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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1999
REGISTRATION NO. XXXXXXX
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)
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DELAWARE 3674 84-1070278
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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10989 VIA FRONTERA
SAN DIEGO, CALIFORNIA 92127
(619) 674-5000
(Address and telephone number of principal executive offices
and principal place of business)
ROBERT PUTNAM, SECRETARY
PATRIOT SCIENTIFIC CORPORATION
10989 VIA FRONTERA
SAN DIEGO, CALIFORNIA 92127
(619) 674-5000
(Name, address and telephone number of agent for service)
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COPIES TO:
OTTO E. SORENSEN, ESQ.
STEVEN J. DAVIS, ESQ.
LUCE, FORWARD, HAMILTON & SCRIPPS LLP
600 WEST BROADWAY, SUITE 2600
SAN DIEGO, CALIFORNIA 92101
(619) 236-1414
(619) 232-8311 (FAX)
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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Pursuant to Rule 416, there are also being registered such additional
shares and warrants as may become issuable pursuant to anti-dilution provisions
contained in Common Stock Purchase Warrants, the underlying shares of which are
registered hereby.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed
Title of Each Class of Securities Amount to be Offering Price Maximum Amount of
to be Registered Registered Per Security(1) Aggregate Registration
Offering Price Fee
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Common Stock, $.00001 par value 11,294,544 $0.36 $4,066,036 $1,130.36
Common Stock, $.00001 par value(2) 1,943,679 $0.36 699,724 194.52
TOTAL 13,238,223 $0.36 $4,765,760 $1,324.88
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended
(the "Act"), based on the average of the closing bid and asked prices
for the Registrant's Common Stock (the "Common Stock") as reported on
the OTC Electronic Bulletin Board on April 9, 1999.
(2) Issuable upon the exercise of Common Stock Purchase Warrants issued or
issuable to Selling Shareholders.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion, Dated April 14, 1999
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P R O S P E C T U S
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PATRIOT SCIENTIFIC CORPORATION
The resale of 13,238,223 shares of Common Stock
The selling price will be determined by market factors at the time of their
resale.
Patriot Scientific Corporation
10989 Via Frontera
San Diego, California 92127
(619) 674-5000
THE OFFERING
This prospectus relates to the resale by the selling shareholders of up to
13,238,223 shares of common stock. The selling shareholders may sell the stock
from time to time in the over-the-counter market at the prevailing market price
or in negotiated transactions. Of the shares offered:
- 859,761 shares are presently outstanding,
- up to 10,434,783 shares are issuable to Swartz Private Equity, LLC
based on an Investment Agreement dated February 24, 1999,
- up to 1,565,217 shares are issuable upon the exercise of warrants
issuable to Swartz under the Investment Agreement, and
- 378,462 shares are issuable upon the exercise of warrants issuable
to other selling shareholders.
We will receive no proceeds from the sale of the shares by the selling
shareholders. However, we have received proceeds from the sale of shares
currently outstanding and may receive proceeds from the sale of shares to Swartz
and, if exercised, will receive proceeds from the sale of shares issuable upon
the exercise of warrants by Swartz and certain other selling shareholders.
Trading Symbol
PTSC
(Over-the-counter Electronic Bulletin Board)
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE 5
THE SECURITIES AND EXCHANGE COMMISSION (SEC) AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD
BE REPORTED IMMEDIATELY TO THE SEC BY CALLING 1-800-SEC-0330.
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PATRIOT SCIENTIFIC CORPORATION PROSPECTUS
Please read this prospectus carefully. It describes our company, finances and
products. Federal and state securities laws require that we include in this
prospectus all the important information that investors will need to make an
investment decision.
You should rely only on the information contained in this prospectus to make
your investment decision. We have not authorized anyone to provide you with
information that is different from what is contained in this prospectus.
TABLE OF CONTENTS
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Prospectus Summary.................................................... 3
Risk Factors ......................................................... 5
Plan of Distribution ................................................. 10
Selling Shareholders ................................................. 11
The Company .......................................................... 13
Litigation ........................................................... 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 27
Management............................................................ 31
Principal Shareholders................................................ 37
Certain Transactions.................................................. 38
Trading Market and Related Matters.................................... 39
Description of Securities............................................. 40
Legal Matters......................................................... 41
Experts............................................................... 41
Index to Financial Statements......................................... F-1
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking" statements within the meaning
of Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995;
and we desire to take advantage of the "safe harbor" provisions set forth
therein. Therefore, we are including this statement for the express purpose of
availing ourselves of the protections of these safe harbor provisions with
respect to all of such forward-looking statements. The forward-looking
statements in this prospectus reflect our current views with respect to possible
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties, including specifically the absence
of significant revenues, financial resources, a history of losses, a possibility
that technology cannot be completed or that its completion might be delayed,
significant competition, the uncertainty of patent and proprietary rights,
uncertainty as to royalty payments and indemnification risks, trading risks of
low-priced stocks and those other risks and uncertainties discussed herein that
could cause actual results to differ materially from historical results or those
anticipated. In this prospectus, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify certain of the
forward-looking statements. You are cautioned to consider the specific risk
factors described in "Risk Factors" and elsewhere in this prospectus and not to
place undue reliance on the forward-looking statements contained herein, which
speak only as of the date hereof. We undertake no obligation to publicly revise
these forward-looking statements to reflect the effect of events or
circumstances that may arise after the date of this prospectus. All written and
oral forward-looking statements made subsequent to the date of this prospectus
and attributable to us or persons acting on our behalf are expressly qualified
in their entirety by this section.
PROSPECTUS SUMMARY
ABOUT OUR COMPANY
Our company is engaged in the development, marketing, and sale of
patented microprocessor technology and high-performance digital communication
products. These products have applications in the Internet and computer,
networking and telecommunications markets. We also own and are developing radar
and antenna technology. Our strategy is to exploit our technologies and products
through product sales, licensing, strategic alliances and government
contracting.
In December 1996, we acquired Metacomp, Inc. in a business combination
accounted for as a pooling-of-interests. Metacomp, founded in 1978, was a
privately-held, high technology company located in San Diego, California.
Metacomp designed, manufactured, and sold a wide range of high performance data
and telecommunications solutions for wide area networking and digital
telecommunications requirements. Metacomp's product line has been incorporated
into our communication division, and we continue to use the assets acquired as
Metacomp had previously employed them.
ABOUT OUR PRODUCTS
The markets for digital communication products and microprocessors are
experiencing significant growth due in part to the Internet. The Internet is a
global web of computer networks. Developed over 25 years ago, this "network of
networks" allows computers connected to the Internet to communicate with each
other. The Internet provides organizations and individuals with new means to
conduct business. The growth of the Internet and corporate Intranets is creating
a demand for hardware, software and peripherals. The large number of users
connecting to the Internet is creating a demand for traditional analog modems
and higher speed digital modems. New software, such as Java, is emerging to
serve the requirements of Internet users.
Java is an object-oriented programming language for the Internet. With
Java, data and programs do not have to be stored on the user's computer; they
can reside anywhere on the Internet to be called upon as needed. Java can run on
a variety of computer operating systems, thus avoiding the problem of
incompatibility across networks, and Java offers a high degree of data security.
Because of Java's useful features, we believe that it may also become a popular
programming language for embedded control applications. The growth of Java is
also causing a number of companies to consider it as a basis for a new style of
computing, tailored to the Internet, using inexpensive Internet computer
devices.
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A microprocessor is the computer chip that provides intelligence for
electronic devices. Our microprocessor technology, trade named ShBoom, uses a
proprietary architecture in a high-performance microprocessor integrated on a
single silicon chip. The microprocessor can be manufactured at a comparatively
low production cost. Our first ShBoom-architecture microprocessors, the PSC1000
family, are targeted as Java programming language processors, for internally
developed digital communication products and for use as the computer on embedded
controllers. Embedded controllers are used in sophisticated products, such as
laser printers, motion and industrial controllers, cable and satellite modems
and television set-top boxes. We believe the PSC1000 family can be competitive
with other newly announced microprocessors targeted at the Internet device
market. We are also licensing the ShBoom core technology for use by others in
multi-function microprocessors.
Our CyberShark digital modem provides consumers with a high-performance
interface between a computer and ISDN telephone lines (Integrated Services
Digital Network, a standard digital communication protocol using existing
telephone lines). Our communications division also offers OEMs (original
equipment manufacturers), systems integrators and VARs (value added resellers)
products for high speed access to the Internet, remote access drivers, video
conferencing equipment and digital telephony products. Existing products include
electronic subassemblies used in building hubs and bandwidth-on-demand
applications for satellites and other communications products.
We are also engaged in developing radar and antenna technologies. Our
GPR (ground penetrating radar) prototype has demonstrated the ability to
penetrate multiple solid objects (walls and barriers) and in certain ground
strata has been able to resolve objects of six-inch size at approximately ten
feet in depth. We also have patented antenna technology for which two small
government contracts were awarded in 1997 to evaluate and characterize the
antenna's performance. We are not presently devoting any significant resources
to further development the radar or antenna technologies except with outside
funding or assistance. There can be no assurance of future contracts, grants, or
alliances to further develop the radar or antenna technologies.
We have had limited revenues since our inception. As a result of the
acquisition of Metacomp and the initiation of CyberShark sales, we began to
generate revenues in 1997.
KEY FACTS
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Shares being offered for resale to the public 13,238,223
Total shares outstanding prior to the offering 41,063,915 as of April 12, 1999
Total shares outstanding after the offering 53,442,377
Total shares outstanding after the offering and
exercise of all options/warrants 57,748,736
Price per share to the public Market price at time of resale
Total proceeds raised by offering None, however, up to $5 million may be
received from Swartz Private Equity, LLC
under the Investment Agreement and
additional amounts may be received
from the exercise of warrants
Investment Agreement The agreement between Patriot and Swartz is
included as an exhibit to Patriot's Form
10-QSB/A filed with the Securities and Exchange
Commission on March 5, 1999
Dividend Policy No dividends expected
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RISK FACTORS
The common shares being offered for resale by the selling shareholders
are highly speculative in nature, involve a high degree of risk and should be
purchased only by persons who can afford to lose the entire sum invested in the
common shares. Before purchasing any of the common shares, you should carefully
consider the following factors relating to our business and prospects.
PREVIOUSLY A DEVELOPMENT STAGE BUSINESS; ABSENCE OF SIGNIFICANT REVENUES
We commenced our current operations in 1989. Our funds have been
primarily directed to research and development and administrative functions. We
emerged from the development stage as a result of the acquisition of Metacomp in
fiscal 1997 and the initiation of CyberShark sales. We have had limited revenues
and financial results upon which prospective investors may base an assessment of
our potential. There is no assurance that we will become profitable. We have
experienced in the past and may experience in the future many of the problems,
delays and expenses encountered by any early stage business, many of which are
beyond our control. These include substantial delays and expenses related to
testing and development of new products, production and marketing problems
encountered in connection with new and existing products and technologies,
unexpectedly high manufacturing costs, competition from larger and more
established companies, lack of market acceptance of new products and
technologies, and other unforeseen difficulties.
ACCUMULATED DEFICIT; WORKING CAPITAL DEFICIT; HISTORY OF LOSSES; UNCERTAIN
PROFITABILITY
To date, we have incurred significant losses. As of November 30, 1998,
our accumulated deficit was $19,348,756 and our working capital deficit was
$643,185. For the fiscal years ended May 31, 1998 and 1997, we incurred net
losses of $5,894,785 and $1,463,792, respectively. For the six months ended
November 30, 1998, we incurred a net loss of $2,109,133. These losses have
resulted primarily from significant costs associated with the development of our
products, marketing of those products and the interest charges and expenses
related to previous equity and debt financings. We expect to incur additional
operating losses in the future unless and until we are able to generate
operating revenues sufficient to support expenditures. There is no assurance
that sales of our products will ever generate sufficient revenues to fund our
continuing operations, that we will generate positive cash flow from operations
or that we will attain and thereafter sustain profitability in any future
period.
NEED FOR ADDITIONAL FINANCING; INSUFFICIENT FUNDS FOR THE NEXT TWELVE MONTHS
Based on the potential rate of cash operating expenditures and
current plans, we anticipate our cash requirements for the next twelve months
may come primarily from the proceeds of the Investment Agreement. However, our
ability to raise funds under the agreement is subject to certain conditions.
These conditions include the effectiveness of a registration statement covering
the resale of the shares sold under the Investment Agreement and a limitation on
our ability to issue shares based on the volume of trading in the common stock.
We anticipate that our future cash requirements may be satisfied by improved
product sales, the sale of additional equity securities, debt financing and/or
the sale or licensing of certain of our technologies. However, there can be no
assurance that any future funds required in excess of the proceeds of the
Investment Agreement will be generated from operations or from the
aforementioned or other potential sources. The lack of additional capital could
force us to substantially curtail or cease operations, which would have a
material adverse effect on our 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 our existing
shareholders.
TECHNOLOGIES IN VARIOUS STAGES OF DEVELOPMENT; NO ASSURANCE OF COMPLETION; MAY
BE SUBJECT TO ADDITIONAL DELAYS
Our technologies and products are in various stages of development.
There can be no assurance that additional products can be introduced or
technologies completed to production or marketability due to the inherent risks
of new product and technology development, limitations on financing,
competition, obsolescence, loss of key personnel and other factors. Although we
may be able to license certain technology at its current stage of development,
there can be no assurance thereof.
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We have generated limited revenues from our various technologies to date. Our
development projects are high risk in nature. Unanticipated technical obstacles
can arise at any time and result in lengthy and costly delays or in a
determination that further development is not feasible. Discovery of chip design
errors, frequent in the industry prior to and after production, could result in
lengthy and costly redesign, fabrication (production) and testing in an industry
where new technology rapidly eclipses prior innovations.
The development of our technologies has taken longer than anticipated
by management and could be subject to additional delays. Therefore, there can be
no assurance of timely completion and introduction of improved products on a
cost-effective basis, or that such products, if introduced, will achieve market
acceptance.
FUTURE DEPENDENT ON MARKET ACCEPTANCE OF OUR TECHNOLOGIES AND PRODUCTS
Our future is dependent upon the success of the current and future
generations of one or more of our technologies and the success of our digital
communication products. There can be no assurance that we can introduce any of
our technologies or new products or that, if introduced, they will achieve
market acceptance such that, in combination with existing products, they will
sustain us or allow us to achieve profitable operations.
SIGNIFICANT COMPETITION AND POSSIBLE OBSOLESCENCE
Technological competition from other and longer established
microprocessor, digital communication and radar and antenna companies is
significant and expected to increase. Most of the companies with which we
compete and expect to compete have far greater capital resources and more
significant research and development staffs, marketing and distribution programs
and facilities, and many of them have substantially greater experience in the
production and marketing of products. Our ability to compete effectively may be
adversely affected by the ability of these competitors to devote greater
resources to the sale and marketing of their products than are available to us.
In addition, one or more of our competitors may succeed or may already have
succeeded in developing technologies and products that are more effective than
any of those we currently offer or are developing. This could render our
technology and products obsolete or noncompetitive.
PATENTS AND PROPRIETARY RIGHTS SUBJECT TO UNCERTAINTY; POSSIBLE INFRINGEMENT BY
US
We rely on a combination of patents, trademarks, copyrights, trade
secret laws, confidentiality procedures and licensing arrangements to protect
our intellectual property rights. We currently have nine U.S. patents issued and
five U.S. patents pending. We have one patent pending in Europe and Japan and
have filed an application for another patent in Europe, Japan and elsewhere. We
are considering additional patent applications. Any issued patent may be
challenged and invalidated. Patents may not issue from any of our pending
applications. Any claims allowed from existing or pending patents may not be of
sufficient scope or strength to provide significant protection for our products.
Patents may not be issued in all countries where our products can be sold so as
to provide meaningful protection or any commercial advantage to us. Our
competitors may also be able to design around our patents.
We did not develop the basic ShBoom technology. We acquired the
rights in this technology through a series of agreements from two co- inventors.
We have no assurance that we will not be subject to claims from such prior
parties related to the technology or that any such parties will not attempt to
exploit the technology independently of our rights to do so. One of the
co-inventors of this technology has filed a lawsuit against another prior owner
and us. He is seeking, among other things, a return of the technology. This
lawsuit is further discussed in this prospectus under "Litigation". The Assets
Purchase Agreement and Plan of Reorganization between Patriot, nanoTronics
Corporation and Helmut Falk was the agreement under which we acquired the basic
ShBoom technology. The agreement also contained a number of warranties and
indemnities related to the ownership of the technology and other matters. We
believe nanoTronics Corporation has been liquidated and, due to Mr. Falk's death
in July 1995, our ability to obtain satisfaction for any future claims as a
result of a breach of the agreement may be limited.
Vigorous protection and pursuit of intellectual property rights or
positions characterize the fiercely competitive semiconductor industry, which
has resulted in significant and often protracted and expensive litigation. There
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can be no assurance, therefore, that our competitors will not assert that our
technologies or products infringe the patents or proprietary rights of third
parties. Problems with patents or other rights could increase the cost of our
products or delay or preclude new product development and commercialization by
us. If infringement claims against us are deemed valid, we may not be able to
obtain appropriate licenses on acceptable terms or at all. Litigation could be
costly and time-consuming but may be necessary to protect our future patent
and/or technology license positions or to defend against infringement claims. A
successful challenge to our ownership of our technology could have a material
adverse effect on our business prospects. There can be no assurance that any
application of our technologies will not infringe upon the proprietary rights of
others or that licenses required by us from others will be available on
commercially reasonable terms, if at all.
LAW SUIT AND UNCERTAINTY AS TO ROYALTY PAYMENTS AND INDEMNIFICATION RISKS
In October 1998, we were sued in the District Court for Travis
County, Texas by a co-inventor of the original ShBoom technology. We removed the
suit to the United States District Court for the Western District of Texas,
Austin Division, where it was dismissed for lack of subject matter and personal
jurisdiction. The suit has been refiled in the Superior Court of San Diego
County, California. The suit also names as defendants nanoTronics and Gloria
Felcyn on behalf of the Falk Family Trust. The suit seeks a judgment for damages
based on royalties allegedly due the co-inventor, a rescission of the Technology
Transfer Agreement pursuant to which the co-inventor sold the technology to
nanoTronics, and a restoration of the technology to the co-inventor.
We do not believe the co-inventor is entitled to a return of the
original ShBoom technology or that we are obligated to pay any royalties on
aspects of the ShBoom technology specified in prior agreements between
nanoTronics Corporation and the co-inventor. We believe that, should there be
royalties due the co-inventor, the obligation is that of nanoTronics. However,
if the co-inventor receives a judgement affirming his claim to the technology,
we would probably be effectively precluded from selling any microprocessor
incorporating that technology. Additionally, we could become subject to
unindemnified claims relating to any failure by nanoTronics to pay any royalties
that may be due to the co-inventor. Also we could become liable for up to
$1,250,000 to nanoTronics under certain indemnification provisions. Should we be
required to make any royalty payments or indemnification payments, such payments
could adversely impact our operating margins and sales volumes.
PRODUCTION DEPENDENT ON OUTSIDE FOUNDRIES, MANUFACTURERS AND SUPPLIERS
We are dependent on the availability of contract fabrication
facilities to produce the PSC1000 microprocessors. To produce microprocessors
for customers, we will be required to locate a foundry or foundries that can
allocate a portion of their foundry capacity sufficient to meet our needs,
produce products of acceptable quality and with acceptable manufacturing yields,
and deliver these products to us on time. There can be no assurance we can
locate a foundry to meet our needs. We could be adversely impacted by contract
fabrication capacity shortages. The contract fabrication industry has
experienced and is expected to experience capacity shortages from time to time.
We rely on contract assembly from standardized components purchased from
independent sources for our digital communication products. We are therefore
dependent upon such outside vendors for the components and assembly of the
products we sell to our customers. There can be no assurance that these
manufacturers and suppliers will be able to provide adequately for the future
product needs of our customers. Also, if any of the targeted suppliers should
suffer quality control problems or financial difficulties, we would be required
to find alternative sources, which could result in temporary business
dislocations and a decline in revenues.
PRODUCTS MAY BE DEPENDENT ON THE INTERNET, ISDN, JAVA AND GOVERNMENT FUNDING
Our digital communication products and PSC1000 microprocessor
products will depend in large part upon a robust and growing industry and
infrastructure for providing Internet access and carrying Internet traffic and
the emergence of Java as a widespread programming language for the Internet or
in embedded applications. There can be no assurance that the infrastructure or
complementary products necessary to make the Internet a viable commercial
marketplace will be developed, or, if they are developed, that the Internet will
become a viable commercial marketplace. Even if the Internet continues its
robust growth, there can be no assurance of a market for our ISDN products given
their dependence upon
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telephone company policies and rates and the intense competition from other
access technologies such as cable modems and satellites.
There also can be no assurance that Java will become a widespread
programming language for the Internet or in embedded applications or that a
market will develop for devices to run Java efficiently. If the Internet does
not become a viable commercial marketplace, or if ISDN products become
technologically obsolete, or if Java applications for microprocessors do not
develop, then our business, operating results and financial condition will be
materially and adversely affected.
We received our initial contract for characterization of our antenna
technology in April 1997. We are devoting only limited development and marketing
efforts to our radar and antenna technologies and are seeking additional
government or other funding to further develop these technologies. Government
defense and other funding sources are facing serious cutbacks, and accordingly
our opportunity to develop new technologies with this type of funding has been
reduced. Successful funding requires significant efforts and long lead times. We
have limited experience in obtaining government funding, and we rely on
consultants and agents to assist us in our efforts in that regard. There can be
no assurance that we will be successful in our efforts to obtain additional
government assistance for any of our projects or technologies.
PERFORMANCE DEPENDENT ON KEY PERSONNEL; ABSENCE OF KEY PERSON LIFE INSURANCE;
SUCCESS DEPENDENT ON ADDITIONAL PERSONNEL
Our performance is substantially dependent on the performance of our
executive officers and key technical employees. Given our early stage of
development, we are dependent on our ability to retain and motivate high quality
personnel, especially our management and highly skilled technical personnel. We
do not have "key person" life insurance policies on any of our executive
officers or employees. The loss of the services of any of our executive officers
or other technical employees could have a material adverse effect on our
business, operating results or financial condition.
Our future results and growth also depend on our continuing ability
to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that we will be able to attract, assimilate or retain other
highly qualified technical and managerial personnel in the future. The inability
to attract and retain the necessary technical and managerial personnel could
have a material adverse effect upon our business, operating results or financial
condition.
POSSIBLE ADVERSE EFFECTS OF FUTURE SALES OF SHARES ON MARKET
Future sales of common stock by existing stockholders under Rule 144
of the Securities Act of 1933 or under additional registration statements could
have an adverse effect on the price of the common stock. We have a large number
of shares outstanding that may be subject to Rule 144 including 3,172,068 shares
that were registered in September, 1997 on Form SB-2; and 9,884,764 additional
shares of common stock may be deemed "restricted securities." Restricted
securities may only be sold under a registration statement, in compliance with
Rule 144, or under another exemption from registration.
GENERAL CONFLICTS OF INTEREST DUE TO ADDITIONAL COMMITMENTS OF MANAGEMENT
Two of our executive officers work only part-time and have other
employment and business interests to which they devote significant attention.
Mr. Elwood Norris, Chairman, and Mr. Robert Putnam, Secretary, presently devote
approximately 10% of their time to the affairs of our company. They expect to
continue to devote time to us only on an as-needed basis. Certain conflicts of
interest now exist and will continue to exist between Patriot and Mr. Norris and
Mr. Putnam due to the fact that each of Mr. Norris and Mr. Putnam has other
employment or business interests to which he devotes significant attention. We
have not established policies or procedures for the resolution of current or
potential conflicts of interest between our management and management-affiliated
entities. There can be no assurance that Mr. Norris and Mr. Putnam will resolve
all conflicts of interest in our favor.
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SPECIAL CONFLICTS OF INTEREST DUE TO RELATIONSHIP OF EXECUTIVES
One of our officers, Mr. Robert Putnam, also acts as Secretary of
e.Digital, Inc. (EDIG), a company in which Mr. Elwood Norris is the chairman of
the board, and American Technology Corporation (ATC), a company in which Mr.
Norris is a significant shareholder and director. In these positions Mr. Putnam
is subordinate to Mr. Norris, and the possibility exists that these
relationships will affect Mr. Putnam's independence as an officer of Patriot.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Our Certificate of Incorporation provides for the indemnification of
our officers, directors, employees and agents. Under certain circumstances, they
are indemnified against attorney's fees and other expenses incurred by them and
judgments rendered against them in any litigation to which they become a party
arising from their association with or activities on our behalf. We may also
bear the expenses of such litigation for any of our officers, directors,
employees or agents, upon their promise to repay such sums if it is ultimately
determined that they are not entitled to indemnification. This indemnification
policy could result in substantial expenditures by us that we may be unable to
recoup even if we are entitled to do so.
EXCLUSION OF DIRECTOR LIABILITY
Our Certificate of Incorporation excludes personal liability on the
part of our directors to us for monetary damages for breach of fiduciary duty,
except in certain specified circumstances. Accordingly, we would have a much
more limited right of action against our directors than otherwise would be the
case. This exclusionary provision does not affect the liability of any director
under federal or applicable state securities laws.
TRADING RISK OF LOW-PRICED STOCKS
Our common shares are currently defined as "penny stocks." Penny
stock rules generally impose additional sales practice and disclosure
requirements upon broker-dealers who sell our securities to persons other than
certain "accredited investors" or in transactions not recommended by the
broker-dealer. Accredited investors are, generally, institutions with assets in
excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 jointly with their spouse. For
transactions covered by the penny stock rules, the broker-dealer must make a
suitability determination for each purchaser and receive the purchaser's written
agreement prior to the sale. In addition, the broker-dealer must make certain
mandated disclosures in penny stock transactions, including the actual sale or
purchase price and actual bid and offer quotation, and the compensation to be
received by the broker-dealer and certain associated persons, and deliver
certain disclosures required by the Securities and Exchange Commission.
Consequently, the penny stock rules may affect the ability of broker-dealers to
make a market in or trade our shares and thus may also affect the ability of
purchasers of shares to resell those shares in the public markets.
LIMITED ACTIVE TRADING MARKET; MARKET VOLATILITY
Our shares are traded on the OTC Electronic Bulletin Board, a
screen-based trading system operated by the National Association of Securities
Dealers, Inc. Securities traded on the Bulletin Board are, for the most part,
thinly traded and subject to special regulations not imposed on securities
listed or traded on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") system or on a national securities exchange. Our shares
have experienced in the past and are expected to experience in the future
significant price and volume volatility, increasing the risk of ownership to
investors.
RISKS OF INTERNATIONAL OPERATIONS
We market and sell our products to foreign customers. Accordingly, we
are subject to all of the risks inherent in international operations. Such risks
include work stoppages, transportation delays and interruptions, political
instability, conflict between countries in which we may do business, foreign
currency fluctuations, economic disruption, the imposition of tariffs, import
and export controls, changes in governmental policies (including United States
trade policy), foreign laws
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and regulations and other factors. These factors could have an adverse effect on
our business. With respect to international sales that are denominated in U.S.
dollars, an increase in the value of the U.S. dollar relative to foreign
currencies can increase the effective price of, and reduce demand for, the
Company's products relative to competitive products priced in the local
currency. These international trade factors may materially and adversely impact
demand for our products or our ability to sell our products in particular
countries or deliver our products in a timely manner or at a competitive price,
which in turn may have an adverse impact on our relationships with our
customers.
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK AND ANTI-TAKEOVER
PROVISIONS.
Our Certificate of Incorporation authorizes the issuance of a maximum
of 5,000,000 shares of preferred stock on terms that may be fixed by our Board
of Directors without stockholder action. The terms of any series of preferred
stock could make the possible takeover of our company or the removal of our
management more difficult. This could discourage hostile bids for control of our
company in which stockholders may receive premiums for their shares of common
stock or otherwise dilute the rights of holders of common stock. Additionally,
our Certificate of Incorporation provides that the removal of a director from
office or repeal of the Certificate of Incorporation in its entirety requires
the affirmative vote of a majority of our total voting power. Certain other
matters (including amendment of the Bylaws by the shareholders and the
amendment, adoption, or repeal of any provision in the Certificate of
Incorporation regarding the indemnification of directors and officers) require
the vote of two-thirds of our total voting power. These provisions may also
inhibit a possible takeover of our company, the removal of our management, and
hostile bids for control of our company.
PLAN OF DISTRIBUTION
Each selling shareholder is free to offer and sell his or her common
shares at such times, in such manner and at such prices as he or she may
determine. The types of transactions in which the common shares are sold may
include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of common
shares, or a combination of such methods of sale. The sales will be at market
prices prevailing at the time of sale or at negotiated prices. Such transactions
may or may not involve brokers or dealers. The selling shareholders have advised
us that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities. The selling shareholders do not have an underwriter or coordinating
broker acting in connection with the proposed sale of the common shares.
The selling shareholders may effect such transactions by selling
common stock directly to purchasers or to or through broker-dealers, which may
act as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions, or commissions from the selling shareholders.
They may also receive compensation from the purchasers of common shares for whom
such broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
Swartz Private Equity, LLC is, and each remaining selling shareholder
and any broker-dealer that acts in connection with the sale of common shares may
be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act. Any commissions received by such broker-dealers and any profit
on the resale of the common shares sold by them while acting as principals might
be deemed to be underwriting discounts or commissions. The selling shareholders
may agree to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the common shares against certain liabilities.
Because Swartz Private Equity, LLC is and the remaining selling
shareholders may be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act, the selling shareholders will be subject to
prospectus delivery requirements.
We have informed the selling shareholders that the anti-manipulation
rules of the Securities and Exchange Commission, including Regulation M
promulgated under the Securities and Exchange Act, may apply to their sales in
the market and has provided the selling shareholders with a copy of such rules
and regulations.
Selling shareholders also may resell all or a portion of the common
shares in open market transactions in
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<PAGE> 13
reliance upon Rule 144 under the Securities and Exchange Act, provided they meet
the criteria and conform to the requirements of such Rule.
SELLING SHAREHOLDERS
INVESTMENT AGREEMENT
OVERVIEW. On February 24, 1999, we entered into an Investment Agreement
with Swartz Private Equity, LLC. The Investment Agreement entitles us to issue
and sell our common stock for up to an aggregate of $5 million from time to time
during a three-year period through February 24, 2002. This is also referred to
as a put right.
PUT RIGHTS. In order to invoke a put right, we must have an effective
registration statement on file with the Securities and Exchange Commission
registering the resale of the common shares which may be issued as a consequence
of the invocation of that put right. Additionally, we must give at least ten but
not more than twenty business days advance notice to Swartz of the date on which
we intend to exercise a particular put right and we must indicate the number of
shares of common stock we intend to sell to Swartz. At our option, we may also
designate a maximum dollar amount of common stock (not to exceed $2 million)
which we will sell to Swartz during the put and/or a minimum purchase price per
common share at which Swartz may purchase shares during the put. The number of
common shares sold to Swartz may not exceed 20% of the aggregate daily reported
trading volume during a period which begins on the business day immediately
following the day we invoked the put right and ends on and includes the day
which is twenty business days after the date we invoked the put right.
For each common share, Swartz will pay us the lesser of (i) the market
price for such put, minus $.05 or (ii) a percentage of the market price for the
put, with that percentage determined by the market price in effect on the date
we inform Swartz of the put. If the market price is less than $1.00 per share,
the percentage will be 80%; if the market price is $1.00 or greater but less
than $2.00 per share, the percentage will be 85%, and if the market price is
$2.00 or greater, the percentage will be 90%. Market price is defined as the
lowest intra-day trade price for the common stock on its principal market for
the six business days immediately preceding the date of the applicable purchase
notice for a put. However, the market price may not be less than the designated
minimum per share price, if any, that we indicated in our notice.
WARRANTS. Within five business days after the end of each purchase
period, we are required to issue and deliver to Swartz a warrant to purchase a
number of shares of common stock equal to 15% of the common shares issued to
Swartz in the applicable put. Each warrant will be exercisable at a price which
will initially equal 110% of the market price on the last day of the applicable
purchase period. The warrants will have semi-annual reset provisions. Each
warrant will be immediately exercisable and have a term beginning on the date of
issuance and ending five years thereafter.
LIMITATIONS AND CONDITIONS PRECEDENT TO OUR PUT RIGHTS. Swartz is not
required to acquire and pay for any common shares with respect to any particular
put for which:
- we have announced or implemented a stock split or combination of our
common stock;
- we have paid a common stock dividend;
- we have made a distribution of our common stock or of all or any
portion of our assets between the put notice date and the date the
particular put closes; or
- we have consummated a major transaction (including a transaction,
which constitutes a change of control) between the advance put
notice date and the date the particular put closes.
SHORT SALES. Swartz and its affiliates are prohibited from engaging in
short sales of our common stock unless they have received a put notice and the
amount of shares involved in a short sale does not exceed the number of shares
specified in the put notice.
CANCELLATION OF PUTS. We must cancel a particular put between the date
of the advance put notice and the last day of the pricing period if:
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<PAGE> 14
- we discover an undisclosed material fact relevant to Swartz's
investment decision;
- the registration statement registering resales of the common shares
becomes ineffective; or
- shares are delisted from the then primary exchange.
However, we will be required, at Swartz's option, to issue common shares equal
to the number of shares included in purchase notices delivered by Swartz on or
before the end of the applicable put cancellation date.
TERMINATION OF INVESTMENT AGREEMENT. We may also terminate our right to
initiate further puts or terminate the Investment Agreement by providing Swartz
with notice of such intention to terminate; however, any such termination will
not affect any other rights or obligations we have concerning the Investment
Agreement or any related agreement.
RESTRICTIVE COVENANTS. During the term of the Investment Agreement and
for a period of one-year thereafter, we are prohibited from certain
transactions. These include the issuance of any debt or equity securities in a
private transaction which are convertible or exercisable into shares of common
stock at a price based on the trading price of the common stock at any time
after the initial issuance of such securities or with a fixed conversion or
exercise price subject to adjustment. We are also prohibited from entering into
any private equity line type agreements similar to the Investment Agreement
without obtaining Swartz's prior written approval.
RIGHT OF FIRST REFUSAL. Swartz has a right of first refusal to purchase
any variable priced securities offered by us in any private transaction which
closes on or prior to six months after the termination of the Investment
Agreement.
SWARTZ'S RIGHT OF INDEMNIFICATION. We are obligated to indemnify Swartz
(including their stockholders, officers, directors, employees and agents) from
all liability and losses resulting from any misrepresentations or breaches we
made in connection with the Investment Agreement, the Registration Rights
Agreement, other related agreements, or the registration statement.
The following table sets forth certain information with respect to the
selling shareholders as of April 12, 1999. Except as set forth below, none of
the selling shareholders currently is an affiliate of ours, and none of them has
had a material relationship with us during the past three years.
<TABLE>
<CAPTION>
Amount and
Percentage of
Beneficial Maximum Number Common Stock
Ownership of of Shares of After the Sale
Common Stock as Common Stock ----------------
Name of April 12, 1999 Offered for Sale Number %
<S> <C> <C> <C> <C>
Swartz Private Equity, LLC 12,000,000 12,000,000 -- *
Robert Crawford 375,000 200,000 175,000 *
Richard D. Daniels 249,571 78,571 171,000 *
William J. Kalandros 30,303 30,303 -- *
Robert Lewis, Jr 30,303 30,303 -- *
Clifford E. Koerner 360,000 100,000 260,000 *
Luce, Forward, Hamilton & Scripps
LLP(1) 279,326 279,326 -- *
Wayne Opperman 214,428 121,428 93,000 *
Castle Creek Technology Partners,
LLC 75,000 75,000 -- *
James C. and Josephine M. Zolin 442,857 323,292 119,565 *
</TABLE>
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(1) Luce, Forward, Hamilton & Scripps LLP is counsel to the Company.
* Less than 1 per cent.
THE COMPANY
GENERAL
Patriot Scientific Corporation 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. Our address is 10989 Via
Frontera, San Diego, California 92127, and our telephone number is (619)
674-5000. The Company's home page can be located on the World Wide Web at
http://www.ptsc.com.
We are engaged in the development and marketing of patented
microprocessor technology and high speed data communication products. We also
own and are developing innovative radar and antenna technology. Our strategy is
to exploit our technologies through product sales, licensing, strategic
alliances or government contracting.
In 1997, we emerged from the development stage primarily as a result
of the acquisition of Metacomp Inc. There can be no assurance that we can
achieve profitable operations, and we may need additional financial resources
during the next twelve months.
BACKGROUND
In February 1989, we completed our initial public offering under a
Registration Statement on Form S-18 under the Securities Act of 1933. This
offering raised 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, we acquired our ground penetrating radar (GPR)
technology from the inventor, Mr. Elwood G. Norris, our 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 our operational plans are
discussed below under the caption "Business".
On May 12, 1992, we redomiciled ourselves 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 our common shares, par value
$.00001, into one share of the Delaware corporation, par value $.00001. The
reincorporation also effected a change in our charter and bylaws and a name
change to Patriot Scientific Corporation.
In May 1993, we registered under the Securities Act a total of
7,631,606 shares issuable upon the exercise of outstanding Class A and Class B
common stock purchase warrants. We received net proceeds of $3,343,915 upon the
exercise of those warrants and the issuance of 7,538,102 common shares. None of
such warrants remain outstanding.
Effective May 31, 1994, we entered into an Assets Purchase Agreement
and Plan of Reorganization with nanoTronics Corporation located in Eagle Point,
Oregon and Helmut Falk. We issued a total of 10,000,000 restricted common shares
to nanoTronics to acquire certain microprocessor technology of nanoTronics. The
technology acquired, the ShBoom technology, is being used to develop a
sophisticated yet low cost microprocessor. 5,000,000 of the shares were issued
on a non-contingent basis, and the remaining 5,000,000 shares are subject to the
terms of an earnout escrow
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arrangement. 2,000,000 of these restricted shares had been released from escrow
as of April 12, 1999.
Effective December 26, 1996, pursuant to an exchange offer and letter
of transmittal, we acquired 96.9% of the outstanding shares of Metacomp, Inc., a
California corporation, from 56 shareholders in exchange for the issuance of
1,272,068 shares of our common stock. Based on the closing price of our 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.
BUSINESS
AVAILABLE INFORMATION
We are subject to the informational requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended, and in accordance therewith file
periodic reports and other information with the Securities and Exchange
Commission as a "small business" issuer pursuant to Regulation SB of the
Commission. We file reports, proxy statements and other information with the
Securities and Exchange Commission, and they may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at 1-800-SEC-0330. The
same information may be obtained at the following Regional Offices of the
Commission: 75 Park Place, New York, New York 10007, and the Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621. Copies of
such material may be obtained from the Public Reference Section of the
Securities and Exchange Commission's Washington, D.C. office at prescribed
rates.
We mail a copy of our audited Annual Report on Form 10-KSB along with a
proxy statement to our shareholders prior to our annual meeting.
We have filed a registration statement on Form SB-2, of which this
prospectus is a part, with the Securities and Exchange Commission. This
registration statement or any part thereof may also be inspected and copied at
the public reference facilities of the SEC.
Our filings may also be accessed through the Securities and Exchange
Commission's web site (http://www.sec.gov) or by visiting our web site at
(http://www.ptsc.com) and linking to the SEC's site.
ORGANIZATION AND CORPORATE DEVELOPMENT
Our business is managed as three major technologies/divisions:
- PSC1000 microprocessor technology,
- high-speed data communications and
- radar and antennae technology.
We anticipate that the PSC1000 family of microprocessors will benefit the radar
and antennae technology and the high-speed data communications divisions, in
that the PSC1000 microprocessor may provide a low-cost, high performance
alternative to existing microprocessors. Due to our small size and staffing
overlaps among the divisions, certain personnel work on more than one of the
technologies from time to time.
During at least the last three years, we have focused the majority of
our efforts on the PSC1000 and high-speed data communications technologies. The
PSC1000 technology and our initial microprocessors, the PSC1000 family, are
targeted for the embedded controller and Java language processor marketplaces.
In reviewing markets for the PSC1000 technology, we identified within
the communications markets a possible opportunity for our ISDN product, which is
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
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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 our GPR development, we identified
certain antenna technology employing ionized gas as the conducting element. We
obtained two government contracts to evaluate and characterize the gas antenna
technology. We believe this technology could have applications in private
industry as well as in military communications and radar. However, we have no
present plans to devote significant resources to this technology other than from
outside funding, if available.
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.
We believe that organizations will also increasingly use the Internet and
private Intranet networks to improve communications, distribute information,
lower operating costs and change operations. Use of the Internet has grown
rapidly since its commercialization in the early 1990's, 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 the 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 our 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
a fundamental platform for Internet related applications. A growing number of
Java applications, or applets, are now available on the Internet. These
applications not only enhance Web pages but also perform many functions of
traditional computer software programs. Our PSC1000 technology lends itself to
potential markets in which the use of Java is prevalent.
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.
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-resistant, tamper-resistant 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
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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. In 1991, nanoTronics Corporation was formed 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, we have 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. We obtained the first run
of prototype 0.8-micron microprocessors in late May 1996. 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
demonstrations for prospective customers and is currently being shipped in
limited numbers to customers as an embedded microprocessor. A 0.35 micron
production microprocessor is currently being debugged and features reduced size
and improved performance. We are currently contemplating future enhancements and
generations or modifications of microprocessors employing the ShBoom technology.
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 Circuits (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. We have
designed our microprocessor 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 PSC1000 family of microprocessors which are based on the
ShBoom-architecture. 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.
Microprocessors are generally available in 4-bit through 64-bit
architectures, which refers to the amount of data they can process. 4-bit
microcontrollers are relatively inexpensive, typically less than $1.00 each.
Although they lack
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certain performance and features, they 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, 32-bit and 64-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 , 32-bit and 64-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
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.
Our technology is fundamentally different from most other
microprocessors because it is stack-oriented, in that the data is stored in
groups. Our microprocessor 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. Our 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. Our 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 models of the 0.5 and 0.35
micron 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. We believe that the features described above differentiate
the PSC1000 family from other 8-bit to 64-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. We believe the
PSC1000 microprocessor architecture is capable of being an efficient and
cost-effective Java programming language processor, because Java is designed to
run on a stack-oriented architecture and the stack-oriented ShBoom architecture
executes the virtual stack machine internal to Java efficiently. 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 feature allows the execution of Java
programs with increased speed and reduced code size thereby 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
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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. We believe the ShBoom technology can compete favorably on the basis
of such requirements, although there can be no assurance we can successfully
exploit Java related applications or that competitors will not create superior
Java processors.
We have ported the Java operating environment to the PSC1000 family,
which currently uses the C programming language for software support. We are a
licensee of Sun Microsystems Inc. This enables us to develop and distribute
products based on Sun's JavaOS Technologies. We recently exercised an option to
license from Sun Microsystems Inc., Personal Java, a platform on which to run
Java applications. We also licensed from Wind River an operating system,
VXWorks, and entered into a relationship with Forth Inc. whereby Forth will
provide software support and operating system development tools for the Forth
Programming language. We expect that successful implementation of this software
should result in a microprocessor which is competitive in the Java virtual
machine and embedded applications markets. We believe 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.
STAGE OF DEVELOPMENT. In early 1994, the company from who we
purchased the technology initiated production of a first-generation of wafers at
a contract fabrication facility using 6-inch wafers employing 0.8 micron
double-metal CMOS technology. After the May 31, 1994 acquisition, we 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
0.8 micron microprocessors were fabricated by a contract fabrication facility.
Subsequently, we tested these 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. We made corrections to the
design suggested by the testing of prototype units and produced an additional
run of second-generation microprocessors from remaining wafers in May 1996. In
July 1996, we employed these microprocessors in demonstration boards for use by
developers and prospective customers and licensees.
In December 1997, we completed development of and started shipping a
0.5-micron microprocessor based on the PSC1000 technology and found that
0.5-micron double-metal CMOS technology improved operating speed, reduced power
requirements, reduced physical size and reduced fabrication cost. In May 1998,
we began a production run of a 0.35-micron microprocessor that we anticipate
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 our 0.5 micron microprocessor has been sent to prospective
customers in anticipation of production orders, there can be no assurance that
we, during our 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 our technology and financial condition.
We have developed marketing materials, product manuals and
application development tools for use by licensees and customers. The manuals
and tools are necessary to enable system designers to quickly and easily program
the PSC1000 family for specific applications.
We believe 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. We also believe the ShBoom core
technology is ready for licensing for use by others to develop custom multiple
function microprocessors. An initial licensing agreement was entered into in
December 1998. The agreement establishes a library arrangement with a
governmental unit that allows our core license to be made available to certain
Japanese companies for their further evaluation and review. Based on attaining
1,000 unit volumes,
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these companies will be required to enter into sub-license agreements with us.
However, there can be no assurance of continued market acceptance of the PSC1000
family or our ShBoom technology.
In April 1998, we received our 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 is in excess of $3 million and
deliveries were scheduled to be completed by May 1999. However, the contract is
subject to our customer receiving funds from the Mexican Department of Tourism
and product shipments have been delayed pending the receipt of those funds. It
is now anticipated that product shipments will start in May 1999 and will be
completed in fiscal year 2000, which starts on June 1, 1999.
BUSINESS STRATEGY. The increasing demand for embedded control has
made the market for microprocessors one of the largest segments of the
semiconductor logic market. Our 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 microprocessor and our corresponding low
system cost.
Because of the above factors and competitive conditions, we intend to
focus the majority of our initial efforts on the Java processor business, a new
but highly-competitive field without an established base of microprocessors and
for which we believe the ShBoom architecture has certain technical advantages.
We believe 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
controllers, industrial controllers, digital communication devices, video games,
cable and satellite modems and TV set-top boxes. We expect that early licensing
of the technology and product applications will focus on embedded control.
We have appointed eight international distributors for foreign
markets. We also have a full-time Vice President of Sales and Marketing to lead
marketing of the PSC1000 family.
We believe the appropriate approach for us 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 we
attempt to ascertain and capitalize on the highly dynamic and competitive
embedded microprocessor market. There can be no assurance that we can
successfully exploit our PSC1000 microprocessor technology.
Subject to the availability of financial and personnel resources,
while we are commercializing the PSC1000 family and the ShBoom core technology,
our strategy is to also design and develop future versions of the microprocessor
with more demanding sub-micron technology and with more features. However, our
resources are limited, and there can be no assurance that we 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 is
being fabricated by a contract fabrication facility that has agreed to provide
production quantities for our 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, we believe
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 develops, it could have a material adverse effect on our
financial condition.
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 ours.
The market for microprocessors and for embedded control applications is at
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least as competitive.
While our strategy is to target high-volume licensees and chip
customers requiring more sophisticated but low-cost devices, we can still expect
significant competition. We may also elect to develop embedded control system
products utilizing the ShBoom architecture for ourselves or by contract for
other manufacturers.
We expect that the PSC1000 family, if successfully commercialized in
the embedded controller market, will compete with a variety of 16/64-bit
microprocessors including ARM, MIPS and the PowerPC. As a Java processor, we
expect our 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 ours.
A new entrant, such as ours, is at a competitive disadvantage
compared to these and other established producers. A number of factors
contribute to this, 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 PRODUCTS
GENERAL BACKGROUND. Starting in fiscal 1995, we 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, we acquired 96.9% of Metacomp to create a communications division
including engineering, assembly, marketing and distribution. The acquisition of
Metacomp expanded the product line and added a high-speed data communications
revenue and customer base.
Metacomp, founded in 1978, was a high technology company that
designed, assembled, and sold 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 our 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 conversation 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 personal
computers as well as higher speed industrial systems using sophisticated
interfaces.
MAJOR COMMUNICATIONS DIVISION PRODUCTS. We have 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 adapter card has been
designed 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.
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CyberShark/HSET - This basic rate adapter card is designed to be used
with a headset/handset used by distributed call centers and remote
agents. It offers access to and supports domestic as well as European
telecommunication protocols. The CyberShark/HSET can be used on
Windows/95, Windows/NT, and Linux operating systems.
CyberShark/PRI - This primary rate ISDN adapter card provides
intelligent support of up to 23 simultaneous digital connections
allowing easy integration into third-party voice, analog modem, or
video conferencing. The CyberShark/PRI is also available to support
T1, a more advanced North American communication system, and E1, the
European equivalent to the T1. The CyberShark/PRI can be used on the
Windows/NT operating system.
FlagShip Family
FlagShip/PRI-2 - This ISDN product is a dual-span primary rate
adapter card that supports up to 46 simultaneous digital connections.
NetShark - This ISDN product is a high-density two-card set that
combines a primary rate ISDN interface card with a modem card
containing up to 60 modems. NetShark provides dial-in access to
remote users using either 64 Kbps ISDN or 56 Kbps V.90 connections
and operating under control of Windows NT's built in Remote Access
Server or Routing and Remote Access Server software.
VME Product Line - We also offer a line of intelligent high-speed
communications engines in a virtual memory European 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 - We also market an intelligent two or four
channel product that is used for high-speed data communications.
Other - The communications division also obtains revenue from
providing contract engineering and software development for
customers. From time to time we are able to retain a proprietary
interest in developed products and in such circumstances retain a
license/royalty interest.
Our product strategy is to continue to provide data communication
solutions through improving current products and introducing new products. We
have 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. Our strategy is to have our
high-speed data communication products manufactured on a sub-contract basis
with, in some instances, final assembly at our facility. We test and distribute
the products. An in-house marketing staff manages the marketing of the Company's
high-speed data communications products. Our 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 ours. Although not all of these companies
offer PC plug-in card terminal adapters directly competitive with our product,
additional direct competitors may introduce competitive products.
We believe our products are competitive on both features and price
with the products currently in the marketplace or those known by us 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.
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We do not believe we can avail ourselves of patent protection on most
of our high-speed data communication products in development. However, we rely
on trade secret laws and copyrights to protect our high-speed data
communications products.
RADAR AND ANTENNA TECHNOLOGY
BACKGROUND. During the period from 1980-1983, Mr. Norris, our
Chairman, 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.
We commenced active development of our GPR technology in April 1992.
By May 1993, we were able to demonstrate the sensing, processing and crude
visualization of images from our technology, and by May 1994 we had completed
our prototype device. Since May 1994, we have focused our 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, we filed a patent
application on certain gas antenna technology invented during our 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, we filed an application seeking declassification of
the technology, and in June 1996, we were advised that de-classification had
been approved. The U.S. patent was issued in January 1997. The de-classification
allows us to exploit the technology for both governmental and commercial
purposes.
Our 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. We believe
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 are 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. We believe antennas can be designed
that are low in weight, small in size and lower in power consumption than
traditional solid wire antennas.
We obtained two government contracts to evaluate a prototype of the
gas antenna technology. There can be no assurance that we will obtain additional
development funds or that we can successfully exploit this technology.
GPR TECHNOLOGY DESCRIPTION. We have developed sensors (wave
generators and antennae) and techniques for the processing, conversion,
compression, storage, and visualization (collectively, computer processing) of
GPR data. We have developed proprietary techniques for wave generation and
proprietary antennae for the sending and receiving of data. We use proprietary
methods to capture and process returned signals.
We have assembled a mobile prototype version of our 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, we have been able
to resolve objects of six-inch size at approximately ten feet in depth. Our
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).
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We have one U.S. patent on antenna technology for our 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. Our prototype system is used
for limited prospective customer and user evaluations of the technology. We have
demonstrated using the technology to detect plastic mines, side viewing through
walls and solid structures for detection of bodies or other objects, and viewing
plastic pipes and other underground objects.
We believe that 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 we have no existing users or customers who use the GPR
technology. There can be no assurance any prospective users will select our
device over competitive devices, if any.
BUSINESS STRATEGY. We have limited resources to pursue further
development to commercialize a GPR system for the above markets and to exploit
the gas antenna technology. Our strategy is to use our GPR and gas antenna
prototypes to demonstrate to prospective users our capabilities and to seek
partnering arrangements to develop custom commercial devices for specific
applications. Our marketing activities to date have been very limited and are
focused primarily towards governmental agencies and major prime contractors to
the U.S. government. The strategy is to seek sponsorship to assist in further
development and commercialization of the present technology. There can be no
assurance that we can obtain any outside assistance or successfully complete
development and commercially exploit our 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." Further, it is a specialized subset of geophysical
tools that include seismic equipment and other geophysical and scientific
instruments. The antenna industry 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 our technology.
We have not yet developed a commercially marketable prototype of our
GPR or gas antenna technology. Most of our 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 ours.
RESEARCH AND DEVELOPMENT
Our current development efforts are focused on the introduction of
the PSC1000-family microprocessor and high-speed data communication products.
The development of our technologies has taken longer than anticipated 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.
We 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 our expenditures in fiscal 1998 and 1997 have been devoted to our
PSC1000 and high-speed data communications technologies. To date, we have
expensed internal software development costs as incurred. We believe that
technical advances are essential to our success and expect that we will continue
to expend substantial funds on research and development of our 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
We rely on a combination of patents, copyright and trademark laws,
trade secrets, software security measures,
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license agreements and nondisclosure agreements to protect our proprietary
technologies. We pursue a policy of seeking the issuance of patents that we
consider important to our business to protect inventions and technology that
support our microprocessor and radar and antennae technologies.
We have six U.S. patents issued and five U.S. patents pending, most
dating back to 1989, on the ShBoom microprocessor technology. We have 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, we believe 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 us to obtain patent and
technology licenses from other companies relating to certain technology that may
be employed in future products or processes. To date, we have not received
notices of claimed infringement of patents based on our existing processes or
products; but, due to the nature of the industry, we may receive such claims in
the future. Likewise, we believe that we may have claims against other
semiconductor companies should certain of our pending patents be favorably
granted. However, there can be no assurance thereof nor any assurance that we
could successfully exploit any potential patent claims against larger
competitors.
We acquired the basic ShBoom technology from nanoTronics Corporation
in return for 10,000,000 shares of our common stock in 1994. We do not believe
we are obligated to pay any royalties on aspects of the ShBoom technology
specified in prior agreements between nanoTronics Corporation and a previous
inventor. We believe that, should there be royalties due to the previous
inventor, the obligation is that of nanoTronics. We have been informed by
nanoTronics that the inventor has rejected a tender of a part of the
consideration paid by us to nanoTronics. The inventor has proposed that he is
entitled to royalties and the return of the basic ShBoom technology. The
inventor has filed a lawsuit to enforce these claims. The lawsuit is further
discussed in the "Litigation" section of this prospectus. If it is ultimately
determined that the inventor is entitled to royalties, we could be subject to
indemnification claims by nanoTronics of up to $1,250,000 based on our agreement
with nanoTronics.
Based on the Assets Purchase Agreement and Plan of Reorganization
between Patriot, nanoTronics and Mr. Falk, we were the recipients of a number of
warranties and indemnities. We believe nanoTronics has been or is in the process
of liquidation and due to Mr. Falk's death in July 1995, we may be limited in
our ability to obtain satisfaction should we have any future claims against
nanoTronics or the Falk Family Estate.
We are a licensee of Sun Microsystems Inc. This enables us to develop
and distribute products based on Sun's JavaOS Technologies. We recently
exercised an option to license from Sun Microsystems Inc., Personal Java, a
platform on which to run Java applications. We also licensed from Wind River an
operating system, VXWorks, and entered into a relationship with Forth Inc.
whereby Forth will provide software support and operating system development
tools for the Forth Programming language. An initial licensing agreement was
entered into in December 1998 providing for a library arrangement with a
governmental unit. The agreement provides our core license to be made available
for further evaluation and review by certain Japanese companies. Based on
attaining 1,000 unit volumes, these companies will be required to enter into
sub-license agreements with us.
We have two U.S. patents on our gas antenna technology including one
U.S. patent on antennae technology directly related to our GPR technology. No
foreign application has been made. Although plans in this regard are not
definite, our intention is to apply for patents only as to selected aspects of
our 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, we believe that our interests will best be served by
treating as trade secrets non-patented components or instrumentation groups used
in some of our 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 we are not aware of any possible infringement and have not
received any notices of claimed infringement, we may receive such claims in the
future.
A third party has licensed certain ISDN software technology to us. In
addition to the protection afforded us through the ISDN technology license, we
have created our own software and hardware designs and use copyright, trade
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secret laws, software security measures and nondisclosure agreements to protect
our proprietary products, technology and software. We have one U.S. patent on
our high-speed data communication technology. Despite our precautions, it may be
possible for unauthorized third parties to copy aspects of, or otherwise obtain
and use, our high-speed data communication technology and software without
authorization. In addition, we cannot be certain that others will not develop
substantially equivalent or superior proprietary technology thereby
substantially reducing the value of our proprietary rights.
Metacomp 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 became a royalty free license. In
addition, Patriot has a license agreement with Multi-Tech for the ATComm/PRI
technology. Multi-Tech paid us an up-front license fee of $50,000 plus an
additional royalty fee of $50 per unit for each unit sold up to a maximum
royalty fee of $25,000 after which time the agreement becomes a paid up license.
Multi-Tech also pays us a support fee of $5,000 per year for five years through
2001.
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 us. Although we intend to protect
our rights vigorously, there can be no assurance that these measures will be
successful.
We generally require all of our employees and consultants, including
our management, to sign a non-disclosure and invention assignment agreement upon
employment with us.
MARKETING AND DISTRIBUTION
Our products are marketed through a combination of a direct sales
force and distributors. Approximate sales by principal geographic area (as a
percentage of sales) for fiscal years ended May 31 were as follows:
<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>
All of our operating assets are located within the United States.
While sales to certain geographic areas generally vary from year to year, we do
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 our 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>
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While the level of shipments to individual customers generally varies
from year to year, we do not expect that changes in customer composition will
have a material adverse effect on operations.
FACILITIES
Our company has one office which is located at 10989 Via Frontera,
San Diego, California, and contains 10,000 square feet. The facility is leased
and is currently held under an option which will expire in July 1999. We are
currently in discussions with the existing lessor to extend the current lease
and are looking at other alternative properties of similar size in the San Diego
area. There are a variety of facilities of similar size and cost available
should we decide to relocate our offices. In addition, several of our employees
who are supporting the PSC1000 microprocessor are telecommuting from their homes
in northern California.
EMPLOYEES
We currently have twenty full-time and two part-time personnel.
Eleven full-time persons are employed in research and development, three
full-time persons are engaged in manufacturing and assembly, three full-time
persons are engaged in marketing and three 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 our
affairs. We also engage additional consultants and part-time persons as needed
from time to time.
Our future success depends in significant part upon the continued
service of our key technical and senior management personnel. The competition
for highly qualified personnel is intense, and there can be no assurance that we
will be able to retain our key managerial and technical employees or that we
will be able to attract and retain additional highly qualified technical and
managerial personnel in the future. None of our employees is represented by a
labor union, and we consider our relations with our employees to be good. None
of our employees is covered by key man life insurance policies.
GOVERNMENT REGULATION
To our knowledge, our products are not subject to governmental
regulation by any federal, state or local agencies that would affect the
manufacture, sale or use of our products, other than occupational health and
safety laws and labor laws which are generally applicable to most companies. We
cannot, of course, predict what sort of regulations of this type may be imposed
in the future but do not anticipate any unusual difficulties in complying with
governmental regulations which may be adopted in the future.
Our proposed GPR device and antenna technology uses microwave radio
waves. The use of such waves is regulated by the Federal Communications
Commission ("FCC") and, should we elect to sell such devices, their operation
would have to meet applicable FCC rules and regulations. We do not believe that
the operation of the GPR prototype on contract analysis projects requires FCC
approval.
We have not incurred costs associated with environmental laws and do
not anticipate such laws will have any significant effect on our future
business.
LITIGATION
In October 1998, Patriot was sued in the District Court for Travis
County, Texas by the Fish Family Trust, an assignee of a co-inventor of the
original ShBoom technology. The suit also named as defendants nanoTronics and
Gloria Felcyn as trustee of the Falk Family Trust. The suit sought a judgment
for damages, a rescission of the Technology Transfer Agreement by which
nanoTronics obtained the technology and a restoration of the technology to
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<PAGE> 29
the Fish Family Trust. We had the suit removed to the United States District
Court for the Western District of Texas, Austin Division. We requested the
Federal District Court to dismiss the suit based on a lack of minimum contacts
with Texas or, in the alternative, to transfer the case to the Southern District
of California. In January 1999, the Federal District Court dismissed the suit
for lack of subject matter and personal jurisdiction. The Fish Family Trust then
refiled the suit in the Superior Court of San Diego County, California seeking
remedies similar to the Federal District Court dismissed action.
We obtained our rights to the basic ShBoom technology in 1994 by
entering into an Assets Purchase Agreement and Plan of Reorganization between
Patriot, nanoTronics Corporation and Helmut Falk. The basic ShBoom technology
was purchased by nanoTronics from the Fish Family Trust in 1991 under a Stock
Purchase and Technology Transfer Agreement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our results of operations have been and may continue to be subject to
significant variations. The results for a particular period may vary due to a
number of factors. These include:
- the overall state of the semiconductor and communications
segments of the economy,
- the development status of and demand for our products,
- economic conditions in our markets,
- the timing of orders,
- the timing of expenditures in anticipation of future sales,
- the mix of products sold by us,
- the introduction of new products,
- product enhancements by us or our competitors, and
- pricing and other competitive conditions.
As described in Note 1 to the Consolidated Financial Statements,
effective December 26, 1996, we acquired 96.9% of the common stock of Metacomp.
The business combination was accounted for as a pooling of interests and,
accordingly, our 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 our 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 our results
of operations for the year ended May 31, 1997.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 1998 AND 1997
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 of the microprocessor
and the development contracts for the radar/antenna product line.
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 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.
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<PAGE> 30
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 our addition of one
marketing executive and one financial officer,
- the compensation costs of $375,000 related to the release from
escrow of 500,000 shares of common stock as discussed in Note 4 to
the Consolidated Financial Statements, and
- an increase in marketing costs related to introducing our 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 fiscal year 1998.
Other income (expense) was significantly higher for fiscal 1998 as a
result of a recognition of $2,592,446 of non-cash interest related to the
discount on convertible term debentures and valuation of warrants 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 the successful completion of its Chapter 11 case. A similar item was
not recognized in fiscal 1998.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997
Net sales. Total net sales for the six months ended November 30, 1998
decreased 5.7% to $836,497 from $887,020 for the corresponding six-month period
of fiscal 1998. This decrease was due primarily to a reduction in follow on
shipments for our matured communication products, several of which are
approaching the end of their life cycles. Development and sales of new
communications products have not achieved a level adequate to replace the
maturing products. Also, we anticipated that revenue would increase due to
product delivery on our $3.3 million kiosk application. However, shipments of
the kiosk application were delayed by the customer. Although no assurance can be
given, the kiosk order is scheduled to begin shipments in May 1999, with the
completion of shipments scheduled for fiscal year 2000.
Cost of sales. Cost of sales as a percentage of net sales increased to
68.1% for the six months ended November 30, 1998 compared to 49.2% for the
corresponding period of the previous fiscal year. This increase is due in part
to lower profit margins on the non-recurring engineering portion of our $3.3
million kiosk application order compared to profit margins typically associated
with our other product lines. The remainder of the kiosk order is anticipated to
put upward pressure on the cost of sales as a percentage of net sales when
shipments of the product portion of the kiosk order commences.
Research and development expenses increased 40.1% for the six months
ended November 30, 1998 to $1,155,489 from $824,761 for the corresponding period
for the previous fiscal year. This was due to an increase in licensed software
support and update fees for the Java OS and Personal Java application, increased
costs of porting a real time operating system to the PSC1000, and costs related
to the development of the kiosk.
Selling, general and administrative expenses decreased by 32.6% to
$917,675 for the six months ended November 30, 1998 compared to $1,361,865 for
the corresponding period of the previous fiscal year. This decrease was due
primarily to the compensation costs related to the release from escrow of
500,000 shares to the seller of the ShBoom technology during the second quarter
of fiscal 1998 for $375,000 discussed above coupled with a reduction in other
compensation expenses.
Other income (expense) was $302,568 for the six months ended November
30, 1998 compared to $649,359 for the corresponding period for the previous
fiscal year. This decrease was due primarily to the non-cash interest related to
the Convertible Term Debentures discussed in Note 5 to the Consolidated
Financial Statements and the interest on those Debentures being significantly
less during current six-month period.
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<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1998, working capital was a negative $643,185 and cash
and cash equivalents totaled $39,355. We have funded our operations primarily
through the issuance of securities and debt financings. Cash and cash
equivalents decreased $563,101 during the six months ended November 30, 1998.
The net cash used in operating activities was $597,368, additions to property
and equipment were $273,096, and funds generated from debt and equity financings
were $307,363. During the six months ended November 30, 1998, accounts
receivable decreased $315,634 as a result of a reduction in sales and increased
collection efforts. Prepaid expenses increased $166, 098 as a result of
maintenance contracts on software being amortized over the entire year. Accounts
payable and accrued expenses increased $829,397 as a result of annual
obligations for software maintenance and a slow down in payments as a result of
the cash and cash equivalent reduction. We issued several short-term notes and
established an accounts receivable line of credit with our bank during the
second fiscal quarter of 1999 totaling $102,500.
We expect that our liquidity for the next twelve months will be provided
by:
- profits related to the product portion of the $3.3 million kiosk
order, a portion of which is anticipated as an advance payment
previous to any product shipments,
- short-term debt instruments, including a receivable financing
arrangement established with our bank, and
- additional equity financings under the Equity Line of Credit and
private placements.
We anticipate that we may require additional equipment, fabrication,
components and supplies during the next twelve months to continue development of
our technologies. Product introductions such as those currently underway for
communication products and the PSC1000 may require significant inventory,
product launch, marketing, personnel and other expenditures not presently
determinable. Further, if expanded development is commenced or new generations
of microprocessors are accelerated beyond current plans, additional
expenditures, not currently determinable may be required. It is possible
therefore, that higher levels of expenditures may be required than currently
contemplated resulting from changes in development plans or as required to
support new developments or commercialization activities or otherwise.
Based on the current fiscal year's rate of cash operating expenditures
and current plans, we anticipate additional cash requirements for the next
twelve months. There can be no assurance that any funds required during the next
twelve months or thereafter can be generated from operations or, if such
required funds are not internally generated, that funds will be available from
external sources such as debt or equity financings or other potential sources.
The lack of additional capital could force us to substantially curtail or cease
operations and would therefore have a material adverse effect on our 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 our existing shareholders.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which 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 No. 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. We will implement SFAS No.131 in our May 31, 1999
financial statements. Results of operations and financial position will be
unaffected by implementation of the standard.
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
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<PAGE> 32
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. We believe the
adoption of this statement will have no material impact on our financial
statements.
TAX LOSS CARRYFORWARDS
As of May 31, 1998, we had 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 we
cannot determine that it is more likely than not that the deferred tax asset
will be realized. See also Note 8 to the Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year
in the date field, with the result that data referring to the year 2000 and
subsequent years may be misinterpreted by these programs. If present in the
computer applications of a company or third parties (such as customers,
financial institutions, and suppliers) and not corrected, this problem may cause
computer applications to fail or to create erroneous results and could cause a
disruption in operations and have an adverse effect on a company's business and
results of operations.
We have adopted a formal plan to evaluate our readiness for the Year
2000 and to address any deficiencies. The plan encompasses:
- information technology (IT) systems,
- non-IT systems,
- our products, and
- systems of third parties, including distributors and key
suppliers.
INFORMATION TECHNOLOGY: Our principal computer systems that we use for
financial accounting, manufacturing, inventory control, purchasing, sales
administration, engineering, and other business functions are not Year 2000
compliant. We have identified a replacement system that we expect to purchase,
install, and have fully functional before June 30, 1999.
The cost of this new system will be approximately $30,000.
NON-IT SYSTEMS: By the end of June 1999, we expect to have completed an
evaluation of telephone systems, manufacturing equipment, facility heating and
cooling systems, and other non-IT systems for Year 2000 readiness and will
promptly take remedial action as necessary.
OUR PRODUCTS: We have completed a series of tests, utilizing industry
standards, of the electronics systems of our products, including those product
lines no longer being manufactured but remaining in use at customer sites. Our
review has determined that the products should continue to operate according to
specifications after December 31, 1999.
KEY VENDORS AND SUPPLIERS: We will initiate a survey of our key vendors
and suppliers to assess their plans for bringing any non-compliant systems into
Year 2000 compliance.
This study is expected to be completed by the end of June 1999.
Other than the replacement computer system discussed above,
substantially all of the effort to evaluate our Year 2000 readiness has been
made using internal personnel, and therefore incremental expenses have been less
than $50,000. We have not incurred any material expenses in connection with our
evaluation of non-IT systems and do not expect material expense in the future,
although the evaluation of non-IT systems is not yet complete. We have not
incurred any material expenses to date in connection with the evaluation of our
products and the status of our vendors and suppliers with respect to Year 2000
issues. We do not anticipate material expenses in the future, although the
evaluation of key vendors' and suppliers' Year 2000 readiness is not yet
complete.
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Our Year 2000 readiness plan, as well as our consideration of
contingency plans, are ongoing and will continue to evolve as new information
becomes available. At the present time, we believe that it is difficult to
identify the cause of the most reasonably likely worst case Year 2000 scenario.
We have not yet adopted any formal contingency plans and will determine the need
for such plans as part of our ongoing assessment of vendors and suppliers,
products, and internal business systems. Due to the complexity and pervasiveness
of the Year 200 issue, and in particular the uncertainty regarding the Year 2000
compliance programs of third parties, no assurances can be given that the Year
2000 problem will not have material adverse effects on our business or our
results from operations.
MANAGEMENT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Our current directors and executive officers, their ages, positions held
with us and duration as such, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES DIRECTOR SINCE
<S> <C> <C> <C>
Elwood G. Norris 60 Chairman and Director August 1989
James T. Lunney 44 President, CEO and Director April 1998
Lowell W. Giffhorn 52 Chief Financial Officer N/A
Donald R. Bernier 56 Director January 1995
Helmut Falk, Jr. 42 Director December 1997
Phillip Morettini 42 Vice President Sales and Marketing N/A
Frederick G. Thiel 38 Director February 1999
Robert Putnam 40 Secretary N/A
Jayanta K. Maitra 48 Vice President Engineering N/A
Richard G. Blum 68 Director February 1999
</TABLE>
The terms of all directors will expire at the next annual meeting of our
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 our 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 e.Digital, Inc. (EDIG), 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
EDIG, 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 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 us. Mr. Norris works only
part-time for us.
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JAMES T. LUNNEY. Mr. Lunney has been the President and Chief Executive
Officer of Patriot since March 1998 and was appointed as 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 the Manager of Production Programs, Vice
President and Business Area Manager for Signal Processing, which was a division
of Scientific Atlanta until August 1996, when it was acquired by Global
Associates Ltd. Previously, Mr. Lunney held various managerial positions with GE
Aerospace, Defense Systems Division and Ordinance Systems Division. In 1997, he
obtain a B.S. in Electrical Engineering from Worcester Polytechnic Institute.
ROBERT PUTNAM. Mr. Putnam has been the Secretary and Treasurer of
Patriot since 1989 and was a director 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
works only part-time for us.
JAYANTA K. MAITRA. Mr. Maitra has been Vice President of Engineering of
Metacomp since 1990 and was appointed Vice President of Engineering of Patriot
in January 1997. From 1985 to 1987 he was Manager of Hardware Engineering for
Systech Corporation, a San Diego based hardware and software communications
company. From 1974 to 1985 he held various engineering positions with several
computer related technology companies. He obtained a B.S. in Electrical
Engineering from the Indian Institute of Technology in 1972 and an M.S. in
Electrical Sciences at State University of New York in 1973.
LOWELL W. GIFFHORN. Mr. Giffhorn was the principal in his own financial
management consulting firm from August 1996 until joining Patriot 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 Patriot. From June 1992 to August 1996 and from September 1987 to
June 1990 he was the Chief Financial Officer of Sym-Tek Systems, Inc. and Vice
President of Finance for its successor, Sym-Tek Inc. Sym-Tek Systems, Inc. was a
major supplier of capital equipment to the semiconductor industry which filed
under Chapter 11 of the U.S. Bankruptcy Code in May 1994 while Mr. Giffhorn was
the Chief Financial Officer. He was instrumental in selling the assets of
Sym-Tek Systems, Inc. to Sym-Tek Inc., a wholly owned subsidiary of Aetrium Inc.
He continued with Sym-Tek Inc. as Vice President Finance during the transition
and concluded the liquidation of Sym-Tek Systems, Inc. He has over twenty-five
years of experience in a variety of financial positions, including eleven years
as Controller for Langley Corporation, a publicly traded, San Diego, defense
contractor. In 1975 Mr. Giffhorn obtained an M.B.A. degree from National
University, and in 1969 he obtained a B.S. in Accountancy from the University of
Illinois.
DONALD R. BERNIER. Since 1971, Mr. Bernier has been the owner and
President of Compunetics Incorporated, a Troy, Michigan-based electronics firm
of which he the founder. Compunetics engages in contract research and
development, specializing in microelectronics primarily for the automotive
industry.
HELMUT FALK, JR. For the past six 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 Patriot until his
death in July 1995. Dr. Falk is also an heir to the Helmut Falk Estate, which is
the beneficial owner of our shares held by the Helmut Falk Family Trust and
nanoTronics Corporation.
PHILIP MORETTINI. Mr. Morettini has been the Vice President of Sales and
Marketing of Patriot since July 1997. From September 1995 to April 1997, he was
the President and CEO of Sdept 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 from the University of Illinois.
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FREDERICK G. THIEL. Since April 1998, Mr. Thiel has been the President
and CEO of Lantronix, Inc., an Irvine, CA based developer/manufacturer of
computer network enabling devices and systems. From July 1996 to April 1998 he
was the Vice President of Marketing and General Manager for CDM Technology,
Inc., an Irvine, CA based developer of high-end RAID storage controller and
intelligent serial input/output microprocessor technology. From June 1994 to
March 1996 he was the Director of World Wide Marketing for Standar Microsystems
Corporation, an Irvine, CA based network technology developer and manufacturer.
Mr. Thiel was educated in the United States and Europe and studied business
administration while at the Stockholm School of Economics.
RICHARD G. BLUM. Mr. Blum retired as Chairman and President of Kysor
Europe, a wholly owned subsidiary of Kysor Industrial Corporation, in 1991.
Previously Mr. Blum held a variety of executive level positions with ITT Europe
and ADT Europe. He completed his undergraduate work at Oregon State and Linfield
Colleges in 1951 and post graduate work at John Carrol and Canisius Universities
in 1958.
GENERAL CONFLICTS OF INTEREST
Conflicts of interest now exist and will continue to exist between us
and certain of our officers and directors due to the fact that certain officers
and directors have other employment or business interests to which they devote
attention. We have not established policies or procedures for the resolution of
current or potential conflicts of interest between us and our management or
management-affiliated entities. There can be no assurance that members of
management will resolve all conflicts of interest in our favor.
It is conceivable that the respective areas of interest of ours, ATC and
EDIG could overlap or conflict. We believe that, although each of the three
corporations is involved in the electronics industry, their respective areas of
focus, products and technology are sufficiently distinct that no conflict in
business lines or executive loyalties will result. Therefore, no steps have been
taken to resolve possible conflicts among us, ATC, and EDIG; and any such
conflicts, should they arise, will be addressed at the appropriate time.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
As permitted by Delaware law, our Certificate of Incorporation provides
that we will indemnify our officers, directors, employees and agents. This
includes indemnification 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 us. However, they will not be indemnified if they are adjudged to have
acted with gross negligence or to have engaged in willful misconduct. We 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 we are so entitled. We have provided for indemnification
for liabilities arising under the Securities Act of 1933 as they may be
permitted to directors, officers or persons controlling us. The Securities and
Exchange Commission has informed us that such indemnification is against public
policy and may be unenforceable.
EXCLUSION OF DIRECTOR LIABILITY
Under the General Corporation Law of Delaware, our Certificate of
Incorporation excludes personal liability on the part of our directors to us 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.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
of our chief executive officers and each of the other four most highly
compensated executive officers whose salary and bonus exceeded $100,000 for the
fiscal years ended May 31, 1996, 1997 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Cash Compensation Long-Term Compensation
Options All Other
Name and Principal Position Fiscal 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 50,000 shares None
President and CEO(2) 1997 $138,000 900,000 shares None
Elwood G. Norris 1996 $ 60,000 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 50,000 None
Vice President and 1997 $128,483 Nil 533,953 $4,241
General Manager(5)
Jayanta K. Maitra 1998 $104,500 Nil 25,000 None
Vice President Engineering(6) 1997 $118,700 Nil 535,753 $2,874
</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. Mr. Carenzo
continued to serve on the Board until his resignation in October, 1998.
(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 our acquisition of Metacomp. The amounts disclosed
reflect his compensation before and after the acquisition. Mr. Dawson
terminated his relationship with us in October 1998.
(6) Mr. Maitra was appointed Vice President Engineering on December 26, 1996 as
a result of our acquisition of Metacomp. The amounts disclosed reflect his
compensation before and after the acquisition.
(7) Represents long-term disability insurance payments made us on behalf of Mr.
Dawson and Mr. Maitra during the fiscal year ended May 31, 1997.
We maintain employee benefits that are generally available to all of our
employees, including medical, dental and life insurance benefits and a 401(k)
retirement savings plan. We did not make matching contributions under the 401(k)
plan on behalf of the above named officers during the fiscal year ended May 31,
1998.
34
<PAGE> 37
OPTION GRANTS
The following table sets forth information on grants of stock options
pursuant to our 1996 Stock Option Plan to the officers reflected in the Summary
Compensation Table shown above.
OPTION GRANTS TABLE FOR FISCAL YEAR ENDED MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Total Options
Option Expiration Number of Granted to Employees in
Name Date Options Granted Fiscal Year Exercise Price
---- ----------------- --------------- ------------------------ --------------
<S> <C> <C> <C> <C>
James T. Lunney February 22, 2003 350,000 23.2% $ 0.86
Michael A. Carenzo January 26, 2003 50,000 3.3% $ 0.59
Elwood G. Norris January 26, 2003 50,000 3.3% $ 0.59
Norman J. Dawson January 26, 2003 50,000 3.3% $ 0.59
Jayanta K. Maitra January 26, 2003 25,000 1.7% $ 0.59
</TABLE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
Shown below is information on exercises of stock options and fiscal
year-end values under our 1996 and 1992 Stock Option Plans to the officers
reflected in the Summary Compensation Table shown above.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised In-The-
Shares Number of Unexercised Options Money Options At May 31, 1998(1)
Acquired on Value Held at May 31, 1998
- ------------------------------------------------------------------------------------------------------------
Name Exercise Realized Exercisable Unexercisabl Exercisable Unexercisable
<S> <C> <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.
We have not awarded stock appreciation rights to any employee of ours.
We have no long-term incentive plans except a $50,000 demonstration bonus
payable to Mr. Norris upon successful demonstration of a prototype GPR device.
Under Mr. Maitra's Employment Contract, the Board of Directors canceled
75,000 stock options in fiscal year 1998 and 225,000 stock options in fiscal
year 1999 which had previously been granted to him. This change was made as a
consequence of our not meeting certain performance goals. As a result of Mr.
Carenzo's resignation in March, 1998, 337,500 previously granted stock options
were canceled. We have no defined benefit or actuarial plans covering any
person.
35
<PAGE> 38
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by us to
the directors in their capacity as directors other than the granting of stock
options. We expect that, during the next twelve months, we will not pay any
direct or indirect remuneration to any directors of ours 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
We entered into an employment agreement dated as of February 23, 1998
and approved by our 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 and provides 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% of the base
salary at the end of the first year of its term 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. We 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. We have 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 our control.
We entered into an employment agreement dated as of July 28, 1997 and
approved by our 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. We 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 his 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, we 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.
We entered into an employment agreement dated as of July 23, 1998 with
Mr. Giffhorn providing for his employment as our 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. We 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 his then current base salary. If within twelve months 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, he will receive a lump sum severance payment
equal to twelve months of his then current salary.
We 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
36
<PAGE> 39
incentive bonuses in certain instances of up to 50% of the total yearly base
compensation. We 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. Under the agreement, we originally granted Mr. Maitra
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 canceled 300,000 of such options. Options may
vest earlier subject to the discretion of the Board of Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 12, 1999, the stock
ownership of each officer and director of ours, of all officers and directors of
ours as a group, and of each person known by us to be a beneficial owner of 5%
or more of our 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 ours, except as otherwise noted.
<TABLE>
<CAPTION>
Name and Address of Amount & Nature of
Title of Class Beneficial Owner Beneficial Owner Percent of Class
-------------- ------------------- ------------------- ----------------
<S> <C> <C> <C>
Common Stock par value Gloria Felcyn, CPA 9,092,535 (1) 21.6%
$.00001 14395 Saratoga Ave.,
Suite 100
Saratoga, CA 95070
Same Helmut Falk Family Trust 6,092,535 (3) 14.5%
Gloria Felcyn, Trustee
14395 Saratoga Ave.,
Suite 110
Saratoga, CA 95070
Same Elwood G. Norris 4,252,500 (4) 10.1%
10989 Via Frontera
San Diego, CA 92127
Same nanoTronics Corporation 3,000,000 (2) 7.1%
Attn: Gloria Felcyn, CPA
14395 Saratoga Ave.,
Suite 110
Saratoga, CA 95070
Same Jayanta K. Maitra 298,095 (4) *
10989 Via Frontera
San Diego, CA 92127
Same James T. Lunney 233,334 (5) *
10989 Via Frontera
San Diego, CA 92127
Same Donald R. Bernier 125,000 (4) *
10989 Via Frontera
San Diego, CA 92127
Same Philip Morettini 121,000 (4) *
10989 Via Frontera
San Diego, CA 92127
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
Name and Address of Amount & Nature of
Title of Class Beneficial Owner Beneficial Owner Percent of Class
-------------- ------------------- ------------------- ----------------
<S> <C> <C> <C>
Same 120,000 (5)
Lowell W. Giffhorn
10989 Via Frontera *
San Diego, CA 92127
Same Robert Putnam 75,000 (4) *
10989 Via Frontera
San Diego, CA 92127
Same Helmut Falk, Jr. 50,000 (5) *
10989 Via Frontera
San Diego, CA 92127
Same Frederick G. Thiel 50,000 (5) *
10989 Via Frontera
San Diego, CA 92127
Same Richard G. Blum 50,000 (5) *
10989 Via Frontera
San Diego, CA 92127
Same All directors & officers 5,374,929 (6) 12.8%
as a group (10 persons)
</TABLE>
- ---------------
* Less than 1%.
(1) As trustee of the Helmut Falk Family Trust and executor of the Helmut Falk
estate, Ms. Felcyn effectively controls the shares described in Notes 2 and
3 below.
(2) These shares have been issued but are subject to an escrow arrangement as
described in "Certain Transactions." The shares were originally issued to
nanoTronics in connection with the ShBoom technology acquisition.
(3) These shares remain from 5,000,000 non-escrowed shares and 2,000,000 shares
released from escrow, which were issued to nanoTronics in connection with
the ShBoom technology acquisition. These shares were subsequently
transferred to the Helmut Falk Family Trust.
(4) For Mr. Norris, the amount includes 100,000 shares, for each of Mssrs.
Bernier and Putnam the amount includes 50,000 shares, for Mr. Maitra the
amount includes 110,753 shares, and for Mssrs. 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) Consists entirely of shares issuable upon the exercise of outstanding stock
options.
(6) Includes 4,449,842 shares issued and outstanding and 934,087 shares
issuable upon exercise of stock options.
CERTAIN 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 we are a party, in which the amount exceeds $60,000, and
in which to our knowledge 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 as described below.
Based on the Assets Purchase Agreement and Plan of Reorganization dated
June 22, 1994 between Patriot, nanoTronics Corporation and Helmut Falk, we
issued a total of 10,000,000 restricted common shares to nanoTronics, 5,000,000
of which are a contingent payment subject to the terms of an earnout escrow.
These shares were issued in consideration of technology acquired.
38
<PAGE> 41
nanoTronics was formed in 1991 and acquired certain base technology for
a RISC-based (Reduced Instruction Set Computing) 32-bit microprocessor
integrated on a single chip with merged stack/register architecture. nanoTronics
expended in excess of $1.9 million (unaudited) while engaged in further
development of that technology and produced from the basic architecture an
enhanced chip (ShBoom-architecture microprocessor). In connection with the
acquisition, we also acquired certain fixed assets including a SunSparc 2
workstation and various terminals, peripheral devices and software. A majority
of the expenditures by nanoTronics consisted of chip and related software
development costs. The result of these efforts was a successful initial
fabrication of the chip in early 1994 demonstrating technical feasibility of the
ShBoom architecture. nanoTronics also expended funds on the preparation and
prosecution of patent applications.
The shares were issued to nanoTronics of which Falk was the sole
shareholder. Although 5,000,000 of the shares issued were subject to the terms
of an earnout escrow, as more fully described below, the shares are issued for
the purpose of dividends and voting. Prior to the transaction, Mr. Falk was an
unaffiliated person with respect to us. At the time of issuance the 10,000,000
common shares represented approximately 36% of our total issued and outstanding
shares.
Although the transaction did not result in a majority change in our
board of directors, or a majority change in our stock ownership, the issuance of
new stock resulted in a large percentage ownership controlled by one entity with
the ability to have significant influence over our future affairs.
Based on the terms of the Purchase Agreement, 5,000,000 of the common
shares were issued to nanoTronics subject to an earnout escrow arrangement as a
contingent purchase price. The terms of the escrow arrangement, as defined in
the Purchase Agreement, provides for the release from escrow of 500,000 common
shares for each $500,000 of Patriot revenues commencing June 1, 1994 and ending
May 31, 1999. The Purchase Agreement also provides for release on other major
corporate events including a sale of substantially all our assets, 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 April 12,
1999:
- 2,000,000 shares had been released from escrow,
- an additional 1,500,000 shares may have been earned but remain in
escrow pending the resolution of litigation between us, nanoTronics,
and one of the co-inventors of the ShBoom technology, and
- 1,500,000 shares are held in escrow contingent on our future revenue.
We have granted certain registration and information rights with respect
to the shares issued to nanoTronics, such rights being assignable to Falk and
the Fish Family Trust (such trust having certain rights to become a shareholder
in nanoTronics). We have been advised that nanoTronics has been liquidated with
the 10,000,000 shares in the process of being transferred to the Helmut Falk
Family Trust which is entitled to the same registration rights. We are obligated
to use our best efforts to effect a registration upon written request up to two
times subject to certain limitations. We are also obligated to include the
shares, subject to certain limitations, in any underwriting and in any other
registration filed by us.
We entered into an Agreement to Exchange Technology for Stock dated
August 8, 1989 with Mr. Norris. Under the agreement, Mr. Norris is entitled to a
royalty equal to two and one-half percent (2.5%) of the gross revenues received
by us directly or indirectly from exploitation of our GPR technology (up to a
maximum royalty of $400,000). Mr. Norris was given an advance royalty payment of
$17,000. Mr. Norris also is entitled to a cash bonus of $50,000 within 45 days
after we successfully demonstrate 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.
TRADING MARKET AND RELATED MATTERS
Our 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 our shares has been sporadic and at times
very limited.
39
<PAGE> 42
The following table sets forth the high and low bid quotations for the
common stock for the six months ended November 30, 1998 and the fiscal years
ended May 31, 1998 and 1997.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Six Months Ended November 30, 1998
First Quarter $ 0.77 $ 0.41
Second Quarter 0.81 0.38
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 1.75
Third Quarter 1.83 0.94
Fourth Quarter 1.62 0.94
</TABLE>
We have approximately 254 shareholders of record as of April 12, 1999.
At April 12, 1999 there were 41,063,915 shares of common stock issued and
outstanding. We have never paid a cash dividend on our common stock and do not
expect to pay one in the foreseeable future.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 60,000,000 shares of common
stock, $.00001 par value per share. At April 12, 1999, a total of 41,063,915
common shares were issued and outstanding. The holders of common stock are
entitled to one vote for each share held. The affirmative vote of a majority of
votes cast at a meeting which commences with a lawful quorum is sufficient for
approval of most matters upon which shareholders may or must vote, including the
questions presented for approval or ratification at the Annual Meeting. However,
removal of a director from office or repeal of the certificate of incorporation
in its entirety require the affirmative vote of a majority of the total voting
power for approval, and certain other matters (such as shareholder amendment of
the bylaws, and amendment, repeal or adoption of any provision inconsistent with
provisions in the certificate of incorporation regarding indemnification of
directors, officers and others, exclusion of director liability, and the
Company's election not to be governed by statutory provisions concerning
business combinations with interested shareholders) require the affirmative vote
of two-thirds of the total voting power for approval. Common shares do not carry
cumulative voting rights, and holders of more than 50% of the common stock have
the power to elect all directors and, as a practical matter, to control the
company. Holders of common stock are not entitled to preemptive rights, and the
common stock may only be redeemed at our election.
A special meeting of shareholders may be called by or at the request of:
- the Chairman of the Board,
- the President or any two directors, and
- persons owning in the aggregate not less than 20% of the issued and
outstanding common shares entitled to vote in elections for
directors.
After the satisfaction of requirements with respect to preferential dividends,
if any, holders of common stock are entitled to receive, pro rata, dividends
when and as declared by the Board of Directors out of funds legally available
therefor. Upon our liquidation, dissolution or winding-up, after distribution in
full of the preferential amount, if any, to be distributed to holders of the
preferred stock, holders of common stock are entitled to share ratably in our
assets legally available for
40
<PAGE> 43
distribution to our shareholders.
Our board of directors is authorized to issue 5,000,000 shares of
undesignated preferred stock, $.00001 par value, without any further action by
the stockholders. The board of directors may also divide any and all shares of
preferred stock into series and fix and determine the relative rights and
preferences of the preferred stock, such as the designation of series and the
number of shares constituting such series, dividend rights, redemption and
sinking fund provisions, liquidation and dissolution preferences, conversion or
exchange rights and voting rights, if any. Issuance of preferred stock by the
board of directors will result in such shares having dividend and/or liquidation
preferences senior to the rights of the holders of common stock and could dilute
the voting rights of the holders of common stock. There are currently no shares
of preferred stock issued and outstanding.
We have not paid any cash dividends to date, and no cash dividends will
be declared or paid on the common shares in the foreseeable future. Payment of
dividends is solely at the discretion of our board of directors.
Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt
Lake City, Utah 84117, acts as our transfer agent and registrar for our common
stock. Their telephone number is (801) 272-9294.
LEGAL MATTERS
Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway Street, Suite
2600, San Diego, California 92101 will pass on the validity of the common stock
offered by us. Luce, Forward, Hamilton & Scripps LLP owns 279,326 shares of our
common stock, which it received in consideration of services rendered. These
shares are offered as part of this prospectus.
EXPERTS
The financial statements and schedules included in this Prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their reports appearing elsewhere
herein, and are included herein in reliance upon such reports given upon the
authority of said firm as experts in auditing and accounting.
Harlan & Boettger, LLP, independent certified public accountants for the
fiscal year ended July 31, 1996, have audited the financial statements of
Metacomp, Inc.. Their report appears elsewhere herein and in the registration
statement. We are including and relying upon such report based on the authority
of said firm as experts in accounting and auditing.
41
<PAGE> 44
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-12
Notes to Consolidated Financial Statements..................................... F-13-F-24
Consolidated Balance Sheets as of November 30, 1998 (unaudited)
and May 31, 1998 ..................................................... F-25
Consolidated Statements of Operations for the six months and three
months ended November 30, 1998 and 1997 (unaudited) .................. F-26
Consolidated Statements of Cash Flows for the six months ended
November 30, 1998 and 1997 (unaudited) ............................... F-27
Notes to Consolidated Financial Statements .................................... F-28- F-32
</TABLE>
F-1
<PAGE> 45
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> 46
(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> 47
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> 48
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(SEE NOTE 1)
Years Ended May 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <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> 49
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (See Note 1)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended May 31, 1998 and 1997
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> 50
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> 51
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Patriot Scientific Corporation (the "Company") is engaged in the development,
marketing, and sale 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.
F-8
<PAGE> 52
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories consist of raw materials, work in process and finished goods and are
valued at the weighted average cost method, which approximates cost on a
first-in, first-out basis, not in excess of market value.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful life of three to five years using the straight line method.
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
F-9
<PAGE> 53
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 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.
F-10
<PAGE> 54
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 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.
F-11
<PAGE> 55
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain items included in the 1997 financial statements have been reclassified
to conform to the current year presentation.
F-12
<PAGE> 56
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
</TABLE>
Merger costs and expenses consisted of legal and accounting fees.
F-13
<PAGE> 57
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
EQUIPMENT May 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
================================================================
</TABLE>
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.
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-14
<PAGE> 58
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.
F-15
<PAGE> 59
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 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.
F-16
<PAGE> 60
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-17
<PAGE> 61
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-18
<PAGE> 62
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<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-19
<PAGE> 63
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-20
<PAGE> 64
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 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>
<CAPTION>
=====================================================
<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>
F-21
<PAGE> 65
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 The Company, through its subsidiary, Metacomp, entered
CAPITAL LEASE into an eight year operating lease for its office and
OBLIGATIONS 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-22
<PAGE> 66
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-23
<PAGE> 67
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, sublicenseable 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-24
<PAGE> 68
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
November 30, May 31,
1998 1998
(Unaudited)
------------ ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 39,355 $ 602,456
Accounts receivable 277,908 593,542
Inventories (Note 3) 220,527 230,417
Prepaid expenses and other 275,463 109,365
------------ ------------
Total current assets 813,253 1,535,780
Property and equipment - net 596,488 453,211
Patents and trademarks - net 166,292 196,942
Other 3,720 3,721
------------ ------------
Total Assets $ 1,579,753 $ 2,189,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short term notes payable $ 102,500 $ --
Accounts payable 1,220,164 391,184
Accrued liabilities 131,505 131,088
Current portion - capital lease obligations 2,269 2,179
------------ ------------
Total current liabilities 1,456,438 524,451
Long-term Liabilities
Capital lease obligations 197 1,355
5% Convertible Term Debentures (Note 5) -- 507,000
------------ ------------
Total Liabilities 1,456,635 1,032,806
Contingency (Note 6) -- --
Stockholders' Equity
Preferred stock $.00001 par value; authorized
5,000,000 shares; none outstanding -- --
Common stock $.00001 par value; authorized
60,000,000 shares; 40,204,154 and 37,880,776
shares issued and outstanding (Note 4) 402 379
Additional paid-in capital (Note 4) 19,471,472 18,396,092
Accumulated deficit (19,348,756) (17,239,623)
------------ ------------
123,118 1,156,848
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,579,753 $ 2,189,654
============ ============
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE> 69
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 230,905 $ 408,856 $ 836,497 $ 887,020
Cost of sales 190,420 183,409 569,898 436,700
------------ ------------ ------------ ------------
Gross profit 40,485 225,447 266,599 450,320
Operating expenses:
Research and development 453,497 452,489 1,155,489 824,761
Selling, general and
administrative 514,904 710,246 917,675 1,361,865
------------ ------------ ------------ ------------
968,401 1,162,735 2,073,164 2,186,626
------------ ------------ ------------
Operating loss (927,916) (937,288) (1,806,565) (1,736,306)
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 130 14,739 3,719 35,116
Interest expense (5,616) (59,797) (6,485) (59,797)
Non-cash interest expense
related to convertible
debentures (Note 5) (151,856) (244,203) (299,802) (624,678)
------------ ------------ ------------ ------------
(157,342) (289,261) (302,568) (649,359)
------------ ------------ ------------ ------------
Net loss $ (1,085,258) $ (1,226,549) $ (2,109,133) $ (2,385,665)
============ ============ ============ ============
Basic and diluted loss
per common share: $ (0.03) $ (0.04) $ (0.06) $ (0.08)
============ ============ ============ ============
Weighted average number of
common shares outstanding
during the period (Note 1) 34,742,446 28,951,838 34,161,601 28,839,560
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 70
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended November 30,
1998 1997
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss $(2,109,133) $(2,385,665)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 160,469 133,824
Amortization of debt issuance costs 48,000 --
Warrants issued for services -- 10,500
Non-cash compensation expense -- 375,000
Non-cash interest expense related to
convertible debentures (Note 5) 314,472 624,678
Changes in:
Accounts receivable 315,634 (157,938)
Inventories 9,890 62,051
Prepaid and other assets (166,097) (333,784)
Accounts payable and accrued expenses 829,397 44,497
----------- -----------
Net cash used in operating activities (597,368) (1,626,837)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (273,096) (302,860)
FINANCING ACTIVITIES:
Proceeds from the issuance of notes payable 102,500 --
Principal payments on notes payable and
long-term debt (1,068) (796)
Proceeds from issuance of common stock
and exercise of common stock warrants
and options 205,931 202,533
Proceeds from issuance of convertible notes -- 3,000,000
----------- -----------
Net cash provided by financing activities 307,363 3,201,737
----------- -----------
Net Increase (Decrease) in Cash (563,101) 1,272,040
Cash and cash equivalents at
beginning of period 602,456 477,675
----------- -----------
Cash and cash equivalents at
end of period $ 39,355 $ 1,749,715
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Convertible notes and accrued interest
exchanged for common stock $ 575,642 $ 10,234
=========== ===========
Cash payments for interest $ 6,485 $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 71
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of Patriot Scientific Corporation ("the
Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-QSB and do
not include all of the information and footnotes required by generally accepted
accounting principles. These statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended May
31, 1998.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the three month and six month
periods are not necessarily indicative of the results that may be expected for
the year.
Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Standard of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which required the Company to change the method used to calculate
earnings per share. Under SFAS No. 128, basic loss per share is calculated as
loss available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted loss per share is calculated as net 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
155,032 and 1,030,686 for the three months and 180,617 and 1,315,616 for the six
months and debt convertible into none and 2,609,534 common shares of stock for
the three months and 496,089 and 2,173,900 common shares of stock for the six
months were not included in diluted loss per share for the periods ended
November 30, 1998 or 1997, respectively, as the effect was antidilutive due to
the Company recording losses in each of those periods.
In addition, 4,500,000 shares of common stock in escrow as of November 30, 1998
were not considered outstanding for diluted loss per share because the Company
was negotiating whether they would be released.
Options and warrants to purchase 4,209,291 shares of common stock at exercise
prices from $0.50 to $2.30 per share were outstanding at November 30, 1998 but
were not included in the computation of diluted loss per share because the
exercise prices were greater than the average market price of the common shares.
Options and warrants to purchase 2,039,600 shares of common stock at exercise
prices from $1.37 to $7.50 per share were outstanding at November 30, 1997 but
were not included in the computation of diluted loss per share because the
exercise prices were greater than the average market price of the common shares.
Sale of Accounts Receivable
The Company has adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. Under SFAS 125, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrended, and derecognizes liabilities when
extinguished. The Company sold approximately $110,000 of its accounts receivable
to a bank under a factoring agreement for approximately $90,000. Pursuant to the
provisions of SFAS 125, the Company reflected the transaction as a sale of
assets and established an accounts receivable from the bank for the retained
amount less the costs of the transaction and less any anticipated future loss in
the value of the retained asset.
F-28
<PAGE> 72
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Management's Plan
At November 30, 1998, working capital was a negative $643,185 and cash and cash
equivalents totaled $39,355. The Company has funded its operations primarily
through the issuance of securities and debt financings. The Company's liquidity
for the next twelve months is anticipated to be provided by (1) the cash profits
related to the $3.3 million kiosk order, a portion of which is anticipated as an
advance payment previous to any product shipments, (2) short-term debt
instruments, including a receivable financing arrangement established with the
Company's bank, and (3) additional equity financings. At February 15, 1999, the
Company had received a short-term debt financing for $50,000, private equity
placements to a group of individual investors for an accumulated $165,500, and a
commitment for up to $5,000,000 under an equity line of credit. The equity line
of credit allows the Company, at its sole discretion, to put common stock into
the hands of an institutional underwriter at a discount from market, ranging
from 10% to 20% depending on the market price of the common stock, subject to
common stock trading volume limitations and registration of the securities.
With the exception of the financings and commitment discussed above, there can
be no assurance that any funds required during the next twelve months or
thereafter can be generated from operations or that if such required funds are
not internally generated that funds will be available from external sources such
as debt or equity financings 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.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which 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 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 130 has
been adopted and there was no effect on the financial statements.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which 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 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Results of operations and financial position,
however, will be unaffected by implementation of the standard.
F-29
<PAGE> 73
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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.
3. INVENTORIES
Inventories are stated at cost (determined primarily by the weighted average
cost method which approximates cost on a first-in, first-out basis) not in
excess of market value.
Inventories at November 30, 1998 and May 31, 1998, consist of the following:
<TABLE>
<CAPTION>
November 30, 1998 May 31, 1998
----------------- ------------
<S> <C> <C>
Component parts $ 386,128 $ 418,502
Work in process 76,118 60,136
Finished goods 123,281 116,779
--------- ---------
585,527 595,417
Reserve for obsolescence (365,000) (365,000)
--------- ---------
$ 220,527 $ 230,417
========= =========
</TABLE>
4. STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the six months ended
November 30, 1998:
<TABLE>
<CAPTION>
Common
Shares Amounts
----------- -----------
<S> <C> <C>
Balance June 1, 1998 37,880,776 $18,396,471
Exercise of stock options 32,626 5,931
Stock issued for conversion of notes and related
accrued interest 1,735,752 575,642
Exercise of warrants 555,000 200,000
Non-cash interest expense related to convertible notes
recorded to additional paid-in capital -- 293,830
----------- -----------
Balance November 30, 1998 40,204,154 $19,471,874
=========== ===========
</TABLE>
A total of 5,000,000 shares of the Company's outstanding common stock was issued
as a contingent cost of the Company's acquisition of its ShBoom Technology. As
of November 30, 1998, 500,000 shares have been released from escrow. At November
30, 1998, 4,500,000 shares remain in escrow of which 3,000,000 shares may have
been earned but remain in escrow pending the resolution of litigation which has
been filed against the Company and nanoTronics, the seller of the ShBoom
Technology, by one of the co-inventors of the technology (See Note 6). Any of
the escrowed shares not released prior to May 31, 1999 are to be returned to the
Company and canceled. The 4,500,000 shares are
F-30
<PAGE> 74
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
excluded from the calculation of basic and diluted weighted average number of
common shares outstanding for the computation of loss per share until the shares
are released or the dispute is settled. See Note 6 for a further discussion.
At November 30, 1998, the Company had 165,000 options outstanding pursuant to
its 1992 ISO Stock Option Plan exercisable at prices ranging from $0.50 to $2.30
per share expiring beginning 2000 through 2001. The Company had 511,753 options
outstanding pursuant to its 1992 NSO Stock Option Plan exercisable at prices
ranging from $0.18 to $2.30 per share expiring beginning 1999 through 2002. The
Company also had 3,536,691 options outstanding pursuant to its 1996 Stock Option
Plan exercisable at $0.45 to $2.30 per share expiring beginning in 1999 through
2003. Some of the options outstanding under these plans are not presently
exercisable and are subject to meeting vesting criteria.
As of October 1, 1995, the Board of Directors adopted the 1995 Employee Stock
Compensation Plan providing for the issuance of up to 250,000 common shares to
Employees, as defined. Executive officers and directors were not eligible under
the Plan. Through September 30, 1998 the Company had issued 217,600 common
shares pursuant to the plan. The plan expired on September 30, 1998 with no
additional common shares being issued.
At November 30, 1998, the Company has warrants outstanding exercisable into
512,600 common shares at exercise prices ranging from $0.50 to $1.69 per share
expiring beginning in 2000 through 2003.
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 September 1998, the exercise price
for related warrants to purchase 370,000 shares of common stock was reduced from
$1.69125 to $0.36. In November 1997, 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. In September 1998, the
exercise price for related warrants to purchase 185,000 shares of common stock
was reduced from $1.50 to $0.36. The additional warrants value due to the
reduction in the exercise price of $142,500 was reflected as additional interest
expense in the second fiscal quarter of 1999.
The principal and interest amount of each Debenture could, 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 was the lower of (i) $1.1646 per share or (ii)
depending on the number of days the Debentures had been held after the funding
date, from 75% to 91% of the average of the closing bid prices for the common
stock for the ten consecutive trading days ending on the trading day immediately
preceding such conversion date.
As of November 30, 1998, the Debentures had been fully converted into 6,069,345
common shares of the Company. In addition, as of November 30, 1998, the
investors had exercised warrants to purchase 555,000 common shares of the
Company.
Convertible debt instruments which are convertible at a discount to market were
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 $2,160,941 of additional paid-in
capital for the discount related to the embedded interest in the Debentures.
F-31
<PAGE> 75
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Of this amount, $142,830 has been expensed during the six months ended November
30, 1998 under the caption "Non-cash interest expense related to convertible
notes."
6. CONTINGENCY
In October 1998, the Company was sued in the District Court for Travis County,
Texas by the Fish Family Trust, a co-inventor of the original ShBoom technology.
The suit also named as defendants nanoTronics and Gloria Felcyn on behalf of the
Falk Trust. The suit sought a judgment for damages, a rescission of the
Technology Transfer Agreement and a restoration of the technology to the
co-inventor. The Company had the suit removed to the United States District
Court for the Western District of Texas, Austin Division, and requested the
Federal District Court to dismiss the suit based on lack of minimum contacts
with Texas or, in the alternative, to transfer the case to the Southern District
of California. In January 1999, the Federal District Court dismissed the suit
for lack of subject matter and personal jurisdiction. The Fish Family Trust then
refiled the suit in the Superior Court of San Diego County, California seeking
remedies similar to the Federal District Court dismissed action.
The Company obtained its rights to the basic ShBoom technology in 1994 pursuant
to an Assets Purchase Agreement and Plan of Reorganization between the Company,
nanoTronics Corporation and Helmut Falk. The basic ShBoom technology was
purchased by nanoTronics from the Fish Family Trust in 1991 pursuant to a Stock
Purchase and Technology Transfer Agreement.
F-32
<PAGE> 76
================================================================================
Until the completion of the resale of the common stock included in this
prospectus, all dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
Table of Contents
<TABLE>
<S> <C>
Prospectus Summary .................................................... 3
Risk Factors .......................................................... 5
Plan of Distribution .................................................. 10
Selling Shareholders .................................................. 11
The Company ........................................................... 13
Litigation ............................................................ 26
Management's Discussion and
Analysis of Financial Condition
and Results of Operations .......................................... 27
Management ............................................................ 31
Principal Shareholders ................................................ 37
Certain Transactions .................................................. 38
Trading Market and Related
Matters ............................................................ 39
Description of Securities ............................................. 40
Legal Matters ......................................................... 41
Experts ............................................................... 41
Index to Financial Statements ......................................... F-1
</TABLE>
The Resale of
13,238,223 Shares
of
Common Stock
Offered by
Selling Shareholders
PATRIOT SCIENTIFIC
CORPORATION
PROSPECTUS
April 14, 1999
================================================================================
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to the Company's Certificate of Incorporation, and as permitted
by Section 145 of the General Corporation Law of Delaware, the Company may
indemnify its directors and officers under certain circumstances against
reasonable expenses (including court costs and attorney's fees), judgments,
penalties, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which any of them is a party by
reason of his being a director, officer, employee, or agent of the Company if it
is determined that he acted in accordance with the applicable standard of
conduct set forth in such statutory provisions. Thus, the indemnification
provisions will protect officers and directors from liability only if the
officer or director meets the applicable standard of conduct and the Company has
the financial ability to honor the indemnity.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable in connection with the registration and distribution of
the securities being registered hereunder, all of which will be borne by the
Registrant, are as follows:
<TABLE>
<S> <C>
Registration Fee - Securities and Exchange Commission ... $ 1,325
Printing and Engraving .................................. 1,000*
Legal Fees and Expenses ................................. 25,000*
Accounting Fees ......................................... 10,000*
Blue Sky Fees and Expenses .............................. 1,000*
Total ........................................... $38,325*
</TABLE>
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information with respect to all common
stock, $.00001 par value, of the Registrant sold by it within the three-year
period preceding the date of this Registration Statement:
(a) The Registrant offered and sold the following described
securities, either for cash or in consideration of services rendered as
indicated below, without registration under the Securities Act of 1933, as
amended; and exemption for such sales from registration under the Act is claimed
in reliance upon the exemption provided by Section 4(2) thereof on the basis
that such offers and sales were transactions not involving any public offering.
Appropriate precautions against transfer have been taken, including the placing
of a restrictive legend on all certificates evidencing such securities. All such
sales were effected without the aid of underwriters, and no sales commissions
were paid.
<TABLE>
<CAPTION>
Number of Common Aggregate Purchase Price Per
Date of Sale Shares Purchase Price Share
------------ ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
5/29/96 500,000(1) $ 250,000 $.50 Cash
12/4/98 100,000 25,000 .25 Cash
12/16/98 100,000 23,000 .23 Cash
1/6/99 130,435 30,000 .23 Cash
2/5/99 250,000 87,500 .35 Cash
2/11/99 279,326 94,970 .34 Services
=========================================================================
</TABLE>
i
<PAGE> 78
(1) This reflects exercise of warrants granted as a portion of a unit sold at
$.50 per unit, each consisting of one share of common stock and one warrant to
purchase an additional share of common stock at a price of $.50 per share.
(b) On February 29, 1996, the Registrant offered and sold for cash an
aggregate of 253,166 shares of common stock at a price of $1.58 per share to a
limited number of investors (all but one of whom already were shareholders of
the Registrant), as well as warrants to purchase an additional 253,166 common
shares at a price of $1.58 per share. During May 1996, such warrants were
exercised resulting in the issuance of 126,583 common shares, and in August 1996
the remaining warrants were exercised. Also in August of 1996, 25,000 warrants
granted with a manufacturing agreement were exercised at a price of $1.58 per
share.
(c) In November 1996, the Company issued 431,297 shares of common
stock at $1.04 per share, in December 1996, the Company issued 933,622 shares at
$0.85 to $1.08 per share; and in February 1997, the Company issued 160,184
shares at $1.27 per share. All of such issuances resulted from the conversion of
6% convertible subordinated notes and accrued interest thereon aggregating
$1,517,015. These securities were offered and sold without registration under
the Securities Act of 1933, as amended, and exemption for such sales from
registration under the Act is claimed in reliance upon the exemption provided by
Rule 903 of Regulation S thereunder on the basis that such offers and sales were
made in offshore transactions to persons who were not "U.S. Persons" as defined
in Rule 902 of Regulation S. Appropriate precautions were taken against transfer
into the United States or to any "U.S. Person" during the applicable restricted
period, including the placing of a restrictive legend on all certificates
issued. All such sales were effected without the aid of underwriters, and no
sales commissions were paid.
(d) On January 8, 1997, the Company issued 1,272,068 common shares to
56 persons in connection with the acquisition of Metacomp, Inc. pursuant to an
Exchange Offer and Letter of Transmittal dated December 4, 1996. The effective
date of the acquisition was December 26, 1996. The closing price of the common
shares on December 26, 1996 was $1.375 per share, resulting in aggregate
consideration of $1,749,094. These common shares were issued without
registration under the Securities Act of 1933, as amended, pursuant to the
exemption provided by Regulation D on the ground that such transactions did not
involve any public offering. Appropriate precautions against transfer have been
taken, including the placing of a restrictive legend on all certificates
evidencing such securities. Such shares were issued without the aid of
underwriters, and no sales commissions were paid.
(e) During the period of November 1997 through September 1998, the
Company issued 6,069,345 common shares to two investors pursuant to 5%
convertible debentures aggregating $3,000,000 and the accrued interest thereon.
The per share price for the conversions ranged from $.395 to $1.202. In addition
to the principal, $98,977 of interest was converted into common shares. In
September and October 1998, one of the investors exercised a warrant to purchase
555,000 shares of the Company's common stock at an exercise price of $.36036 per
share. The securities were registered for resale on Forms S-3 which became
effective in September and November 1997.
ITEM 27. EXHIBITS.
The Exhibits to this Registration Statement are listed in the Exhibit
Index commencing at page EX-1 hereof.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a
ii
<PAGE> 79
fundamental change in the information in this Registration Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this registration, or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment to this Registration Statement any of the securities being registered
which remain unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the General Corporation Law of Delaware, the Certificate
of Incorporation, or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in such Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or person controlling the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or person controlling the Registrant in connection with any
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on the date below.
DATED: April 14, 1999 PATRIOT SCIENTIFIC CORPORATION
By: /s/ LOWELL W. GIFFHORN
-----------------------------
Lowell W. Giffhorn
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ JAMES T. LUNNEY President, Director, Chief April 14, 1999
- --------------------------------- Executive Officer
James T. Lunney
/S/ LOWELL W. GIFFHORN Chief Financial Officer, April 14, 1999
- --------------------------------- Principal Financial Officer
Lowell W. Giffhorn and Principal Accounting
Officer
/S/ ELWOOD G. NORRIS Chairman and Director April 14, 1999
- ---------------------------------
Elwood G. Norris
</TABLE>
iii
<PAGE> 80
<TABLE>
<S> <C> <C>
/S/ HELMUT FALK, JR. Director April 14, 1999
- ---------------------------------
Helmut Falk, Jr.
/S/ DONALD BERNIER Director April 14, 1999
- ---------------------------------
Donald Bernier
/S/ RICHARD G. BLUM Director April 14, 1999
- ---------------------------------
Richard G. Blum
/S/ FREDERICK G. THIEL Director April 14, 1999
- ---------------------------------
Frederick G. Thiel
</TABLE>
iv
<PAGE> 81
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under The Securities Act of 1933
EXHIBITS
PATRIOT SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
EX - 1
<PAGE> 82
EXHIBIT INDEX
PATRIOT SCIENTIFIC CORPORATION
The following exhibits are included as part of this registration
statement, except those exhibits marked (1), which have previously been filed
with the Securities and Exchange Commission and are incorporated by reference to
another registration statement, report or document. References to the "Company"
in this Exhibit Index mean PATRIOT SCIENTIFIC CORPORATION, a Delaware
corporation.
<TABLE>
<CAPTION>
Exhibit 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 3.3 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)
</TABLE>
EX - 2
<PAGE> 83
<TABLE>
<CAPTION>
Exhibit No. Document No.
- ----------- -------- ---
<S> <C> <C>
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 3.4 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 3.5 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 3.6 to Form
8-K dated May 12, 1992 (1)
3.7 Bylaws of the Company, incorporated by reference to Exhibit 3.7
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)
</TABLE>
EX - 3
<PAGE> 84
<TABLE>
<CAPTION>
Exhibit No. Document No.
- ----------- -------- ---
<S> <C> <C>
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 incorporated
by reference to Exhibit 4.9 to Form 10-KSB for the fiscal year
ended May 31, 1998 (1)
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
described in Exhibit 4.9 incorporated by reference to Exhibit
4.10 to Form 10-KSB for the year ended May 31, 1998 (1)
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 described in Exhibit 4.9
incorporated by reference to Exhibit 4.11 to Form 10-KSB for the
year ended May 31, 1998 (1)
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 incorporated by reference
to Exhibit 4.12 to Form 10-KSB for the year ended May 31, 1998 (1)
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 incorporated by reference to Exhibit 4.13 to
Form 10-KSB for the year ended May 31, 1998 (1)
4.14 Investment Agreement dated February 24, 1999 by and between the
Company and Swartz Private Equity, LLC for a maximum aggregate
amount of $5,000,000 incorporated by reference to Exhibit 4.14 to
Form 10-QSB/A for the fiscal quarter ended November 30, 1998 (1)
4.15 Registration Rights Agreement dated February 24, 1999 by and
between the Company and Swartz Private Equity, LLC related to the
registration of the common stock related to Exhibit 4.14
incorporated by reference to Exhibit 4.15 to Form 10-QSB/A for
the fiscal quarter ended November 30, 1998 (1)
</TABLE>
EX - 4
<PAGE> 85
<TABLE>
<CAPTION>
Exhibit No. Document No.
- ----------- -------- ---
<S> <C> <C>
4.16 Form of Warrant to Purchase Common Stock (Swartz Private Equity,
LLC) dated February 24, 1999 exercisable to purchase common shares
in connection with the offering of securities in Exhibit 4.14
incorporated by reference to Exhibit 4.16 to Form 10-QSB/A for
the fiscal quarter ended November 30, 1998 (1)
5.0 OPINION RE LEGALITY.
5.1 Legal opinion of Luce, Forward, Hamilton & Scripps LLP,
attorneys at law (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
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
February 29, 1996 (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 February 29, 1996 (1)
10.8 Distribution and Representation Agreement dated February 28,
1996, between the Company and Innoware, Inc., incorporated by
reference to Exhibit 10.8 to Form 10-QSB for fiscal quarter ended
February 29, 1996 (1)
</TABLE>
EX - 5
<PAGE> 86
<TABLE>
<CAPTION>
Exhibit No. Document No.
- ----------- -------- ---
<S> <C> <C>
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 Exhibit
10.11.1 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 Exhibit 10.12 to
Pre-Effective Amendment No. 2 to Registration Statement on Form
SB-2 dated May 23, 1996 (1)
10.13 1996 Stock Option Plan of the Company dated March 25, 1996 and
approved by the Shareholders on May 17, 1996, incorporated by
reference to Exhibit 10.13 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 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 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)
</TABLE>
EX - 6
<PAGE> 87
<TABLE>
<CAPTION>
Exhibit No. Document No.
- ----------- -------- ---
<S> <C> <C>
10.19 Employment Agreement dated March 23, 1998 between the Company and
James T. Lunney incorporated by reference to Exhibit 10.19 to
Form 10-KSB for the fiscal year ended May 31, 1998 (1)
10.20 Employment Agreement dated July 28, 1997 between the Company and
Phillip Morettini incorporated by reference to Exhibit 10.20 to
Form 10-KSB for the fiscal year ended May 31, 1998 (1)
10.21 Employment Agreement dated July 23, 1997 between the Company and
Lowell W. Giffhorn incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998 (1)
23.0 CONSENTS OF EXPERTS AND COUNSEL.
23.1 Consent of BDO Seidman, LLP (2)
23.2 Consent of Luce, Forward, Hamilton & Scripps LLP, attorneys at
law (included in Exhibit 5.1) (2)
23.3 Consent of Harlan & Boettger, LLP, Certified Public Accountants (2)
99.0 ADDITIONAL EXHIBITS.
99.1 Form of ISO Plan Option (Gaspar) dated May 29, 1992, incorporated
by reference to Exhibit 28.2 to registration statement on Form
SB-2, file no. 33-57858 (1)
99.2 Form of NSO Plan Option (Berlin) dated May 29, 1992, incorporated
by reference to Exhibit 28.3 to registration statement on Form
SB-2, file no. 33-57858 (1)
99.3 Form of Incentive Stock Option Agreement to the Company's 1996
Stock Option Plan (individual agreements differ as to number of
shares, dates, prices and vesting), incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on Form
SB-2 dated May 23, 1996 (1)
99.4 Form of NonQualified Stock Option Agreement to the Company's
1996 Stock Option Plan (individual agreement differ as to number
of shares, date, prices and vesting), incorporated by reference
to Pre-Effective Amendment No. 2 to Registration Statement on
Form SB-2 dated May 23, 1996 (1)
99.5 Press Release of the Company dated November 4, 1996 incorporated
by reference to Exhibit 99.5 to Form 8-K dated January 9, 1997 (1)
</TABLE>
- ----------------
(1) Previously filed in indicated registration statement or report.
(2) Exhibit filed herewith this Registration Statement on Form SB-2.
EX - 7
<PAGE> 1
EXHIBIT 5.1
(Luce, Forward, Hamilton & Scripps, LLP Letterhead)
April 14, 1999
Patriot Scientific Corporation
10989 Via Frontera
San Diego, California 92127
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We are counsel for Patriot Scientific Corporation, a Delaware corporation
("Patriot"), in connection with the preparation of a Registration Statement on
Form SB-2 of which this opinion is a part, to be filed with the Securities and
Exchange Commission (the "Commission"), for the sale by certain selling
shareholders (the "Selling Shareholders") of 13,238,223 shares of Patriot's
common stock (the "Common Stock").
In connection with rendering our opinion as set forth below, we have reviewed
and examined originals or copies of such corporate records and other documents
and have satisfied ourselves as to such other matters as we have deemed
necessary to enable us to express our opinion hereinafter set forth.
Based upon the foregoing, it is our opinion that:
The shares of Common Stock being registered for the account of the Selling
Shareholders have been validly issued, and are fully paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ LUCE, FORWARD, HAMILTON & SCRIPPS LLP
EX - 8
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
San Diego, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated July 17, 1998 relating to the
consolidated financial statements of Patriot Scientific Corporation, which is
contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
Denver, Colorado
April 14, 1999
EX - 9
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Patriot Scientific Corporation
San Diego, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated December 17, 1996 relating to the
financial statements of Metacomp, Inc., which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ HARLAN & BOETTGER, LLP
San Diego, California
April 14, 1999
EX - 10
