or
sold, any shares of Common Stock for no consideration or for a consideration per
share less than the Market Price (as herein defined) on the date of issuance (a
"Dilutive Issuance"), then effective immediately upon the Dilutive Issuance, the
Exercise Price will be adjusted in accordance with the following formula:
E' = E x O + P/M
-------
CSDO
where:
E' = the adjusted Exercise Price
E = the then current Exercise Price;
M = the then current Market Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
EX-32
<PAGE> 6
P = the aggregate consideration, calculated as set
forth in Section 4(b) hereof, received by the
Company upon such Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed
Outstanding (as herein defined) immediately after
the Dilutive Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes of
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) Issuance of Rights or Options. If the Company in
any manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities exercisable, convertible into or exchangeable for Common Stock
("Convertible Securities") (such warrants, rights and options to purchase Common
Stock or Convertible Securities are hereinafter referred to as "Options") and
the price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Market Price on the date of issuance ("Below Market
Options"), then the maximum total number of shares of Common Stock issuable upon
the exercise of all such Below Market Options (assuming full exercise,
conversion or exchange of Convertible Securities, if applicable) will, as of the
date of the issuance or grant of such Below Market Options, be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For purposes of the preceding sentence, the price per share for which
Common Stock is issuable upon the exercise of such Below Market Options is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or granting of such Below Market
Options, plus the minimum aggregate amount of additional consideration, if any,
payable to the Company upon the exercise of all such Below Market Options, plus,
in the case of Convertible Securities issuable upon the exercise of such Below
Market Options, the minimum aggregate amount of additional consideration payable
upon the exercise, conversion or exchange thereof at the time such Convertible
Securities first become exercisable, convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon the exercise of all
such Below Market Options (assuming full conversion of Convertible Securities,
if applicable). No further adjustment to the Exercise Price will be made upon
the actual issuance of such Common Stock upon the exercise of such Below Market
Options or upon the exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Market Options.
(ii) Issuance of Convertible Securities.
(A) If the Company in any manner issues or sells
any Convertible Securities, whether or not immediately convertible (other than
where the same are issuable upon the exercise of Options) and the price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange (as determined pursuant to Section 4(b)(ii)(B) if applicable) is less
than the Market Price on the date of issuance, then the maximum total number of
shares of Common Stock issuable upon the exercise, conversion or exchange of all
such Convertible Securities will, as of the date of the issuance of such
Convertible Securities, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For the purposes of the preceding
sentence, the price per share for which Common Stock is issuable upon such
exercise, conversion or exchange is determined by dividing (i) the total amount,
if any, received or receivable by the Company as consideration for the issuance
or sale of all such Convertible Securities, plus the
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<PAGE> 7
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the exercise, conversion or exchange thereof at the time such
Convertible Securities first become exercisable, convertible or exchangeable, by
(ii) the maximum total number of shares of Common Stock issuable upon the
exercise, conversion or exchange of all such Convertible Securities. No further
adjustment to the Exercise Price will be made upon the actual issuances of such
Common Stock upon exercise, conversion or exchange of such Convertible
Securities.
(B) If the Company in any manner issues or sells
any Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "Variable Rate Convertible Security"), then the price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
assuming that (1) all holding period and other conditions to any discounts
contained in such Convertible Security have been satisfied, and (2) the Market
Price on the date of issuance of such Convertible Security was 75% of the Market
Price on such date (the "Assumed Variable Market Price"). In addition, the
Exercise Price shall be adjusted any time or times the Market Price thereafter
is less than or equal to the Assumed Variable Market Price last used for making
any adjustment under this Section 4 with respect to any Variable Rate
Convertible Security. At such time, the Exercise Price shall be adjusted to the
Exercise Price which would have resulted if the Assumed Variable Market Price at
the time of issuance of the Variable Rate Convertible Security had been 75% of
the Market Price existing at the time of the adjustment required by this
sentence.
(iii) Change in Option Price or Conversion Rate. If
there is a change at any time in (i) the amount of additional consideration
payable to the Company upon the exercise of any Options; (ii) the amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange or any Convertible Securities; or (iii) the rate at which
any Convertible Securities are convertible into or exchangeable for Common Stock
(other than under or by reason of provisions designed to protect against
dilution), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. If, in any case, the total number of shares of Common
Stock issuable upon exercise of any Options or upon exercise, conversion or
exchange of any Convertible Securities is not, in fact, issued and the rights to
exercise such option or to exercise, convert or exchange such Convertible
Securities shall have expired or terminated, the Exercise Price then in effect
will be readjusted to the Exercise Price which would have been in effect at the
time of such expiration or termination had such Options or Convertible
Securities, to the extent outstanding immediately prior to such expiration or
termination (other than in respect of the actual number of shares of Common
Stock issued upon exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, before
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<PAGE> 8
deduction of reasonable commissions, underwriting discounts or allowances or
other reasonable expenses paid or incurred by the Company in connection with
such issuance, grant or sale. In case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration part or all of which shall be
other than cash, the amount of the consideration other than cash received by the
Company will be the fair market value of such consideration except where such
consideration consists of securities, in which case the amount of consideration
received by the Company will be the Market Price thereof as of the date of
receipt. In case any Common Stock, Options or Convertible Securities are issued
in connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration therefor will be deemed to be
the fair market value of such portion of the net assets and business of the
non-surviving corporation as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair market value of any
consideration other than cash or securities will be determined in good faith by
an investment banker or other appropriate expert of national reputation selected
by the Company and reasonably acceptable to the Holder, with the costs of such
appraisal to be borne by the Company.
(vi) Exceptions to Adjustment of Exercise Price. No
adjustment to the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities issued and outstanding on the First
Closing Date in accordance with the terms of such securities as of such date;
(ii) upon the grant or exercise of any stock or options which may hereafter be
granted or exercised under any employee benefit plan of the Company now existing
or to be implemented in the future, so long as the issuance of such stock or
options is approved by a majority of the non-employee members of the Board of
Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose; (iii) upon the issuance of
the convertible term debentures of the Company (the "Debentures"), the preferred
stock, par value $.00001 per share, of the Company (the "Preferred Stock") or
Warrants in accordance with terms of the Securities Purchase Agreement; (iv)
upon the exercise of the Warrants or conversion of the Debentures or Preferred
Stock or (v) the warrants to purchase Common Stock issued or to be issued to
Swartz Investments, LLC in consideration of its services in connection with the
Securities Purchase Agreement and the transactions contemplated thereby so long
as such warrants are not exercisable, in the aggregate, for more than 330,000
shares of Common Stock.
(c) Subdivision or Combination of Common Stock. If the Company,
at any time after the First Closing Date, subdivides (by any stock split, stock
dividend, recapitalization, reorganization, reclassification or otherwise) its
shares of Common Stock into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company, at
any time after the initial issuance of this Warrant, combines (by reverse stock
split, recapitalization, reorganization, reclassification or otherwise) its
shares of Common Stock into a smaller number of shares, then, after the date of
record for effecting such combination, the Exercise Price in effect immediately
prior to such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable
EX-35
<PAGE> 9
upon exercise of this Warrant immediately prior to such adjustment and dividing
the product so obtained by the adjusted Exercise Price.
(e) Major Transactions. If the Company shall consolidate with or
merge into any corporation or reclassify its outstanding shares of Common Stock
(other than by way of subdivision or reduction of such shares) (each a "Major
Transaction"), then each holder of a Warrant shall thereafter be entitled to
receive consideration, in exchange for such Warrant, equal to the greater of, as
determined in the sole discretion of such holder: (i) a warrant to purchase, at
the same aggregate exercise price, the number of shares of stock or securities
or property of the Company, or of the entity resulting from such consolidation
or merger (the "Major Transaction Consideration"), to which a holder of the
number of shares of Common Stock delivered upon exercise of such Warrant would
have been entitled upon such Major Transaction had the holder of such Warrant
exercised the Warrant on the trading date immediately preceding the public
announcement of the transaction resulting in such Major Transaction and had such
Common Stock been issued and outstanding and had such holder been the holder of
record of such Common Stock at the time of such Major Transaction, and the
Company shall make lawful provision therefor as a part of such consolidation,
merger or reclassification; and (ii) cash paid by the Company in immediately
available funds, in an amount equal to the Black-Scholes Amount (as defined
herein) times the number of shares of Common Stock for which this Warrant was
exercisable on the date immediately preceding the date of such Major
Transaction. No sooner than ten (10) days nor later than five (5) days prior to
the consummation of the Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written notice
("Notice of Major Transaction") to each holder of Warrants, which Notice of
Major Transaction shall be deemed to have been delivered one (1) business day
following the Company's sending such notice by telecopy (provided that the
Company sends a confirming copy of such notice on the same day by overnight
courier) of such Notice of Major Transaction. Such Notice of Major Transaction
shall indicate the amount and type of the Major Transaction Consideration which
such holder would receive under clause (i) of this paragraph (e). If the Major
Transaction Consideration does not consist entirely of United States currency,
such holder may elect to receive United States currency in an amount equal to
the value of the Major Transaction Consideration in lieu of the Major
Transaction Consideration by delivering notice of such election to the Company
within five (5) days of the holder's receipt of the Notice of Major Transaction.
The "Black-Scholes Amount" shall be an amount determined by calculating
the "Black-Scholes" value of an option to purchase one share of Common Stock on
the applicable page on the Bloomberg online page, using the following variable
values: (i) the current market price of the Common Stock equal to the closing
trade price on the last trading day before the date of the Notice of the Major
Transaction; (ii) volatility of the Common Stock equal to the volatility of the
Common Stock during the 100 trading day period preceding the date of the Notice
of the Major Transaction; (iii) a risk free rate equal to the interest rate on
the United States treasury bill or treasury note with a maturity corresponding
to the remaining term of this Warrant on the date of the Notice of the Major
Transaction; and (iv) an exercise price equal to the Exercise Price on the date
of the Notice of the Major Transaction. In the event such calculation function
is no longer available utilizing the Bloomberg online page, the Holder shall
calculate such amount in its sole discretion using the closest available
alternative mechanism and variable values to those available utilizing the
Bloomberg online page for such calculation function.
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<PAGE> 10
(f) Distribution of Assets. The Company shall provide Holder
with at least thirty (30) trading days written notice prior to any date on which
the Company intends to declare or make any distribution of its assets (or rights
to acquire its assets) to holders of Common Stock as a partial liquidating
dividend, by way of return of capital or otherwise (including any dividend or
distribution to the Company's shareholders of cash or shares (or rights to
acquire shares) of capital stock of a subsidiary).
(g) Notices of Adjustment. Upon the occurrence of any event
which requires any adjustment of the Exercise Price, then, and in each such
case, the Company shall give notice thereof to the Holder, which notice shall
state the Exercise Price resulting from such adjustment and the increase or
decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.
(j) Other Notices. In case at any time:
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution to
the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to
the holders of the Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization of the
Company, or reclassification of the Common Stock, or consolidation or merger of
the Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Holder (a) notice of the
date on which the books of the Company shall close or a record shall be taken
for determining the holders of Common Stock entitled to receive any such
dividend, distribution, or subscription rights or for determining
EX-37
<PAGE> 11
the holders of Common Stock entitled to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up and (b) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, notice of the date (or, if not then known, a reasonable
approximation thereof by the Company) when the same shall take place. Such
notice shall also specify the date on which the holders of Common Stock shall be
entitled to receive such dividend, distribution, or subscription rights or to
exchange their Common Stock for stock or other securities or property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, or winding-up, as the case may be. Such notice
shall be given at least 30 days prior to the record date or the date on which
the Company's books are closed in respect thereto. Failure to give any such
notice or any defect therein shall not affect the validity of the proceedings
referred to in clauses (i), (ii), (iii) and (iv) above.
(k) Certain Events. If, at any time after the First Closing
Date, any event occurs of the type contemplated by the adjustment provisions of
this Section 4 but not expressly provided for by such provisions, the Company
will give notice of such event as provided in Section 4(g) hereof, and the
Company's board of directors will make an appropriate adjustment in the Exercise
Price and the number of shares of Common Stock acquirable upon exercise of this
Warrant so that the rights of the Holder shall be neither enhanced nor
diminished by such event.
(l) Certain Definitions.
(i) "Common Stock Deemed Outstanding" shall mean the number
of shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) in case of any adjustment
required by Section 4(a) resulting from the issuance of any Options, the maximum
total number of shares of Common Stock issuable upon the exercise of the Options
for which the adjustment is required (including any Common Stock issuable upon
the conversion of Convertible Securities issuable upon the exercise of such
Options), and (y) in the case of any adjustment required by Section 4(a)
resulting from the issuance of any Convertible Securities, the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of the Convertible Securities for which the adjustment is required, as
of the date of issuance of such Convertible Securities, if any.
(ii) "Market Price," as of any date, means the average of
the Closing Bid Prices for the shares of Common Stock for the five (5)
consecutive trading days ending on the trading day immediately preceding such
date.
(iii) "Common Stock," for purposes of this Section 4,
includes the Common Stock and any additional class of stock of the Company
having no preference as to dividends or distributions on liquidation, provided
that the shares purchasable pursuant to this Warrant shall include only Common
Stock in respect of which this Warrant is exercisable, or shares resulting from
any subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.
5. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the Holder or such
shares for any issuance tax or other
EX-38
<PAGE> 12
costs in respect thereof, provided that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than the Holder.
6. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the Holder to any voting rights or other rights as a shareholder of the
Company. No provision of this Warrant, in the absence of affirmative action by
the Holder to purchase Warrant Shares, and no mere enumeration herein of the
rights or privileges of the Holder, shall give rise to any liability of the
Holder for the Exercise Price or as a shareholder of the Company, whether such
liability is asserted by the Company or by creditors of the Company.
7. Transfer, Exchange, Redemption and Replacement of Warrant.
a. Restriction on Transfer. This Warrant and the rights granted
to the Holder are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto as Exhibit 2, at the office or agency of the Company referred to in
Section 7(e) below, provided, however, that any transfer or assignment shall be
subject to the to the provisions of Section 5.1 and 5.2 of the Securities
Purchase Agreement. Until due presentment for registration of transfer on the
books of the Company, the Company may treat the registered holder hereof as the
owner and holder hereof for all purposes, and the Company shall not be affected
by any notice to the contrary. Notwithstanding anything to the contrary
contained herein, the registration rights described in Section 8 hereof are
assignable only in accordance with the provisions of that certain Registration
Rights Agreement, dated as of June 2, 1997, by and among the Company and the
other signatories thereto (the "Registration Rights Agreement").
b. Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the Holder at the office
or agency of the Company referred to in Section 7(e) below, for new Warrants, in
the form hereof, of like tenor of different denominations representing in the
aggregate the right to purchase the number of shares of Common Stock which may
be purchased hereunder, each of such new Warrants to represent the right to
purchase such number of shares as shall be designated by the Holder of at the
time of such surrender.
c. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant or, in the case of any such loss, theft, or destruction, upon
delivery, of an indemnity agreement reasonably satisfactory in form and amount
to the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, new Warrants, in the form hereof, in such
denominations as Holder may request. The Company shall not be obligated to
reissue such Warrant if Holder contemporaneously requests the Company to convert
this Warrant.
d. Cancellation; Payment of Expenses. Upon the surrender of
this Warrant in connection with any transfer, exchange, or replacement as
provided in this Section 7, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities
EX-39
<PAGE> 13
transfer taxes) and charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Section 7.
e. Warrant Register. The Company shall maintain, at its
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the Holder), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
f. Additional Restriction on Exercise or Transfer.
Notwithstanding anything to the contrary contained herein, the Warrants shall
not be exercisable by the Holder to the extent (but only to the extent) that, if
exercisable by Holder, Holder would beneficially own in excess of 4.9% of the
shares of Common Stock. To the extent the above limitation applies, the
determination of whether the Warrants shall be exercisable (vis-a-vis other
securities owned by Holder) and of which Warrants shall be convertible shall be
in the sole discretion of the Holder and submission of the Warrants for exercise
shall be deemed to be the Holder's determination of whether such Warrants are
exercisable and of which Warrants are exercisable, subject to such aggregate
percentage limitation. No prior inability to exercise Warrants pursuant to this
paragraph shall have any effect on the applicability of the provisions of this
paragraph with respect to any subsequent determination of exercisability. For
the purposes of this paragraph, beneficial ownership and all calculations,
including without limitation, with respect to calculations of percentage
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D and G thereunder. The
provisions of this paragraph may be waived and/or implemented in a manner
otherwise than strictly in conformity with the foregoing provisions of this
paragraph f with the approval of the Board of Directors of the Corporation and
the holders of majority in interest in the then outstanding Debentures and
Warrants (voting together as a single class): (i) with respect to any matter to
cure any ambiguity herein, to correct this paragraph (or any portion hereof)
which may be defective or inconsistent with the intended 4.9% beneficial
ownership limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such 4.9% limitation; and (ii)
with respect to any other matter, with the further consent of the holders of a
majority of the then outstanding shares of Common Stock. The limitations
contained in this paragraph shall apply to a successor holder of Warrants if,
and to the extent, elected by such successor holder concurrently with its
acquisition of such Warrants, such election to be promptly confirmed in writing
to the Company (provided no transfer or series of transfer to a successor holder
or holders shall be used by a Holder to evade the limitations contained in this
paragraph).
8. Registration Rights. The initial holder of this Warrant (and
certain assignees thereof) is entitled to the benefit of such registration
rights in respect of the Warrant Shares as are set forth in the Registration
Rights Agreement.
9. Notices. Any notice herein required or permitted to be given
shall be in writing and may be personally served or delivered by courier or by
confirmed telecopy, and shall be deemed delivered at the time and date of
receipt (which shall include telephone line facsimile transmission). The
addresses for such communications shall be:
EX-40
<PAGE> 14
If to the Company:
Patriot Scientific Corporation
10989 Via Frontera
San Diego, California 92129
Telecopy: (619) 674-5005
Attention: Lowell W. Giffhorn
with copy to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway
Suite 2600
San Diego, California 92101
Telecopy: (619) 232-8311
Attention: Otto E. Sorensen
and with a copy to:
Robert Putnam
13112 Evening Creek Drive South
San Diego, California 92128
Telecopy: (619) 679-0545
If to Holder:
CC Investments, LDC
Corporate Centre, West Bay Road
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
with a copy to:
Castle Creek Partners, LLC
333 West Wacker Drive
Suite 1410
Chicago, IL 60606
Telecopy: (312) 435-2636
Attention: John D. Ziegelman
and with a copy to:
Altheimer & Gray
10 South Wacker Drive
Suite 4000
EX-41
<PAGE> 15
Chicago, IL 60606
Telecopy: (312) 715-4800
Attention: Kenneth M. Crane
If to any other Holder, to such address set forth under Holder's name on the
signature page hereto executed by Holder.
10. Governing Law; Jurisdiction. This Warrant shall be governed by
and construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts
located in the County of New Castle in the State of Delaware in any suit or
proceeding based on or arising under this Warrant and irrevocably agrees that
all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company agrees that service of
process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceedings. Nothing herein shall affect the Holder's right to serve process in
any other manner permitted by law. The Company agrees that a final nonappealable
judgment in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful manner.
11. Miscellaneous.
a. Amendments. This Warrant and any provision hereof may only
be amended by an instrument in writing signed by the Company and the Holder.
b. Descriptive Headings. The descriptive headings of the
several Sections of this Warrant are inserted for purposes of reference only,
and shall not affect the meaning or construction of any of the provisions
hereof.
c. Exercise. Notwithstanding anything to the contrary contained
in this Warrant, if the resale of the Warrant Shares by the Holder is not then
registered pursuant to an effective registration statement under the Securities
Act, this Warrant may be exercised at any time after the first date that the
Holder could sell the Warrant Shares pursuant to Rule 144 under the Securities
Act and until the end of the Exercise Period.
d. Assignability. This Warrant shall be binding upon the
Company and its successors and assigns and shall inure to the benefit of Holder
and its successors and assigns.
* * *
EX-42
<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
PATRIOT SCIENTIFIC
CORPORATION
By:/s/ ELWOOD G. NORRIS
-------------------
Elwood G. Norris
Chairman and a Director
By:/s/ MICHAEL A. CARENZO
----------------------
Michael A. Carenzo
President, Chief Executive Officer
and a Director
EX-43
<PAGE> 17
EXHIBIT 1
TO STOCK PURCHASE WARRANT
EXERCISE AGREEMENT
(To be Executed by the Holder in order to Exercise the Warrant)
The undersigned hereby irrevocably exercise the right to purchase
____________ of the shares of common stock of Patriot Scientific Corporation, a
Delaware corporation (the "Company"), evidenced by the attached Warrant, and
herewith effects a Cashless Exercise pursuant to the terms of the Warrant, all
in accordance with the conditions and provisions of said Warrant.
(i) The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws.
(ii) The undersigned requests that stock certificates for such shares be
issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder (or such other person or
persons indicated below) and delivered to the undersigned (or designee(s)) at
the address (or addresses) set forth below:
Date: ____________________
-----------------------------------
Signature of Holder
-----------------------------------
Name of Holder (Print)
Address:
-----------------------------------
-----------------------------------
EX-44
<PAGE> 18
EXHIBIT 2
TO STOCK PURCHASE WARRANT
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
<S> <C> <C>
</TABLE>
, and hereby irrevocably constitutes and appoints ______________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Date:____________, _____,
In the presence of
- ------------------------
Name:
- -------------------------------------
Signature:
- ------------------------------------- Title of Signing Officer
or Agent (if any):
Address:
- -------------------------
--------------------------
Note: The above signature should
correspond exactly with the
name on the face of the
within Warrant.
EX-45
<PAGE> 1
NEED TO REVIEW AND MAKE CHANGES TO CONFORM
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
Annual Report
EXHIBIT NO. 4.11
Form of Warrant to Purchase Common Stock
EX-46
<PAGE> 2
THIS WARRANT AND THE SECURITIES RECEIVABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (i) A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION
WITH SUCH OFFER, SALE OR TRANSFER.
Warrant to Purchase
38,250 shares
WARRANT TO PURCHASE COMMON STOCK
OF
PATRIOT SCIENTIFIC CORPORATION
THIS CERTIFIES that Swartz Family Partnership, L.P. or any subsequent
("Holder") hereof, has the right to purchase from PATRIOT SCIENTIFIC
CORPORATION, a Delaware corporation (the "Company"), not more than 38,250 fully
paid and nonassessable shares of the Company's Common Stock, par value $.00001
per share ("Common Stock"), at a price equal to the Exercise Price as defined in
Section 3 below, subject to adjustment as provided herein, at any time on or
before 5:00 p.m., San Diego, California time, on May 31, 2002.
The Holder of this Warrant agrees with the Company that this Warrant is
issued and all rights hereunder shall be held subject to all of the conditions,
limitations and provisions set forth herein.
1. Date of Issuance.
This Warrant shall be deemed to be issued on November 24, 1997 ("Date of
Issuance").
2. Exercise.
(a) Manner of Exercise. This Warrant may be exercised as to all or any
lesser number of full shares of Common Stock covered hereby upon surrender of
this Warrant, with the Exercise Form attached hereto duly executed, together
with the full Exercise Price (as defined in Section 3) for each share of Common
Stock as to which this Warrant is exercised, at the office of the Company,
Patriot Scientific Corporation, 10989 Via Frontera, San Diego, California 92127,
Attention: President, Telephone No. 619-679-4428, Telecopy No. 619-674-5000, or
at such other office or agency as the Company may designate in writing, by
overnight mail, with an advance copy of the Exercise Form attached as Exhibit A
("Exercise Form") by facsimile (such surrender and payment of the Exercise Price
hereinafter called the "Exercise of this Warrant").
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the Exercise Form is sent by
facsimile to the Company, provided that the original
EX-47
<PAGE> 3
Warrant and Exercise Form are received by the Company within five (5) business
days thereafter. The original Warrant and Exercise Form must be received within
five (5) business days of the Date of Exercise, or the exercise may, at the
Company's option, be considered void. Alternatively, the Date of Exercise shall
be defined as the date the original Exercise Form is received by the Company, if
Holder has not sent advance notice by facsimile.
(c) Cancellation of Warrant. This Warrant shall be canceled upon its
Exercise, and, as soon as practical after the Date of Exercise, the Holder
hereof shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise, and if this Warrant is not exercised in full, the
Holder shall be entitled to receive a new Warrant or Warrants (containing terms
identical to this Warrant) representing any unexercised portion of this Warrant
in addition to such Common Stock.
(d) Holder of Record. Each person in whose name any Warrant for shares
of Common Stock is issued shall, for all purposes, be deemed to have become the
Holder of record of such shares on the Date of Exercise of this Warrant,
irrespective of the date of delivery of such shares of Common Stock. Nothing in
this Warrant shall be construed as conferring upon the Holder hereof any rights
as a shareholder of the Company.
3. Payment of Warrant Exercise Price.
The Exercise Price ("Exercise Price") shall equal $1.50.
For purposes hereof, the term "Closing Price" shall mean the closing
price on the National Association of Securities Dealers Automated Quotation
System ("Nasdaq") Small Cap Market or OTC Bulletin Board, or if no longer traded
on the Nasdaq Small Cap Market or OTC Bulletin Board, the closing price on the
principal national securities exchange or the National Market System on which
the Common Stock is so traded and, if not available, the mean of the high and
low prices on the principal national securities exchange or the National
Securities Exchange on which the Common Stock is so traded.
Payment of the Exercise Price may be made by either of the following, or
a combination thereof, at the election of Holder:
(i) Cash Exercise: cash, certified check or cashiers check or wire
transfer; or
(ii) Cashless Exercise: surrender of this Warrant at the principal
office of the Company together with notice of cashless election, in which event
the Company shall issue Holder a number of shares of Common Stock computed using
the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant
is being exercised.
EX-48
<PAGE> 4
A = the Market Price of one (1) share of Common Stock (for
purposes of this Section 3(ii), the "Market Price" shall be
defined as the average closing price of the Common Stock for the
five (5) trading days prior to the Date of Exercise of this
Warrant (the "Average Closing Price"), as reported by Nasdaq or
if the Common Stock is not traded on Nasdaq, the Average Closing
Price in the over-the-counter market; provided, however, that if
the Common Stock is listed on a stock exchange, the Market Price
shall be the Average Closing Price on such exchange. If the
Common Stock is/was not traded during the five (5) trading days
prior to the Date of Exercise, then the closing price for the
last publicly traded day shall be deemed to be the closing price
for any and all (if applicable) days during such five (5) trading
day period.
B = the Exercise Price.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended,
understood and acknowledged that the Common Stock issuable upon exercise of this
Warrant in a cashless exercise transaction shall be deemed to have been acquired
at the time this Warrant was issued. Moreover, it is intended, understood and
acknowledged that the holding period for the Common Stock issuable upon exercise
of this Warrant in a cashless exercise transaction shall be deemed to have
commenced on the date this Warrant was issued.
4. Transfer and Registration.
(a) Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
endorsed. This Warrant shall be canceled upon such surrender and, as soon as
practicable thereafter, the person to whom such transfer is made shall be
entitled to receive a new Warrant or Warrants as to the portion of this Warrant
transferred, and the Holder of this Warrant shall be entitled to receive a new
Warrant or Warrants as to the portion hereof retained.
(b) Registrable Securities. The Common Stock issuable upon the exercise
of this Warrant constitute "Registrable Securities" under that certain
Registration Rights Agreement dated on or about May 30, 1997 by and between the
Company and Swartz Investments, LLC and, accordingly, has the benefit of the
registration rights pursuant to that agreement.
5. Anti-Dilution Adjustments.
(a) Stock Dividend. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then the Holder hereof, upon Exercise of this
Warrant after the record date for the determination of Holders of Common Stock
entitled to receive such dividend, shall be entitled to receive upon Exercise of
this Warrant, in addition to the number of shares of Common Stock as to which
this Warrant is Exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been Exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
EX-49
<PAGE> 5
(b) Recapitalization or Reclassification. If the Company shall at any
time effect a recapitalization, reclassification or other similar transaction of
such character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which the Holder hereof shall
be entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give the Warrant Holder the same notice it provides to holders of
Common Stock of any transaction described in this Section 5(b).
(c) Distributions. If the Company shall at any time distribute to
Holders of Common Stock cash, evidences of indebtedness or other securities or
assets (other than cash dividends or distributions payable out of earned surplus
or net profits for the current or preceding year) then, in any such case, the
Holder of this Warrant shall be entitled to receive, upon exercise of this
Warrant, with respect to each share of Common Stock issuable upon such Exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which such Holder would have been entitled to receive with respect to each such
share of Common Stock as a result of the happening of such event had this
Warrant been Exercised immediately prior to the record date or other date fixing
shareholders to be affected by such event (the "Determination Date") or, in lieu
thereof, if the Board of Directors of the Company should so determine at the
time of such distribution, a reduced Exercise Price determined by multiplying
the Exercise Price on the Determination Date by a fraction, the numerator of
which is the result of such Exercise Price reduced by the value of such
distribution applicable to one share of Common Stock (such value to be
determined by the Board in its discretion) and the denominator of which is such
Exercise Price.
(d) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of the same or another
class or classes of stock or securities or other assets of the Company or
another entity or there is a sale of all or substantially all the Company's
assets (a "Corporate Change"), then this Warrant shall be assumed by the
acquiring entity or any affiliate thereof and thereafter this Warrant shall be
exerciseable into such class and type of securities or other assets as the
Holder would have received had the Holder exercised this Warrant immediately
prior to such Corporate Change; provided, however, that Company may not affect
any Corporate Change unless it first shall have given thirty (30) business days
notice to the Holder hereof of any Corporate Change.
(e) Exercise Price Adjusted. As used in this Warrant, the term "Exercise
Price" shall mean the purchase price per share specified in Section 3 of this
Warrant, as it may be adjusted from time to time, until the occurrence of an
event stated in subsection (a), (b) or (c) of this Section 5 and thereafter
shall mean said price as adjusted from time to time in accordance with the
provisions of said subsection. No such adjustment under this Section 5 shall be
made unless such adjustment would change the Exercise Price at the time by $.01
or more; provided, however, that all adjustments not so made shall be deferred
and made when the aggregate thereof would change the Exercise Price at the time
by $.01 or more. No adjustment made pursuant to any provision of this Section 5
shall have the
EX-50
<PAGE> 6
effect of increasing the total consideration payable upon Exercise of this
Warrant in respect of all the Common Stock as to which this Warrant may be
exercised. Notwithstanding anything to the contrary contained herein, the
Exercise Price shall not be reduced to an amount below the par value of the
Common Stock.
(f) Adjustments: Additional Shares, Securities or Assets. In the event
that at any time, as a result of an adjustment made pursuant to this Section 5,
the Holder of this Warrant shall, upon Exercise of this Warrant, become entitled
to receive shares and/or other securities or assets (other than Common Stock)
then, wherever appropriate, all references herein to shares of Common Stock
shall be deemed to refer to and include such shares and/or other securities or
assets; and thereafter the number of such shares and/or other securities or
assets shall be subject to adjustment from time to time in a manner and upon
terms as nearly equivalent as practicable to the provisions of this Section 5.
EX-51
<PAGE> 7
6. Fractional Interests.
No fractional shares or scrip representing fractional shares
shall be issuable upon the Exercise of this Warrant, but on Exercise of this
Warrant, the Holder hereof may purchase only a whole number of shares of Common
Stock. If, on Exercise of this Warrant, the Holder hereof would be entitled to a
fractional share of Common Stock or a right to acquire a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon conversion shall be the next higher number
of shares.
7. Reservation of Shares.
The Company shall at all times reserve for issuance such number
of authorized and unissued shares of Common Stock (or other securities
substituted therefor as herein above provided) as shall be sufficient for
Exercise and payment of the Exercise Price of this Warrant. The Company
covenants and agrees that upon Exercise of this Warrant, all shares of Common
Stock issuable upon such Exercise shall be duly and validly issued, fully paid,
nonassessable and not subject to preemptive rights, rights of first refusal or
similar rights of any person or entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant and the
Common Stock issuable on Exercise hereof have not been registered under the
Securities Act of 1933, as amended, and may not be sold, transferred, pledged,
hypothecated or otherwise disposed of in the absence of registration or the
availability of an exemption from registration under said Act. All shares of
Common Stock issued upon Exercise of this Warrant shall bear an appropriate
legend to such effect, if applicable.
(b) Assignment. Assuming the conditions of (a) above regarding
registration or exemption have been satisfied, the Holder may sell, transfer,
assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder
shall deliver a written notice to Company, substantially in the form of the
Assignment attached hereto as Exhibit B, indicating the person or persons to
whom the Warrant shall be assigned and the respective number of warrants to be
assigned to each assignee. The Company shall effect the assignment within ten
days, and shall deliver to the assignee(s) designated by Holder a Warrant or
Warrants of like tenor and terms for the appropriate number of shares.
(c) Investment Intent. The Warrant and Common Stock issuable upon
conversion are intended to be held for investment purposes and not with an
intent to distribution, as defined in the Act.
9. Benefits of this Warrant.
Nothing in this Warrant shall be construed to confer upon any
person other than the Company and the Holder of this Warrant any legal or
equitable right, remedy or claim under this Warrant and this Warrant shall be
for the sole and exclusive benefit of the Company and the Holder of this
Warrant.
EX-52
<PAGE> 8
10. Applicable Law.
This Warrant is issued under and shall for all purposes be
governed by and construed in accordance with the laws of the state of Delaware,
without giving effect to conflict of law provisions thereof.
EX-53
<PAGE> 9
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. Notice or Demands.
Notices or demands pursuant to this Warrant to be given or made by the Holder of
this Warrant to or on the Company shall be sufficiently given or made if sent by
certified or registered mail, return receipt requested, postage prepaid, and
addressed, until another address is designated in writing by the Company,
Patriot Scientific Corporation, 10989 Via Frontera, San Diego, California
92127), Attention: President, Telephone No. 619-674-5000, Telecopy No.
619-674-5005. Notices or demands pursuant to this Warrant to be given or made by
the Company to or on the Holder of this Warrant shall be sufficiently given or
made if sent by certified or registered mail, return receipt requested, postage
prepaid, and addressed, Attn: Holder, address: c/o Swartz Investments, LLC, 200
Roswell Summit, Suite 285, 1080 Holcomb Bridge Road, Roswell, Georgia 30076,
until another address is designated in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
24th day of November, 1997.
PATRIOT SCIENTIFIC CORPORATION
By: /s/ LOWELL W. GIFFHORN
---------------------
Lowell Giffhorn
Chief Financial Officer
EX-54
<PAGE> 10
EXHIBIT A
EXERCISE FORM
TO: ___________________.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock of PATRIOT SCIENTIFIC CORPORATION, a
__________ corporation, evidenced by the attached Warrant, and herewith makes
payment of the Exercise Price with respect to such shares in full, all in
accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any of such Common Stock, except in accordance with the provisions of Section
8 of the Warrant, and consents that the following legend may be affixed to the
stock certificates for the Common Stock hereby subscribed for, if such legend is
applicable:
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any
provincial or state securities law, and may not be sold, transferred,
pledged, hypothecated or otherwise disposed of until either (i) a
registration statement under the Securities Act and applicable
provincial or state securities laws shall have become effective with
regard thereto, or (ii) an exemption from registration under the
Securities Act or applicable provincial or state securities laws is
available in connection with such offer, sale or transfer."
The undersigned requests that stock certificates for such shares be
issued, and a warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Registered Holder and delivered to
the undersigned at the address set forth below:
Dated:
- ------------------------------------------------------------------------
Signature of Registered Holder
- ------------------------------------------------------------------------
Name of Registered Holder (Print)
- ------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
EX-55
<PAGE> 11
EXHIBIT B
ASSIGNMENT
(To be executed by the registered Holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby sells,
assigns and transfers unto the person or persons below named the right to
purchase _______ shares of the Common Stock of PATRIOT SCIENTIFIC CORPORATION
evidenced by the attached Warrant and does hereby irrevocably constitute and
appoint _______________________ attorney to transfer the said Warrant on the
books of the Company, with full power of substitution in the premises.
Dated: ______________________________
Signature
Fill in for new Registration of Warrant:
- -----------------------------------
Name
- -----------------------------------
Address
- -----------------------------------
Please print name and address of assignee
(including zip code number)
- -----------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form or Assignment must correspond to
the name as written upon the face of the attached Warrant in every particular,
without alteration or enlargement or any change whatsoever.
------------------------------------------------------------------------
EX-56
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
Annual Report
EXHIBIT NO. 4.12
Form of Warrant to Purchase Common Stock
EX-57
<PAGE> 2
THIS WARRANT AND THE SECURITIES RECEIVABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (i) A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION
WITH SUCH OFFER, SALE OR TRANSFER.
Warrant to Purchase
30,000 shares
WARRANT TO PURCHASE COMMON STOCK
OF
PATRIOT SCIENTIFIC CORPORATION
THIS CERTIFIES that THE INVESTOR COMMUNICATIONS GROUP, INC. or any
subsequent ("Holder") hereof, has the right to purchase from PATRIOT SCIENTIFIC
CORPORATION, a Delaware corporation (the "Company"), not more than 30,000 fully
paid and nonassessable shares of the Company's Common Stock, par value $.00001
per share ("Common Stock"), at a price equal to the Exercise Price as defined in
Section 3 below, subject to adjustment as provided herein, at any time on or
before 5:00 p.m., San Diego, California time, on June 15, 1999, unless earlier
canceled pursuant to Section 2 (c) below.
The Holder of this Warrant agrees with the Company that this Warrant is
issued and all rights hereunder shall be held subject to all of the conditions,
limitations and provisions set forth herein.
1. Date of Issuance.
This Warrant shall be deemed to be issued on June 16, 1997 ("Date of
Issuance").
2. Exercise.
(a) Manner of Exercise. This Warrant may be exercised as to all or any
lesser number of full shares of Common Stock covered hereby upon surrender of
this Warrant, with the Exercise Form attached hereto duly executed, together
with the full Exercise Price (as defined in Section 3) for each share of Common
Stock as to which this Warrant is exercised, at the office of the Company,
Patriot Scientific Corporation, 10989 Via Frontera, San Diego, California 92127,
Attention: President, Telephone No. 619-674-5000, Telecopy No. 619-674-5005, or
at such other office or agency as the Company may designate in writing, by
overnight mail, with an advance copy of the Exercise Form attached as Exhibit A
("Exercise Form") by facsimile (such surrender and payment of the Exercise Price
hereinafter called the "Exercise of this Warrant").
EX-58
<PAGE> 3
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the Exercise Form is sent by
facsimile to the Company, provided that the original Warrant and Exercise Form
are received by the Company within five (5) business days thereafter. The
original Warrant and Exercise Form must be received within five (5) business
days of the Date of Exercise, or the exercise may, at the Company's option, be
considered void. Alternatively, the Date of Exercise shall be defined as the
date the original Exercise Form is received by the Company, if Holder has not
sent advance notice by facsimile.
(c) Cancellation of Warrant. This Warrant shall be canceled (i) upon its
Exercise, and, as soon as practical after the Date of Exercise, the Holder
hereof shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise, and if this Warrant is not exercised in full, the
Holder shall be entitled to receive a new Warrant or Warrants (containing terms
identical to this Warrant) representing any unexercised portion of this Warrant
in addition to such Common Stock, (ii) the earlier of (a) one year from the date
of termination of the Marketing Agreement by and among the Company and the
Holder dated June 16, 1997 if the Marketing Agreement shall have been terminated
by the Company or (b) June 15, 1999, or (iii) on the date of termination of the
Marketing Agreement by and among the Company and the Holder dated June 16, 1997
if the Marketing Agreement shall have been terminated by the Holder.
(d) Holder of Record. Each person in whose name any Warrant for shares
of Common Stock is issued shall, for all purposes, be deemed to have become the
Holder of record of such shares on the Date of Exercise of this Warrant,
irrespective of the date of delivery of such shares of Common Stock. Nothing in
this Warrant shall be construed as conferring upon the Holder hereof any rights
as a shareholder of the Company.
3. Payment of Warrant Exercise Price.
The Exercise Price ("Exercise Price") shall equal $ 2.50.
Payment of the Exercise Price may be made by cash, certified or cashiers
check, or wire transfer.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is
intended, understood and acknowledged that the Common Stock issuable upon
exercise of this Warrant shall be deemed to have been acquired at the time this
Warrant was exercised. Moreover, it is intended, understood and acknowledged
that the holding period for the Common Stock issuable upon exercise of this
Warrant shall be deemed to have commenced on the date this Warrant was
exercised.
4. Transfer Rights and Piggyback Registration Rights.
(a) Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
endorsed. This Warrant shall be canceled upon such surrender and, as soon as
practicable thereafter, the person to whom such transfer is made shall be
entitled to receive a
EX-59
<PAGE> 4
new Warrant or Warrants as to the portion of this Warrant transferred, and the
Holder of this Warrant shall be entitled to receive a new Warrant or Warrants as
to the portion hereof retained.
(b) Piggyback Registration Rights. If at any time or from time to
time subsequent to the exercise of the Warrant, the Company shall determine to
register any of its securities, either for its own account or the account of a
security holder or holders exercising their respective demand registration
rights, other an (i) a registration relating solely to employee benefit plans,
or (ii) a registration relating solely to a Securities and Exchange Commission
Rule 145 transaction, the Company will:
(i) promptly give to Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within 30 days after receipt of such written notice from the
Company by Holder, but only to the extent that such inclusion will not diminish
the number of securities included by the Company or by holders of the Company's
securities who have demanded such registration. The Company shall have the right
to terminate or withdraw any registration initiated by it prior to the
effectiveness of such registration whether or not Holder has elected to include
securities in such registration.
5. Anti-Dilution Adjustments.
(a) Stock Dividend. If the Company shall at any time declare a
dividend payable in shares of Common Stock, then the Holder hereof, upon
Exercise of this Warrant after the record date for the determination of Holders
of Common Stock entitled to receive such dividend, shall be entitled to receive
upon Exercise of this Warrant, in addition to the number of shares of Common
Stock as to which this Warrant is Exercised, such additional shares of Common
Stock as such Holder would have received had this Warrant been Exercised
immediately prior to such record date and the Exercise Price will be
proportionately adjusted.
(b) Recapitalization or Reclassification. If the Company shall at any
time effect a recapitalization, reclassification or other similar transaction of
such character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which the Holder hereof shall
be entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give the Warrant Holder the same notice it provides to holders of
Common Stock of any transaction described in this Section 5(b).
(c) Distributions. If the Company shall at any time distribute to
Holders of Common Stock cash, evidences of indebtedness or other securities or
assets (other than cash dividends or distributions payable out of earned surplus
or net profits for the current or preceding year) then, in any such case, the
Holder of this Warrant shall be entitled to receive, upon exercise of this
Warrant, with
EX-60
<PAGE> 5
respect to each share of Common Stock issuable upon such Exercise, the amount of
cash or evidences of indebtedness or other securities or assets which such
Holder would have been entitled to receive with respect to each such share of
Common Stock as a result of the happening of such event had this Warrant been
Exercised immediately prior to the record date or other date fixing shareholders
to be affected by such event (the "Determination Date") or, in lieu thereof, if
the Board of Directors of the Company should so determine at the time of such
distribution, a reduced Exercise Price determined by multiplying the Exercise
Price on the Determination Date by a fraction, the numerator of which is the
result of such Exercise Price reduced by the value of such distribution
applicable to one share of Common Stock (such value to be determined by the
Board in its discretion) and the denominator of which is such Exercise Price.
(d) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of the same or another
class or classes of stock or securities or other assets of the Company or
another entity or there is a sale of all or substantially all the Company's
assets (a "Corporate Change"), then this Warrant shall be assumed by the
acquiring entity or any affiliate thereof and thereafter this Warrant shall be
exerciseable into such class and type of securities or other assets as the
Holder would have received had the Holder exercised this Warrant immediately
prior to such Corporate Change; provided, however, that Company may not affect
any Corporate Change unless it first shall have given thirty (30) business days
notice to the Holder hereof of any Corporate Change.
(e) Exercise Price Adjusted. As used in this Warrant, the term
"Exercise Price" shall mean the purchase price per share specified in Section 3
of this Warrant, as it may be adjusted from time to time, until the occurrence
of an event stated in subsection (a), (b) or (c) of this Section 5 and
thereafter shall mean said price as adjusted from time to time in accordance
with the provisions of said subsection. No such adjustment under this Section 5
shall be made unless such adjustment would change the Exercise Price at the time
by $.01 or more; provided, however, that all adjustments not so made shall be
deferred and made when the aggregate thereof would change the Exercise Price at
the time by $.01 or more. No adjustment made pursuant to any provision of this
Section 5 shall have the effect of increasing the total consideration payable
upon Exercise of this Warrant in respect of all the Common Stock as to which
this Warrant may be exercised. Notwithstanding anything to the contrary
contained herein, the Exercise Price shall not be reduced to an amount below the
par value of the Common Stock.
(f) Adjustments: Additional Shares, Securities or Assets. In the
event that at any time, as a result of an adjustment made pursuant to this
Section 5, the Holder of this Warrant shall, upon Exercise of this Warrant,
become entitled to receive shares and/or other securities or assets (other than
Common Stock) then, wherever appropriate, all references herein to shares of
Common Stock shall be deemed to refer to and include such shares and/or other
securities or assets; and thereafter the number of such shares and/or other
securities or assets shall be subject to adjustment from time to time in a
manner and upon terms as nearly equivalent as practicable to the provisions of
this Section 5.
6. Fractional Interests.
EX-61
<PAGE> 6
No fractional shares or scrip representing fractional shares
shall be issuable upon the Exercise of this Warrant, but on Exercise of this
Warrant, the Holder hereof may purchase only a whole number of shares of Common
Stock. If, on Exercise of this Warrant, the Holder hereof would be entitled to a
fractional share of Common Stock or a right to acquire a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon conversion shall be the next higher number
of shares.
7. Reservation of Shares.
The Company shall at all times reserve for issuance such number
of authorized and unissued shares of Common Stock (or other securities
substituted therefor as herein above provided) as shall be sufficient for
Exercise and payment of the Exercise Price of this Warrant. The Company
covenants and agrees that upon Exercise of this Warrant, all shares of Common
Stock issuable upon such Exercise shall be duly and validly issued, fully paid,
nonassessable and not subject to preemptive rights, rights of first refusal or
similar rights of any person or entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant and the
Common Stock issuable on Exercise hereof have not been registered under the
Securities Act of 1933, as amended, and may not be sold, transferred, pledged,
hypothecated or otherwise disposed of in the absence of registration or the
availability of an exemption from registration under said Act. All shares of
Common Stock issued upon Exercise of this Warrant shall bear an appropriate
legend to such effect, if applicable.
(b) Assignment. Assuming the conditions of (a) above regarding
registration or exemption have been satisfied, the Holder may sell, transfer,
assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder
shall deliver a written notice to Company, substantially in the form of the
Assignment attached hereto as Exhibit B, indicating the person or persons to
whom the Warrant shall be assigned and the respective number of warrants to be
assigned to each assignee. The Company shall effect the assignment within ten
days, and shall deliver to the assignee(s) designated by Holder a Warrant or
Warrants of like tenor and terms for the appropriate number of shares.
(c) Investment Intent. The Warrant and Common Stock issuable upon
conversion are intended to be held for investment purposes and not with an
intent to distribution, as defined in the Act.
9. Benefits of this Warrant.
Nothing in this Warrant shall be construed to confer upon any
person other than the Company and the Holder of this Warrant any legal or
equitable right, remedy or claim under this Warrant and this Warrant shall be
for the sole and exclusive benefit of the Company and the Holder of this
Warrant.
10. Applicable Law.
EX-62
<PAGE> 7
This Warrant is issued under and shall for all purposes be
governed by and construed in accordance with the laws of the state of
California, without giving effect to conflict of law provisions thereof.
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. Notice or Demands.
Notices or demands pursuant to this Warrant to be given or made by the Holder of
this Warrant to or on the Company shall be sufficiently given or made if sent by
certified or registered mail, return receipt requested, postage prepaid, and
addressed, until another address is designated in writing by the Company,
Patriot Scientific Corporation, 10989 Via Frontera, San Diego, California 92127,
Attention: President, Telephone No. 619-674-5000, Telecopy No. 619-674-5005.
Notices or demands pursuant to this Warrant to be given or made by the Company
to or on the Holder of this Warrant shall be sufficiently given or made if sent
by certified or registered mail, return receipt requested, postage prepaid, and
addressed, Attn: Holder, address: The Investor Communications Group, Inc., 1730
Mount Vernon Road, Suite C, Atlanta, Georgia, 30338, Attention: President.
Telephone No. 770-351-9700, Telecopy No. 770-351-0700, until another address is
designated in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the 26th day
of June, 1997.
PATRIOT SCIENTIFIC CORPORATION
By: /S/ LOWELL W. GIFFHORN
----------------------
Lowell W. Giffhorn
Chief Financial Officer
EX-63
<PAGE> 8
EXHIBIT A
EXERCISE FORM
TO: ___________________.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock of PATRIOT SCIENTIFIC CORPORATION, a
__________ corporation, evidenced by the attached Warrant, and herewith makes
payment of the Exercise Price with respect to such shares in full, all in
accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any of such Common Stock, except in accordance with the provisions of Section
8 of the Warrant, and consents that the following legend may be affixed to the
stock certificates for the Common Stock hereby subscribed for, if such legend is
applicable:
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any
provincial or state securities law, and may not be sold, transferred,
pledged, hypothecated or otherwise disposed of until either (i) a
registration statement under the Securities Act and applicable
provincial or state securities laws shall have become effective with
regard thereto, or (ii) an exemption from registration under the
Securities Act or applicable provincial or state securities laws is
available in connection with such offer, sale or transfer."
The undersigned requests that stock certificates for such shares be
issued, and a warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Registered Holder and delivered to
the undersigned at the address set forth below:
Dated:
- ------------------------------------------------------------------------
Signature of Registered Holder
- ------------------------------------------------------------------------
Name of Registered Holder (Print)
- ------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
EX-64
<PAGE> 9
EXHIBIT B
ASSIGNMENT
(To be executed by the registered Holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby sells,
assigns and transfers unto the person or persons below named the right to
purchase _______ shares of the Common Stock of PATRIOT SCIENTIFIC CORPORATION
evidenced by the attached Warrant and does hereby irrevocably constitute and
appoint _______________________ attorney to transfer the said Warrant on the
books of the Company, with full power of substitution in the premises.
Dated: ______________________________
Signature
Fill in for new Registration of Warrant:
- -----------------------------------
Name
- -----------------------------------
Address
- -----------------------------------
Please print name and address of assignee
(including zip code number)
- -----------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form or Assignment must correspond to
the name as written upon the face of the attached Warrant in every particular,
without alteration or enlargement or any change whatsoever.
------------------------------------------------------------------------
EX-65
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
Annual Report
EXHIBIT NO. 4.13
Form of Warrant to Purchase Common Stock
EX-66
<PAGE> 2
THIS WARRANT AND THE SECURITIES RECEIVABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (i) A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION
WITH SUCH OFFER, SALE OR TRANSFER.
Warrant to Purchase
100,000 shares
WARRANT TO PURCHASE COMMON STOCK
OF
PATRIOT SCIENTIFIC CORPORATION
THIS CERTIFIES that SPELLCASTER TELECOMMUNICATIONS, INC. or any
subsequent ("Holder") hereof, has the right to purchase from PATRIOT SCIENTIFIC
CORPORATION, a Delaware corporation (the "Company"), not more than 100,000 fully
paid and nonassessable shares of the Company's Common Stock, par value $.00001
per share ("Common Stock"), at a price equal to the Exercise Price as defined in
Section 3 below, subject to adjustment as provided herein, at any time on or
before 5:00 p.m., San Diego, California time, on April 29, 2000.
The Holder of this Warrant agrees with the Company that this Warrant is
issued and all rights hereunder shall be held subject to all of the conditions,
limitations and provisions set forth herein.
1. Date of Issuance.
This Warrant shall be deemed to be issued on April 28, 1998 ("Date of
Issuance").
2. Exercise.
(a) Manner of Exercise. This Warrant may be exercised as to all or any
lesser number of full shares of Common Stock covered hereby upon surrender of
this Warrant, with the Exercise Form attached hereto duly executed, together
with the full Exercise Price (as defined in Section 3) for each share of Common
Stock as to which this Warrant is exercised, at the office of the Company,
Patriot Scientific Corporation, 10989 Via Frontera, San Diego, California 92127,
Attention: President, Telephone No. 619-674-5000, Telecopy No. 619-674-5005, or
at such other office or agency as the Company may designate in writing, by
overnight mail, with an advance copy of the Exercise Form attached as Exhibit A
("Exercise Form") by facsimile (such surrender and payment of the Exercise Price
hereinafter called the "Exercise of this Warrant").
EX-67
<PAGE> 3
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the Exercise Form is sent by
facsimile to the Company, provided that the original Warrant and Exercise Form
are received by the Company within five (5) business days thereafter. The
original Warrant and Exercise Form must be received within five (5) business
days of the Date of Exercise, or the exercise may, at the Company's option, be
considered void. Alternatively, the Date of Exercise shall be defined as the
date the original Exercise Form is received by the Company, if Holder has not
sent advance notice by facsimile.
(c) Cancellation of Warrant. This Warrant shall be canceled upon its
Exercise, and, as soon as practical after the Date of Exercise, the Holder
hereof shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise, and if this Warrant is not exercised in full, the
Holder shall be entitled to receive a new Warrant or Warrants (containing terms
identical to this Warrant) representing any unexercised portion of this Warrant
in addition to such Common Stock.
(d) Holder of Record. Each person in whose name any Warrant for shares
of Common Stock is issued shall, for all purposes, be deemed to have become the
Holder of record of such shares on the Date of Exercise of this Warrant,
irrespective of the date of delivery of such shares of Common Stock. Nothing in
this Warrant shall be construed as conferring upon the Holder hereof any rights
as a shareholder of the Company.
3. Payment of Warrant Exercise Price.
The Exercise Price ("Exercise Price") shall equal $ 1.25.
Payment of the Exercise Price may be made by cash, certified or cashiers
check, or wire transfer.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is
intended, understood and acknowledged that the Common Stock issuable upon
exercise of this Warrant shall be deemed to have been acquired at the time this
Warrant was exercised. Moreover, it is intended, understood and acknowledged
that the holding period for the Common Stock issuable upon exercise of this
Warrant shall be deemed to have commenced on the date this Warrant was
exercised.
4. Transfer Rights
Subject to the provisions of Section 8 of this Warrant, this Warrant may
be transferred on the books of the Company, in whole or in part, in person or by
attorney, upon surrender of this Warrant properly endorsed. This Warrant shall
be canceled upon such surrender and, as soon as practicable thereafter, the
person to whom such transfer is made shall be entitled to receive a new Warrant
or Warrants as to the portion of this Warrant transferred, and the Holder of
this Warrant shall be entitled to receive a new Warrant or Warrants as to the
portion hereof retained.
5. Anti-Dilution Adjustments.
EX-68
<PAGE> 4
(a) Stock Dividend. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then the Holder hereof, upon Exercise of this
Warrant after the record date for the determination of Holders of Common Stock
entitled to receive such dividend, shall be entitled to receive upon Exercise of
this Warrant, in addition to the number of shares of Common Stock as to which
this Warrant is Exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been Exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
(b) Recapitalization or Reclassification. If the Company shall at any
time effect a recapitalization, reclassification or other similar transaction of
such character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which the Holder hereof shall
be entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give the Warrant Holder the same notice it provides to holders of
Common Stock of any transaction described in this Section 5(b).
(c) Distributions. If the Company shall at any time distribute to
Holders of Common Stock cash, evidences of indebtedness or other securities or
assets (other than cash dividends or distributions payable out of earned surplus
or net profits for the current or preceding year) then, in any such case, the
Holder of this Warrant shall be entitled to receive, upon exercise of this
Warrant, with respect to each share of Common Stock issuable upon such Exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which such Holder would have been entitled to receive with respect to each such
share of Common Stock as a result of the happening of such event had this
Warrant been Exercised immediately prior to the record date or other date fixing
shareholders to be affected by such event (the "Determination Date") or, in lieu
thereof, if the Board of Directors of the Company should so determine at the
time of such distribution, a reduced Exercise Price determined by multiplying
the Exercise Price on the Determination Date by a fraction, the numerator of
which is the result of such Exercise Price reduced by the value of such
distribution applicable to one share of Common Stock (such value to be
determined by the Board in its discretion) and the denominator of which is such
Exercise Price.
(d) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of the same or another
class or classes of stock or securities or other assets of the Company or
another entity or there is a sale of all or substantially all the Company's
assets (a "Corporate Change"), then this Warrant shall be assumed by the
acquiring entity or any affiliate thereof and thereafter this Warrant shall be
exerciseable into such class and type of securities or other assets as the
Holder would have received had the Holder exercised this Warrant immediately
prior to such Corporate Change; provided, however, that Company may not affect
any Corporate Change unless it first shall have given thirty (30) business days
notice to the Holder hereof of any Corporate Change.
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(e) Exercise Price Adjusted. As used in this Warrant, the term
"Exercise Price" shall mean the purchase price per share specified in Section 3
of this Warrant, as it may be adjusted from time to time, until the occurrence
of an event stated in subsection (a), (b) or (c) of this Section 5 and
thereafter shall mean said price as adjusted from time to time in accordance
with the provisions of said subsection. No such adjustment under this Section 5
shall be made unless such adjustment would change the Exercise Price at the time
by $.01 or more; provided, however, that all adjustments not so made shall be
deferred and made when the aggregate thereof would change the Exercise Price at
the time by $.01 or more. No adjustment made pursuant to any provision of this
Section 5 shall have the effect of increasing the total consideration payable
upon Exercise of this Warrant in respect of all the Common Stock as to which
this Warrant may be exercised. Notwithstanding anything to the contrary
contained herein, the Exercise Price shall not be reduced to an amount below the
par value of the Common Stock.
(f) Adjustments: Additional Shares, Securities or Assets. In the
event that at any time, as a result of an adjustment made pursuant to this
Section 5, the Holder of this Warrant shall, upon Exercise of this Warrant,
become entitled to receive shares and/or other securities or assets (other than
Common Stock) then, wherever appropriate, all references herein to shares of
Common Stock shall be deemed to refer to and include such shares and/or other
securities or assets; and thereafter the number of such shares and/or other
securities or assets shall be subject to adjustment from time to time in a
manner and upon terms as nearly equivalent as practicable to the provisions of
this Section 5.
6. Fractional Interests.
No fractional shares or scrip representing fractional shares
shall be issuable upon the Exercise of this Warrant, but on Exercise of this
Warrant, the Holder hereof may purchase only a whole number of shares of Common
Stock. If, on Exercise of this Warrant, the Holder hereof would be entitled to a
fractional share of Common Stock or a right to acquire a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon conversion shall be the next higher number
of shares.
7. Reservation of Shares.
The Company shall at all times reserve for issuance such number
of authorized and unissued shares of Common Stock (or other securities
substituted therefor as herein above provided) as shall be sufficient for
Exercise and payment of the Exercise Price of this Warrant. The Company
covenants and agrees that upon Exercise of this Warrant, all shares of Common
Stock issuable upon such Exercise shall be duly and validly issued, fully paid,
nonassessable and not subject to preemptive rights, rights of first refusal or
similar rights of any person or entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant and the
Common Stock issuable on Exercise hereof have not been registered under the
Securities Act of 1933, as amended, and may not be sold, transferred, pledged,
hypothecated or otherwise disposed of in the absence of registration or the
availability of an exemption from registration under said Act. All shares of
Common
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Stock issued upon Exercise of this Warrant shall bear an appropriate legend to
such effect, if applicable.
(b) Assignment. Assuming the conditions of (a) above regarding
registration or exemption have been satisfied, the Holder may sell, transfer,
assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder
shall deliver a written notice to Company, substantially in the form of the
Assignment attached hereto as Exhibit B, indicating the person or persons to
whom the Warrant shall be assigned and the respective number of warrants to be
assigned to each assignee. The Company shall effect the assignment within ten
days, and shall deliver to the assignee(s) designated by Holder a Warrant or
Warrants of like tenor and terms for the appropriate number of shares.
(c) Investment Intent. The Warrant and Common Stock issuable upon
conversion are intended to be held for investment purposes and not with an
intent to distribution, as defined in the Act.
9. Benefits of this Warrant.
Nothing in this Warrant shall be construed to confer upon any
person other than the Company and the Holder of this Warrant any legal or
equitable right, remedy or claim under this Warrant and this Warrant shall be
for the sole and exclusive benefit of the Company and the Holder of this
Warrant.
10. Applicable Law.
This Warrant is issued under and shall for all purposes be
governed by and construed in accordance with the laws of the state of
California, without giving effect to conflict of law provisions thereof.
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. Notice or Demands.
Notices or demands pursuant to this Warrant to be given or made by the Holder of
this Warrant to or on the Company shall be sufficiently given or made if sent by
certified or registered mail, return receipt requested, postage prepaid, and
addressed, until another address is designated in writing by the Company,
Patriot Scientific Corporation, 10989 Via Frontera, San Diego, California 92127,
Attention: President, Telephone No. 619-674-5000, Telecopy No. 619-674-5005.
Notices or demands pursuant to this Warrant to be given or made by the Company
to or on the Holder of this Warrant shall be sufficiently given or made if sent
by certified or registered mail, return receipt requested, postage prepaid, and
addressed, Attn: Holder, address: Spellcaster Telecommunications Inc., 73 Laird
Dr., Suite 206, Toronto, Ontario, Canada M4G-3T4, Attention: President.
Telephone
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No. 416-425-0600, Telecopy No. 416-425-0854, until another address is designated
in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the 28th day
of April, 1998.
PATRIOT SCIENTIFIC CORPORATION
By: ________________________________
Lowell W. Giffhorn
Chief Financial Officer
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EXHIBIT A
EXERCISE FORM
TO: ___________________.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock of PATRIOT SCIENTIFIC CORPORATION, a
__________ corporation, evidenced by the attached Warrant, and herewith makes
payment of the Exercise Price with respect to such shares in full, all in
accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any of such Common Stock, except in accordance with the provisions of Section
8 of the Warrant, and consents that the following legend may be affixed to the
stock certificates for the Common Stock hereby subscribed for, if such legend is
applicable:
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any
provincial or state securities law, and may not be sold, transferred,
pledged, hypothecated or otherwise disposed of until either (i) a
registration statement under the Securities Act and applicable
provincial or state securities laws shall have become effective with
regard thereto, or (ii) an exemption from registration under the
Securities Act or applicable provincial or state securities laws is
available in connection with such offer, sale or transfer."
The undersigned requests that stock certificates for such shares be
issued, and a warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Registered Holder and delivered to
the undersigned at the address set forth below:
Dated:
- ------------------------------------------------------------------------
Signature of Registered Holder
- ------------------------------------------------------------------------
Name of Registered Holder (Print)
- ------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
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<PAGE> 9
EXHIBIT B
ASSIGNMENT
(To be executed by the registered Holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby sells,
assigns and transfers unto the person or persons below named the right to
purchase _______ shares of the Common Stock of PATRIOT SCIENTIFIC CORPORATION
evidenced by the attached Warrant and does hereby irrevocably constitute and
appoint _______________________ attorney to transfer the said Warrant on the
books of the Company, with full power of substitution in the premises.
Dated: ______________________________
Signature
Fill in for new Registration of Warrant:
- -----------------------------------
Name
- -----------------------------------
Address
- -----------------------------------
Please print name and address of assignee
(including zip code number)
- -----------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form or Assignment must correspond to
the name as written upon the face of the attached Warrant in every particular,
without alteration or enlargement or any change whatsoever.
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<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
Annual Report
EXHIBIT NO. 10.19
JAMES LUNNEY EMPLOYMENT AGREEMENT
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<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into effective as of the 23rd day of March, 1998,
between PATRIOT SCIENTIFIC CORPORATION, a Delaware publicly traded corporation
(the "Company"), and James Lunney ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employees future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this agreement until March 23, 2001, and said employment shall continue after
such date until either party shall deliver written notice to the other party
hereto to the effect that the employment hereunder shall terminate thirty (30)
days from the giving of such notice. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee.
Employee acknowledges that he is free to enter into this agreement and is not
subject to any existing employment contract written or oral.
2. Services to be Rendered by Employee. Employee shall be subject to the
direction of the Board of Directors, or a duly authorized committee thereof and
his duties shall be those generally vested in the office of President and Chief
Executive Officer and Director for the corporation and he shall have such other
powers and duties as may be reasonably prescribed by the Board of Directors, or
a duly authorized committee thereof, and shall perform such duties as from time
to time may be decided upon by the Board of Directors, or a duly authorized
committee thereof, of the Company, including but not limited to, speaking for
and promoting the sale of the Company's product lines as public spokesman both
in print and television ads.
The Employee agrees that he will serve the Company faithfully and to the best of
his abilities, devoting substantially all his time, energy and skill to the
activities of the Company and the promotion of its interests. Employee shall not
serve as an officer or director or similar capacity with any other entity except
with the consent of the Board of Directors.
3. Compensation.
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a Base Salary of One hundred and Thirty
thousand dollars ($130,000) per annum during the term of this agreement,
prorated for any partial month and paid in conformity with the Company's normal
payroll period. Employee's salary shall increase to $140,000 per annum after
completing one full year of employment. Employee's salary shall be reviewed by
the Board of Directors from time to time in its discretion, and Employee will
receive such salary increases, if any, as the Board of Directors in its sole
discretion determines.
(b) In addition to the Base Salary during each year of the term of employment,
the Employee will be eligible to receive an Annual Bonus equal to 25% of
Employee's Base Salary. The Annual Bonus shall be based upon the Employee's
achievement of specific quantitative and non-quantitative objectives related to
each fiscal year business plan established by the Company's Board of Directors
prior to each annual period in question, and approved by the Board based upon
milestones, to be paid within 60 days of employment anniversary. First year
bonus of 25% guaranteed on first year employment anniversary or certain changes
of control as defined in Paragraph 5(b)(2). Additional bonuses and future year
bonuses shall be at the discretion of the Board of Directors.
(c) The Employee's place of employment shall be considered San Diego County,
California.
(d) Employee shall be entitled to participate in and receive benefits under the
Company's executive benefits plans as in effect from time to time, including,
specifically for Employee, a $600 per month car allowance payable monthly,
medical insurance, sick leave, and vacation time, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and Company policies. Specifically, Employee shall be entitled to three (3)
weeks of vacation for the first year of employment increasing to four (4) weeks
annually for each full year of employment.
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<PAGE> 3
(e) The Company shall pay or reimburse Employee for all expenses normal
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations and the like
upon submission by him of vouchers or an itemized list thereof as the Board of
Directors; may from time to time adopt and authorize, and as may be required in
order to permit such payments as proper deductions to the Company under the
Internal Revenue Code of 1986 and the rules and regulations adopted pursuant
thereto now or hereafter in effect.
(f) All amounts payable or which become payable under any provision of this
Agreement will be subject to any deductions authorized in writing by you and any
deductions and withholdings required by law.
4. Indemnification.
(a) If, after the date of the commencement of the Employment Period, the
Employee is made a party or is threatened to be made a party to any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company or is or was serving at the request of the Company as a director,
officer, member, employee or agent of another corporation or partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether or not the basis of such Proceeding is an alleged act or
failure to act in an official capacity as a director, officer, member, employee
or agent, he shall be indemnified and held harmless by the Company to the
fullest extent authorized by Delaware law, as the same exists or may hereafter
be amended, against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Employee in connection
therewith, including, without limitation, payment of expenses incurred in
defending a Proceeding prior to the final disposition of such Proceeding
(subject to receipt of an undertaking by the Employee to repay such amount if it
shall ultimately be determined that the Employee is not entitled to be
indemnified by the Company under Delaware law), and such indemnification shall
continue as to the Employee even if he has ceased to be a director, officer,
member, employee or agent of the Company or other enterprise and shall inure to
the benefit of his heirs, executors and administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 4 shall not be exclusive of any other right that the Employee may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
5. Termination of Employment.
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) If the Board of Directors of the Company, or a duly authorized
committee thereof, acting in good faith and upon reasonable grounds,
determines that the Employee should be terminated for Cause. For
purposes of this Agreement, "Cause" means, in each case as determined in
good faith by the Board, Employee's (i) personal dishonesty, willful
misconduct, or breach of fiduciary duty involving personal profit,
and/or (ii) conviction of any felony law, and/or (iii) a determination
or request by an appropriate regulatory authority that Employee be
removed or disqualified from acting as an officer of the Company, and/or
(iv) willful breach of a material provision of this Agreement after
written notice, in reasonable detail as the alleged breach, has been
given to you by the Board and you have had a reasonable opportunity to
cure such breach. Notwithstanding the foregoing, the Employee shall not
be deemed to have been terminated for Cause unless and until there shall
have been delivered to the Employee (i) a copy of a resolution, duly
adopted by the Board (excluding the Employee) at a meeting of the Board
called and held for the purpose (after reasonable notice to the Employee
of the meeting of the Board at which the motion is to be considered,
which notice shall specify in reasonably detailed terms the facts and
circumstances constituting Cause, and after the Employee, together with
his counsel, having been afforded at such meeting an opportunity to be
heard before the Board), finding that the Employee was guilty of conduct
constituting Cause; (ii) a certificate of the Secretary or an Assistant
Secretary of the Company stating that such resolution was in fact duly
adopted by the Board (excluding the Employee); and (iii) a Notice of
Termination in the form specified in the following sentence. A Notice of
Termination shall indicate the specific termination provision in this
Agreement relied upon and set forth in reasonable detail the
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<PAGE> 4
facts and circumstances of the Employee's employment under the provision
so indicated and the actual termination effective date.
(2) If the Company gives Employee thirty days advance written notice of
termination of employment.
(3) If the Employee dies during the term of employment, the Employee's
employment hereunder and Employee's compensation and other rights under
this Agreement and as an employee of the Company (except as to
compensation rights accrued prior thereto and except as expressly
provided in the next succeeding sentence) shall terminate thirty (30 )
days following the date of death. In such event, the Company shall pay
to the Employee's designated executor or administrator of the Employee's
estate, all compensations and benefits accrued which would otherwise be
payable to the Employee through the thirtieth (30) day following the
date of death.
(4) If the Employee is unable for any reason to carry out or to perform
the duties required of him hereunder and does not resume his duties
prior to the termination date specified in the Company's written notice
of termination; provided, however, if the Employee shall fail to carry
out or to perform the duties required of him because of mental or
physical disability for a six consecutive month period during the term
hereof and following such period he is unable to perform his duties
hereunder because of mental or physical disability, as determined by the
Board of Directors of the Company, or a duly authorized committee
thereof, acting in good faith and upon reasonable grounds, he shall be
entitled to receive his then Base Salary he would otherwise be entitled
to hereunder during the term of this Agreement pursuant to Paragraph 3
hereof for a period of not longer than twelve (12) months after the
termination of his employment pursuant to this Paragraph 5(a) (4).
(5) If this Agreement is terminated by the Company pursuant to Paragraph
5(a)(2) hereof, then Employee shall be entitled to severance payments of
(i) during the first six (6) months of this agreement equal to six (6)
months of his then monthly Base Salary; and (ii) equal to twelve (12)
months of his then monthly Base Salary and any bonus on an as if
perfected basis payable in one lump sum within thirty (30) days after
such effective termination of Employee's employment by the Company
irrespective of the remaining term of this agreement.
(b) The Employee shall have the right at his sole option to terminate employment
hereunder under the following conditions:
(1) at any time upon thirty (30) days written notice.
(2) upon written notice by Employee to the Company within thirty (30)
days of and indicating that a change in control of the Company
("Corporate Transaction") has occurred and therefore Employee elects to
terminate as provided herein. A Corporate Transaction of the Company
shall mean a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided that, without limitation, such a change in
control or other qualifying event shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined
voting power of the Company's then outstanding securities; or (ii) the
Company sells, transfers or otherwise disposes of all or substantially
all of the assets of the Company; or (iii) a merger or acquisition in
which the Company is not the surviving entity (except for a merger into
a wholly-owned subsidiary, and except for a transaction the sole purpose
of which is to change domicile.
(3) if termination by the Employee is pursuant to 5 (b) (1) then no
severance or termination payments shall be payable. If termination is
noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to
a payment equal to the remaining months of this Agreement multiplied by
the Base Salary and any bonus on an as if perfected basis payable in one
lump sum within sixty (60) days. In addition, the Employee shall be
entitled to recover legal fees and costs incurred by Employee should the
Company not make timely payment prescribed by this section and should
the Employee prevail in any action filed thereabout.
6. Soliciting Customers. The Employee agrees that he will not for a period of
one (1) year immediately following the termination of his employment with the
Company, either directly or indirectly make known to any competing person,
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<PAGE> 5
firm, or corporation the names or addresses of any of the customers of the
Company or any other information pertaining to them that is not in the public
domain.
7. Trade Secrets of the Company. The Employee prior to and during the term of
employment under this Agreement has had and will have access to and become
acquainted with various trade secrets, consisting of devices, secret inventions,
processes, and compilations of information, records, and specifications which
are owned by the Company, and which are regularly used or to be used in the
operation of the business of the Company. The Employee shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them in any way,
either during the term of this agreement or for a period of 36 months
thereafter, except as required in the course of his employment. All files,
records, documents, drawings, specifications, equipment, and similar items
relating to the business of the Company, whether prepared by the Employee or
otherwise coming into his possession, shall remain the exclusive property of the
Company and shall not be removed under any circumstances from the premises of
the Company where the work is being carried on without prior written consent of
the Company or consistent with the Company's normal business practices.
8. Inventions and Patents.
(a) The Employee agrees that as to any inventions made by him during the term
of his employment, solely or jointly with others, which are made with the
equipment, supplies, facilities or trade secret information of the Company, or
which relate at the time of the conception or reduction to purchase of the
invention to the business of the Company or the Company's actual or demonstrably
anticipated research and development, or which result from any work performed by
the Employee for the Company, shall belong to the Company and the Employee
promises to assign such inventions to the Company. The Employee also agrees that
the Company shall have the right to keep such inventions as trade secrets, if
the Company chooses. The Employee agrees to assign to the Company the Employee's
rights in any other inventions where the Company is required to grant those
rights to the United States government or any agency thereof. In order to permit
the Company to claim rights to which it may be entitled, the Employee agrees to
disclose to the Company in confidence all inventions which the Employee makes
arising out of the Employee's employment and all patent application filed by the
Employee within one year after the termination of his employment.
(b) The Employee shall assist the Company in obtaining patents on all
inventions, designs, improvements, and discoveries patentable by the Company in
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the Company with
full and extensive title thereto, and to protect the same against infringement
by others. Any assistance after termination shall be at the Company's expense.
9. Stock Options.
(a) The Employee has been granted stock options on 350,000 shares, subject to
vesting, in connection with this employment agreement. The Company agrees that
if it should cause the registration of any stock options of any senior officers
that it will include the option shares of the Employee with any registration
statement, subject to qualification, at no cost to Employee. Subject to Board of
Director approval, the Company may file a registration statement on Form S-8, if
so registerable on such form, covering the shares issuable on option exercise.
(b) Subject to the provisions of Section 9(b) hereof, immediately prior to the
closing of a transaction as described in Section 5(b)(2) ("Corporate
Transaction"), the exerciseability of each option granted to you to purchase
shares of Common Stock that is outstanding immediately prior to the closing of
such Corporate Transaction, will be automatically accelerated so that each such
option will, immediately prior to the closing date for the Corporate
Transaction, become fully exerciseable with respect to the total number of
shares issuable upon exercise thereof and may be exercised prior to the closing
of such Corporate Transaction for all or any portion of such shares.
10. Severability. Each paragraph and subparagraph of this Agreement shall be
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
11. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
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<PAGE> 6
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
12. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid:
(a) If to Employee, addressed to him at the following address as may be changed
in writing from time to time:
James Lunney
11319 Monticook Ct.
San Diego, CA 92127
(b) If to the Company, addressed to:
Patriot Scientific Corporation
10989 Via Frontera
San Diego, California 92127
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
13. Title and Headings. Titles and headings to paragraphs hereof are for
purposes of references only and shall in no way limit, define or otherwise
affect the provisions hereof.
14. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
15. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
16. Cumulative Rights. Each and all of the various rights, powers and remedies
of the Company and Employee in this Agreement shall be considered as cumulative,
with and in addition to any other rights, powers or remedies of the Company or
the Employee and no one of them as exclusive of the others or as exclusive of
any other rights, powers and remedies allowed by law. The exercise or partial
exercise of any right, power or remedy shall neither constitute the election
thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and
8 hereof shall continue in full force and effect notwithstanding the Employee's
termination of employment and the termination of this Agreement.
17. Remedies. The Employee and the Company both acknowledge that each may have
no adequate remedy at law if either violates any of the terms contained in
Sections 6, 7 and 8. In such event, either party shall have the right, in
addition to any other rights it may have, to obtain relief to restrain any
breach hereof or otherwise to specifically enforce any of the provisions hereof.
18. Waiver of Breach. The waiver by one party to this Agreement of a breach of
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the said party .
19. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
20. Attorney's Fees. In the event that either party must institute legal action
to compel the other to comply with the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees and costs.
21. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first above written.
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/S/ ELWOOD G. NORRIS February 23, 1998
- --------------------
Elwood G. Norris, Chairman
/S/ JAMES T. LUNNEY February 23, 1998
- ----------------------
James Lunney, Employee
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PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
Annual Report
EXHIBIT NO. 10.20
PHILIP MORETTINI EMPLOYMENT AGREEMENT
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EMPLOYMENT AGREEMENT dated as of July 28, 1997, between PATRIOT SCIENTIFIC
CORPORATION, a Delaware Corporation (the "Company"), and Philip
Morettini (the "Executive").
WITNESSETH:
1. Term of Employment.
(a) The Company hereby agrees to employ the Executive and the Executive
hereby agrees to accept employment as Vice President of Sales and Marketing of
the Company for a three year period commencing July 28, 1997, or for such
shorter period as may be mutually agreed by the Company and the Executive (the
"Employment Period"), subject to the terms and conditions of this Agreement. In
his capacity as Vice President of Sales and Marketing of the Company, Executive
will be responsible for the general duties associated with his title including,
but not limited to developing, implementing, and monitoring the plans and
programs to successfully market and sell the Company's microprocessor,
communications, radar and antenna technologies, and/or such other management
duties on behalf of the Company as may be assigned to him from time to time by
the President and Chief Executive Officer ("CEO") of the Company.
(b) The Executive agrees that, during the Employment Period, he will
serve the Company faithfully and to the best of his abilities, devoting
substantially all his time, energy and skill to the activities of the Company
and the promotion of its interests. It is expressly understood that the
Executive may devote a reasonable amount of time to such charitable, civic and
personal affairs as shall not interfere with the obligations set forth in the
preceding sentence. The Executive agrees not to work for or participate in any
business that competes in any manner with the business of the Company during his
employment with the Company, including after hours, on weekends, or during
vacation time, even if only organizational assistance or limited consultation is
involved.
2. Compensation and Benefit Plans
(a) The Executive shall receive a base salary during the Employment
Period which shall be payable in installments at such times as other employees
are paid but in any case at least monthly as follows: (1) During the first year
of the Employment Period ("Year One"), the Executive shall receive a gross base
salary of not less than nine thousand one hundred sixty seven dollars
($9,167.00) per month; (2) During the second and third year of the Employment
Period ("Year Two" and "Year Three" respectively), the Executive shall receive a
base salary of not less than the base salary received in Year One. The base
salary received in any year shall be subject to other upward adjustments as
shall be recommended by the President and CEO of the Company to the Board of
Directors of the Company (the "Board") and as shall be approved by the Board and
Compensation Committee.
(b) The Executive is entitled, at the discretion of the Board of
Directors of the Company, to an Annual Incentive Bonus up to 50% of the total
yearly base compensation for the applicable year (the "Annual Incentive Bonus").
The Annual Incentive Bonus payment will be based upon mutually agreed upon
objectives and levels of performance.
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(c) The Executive shall be eligible to participate in all employee
benefit programs, if any, maintained by the Company, including, but not limited
to, group life insurance, medical, dental, retirement and pension plans, any
deferred compensation profit sharing plans, 401(k) savings plan, and other such
fringe benefits as are or may be available from time to time to senior
executives of the Company. During the Employment Period, the Executive is
entitled to 4 weeks vacation per annum.
(d) The Company will pay or reimburse the Executive during the
Employment Period for all expenses normally reimbursed by the Company and
reasonably incurred by the Executive in furtherance of his duties hereunder and
authorized by the Company, including but not limited to, expenses of
entertainment, travel, meals, hotel accommodations and the like upon the
submission of the Executive of vouchers or an itemized list thereof and as may
be required in order to permit such payments as proper deductions for the
Company under the Internal Revenue Code of 1986 and the rules and regulations
adopted pursuant thereto now or hereafter in effect.
3. Stock Options.
(a) The Executive will be granted an option to purchase three hundred
thousand (300,000) shares of the Company's common stock at the average of the
closing bid and ask price of the Company's stock on July 28, 1997. This option
will be granted under the Company's 1996 Stock Option Plan and is subject to
shareholders approval. The Company and the Executive will sign a Stock Option
Agreement memorializing the grant on July 28, 1997 in the form of the attached
Exhibit A upon approval by the Stock Compensation Committee.
(b) The Stock Options will vest according to the following schedule: (1)
30,000 shares effective upon shareholder approval, 90,000 shares will vest at
the end of Year One if, and only if, the Executive meets mutually agreed upon
performance goals including, but not limited to two (2) significant design wins
for the microprocessor technology and significant increased sales in the
Company's other technologies ("Year One Performance"). If the Year One
Performance criteria are not met, but the Executive has one (1) significant
design win for the Company's family of PSC1000 (ShBoom) microprocessors in Year
One and the Executive meets such other performance goals as shall be determined
by the President and CEO in his sole discretion, then the 90,000 shares can be
vested at the end of Year One; (2) 90,000 shares will vest at the end of Year
Two if, and only if, the Executive meets mutually agreed upon performance goals
including, but not limited to significant sales of the Company's microprocessor
and communication technologies in each of the respective quarters of Year Two
("Year Two Performance"); (3) 90,000 shares will vest at the end of Year Three
if, and only if, the Executive meets mutually agreed upon performance goals,
including, but not limited to significant sales of the Company's microprocessor
and communication technologies in each of the respective quarters of Year Three
("Year Three Performance"); (4) During any year, at the discretion of the Board,
any unvested options can be vested if it is determined that significant progress
has been made toward reaching the respective performance goals for that year.
All stock options held by employee will vest immediately prior to a Change in
Control of the Company.
4. Termination of Employment.
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(a) The employment of the Executive hereunder shall automatically
terminate if the Executive shall die during the Term of Employment. The
employment of the Executive can be terminated for cause by the Company at its
option only for the following:
(1) the conviction of the Executive under state or federal law of a
felony or other crime, or the equivalent under foreign law; unless in any such
case Executive performed such act in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the Company;
(2) the material breach by Executive of any provision of the Agreement
which has not been cured pursuant to the provisions of Section 5 hereof; or
(3) a determination or request by an appropriate regulatory authority
that the Executive be removed or disqualified from acting as an officer of the
Company.
(b) If the Executive's employment is terminated for other than cause by
the Company, then the Executive is entitled to severance payments equal to four
(4) months of the current base salary payable in a lump sum payment on the last
day of the thirty (30) day notice period;
(c) The Executive shall have the right as his sole option to terminate
his employment at any time upon ninety (90) days written notice or for such
other notice period to be determined by the President and CEO in his sole
discretion.
(d) If within twelve (12) months of a Change in Control, as that term is
defined herein, Executive's employment is terminated for other than cause or
Executive refused to accept or voluntarily resigns from a position other than a
Qualified Position, as that term is defined herein, Executive shall receive
severance compensation equal to twelve (12) months of his then current base
salary. A "Change in Control" means the acquisition, directly or indirectly of
more than 40% of the outstanding shares of any class of voting securities of the
Company by one person or one entity that is not an existing shareholder as of
the date of this Agreement, or a merger, consolidation or sale of all or
substantially all of the assets of the Company, such that the individuals
constituting the Board of the Company immediately prior to such period shall
cease to constitute a majority of the Board, unless the election of each
director who was not a director prior thereto was approved by vote of at least
two-thirds of the directors then in office who were directors prior to such
period. Notwithstanding the foregoing, an acquisition of the requisite
percentage of voting securities in connection with a public offering of
securities by the Company for the primary purpose of providing capital resources
to the Company shall not be considered a "Change in Control" for purposes of
this Section 4(d). "Qualified Position" is an executive officer position with
the entity surviving the Change in Control with substantially the same
responsibilities as those held by the Executive on the date of the Change in
Control. Also, notwithstanding the foregoing, if the Company determines that the
amounts payable to Executive under this employment agreement, when considered
together within the other amounts payable to Executive as a result of a Change
in Control, cause such payments to be treated as excess parachute payments
within the meaning of Section 280G of the Internal Revenue Code, the Company
shall reduce the amount payable to Executive under this Section 4(d) to an
amount that will not subject Executive to the imposition of tax under Section
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4999 of the Internal Revenue Code; provided, however, that this provision shall
apply only to payments to be made under this employment agreement and shall not
cause the reduction of any other payments to be made to Executive by the
Company.
5. Notice of Breach. The Company and the Executive agree that, prior to the
termination of the Employment Period by reason of any breach of any provision of
the Agreement, the injured party will give the party in breach written notice,
specifying such breach and permitting the party in breach to cure such breach
within a period of thirty (30) days after receipt of such notice, except a
breach by Executive of provisions of Section 7 of this Agreement shall not have
a cure period.
6. Indemnification.
(a) If, after the date of the commencement of the Employment Period, the
Executive is made a party or is threatened to be made a party to any action ,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company or is or was serving at the request of the Company as a director,
officer, member, employee or agent of another corporation or partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether or not the basis of such Proceeding is an alleged act or
failure to act in an official capacity as a director, officer, member, employee
or agent, he shall be indemnified and held harmless by the Company to the
fullest extent authorized by Delaware law, as the same exists or may hereafter
be amended, against all expense, liability and loss (including, without
limitation, attorney's fees, judgments, fines and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Executive in connection
herewith, including , without limitation, payment of expenses incurred in
defending a Proceeding prior to the final disposition of such Proceeding
(subject to receipt of an undertaking by the Executive to repay such amount if
it shall ultimately be determined that the Executive is not entitled to be
indemnified by the Company under Delaware law), and such indemnification shall
continue as to the Executive even if he has ceased to be a director, officer,
member, employee or agent of the Company or other enterprise and shall inure to
the benefit of his heirs, executors and administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferring in this
Section 6 shall not be exclusive of any other right that the Executive may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
7. Trade Secrets of the Company, Patents and Inventions.
(a) Except as required by the performance of the Executive's services to
the Company under the terms of this Agreement, neither the Executive or any of
his agents or representatives, shall, during his employment and for so long
afterwards as the pertinent information or data remain Confidential Information,
directly or indirectly, make use of, permit others to use, divulge, disseminate,
copy or otherwise disclose the Company's Confidential Information and/or
Inventions as defined by subparagraphs (i) and (ii), respectively.
(i) "Confidential Information" means all information and material which
is proprietary to the Company, whether or not marked as "confidential" or
"proprietary" and which is disclosed to
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or obtained from the Company by the Executive, which relates to the Company'
past, present or future research, development or business activities.
Confidential Information is all information or materials prepared by or for the
Company and includes, without limitation, all of the following: designs,
drawings, specifications, techniques, models, data, source code, object code,
documentation, diagrams, flow charts, research, development, processes, systems,
methods, machinery, procedures, "know-how", new product or new technology
information, formulas, patents, patent applications, product prototypes, product
copies, cost of production, manufacturing, developing or marketing techniques
and materials, cost of production, development or marketing time tables,
customer lists, strategies related to customers, suppliers or personnel,
contract forms, pricing policies and financial information, volumes of sales,
and other information of similar nature, whether or not reduced to writing or
other tangible form, and any other Trade Secrets, as defined by subparagraph
(iii), or non-public business information. Confidential Information does not
include any information which (1) was in the lawful and unrestricted possession
of the Executive prior to its disclosure by the Company, (2) is or becomes
generally available to the public by acts other than those of the Executive
after receiving it, or (3) has been received lawfully and in good faith by the
Executive from a third party who did not derive it from the Company.
(ii) "Inventions" means and all discoveries, concepts and ideas, whether
patentable or not, including but not limited to, processes, methods, formulas,
compositions, techniques, articles and machines, as well as improvements thereof
or "know-how" related thereto, relating at the time of conception or reduction
to practice to the business engaged in by the Company, or any actual or
anticipated research or development by the Company.
(iii) "Trade Secrets" shall mean any scientific or technical data,
information, design, process, procedure, formula or improvement that is
commercially available to the Company and is not generally known in the
industry.
Materials involving Confidential Information and Inventions are the exclusive
property of the Company and shall not be removed under any circumstances from
the premises of the Company where the work is being carried on without prior
written consent of the Company except when consistent with the Company's normal
business practices.
(b) The Executive agrees that any inventions made, conceived or
completed by him during the term of his employment, solely or jointly with
others, which are made with the Company's equipment, supplies, facilities or
Confidential Information, or which relate at the time of conception or reduction
to purpose of the invention to the business of the Company or the Company's
actual or demonstrably anticipated research and development, or which result
from any work performed by the Executive for the Company, shall be the sole and
exclusive property of the Company. The Executive promises to assign such
inventions to the Company. The Executive also agrees that the Company shall have
the right to keep such inventions as trade secrets, if the Company chooses. The
Executive agrees to assign to the Company the Executive's rights in any other
inventions where the Company is required to grant those rights to the United
States government or any agency thereof. In order to permit the Company to claim
rights to which it may be entitled, the Executive agrees to disclose to the
Company in confidence all inventions which the Executive makes arising out of
the Executive's employment and all patent applications filed by the Executive
within one year after the termination of his employment.
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(c) The Executive shall assist the Company in obtaining patents on all
inventions, designs, improvements and discoveries patentable by the Company in
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the Company with
full and extensive title thereto, and to protect the same against infringement
by others.
8. Severability In the event that any provisions or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
9. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Executive, be assigned by the Company
to any parent, subsidiary, or a successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without the prior written consent of the Executive. Except
as provided for in Section 11 hereunder, the Executive may not assign all or any
of his rights, duties or obligations hereunder without the prior written consent
of the Company.
10. Survival of Certain Provisions. The covenants and agreements set forth in
Paragraph 7 of this Agreement shall survive termination of the Executive's
employment and/or this Agreement, and shall remain in full force and effect
regardless of the cause of such termination.
11. Beneficiaries; References. The Executive shall be entitled to select (and
change) a beneficiary or beneficiaries to receive any compensation or benefit
payable following the Executive's death, and may change such election, in either
case, by giving the Company written notice thereof. In the event of the
Executive's death or a judicial determination of his incompetence, reference in
this Agreement shall be deemed, where appropriate, to refer to the Executive's
beneficiary, estate, committee, conservator or other legal representative.
12. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid;
(a) If to the Executive, addressed to him at the following address as
may be changed in writing from time to time:
Philip Morettini
13451 Tiverton Road
San Diego, CA 92130
(b) If to the Company, addressed to:
Patriot Scientific Corporation
10989 Via Frontera
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<PAGE> 8
San Diego, CA 92127
or to such other address as any party may request by notice given as aforesaid
to the other parties hereto.
13. Titles and Headings. Titles and heading to paragraphs hereof are for the
purposes of references only and shall in no way limit, define or otherwise
effect the provisions hereof.
14. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
14.5 Arbitration/Sole Remedy for Breach of Agreement. In the event of any
dispute between the Company and the Executive concerning any aspect of the
employment relationship, including any disputes upon termination, all such
disputes shall be resolved by binding arbitration before a single neutral
arbitrator. The arbitrator shall be selected from the "American Arbitration
Association." The arbitration shall be held in San Diego, California. The
arbitrator is bound to rule only on whether or not there has been a violation of
the terms of this employment agreement and to render an award, if any, that is
consistent with the terms of this employment agreement. Neither party to this
employment agreement is entitled to any legal recourse or rights or remedies
other than those provided within this employment agreement. The Executive's sole
remedies, are those set forth in this employment agreement. The arbitrator shall
determine a "prevailing party" and shall award such prevailing party (i)
attorney's fees and costs and (ii) the prevailing party's portion of the costs
of arbitration.
In the event of any dispute between the Company and the Executive concerning any
ownership, use or disclosure of the Company's Confidential Information or other
intellectual property, the requirement of arbitration may be waived, at the
Company's sole election, and any such dispute may be brought before a court
having jurisdiction of the matter.
15. Counterparts. This Agreement shall be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
16. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by the parties hereto. Effective on the first day of the Employment
Period, any prior employment agreements between the Company and the Executive
shall terminate.
17. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
18. Waiver. No waiver of any of the provisions of this Agreement shall be deemed
to be or shall constitute a waiver of any other provision of the Agreement,
whether or not similar, nor shall any
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waiver constitute a continuing waiver. No waiver of any provision of this
Agreement shall be binding upon the parties hereto unless it is executed in
writing by the party making the waiver.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as of the day
and year first above written.
Patriot Scientific Corporation
By:
/S/ MICHAEL A. CARENZO
----------------------------
Michael A. Carenzo
President and CEO
/S/ PHILIP MORETTINI
----------------------------
Philip Morettini
Executive
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<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
Annual Report
EXHIBIT NO. 10.21
LOWELL W. GIFFHORN EMPLOYMENT AGREEMENT
EX-91
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EMPLOYMENT AGREEMENT dated as of July 23, 1998, between PATRIOT SCIENTIFIC
CORPORATION, a Delaware Corporation (the "Company"), and
Lowell W. Giffhorn (the "Executive").
WITNESSETH:
1. Term of Employment.
(a) The Company hereby agrees to employ the Executive and the Executive
hereby agrees to accept employment as the Chief Financial Officer of the Company
for a three year period commencing July 20, 1998, or for such shorter period as
may be mutually agreed by the Company and the Executive (the "Employment
Period"), subject to the terms and conditions of this Agreement. In his capacity
as Chief Financial Officer of the Company, Executive will be responsible for the
general duties associated with his title including, but not limited to the care
and custody of all funds, securities, evidence of indebtedness and other
valuable effects of the Company, shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all money and other valuable effects of the Company in the name and to the
credit of the Company in such depositories as from time to time may be
designated by the Board. The Executive shall disburse the funds of the Company
in such manner as may be ordered by the Board from time to time and shall render
to the Chairman of the Board, the President and Chief Executive Officer and the
Board, at regular meetings or whenever any of them may so require, an account of
all transactions and of the Company's financial condition. The Executive shall
also perform such other management duties on behalf of the Company as may be
assigned to him from time to time by the President and Chief Executive Officer
("CEO") of the Company.
(b) The Executive agrees that, during the Employment Period, he will
serve the Company faithfully and to the best of his abilities, devoting
substantially all his time, energy and skill to the activities of the Company
and the promotion of its interests. It is expressly understood that the
Executive may devote a reasonable amount of time to such charitable, civic and
personal affairs as shall not interfere with the obligations set forth in the
preceding sentence. The Executive agrees not to work for or participate in any
business that competes in any manner with the business of the Company during his
employment with the Company, including after hours, on weekends, or during
vacation time, even if only organizational assistance or limited consultation is
involved. The Executive may sit on the Board of Directors of other companies as
long as such companies do not in any way compete in the business of the Company.
2. Compensation and Benefit Plans
(a) The Executive shall receive a base salary during the Employment
Period which shall be payable in installments at such times as other employees
are paid but in any case at least monthly as follows: (1) During the first year
of the Employment Period ("Year One"), the Executive shall receive a gross base
salary of not less than nine thousand one hundred sixty seven dollars
($9,167.00) per month; (2) During the second and third year of the Employment
Period ("Year Two" and "Year Three" respectively), the Executive shall receive a
base salary of not less than the
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base salary received in Year One. The base salary received in any year shall be
subject to other upward adjustments as shall be recommended by the President and
CEO of the Company to the Board of Directors of the Company (the "Board") and as
shall be approved by the Board and Compensation Committee.
(b) The Executive is entitled, at the discretion of the Board of
Directors of the Company, to an Annual Incentive Bonus up to 50% of the total
yearly base compensation for the applicable year (the "Annual Incentive Bonus").
The Annual Incentive Bonus payment will be based upon mutually agreed upon
objectives and levels of performance.
(c) The Executive shall be eligible to participate in all employee
benefit programs, if any, maintained by the Company, including, but not limited
to, group life insurance, medical, dental, retirement and pension plans, any
deferred compensation profit sharing plans, 401(k) savings plan, and other such
fringe benefits as are or may be available from time to time to senior
executives of the Company. During the Employment Period, the Executive is
entitled to 4 weeks vacation per annum.
(d) The Company will pay or reimburse the Executive during the
Employment Period for all expenses normally reimbursed by the Company and
reasonably incurred by the Executive in furtherance of his duties hereunder and
authorized by the Company, including but not limited to, expenses of
entertainment, travel, meals, hotel accommodations and the like upon the
submission of the Executive of vouchers or an itemized list thereof and as may
be required in order to permit such payments as proper deductions for the
Company under the Internal Revenue Code of 1986 and the rules and regulations
adopted pursuant thereto now or hereafter in effect.
3. Termination of Employment.
(a) The employment of the Executive hereunder shall automatically
terminate if the Executive shall die during the Term of Employment. The
employment of the Executive can be terminated for cause by the Company at its
option only for the following:
(1) The conviction of the Executive under state or federal law of a
felony or other crime, or the equivalent under foreign law; unless in any such
case Executive performed such act in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the Company;
(2) the material breach by Executive of any provision of the Agreement
which has not been cured pursuant to the provisions of Section 4 hereof; or
(3) a determination or request by an appropriate regulatory authority
that the Executive be removed or disqualified from acting as an officer of the
Company.
(b) If the Executive's employment is terminated for other than cause by
the Company, then the Executive is entitled to severance payments equal to four
(4) months of the current base salary payable in a lump sum payment on the last
day of the thirty (30) day notice period;
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(c) The Executive shall have the right as his sole option to terminate
his employment at any time upon ninety (90) days written notice or for such
other notice period to be determined by the President and CEO in his sole
discretion.
(d) If within twelve (12) months of a Change in Control, as that term is
defined herein, Executive's employment is terminated for other than cause or
Executive refused to accept or voluntarily resigns from a position other than a
Qualified Position, as that term is defined herein, Executive shall receive
severance compensation equal to twelve (12) months of his then current base
salary. A "Change in Control" means the acquisition, directly or indirectly of
more than 40% of the outstanding shares of any class of voting securities of the
Company by one person or one entity that is not an existing shareholder as of
the date of this Agreement, or a merger, consolidation or sale of all or
substantially all of the assets of the Company, such that the individuals
constituting the Board of the Company immediately prior to such period shall
cease to constitute a majority of the Board, unless the election of each
director who was not a director prior thereto was approved by vote of at least
two-thirds of the directors then in office who were directors prior to such
period. Notwithstanding the foregoing, an acquisition of the requisite
percentage of voting securities in connection with a public offering of
securities by the Company for the primary purpose of providing capital resources
to the Company shall not be considered a "Change in Control" for purposes of
this Section 3(d). "Qualified Position" is an executive officer position with
the entity surviving the Change in Control with substantially the same
responsibilities as those held by the Executive on the date of the Change in
Control. Also, notwithstanding the foregoing, if the Company determines that the
amounts payable to Executive under this employment agreement, when considered
together within the other amounts payable to Executive as a result of a Change
in Control, cause such payments to be treated as excess parachute payments
within the meaning of Section 280G of the Internal Revenue Code, the Company
shall reduce the amount payable to Executive under this Section 3(d) to an
amount that will not subject Executive to the imposition of tax under Section
4999 of the Internal Revenue Code; provided, however, that this provision shall
apply only to payments to be made under this employment agreement and shall not
cause the reduction of any other payments to be made to Executive by the
Company.
4. Notice of Breach. The Company and the Executive agree that, prior to the
termination of the Employment Period by reason of any breach of any provision of
the Agreement, the injured party will give the party in breach written notice,
specifying such breach and permitting the party in breach to cure such breach
within a period of thirty (30) days after receipt of such notice, except a
breach by Executive of provisions of Section 6 of this Agreement shall not have
a cure period.
5. Indemnification.
(a) If, after the date of the commencement of the Employment Period, the
Executive is made a party or is threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company or is or was serving at the request of the Company as a director,
officer, member, employee or agent of another corporation or partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether or not the basis of such Proceeding is an alleged act or
failure to act in an official capacity as a director, officer, member, employee
or agent, he shall be indemnified and held harmless by the Company to the
fullest extent
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authorized by Delaware law, as the same exists or may hereafter be amended,
against all expense, liability and loss (including, without limitation,
attorney's fees, judgments, fines and amounts paid or to be paid in settlement)
reasonably incurred or suffered by the Executive in connection herewith,
including , without limitation, payment of expenses incurred in defending a
Proceeding prior to the final disposition of such Proceeding (subject to receipt
of an undertaking by the Executive to repay such amount if it shall ultimately
be determined that the Executive is not entitled to be indemnified by the
Company under Delaware law), and such indemnification shall continue as to the
Executive even if he has ceased to be a director, officer, member, employee or
agent of the Company or other enterprise and shall inure to the benefit of his
heirs, executors and administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferring in this
Section 6 shall not be exclusive of any other right that the Executive may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
6. Trade Secrets of the Company, Patents and Inventions.
(a) Except as required by the performance of the Executive's services to
the Company under the terms of this Agreement, neither the Executive or any of
his agents or representatives, shall, during his employment and for so long
afterwards as the pertinent information or data remain Confidential Information,
directly or indirectly, make use of, permit others to use, divulge, disseminate,
copy or otherwise disclose the Company's Confidential Information and/or
Inventions as defined by subparagraphs (i) and (ii), respectively.
(i) "Confidential Information" means all information and material which
is proprietary to the Company, whether or not marked as "confidential" or
"proprietary" and which is disclosed to or obtained from the Company by the
Executive, which relates to the Company' past, present or future research,
development or business activities. Confidential Information is all information
or materials prepared by or for the Company and includes, without limitation,
all of the following: designs, drawings, specifications, techniques, models,
data, source code, object code, documentation, diagrams, flow charts, research,
development, processes, systems, methods, machinery, procedures, "know-how", new
product or new technology information, formulas, patents, patent applications,
product prototypes, product copies, cost of production, manufacturing,
developing or marketing techniques and materials, cost of production,
development or marketing time tables, customer lists, strategies related to
customers, suppliers or personnel, contract forms, pricing policies and
financial information, volumes of sales, and other information of similar
nature, whether or not reduced to writing or other tangible form, and any other
Trade Secrets, as defined by subparagraph (iii), or non-public business
information. Confidential Information does not include any information which (1)
was in the lawful and unrestricted possession of the Executive prior to its
disclosure by the Company, (2) is or becomes generally available to the public
by acts other than those of the Executive after receiving it, or (3) has been
received lawfully and in good faith by the Executive from a third party who did
not derive it from the Company.
(ii) "Inventions" means and all discoveries, concepts and ideas, whether
patentable or not, including but not limited to, processes, methods, formulas,
compositions, techniques, articles and machines, as well as improvements thereof
or "know-how" related thereto, relating at the time of
EX-95
<PAGE> 6
conception or reduction to practice to the business engaged in by the Company,
or any actual or anticipated research or development by the Company.
(iii) "Trade Secrets" shall mean any scientific or technical data,
information, design, process, procedure, formula or improvement that is
commercially available to the Company and is not generally known in the
industry.
Materials involving Confidential Information and Inventions are the exclusive
property of the Company and shall not be removed under any circumstances from
the premises of the Company where the work is being carried on without prior
written consent of the Company except when consistent with the Company's normal
business practices.
(b) The Executive agrees that any inventions made, conceived or
completed by him during the term of his employment, solely or jointly with
others, which are made with the Company's equipment, supplies, facilities or
Confidential Information, or which relate at the time of conception or reduction
to purpose of the invention to the business of the Company or the Company's
actual or demonstrably anticipated research and development, or which result
from any work performed by the Executive for the Company, shall be the sole and
exclusive property of the Company. The Executive promises to assign such
inventions to the Company. The Executive also agrees that the Company shall have
the right to keep such inventions as trade secrets, if the Company chooses. The
Executive agrees to assign to the Company the Executive's rights in any other
inventions where the Company is required to grant those rights to the United
States government or any agency thereof. In order to permit the Company to claim
rights to which it may be entitled, the Executive agrees to disclose to the
Company in confidence all inventions which the Executive makes arising out of
the Executive's employment and all patent applications filed by the Executive
within one year after the termination of his employment.
(c) The Executive shall assist the Company in obtaining patents on all
inventions, designs, improvements and discoveries patentable by the Company in
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the Company with
full and extensive title thereto, and to protect the same against infringement
by others.
7. Severability In the event that any provisions or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
8. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Executive, be assigned by the Company
to any parent, subsidiary, or a successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without the prior written consent of the Executive. Except
as provided for in Section 10 hereunder, the Executive may not assign all or any
of his rights, duties or obligations hereunder without the prior written consent
of the Company.
EX-96
<PAGE> 7
9. Survival of Certain Provisions. The covenants and agreements set forth in
Paragraph 6 of this Agreement shall survive termination of the Executive's
employment and/or this Agreement, and shall remain in full force and effect
regardless of the cause of such termination.
10. Beneficiaries; References. The Executive shall be entitled to select (and
change) a beneficiary or beneficiaries to receive any compensation or benefit
payable following the Executive's death, and may change such election, in either
case, by giving the Company written notice thereof. In the event of the
Executive's death or a judicial determination of his incompetence, reference in
this Agreement shall be deemed, where appropriate, to refer to the Executive's
beneficiary, estate, committee, conservator or other legal representative.
11. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid;
(a) If to the Executive, addressed to him at the following address as
may be changed in writing from time to time:
Lowell W. Giffhorn
10875 Kemah Lane
San Diego, CA 92131
(b) If to the Company, addressed to:
Patriot Scientific Corporation
10989 Via Frontera
San Diego, CA 92127
or to such other address as any party may request by notice given as aforesaid
to the other parties hereto.
12. Titles and Headings. Titles and heading to paragraphs hereof are for the
purposes of references only and shall in no way limit, define or otherwise
effect the provisions hereof.
13. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
14. Arbitration/Sole Remedy for Breach of Agreement. In the event of any dispute
between the Company and the Executive concerning any aspect of the employment
relationship, including any disputes upon termination, all such disputes shall
be resolved by binding arbitration before a single neutral arbitrator. The
arbitrator shall be selected from the "American Arbitration Association." The
arbitration shall be held in San Diego, California. The arbitrator is bound to
rule only on whether or not there has been a violation of the terms of this
employment agreement and to render an award, if any, that is consistent with the
terms of this employment agreement. Neither party to this employment agreement
is entitled to any legal recourse or rights or remedies other than those
EX-97
<PAGE> 8
provided within this employment agreement. The Executive's sole remedies, are
those set forth in this employment agreement. The arbitrator shall determine a
"prevailing party" and shall award such prevailing party (i) attorney's fees and
costs and (ii) the prevailing party's portion of the costs of arbitration.
In the event of any dispute between the Company and the Executive concerning any
ownership, use or disclosure of the Company's Confidential Information or other
intellectual property, the requirement of arbitration may be waived, at the
Company's sole election, and any such dispute may be brought before a court
having jurisdiction of the matter.
15. Counterparts. This Agreement shall be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
16. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by the parties hereto. Effective on the first day of the Employment
Period, any prior employment agreements between the Company and the Executive
shall terminate.
17. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
18. Waiver. No waiver of any of the provisions of this Agreement shall be deemed
to be or shall constitute a waiver of any other provision of the Agreement,
whether or not similar, nor shall any waiver constitute a continuing waiver. No
waiver of any provision of this Agreement shall be binding upon the parties
hereto unless it is executed in writing by the party making the waiver.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as of the day
and year first above written.
Patriot Scientific Corporation
By:
/S/ JAMES T. LUNNEY
-------------------
James T. Lunney
President and CEO
/S/ LOWELL W. GIFFHORN
----------------------
Lowell W. Giffhorn
Executive
EX-98
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 23.1
CONSENT OF BDO SEIDMAN, LLP
EX-99
<PAGE> 2
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
San Diego, California
We hereby consent to the incorporation by reference in this Registration of our
report dated July 17, 1998, 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, 1998.
/s/ BDO SEIDMAN, LLP
Denver, Colorado
August 17, 1998
EX-100
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10-KSB
EXHIBIT NO. 23.2
CONSENT OF HARLAN & BOETTGER, CERTIFIED PUBLIC ACCOUNTANTS
EX-101
<PAGE> 2
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
San Diego, California
We hereby consent to the incorporation by reference in this Registration of our
report dated December 17, 1996, 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, 1998.
/s/ HARLAN & BOETTGER
San Diego, California
August 17, 1998
EX-102
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
STATEMENTS FOR THE FISCAL YEAR ENDED MAY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
MAY 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 602,456
<SECURITIES> 0
<RECEIVABLES> 598,542
<ALLOWANCES> 5,000
<INVENTORY> 230,417
<CURRENT-ASSETS> 1,535,780
<PP&E> 1,585,684
<DEPRECIATION> 1,132,473
<TOTAL-ASSETS> 2,189,654
<CURRENT-LIABILITIES> 524,451
<BONDS> 507,000
0
0
<COMMON> 379
<OTHER-SE> 18,396,092
<TOTAL-LIABILITY-AND-EQUITY> 2,189,654
<SALES> 1,902,874
<TOTAL-REVENUES> 1,902,874
<CGS> 1,163,688
<TOTAL-COSTS> 1,163,688
<OTHER-EXPENSES> 4,078,765
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,616,816
<INCOME-PRETAX> (5,894,785)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,894,785)
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<EXTRAORDINARY> 0
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<NET-INCOME> (5,894,785)
<EPS-PRIMARY> (.20)
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