<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
[X] AMENDMENT NO. 1 TO QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended November 30,
1998
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the
transition period from _____________ to _______________
Commission File Number 0-22182
PATRIOT SCIENTIFIC CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 84-1070278
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
10989 Via Frontera, San Diego, California 92127
(Address of principal executive offices)
(619) 674-5000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.00001 par value 40,534,589
- ------------------------------- ----------
(Class) (Outstanding at January 12, 1999)
Transitional Small Business Disclosure Format (check one): YES ___ NO [X]
<PAGE> 2
PATRIOT SCIENTIFIC CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of November 30, 1998 (unaudited)
and May 31, 1998 3
Consolidated Statements of Operations for the six months and three
months ended November 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
November 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
</TABLE>
* No information provided due to inapplicability of the item.
2
<PAGE> 3
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
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, 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
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.
3
<PAGE> 4
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 income (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.
4
<PAGE> 5
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.
5
<PAGE> 6
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 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 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 earnings (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 earnings (loss) per share because
the Company is currently negotiating whether they will 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 earnings (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 earnings (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"). 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.
6
<PAGE> 7
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 15% to 25% 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. Because of the recent issuance of the standard,
management has been unable to fully evaluate the impact, if any, the standard
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of the
standard.
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
7
<PAGE> 8
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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.
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 Dollars
<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. 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 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.
8
<PAGE> 9
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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. 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."
9
<PAGE> 10
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING,
"FUTURE PERFORMANCE AND RISK FACTORS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1998.
The Company's results of operations have and may continue to be subject to
significant quarterly variation. The results for a particular quarter may vary
due to a number of factors, including the overall state of the microprocessor
and communications segments of the economy, the development status and demand
for the Company's products, economic conditions in the Company's markets, the
timing of orders, the timing of expenditures in anticipation of future sales,
the mix of products sold by the Company, the introduction of new products and
product enhancements by the Company or its competitors and pricing and other
competitive conditions.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
Net sales. Total net sales for the second quarter of fiscal 1999 decreased 43.5%
to $230,905 from $408,856 for the second quarter of fiscal 1998. This decrease
was due primarily to rescheduling the product delivery on the Company's $3.3
million kiosk application order coupled with a reduction in follow on shipments
for the Company's 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 to replace the maturing
products. The balance of the kiosk order is scheduled to be shipped during the
remainder of fiscal year 1999.
Cost of sales. Cost of sales as a percentage of net sales increased to 82.5% for
the second quarter of fiscal 1999 compared to 44.9% for the corresponding
quarter of the previous fiscal year. This increase is due in part to lower
profit margins on the Company's $3.3 million kiosk application order compared to
profit margins typically associated with the Company's other product lines. The
remainder of the kiosk order, which is scheduled to be shipped during the
balance of fiscal year 1999, is anticipated to put upward pressure on the cost
of sales as a percentage of net sales for the current fiscal year when compared
to corresponding periods of the previous fiscal year. In addition, the fixed
production costs being allocated over a reduced sales base during the second
quarter of fiscal 1999 resulted in additional upward pressure on the cost of
sales as a percentage of sales.
Research and development expenses remained substantially the same at $453,497
for the second fiscal quarter of 1999 compared to $452,489 for the second fiscal
quarter of 1998.
Selling, general and administrative expenses decreased by 27.5% from $710,246
for the second quarter of fiscal 1998 to $514,904 for the second quarter of
fiscal 1999. This decrease was due primarily to a $375,000 reduction in 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 offset by an increase in
legal fees during the second quarter of fiscal 1999. When and if the additional
4,500,000 escrowed shares are released, selling, general and administrative
expenses would be impacted significantly.
Other income (expense) was significantly lower for the second quarter of fiscal
1999 as a result of the non-cash interest related to discounted notes discussed
in Note 5 to the consolidated financial statements and the interest on the same
notes.
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 period of fiscal 1998. This
decrease was due primarily to rescheduling the product delivery on the Company's
$3.3 million kiosk application order coupled with a reduction in follow on
shipments for the Company's matured communication products several of which are
approaching the end of their life cycles.
11
<PAGE> 12
Development and sales of new communications products have not achieved a level
to replace the maturing products. The balance of the kiosk order is scheduled to
be shipped during the remainder of fiscal year 1999.
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 Company's $3.3 million kiosk application order compared to profit
margins typically associated with the Company's other product lines. The
remainder of the kiosk order, which is scheduled to be shipped during the
balance of fiscal year 1999, is anticipated to put upward pressure on the cost
of sales as a percentage of net sales for the current fiscal year when compared
to corresponding periods of the previous fiscal year.
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% from $1,361,865
for the six months ended November 30, 1998 compared to $917,675 for the
corresponding period of the previous fiscal year. This decrease was due
primarily to a reduction in 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 discussed above coupled with a reduction in compensation expenses.
Other income (expense) was significantly lower for the six months ended November
30, 1998 compared to the corresponding period for the previous fiscal year as a
result of the non-cash interest related to discounted notes discussed in Note 5
to the consolidated financial statements and the interest on the same notes.
LIQUIDITY AND CAPITAL RESOURCES
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. Cash and cash
equivalents decreased $563,101 during the six months ended November 30, 1998.
The net cash used in operating activities was $689,278, additions to property
and equipment were $273,096, and funds generated from debt and equity financings
were $399,273. During the six months ended November 30 1998, accounts receivable
decreased $223,724 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
increased $828,980 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. The Company did procure several short term notes and established an
accounts receivable line of credit with its bank during the second fiscal
quarter of 1999 totaling $194,410.
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.
The Company anticipates that it may require additional equipment, fabrication,
components and supplies during the next twelve months to continue development of
the Company's technologies. Product introductions such as those currently
underway for communication products and the PSC1000 may require significant
inventory, product launch, marketing personnel and other expenditures not
presently estimable by management. Further, if expanded development is commenced
or new generations of microprocessors or radar are accelerated beyond current
plans, additional expenditures, not currently estimable by management, may be
required. It is possible therefore, that higher levels of expenditures may be
required than currently contemplated by management resulting from changes in
development plans or as required to support new developments or
commercialization activities or otherwise.
Based on the current fiscal year's rate of cash operating expenditures and
current plans, management anticipates 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 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
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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.
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 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of the standard,
management has been unable to fully evaluate the impact, if any, the standard
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of the
standard.
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.
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 the 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 the company's business and results
of operations.
The Company adopted a formal plan to evaluate its readiness for the Year 2000
and address any deficiencies. The plan encompasses 1) information technology
(IT) systems, 2) non-IT systems, 3) Company products, and 4) systems of third
parties, including distributors and key suppliers.
INFORMATION TECHNOLOGY: The Company's principal computer systems that
it uses for financial accounting, manufacturing, inventory control, purchasing,
sales administration, engineering, and other business functions have been
determined to not be Year 2000 compliant. The Company has identified a
replacement system that it will purchase, install, and have fully functional
before June 30, 1999. The cost of this new system will be approximately $30,000.
13
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NON-IT SYSTEMS: By the end of the second quarter of 1999, the Company
expects 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.
COMPANY PRODUCTS: The Company has completed a series of tests,
utilizing industry standards, of the electronics systems of its products,
including those product lines no longer being manufactured but remaining in use
at customer sites, and has determined that the products should continue to
operate according to specification after December 31, 1999.
KEY VENDORS AND SUPPLIERS: The Company will initiate a survey of its
key vendors and suppliers to assess their plans for bringing any non-compliant
systems into Year 2000 compliance. Such study is expected to be completed by the
end of the second calendar quarter of 1999.
Other than the replacement computer system discussed above, substantially all of
the effort to evaluate the Company's Year 2000 readiness has been made using
internal personnel, and therefore incremental expenses have been less than
$50,000. The Company has not incurred any material expenses in connection with
its evaluation of non-IT systems, and does not expect material expense in the
future, although the evaluation of non-IT systems is not yet complete. The
Company has not incurred any material expenses to date in connection with the
evaluation of its products and the status of its vendors and suppliers with
respect to Year 2000 issues, and does not anticipate material expenses in the
future, although the evaluation of key vendors' and suppliers' Year 2000
readiness is not yet complete.
Efforts on the Company's Year 2000 readiness plan, as well as its consideration
of contingency plans, are ongoing and will continue to evolve as new information
becomes available. At this stage of the process, the Company believes that it is
difficult to identify the cause of the most reasonably likely worst case Year
2000 scenario. The Company has not yet adopted any formal contingency plans, and
will determine the need for such plans as part of its 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 there will not be material adverse effects on the
Company's business or its results from operations.
FUTURE PERFORMANCE AND RISK FACTORS
THIS REPORT CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECTS THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE
SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE SUMMARIZED BELOW.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES
NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS, TO REFLECT
EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS REPORT.
Since the business combination with Metacomp, effective December, 1996, the
Company has segregated its operations into microprocessor, communication, and
radar/antenna segments. However, synergistic technical and other resources can
and will be deployed across all three segments.
Product revenues have been primarily from the communication segment. The
communication products are specifically designed to fill both the high speed
data as well as the video conferencing requirements of the Internet.
The microprocessor continues to be the Company's primary development focus. The
Company has completed development of a 0.35 micron version of the PSC1000 which
has resulted in increased processing speed and performance. In addition, the
Company is running the Sun Microsystems's Java OS on the PSC1000. The PSC1000
executes Java very efficiently, and is the price/performance leader in the Java
processor marketplace. This enhancement is expected to increase potential market
opportunities in areas such as TV set top boxes, smart phones, PDAs, network
computers, and other Internet related products.
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<PAGE> 15
The Company's primary focus for the radar and antenna technology segment
continues to be to pursue various government agencies and commercial entities to
fund additional development efforts and to establish business partnerships that
will enable the Company to commercialize this technology. The Company recently
completed the first phase of a development contract and has submitted a proposal
for additional funding to the Navy to continue development of the gas antenna.
The Company is focusing its sales efforts on original equipment manufacturers,
system integrators, and Internet service providers for both the microprocessor
and communication segments. In addition, the Company anticipates using the
microprocessor in existing and future products developed in all three product
segments.
The Company has experienced in the past and may experience in the future many of
the problems, delays and expenses encountered by any business in the early
stages of development, some of which are beyond the Company's control. The
Company has a limited operating history, has incurred significant cumulated
losses, has only recently commenced marketing and sales of its products and has
not achieved a profitable level of operations. There can be no assurance of
future profitability. The Company may require additional funds in the future for
operations or to exploit its technologies. There can be no assurance that any
funds required during the next twelve months or thereafter can be generated from
operations or that such required funds will be available from the aforementioned
or other potential sources. The lack of additional capital could force the
Company to substantially curtail or cease operations and could 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. The Company's technologies are in various
stages of development. The Company's communication products have been developed
to the point of production of marketable product and the PSC1000 is in the first
stages of production. There can be no assurance that any of the technologies in
development can be completed to commercial exploitation due to the inherent
risks of new technology development, limitations on financing, competition,
obsolescence, loss of key technical personnel and other factors. The Company's
development projects are high risk in nature, where unanticipated technical
obstacles can arise at any time and result in lengthy and costly delays or
result in determination that further development is unfeasible. There can be no
assurance that the technologies, if completed, will achieve market acceptance
sufficient to sustain the Company or achieve profitable operations.
The Company relies primarily on patents to protect its intellectual property
rights. There can be no assurance that patents held by the Company will not be
challenged and invalidated, that patents will issue from any of the Company's
pending applications or that any claims allowed from existing or pending patents
will be sufficient in scope or strength or be issued in all countries where the
Company's products can be sold to provide meaningful protection or commercial
advantage to the Company. Competitors may also be able to design around the
Company's patents.
The Company acquired its ShBoom technology pursuant to a chain of agreements,
and there is uncertainty regarding royalty payments, if any, and indemnification
from prior parties. The Company does not believe it is obligated to pay any
royalties on aspects of the ShBoom technology specified in prior agreements
between nanoTronics Corporation and previous inventors. The Company believes,
should there be royalties due to previous inventors, that the obligation is that
of nanoTronics. The Company could become subject to unindemnified claims
relating to any failure by nanoTronics to pay such royalties, if due. Also the
Company could become liable for up to $1,250,000 to nanoTronics under certain
indemnification provisions. The Company has recently been named as a defendant
in a law suit filed by one of the previous inventors. The Company is unable at
this time to determine the eventual outcome of this suit. The Company's
Consolidated Financial Statements do not include any adjustments that might
result from the outcome of this uncertainty. See "Legal Proceedings."
The Company's common shares are traded on the OTC Bulletin Board, are thinly
traded and are subject to special regulations imposed on "penny stocks." The
Company's shares may experience significant price and volume volatility,
increasing the risk of ownership to investors.
15
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exh. No. Document
4.14 Investment Agreement dated February 24, 1999 by and between the Company
and Swartz Private Equity LLC for an maximum aggregate amount of
$5,000,000.
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.
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.
27 Financial Data Schedule
(b) Reports on Form 8-K - NONE
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PATRIOT SCIENTIFIC CORPORATION
Date: March 5, 1999 By: /s/ LOWELL W. GIFFHORN
------------------------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
16
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================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO FORM 10-QSB/A
AMENDMENT NO. 1 TO QUARTERLY REPORT
UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For second quarter ended November 30, 1998 Commission File No. 0-22182
PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)
================================================================================
EX- 1
<PAGE> 18
EXHIBIT INDEX
Exh. No. Document
- -------- --------
4.14 Investment Agreement dated February 24, 1999 by and between the
Company and Swartz Private Equity LLC for an maximum aggregate
amount of $5,000,000.
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.
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.
27 Financial Data Schedule
EX- 2
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10Q-SB/A
Amendment No. 1 to Quarterly Report
EXHIBIT NO. 4.14
Investment Agreement
EX- 3
<PAGE> 2
PATRIOT SCIENTIFIC CORP.
INVESTMENT AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES AUTHORITIES. THEY
MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE FEDERAL AND STATE SECURITIES LAWS.
THIS INVESTMENT AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED
HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED
BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH AUTHORITIES
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. THE
INVESTOR MUST RELY ON ITS OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF
THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH IN THE ATTACHED
DISCLOSURE DOCUMENTS AS EXHIBIT J.
SEE ADDITIONAL LEGENDS AT SECTIONS 4.7.
THIS INVESTMENT AGREEMENT (this "Agreement") is made as of the 24th
day of February, 1999, by and between Patriot Scientific Corp., a corporation
duly organized and existing under the laws of the State of Delaware (the
"Company"), and the undersigned Investor executing this Agreement ("Investor").
RECITALS:
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue to the Investor, and the
Investor shall purchase from the Company, from time to time as provided herein,
shares of the Company's Common Stock, par value $0.00001 per share (the "Common
Stock"), as part of an offering of Common Stock by the Company to Investor, for
a maximum aggregate offering amount of Five Million Dollars ($5,000,000) (the
"Maximum Offering Amount"); and
WHEREAS, the solicitation of this Investment Agreement and, if accepted by
the Company, the offer and sale of the Common Stock are being made in reliance
upon the provisions of
EX- 4
<PAGE> 3
Regulation D ("Regulation D") promulgated under the Securities Act of 1933, as
amended (the "Act"), and/or upon such other exemption from the registration
requirements of the Act as may be available with respect to any or all of the
purchases of Common Stock to be made hereunder.
TERMS:
NOW, THEREFORE, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement (including the
recitals above), the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"20% Approval" shall have the meaning set forth in Section 5.26.
"AAA" shall have the meaning set forth in Section 7.8.
"Accredited Investor" shall have the meaning set forth in Section 3.1.
"Act" shall mean the Securities Act of 1933, as amended.
"Advance Put Notice" shall have the meaning set forth in Section 2.3.1(a),
the form of which is attached hereto as Exhibit E.
"Advance Put Notice Confirmation" shall have the meaning set forth in
Section 2.3.1(a), the form of which is attached hereto as Exhibit F.
"Advance Put Notice Date" shall have the meaning set forth in Section
2.3.1(a).
"Affiliate" shall have the meaning as set forth Section 6.5.
"Aggregate Issued Shares" equals the aggregate number of shares of Common
Stock issued to Investor pursuant to the terms of this Agreement or the
Registration Rights Agreement as of a given date, including Put Shares and
Warrant Shares.
"Agreed Upon Procedures Report" shall have the meaning set forth in
Section 2.6.3(b).
"Agreement" shall mean this Investment Agreement.
"Automatic Termination" shall have the meaning set forth in Section 2.3.2.
"Bid Price" shall mean the bid price of the Common Stock on the Company's
Principal Market.
"Bring Down Cold Comfort Letters" shall have the meaning set forth in
Section 2.3.6(b).
"Business Day" shall mean any day during which the Principal Market is
open for business.
EX- 5
<PAGE> 4
"Calendar Month" shall mean the period of time beginning on the numeric
day in question in a calendar month (the "Numeric Day") and for Calendar Months
thereafter, beginning on the earlier of (i) the same Numeric Day of the next
calendar month or (ii) the last day of the next calendar month. Each Calendar
Month shall end on the day immediately preceding the beginning of the next
succeeding Calendar Month.
"Cap Amount" shall have the meaning set forth in Section 2.3.11.
"Capital Raising Limitations" shall have the meaning set forth in Section
6.6.1.
"Capitalization Schedule" shall have the meaning set forth in Section
3.2.4, attached hereto as Exhibit K.
"Closing" shall mean one of (i) the Investment Commitment Closing and (ii)
each closing of a purchase and sale of Common Stock pursuant to Section 2.
"Closing Bid Price" means, for any security as of any date, the last
closing bid price for such security on the O.T.C. Bulletin Board, or, if the
O.T.C. Bulletin Board is not the principal securities exchange or trading market
for such security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by such principal securities exchange or trading market, or if the
foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security, or,
if no closing bid price is reported for such security, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as mutually determined by the Company and the Investor in this Offering. If the
Company and the Investor in this Offering are unable to agree upon the fair
market value of the Common Stock, then such dispute shall be resolved by an
investment banking firm mutually acceptable to the Company and the Investor in
this offering and any fees and costs associated therewith shall be paid by the
Company.
"Commitment Evaluation Period" shall have the meaning set forth in Section
2.7.
"Common Shares" shall mean the shares of Common Stock of the Company.
"Common Stock" shall mean the common stock of the Company, par value
$0.00001 per share.
"Company" shall mean Patriot Scientific Corp., a corporation duly
organized and existing under the laws of the State of Delaware.
"Company Designated Maximum Put Dollar Amount" shall have the meaning set
forth in Section 2.3.1(a).
EX- 6
<PAGE> 5
"Company Designated Minimum Put Share Price" shall have the meaning set
forth in Section 2.3.1(a).
"Company Termination" shall have the meaning set forth in Section 2.3.14.
"Conditions to Investor's Obligations" shall have the meaning as set forth
in Section 2.2.4.
"Delisting Event" shall mean any time during the term of this Investment
Agreement, that the Company's Common Stock is not listed for and actively
trading on the O.T.C. Bulletin Board, the Nasdaq Small Cap Market, the Nasdaq
National Market, the American Stock Exchange, or the New York Stock Exchange or
is suspended or delisted with respect to the trading of the shares of Common
Stock on such market or exchange.
"Disclosure Documents" shall have the meaning as set forth in Section
3.2.4.
"Due Diligence Review" shall have the meaning as set forth in Section 2.6
"Effective Date" shall have the meaning set forth in Section 2.3.1.
"Evaluation Day" shall have the meaning set forth in Section 2.3.7(b).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Excluded Day" shall have the meaning set forth in Section 2.3.7(b).
"Extended Put Period" shall mean the period of time between the Advanced
Put Notice Date until the Purchase Period End Date.
"Gross Discount Amount," for each Purchase of Put Shares, shall equal the
product of (i) the difference of one minus the quotient obtained when the Put
Share Price for such Purchase is divided by the Market Price for such Purchase,
multiplied by (ii) the Put Dollar Amount paid to the Company by the Investor for
the Put Shares in that Purchase.
"Impermissible Put Cancellation" shall have the meaning set forth in
Section 2.3.1(e).
"Indemnified Liabilities" shall have the meaning set forth in Section 9.
"Indemnities" shall have the meaning set forth in Section 9.
"Indemnitor" shall have the meaning set forth in Section 9.
"Individual Put Limit" shall have the meaning set forth in Section 2.3.1
(b).
"Ineffective Period" shall mean any period of time that the Registration
Statement or any Supplemental Registration Statement (each as defined in the
Registration Rights Agreement) becomes ineffective or unavailable for use for
the sale or resale, as applicable, of any or all of the
EX- 7
<PAGE> 6
Registrable Securities (as defined in the Registration Rights Agreement) for any
reason (or in the event the prospectus under either of the above is not current
and deliverable) during any time period required under the Registration Rights
Agreement.
"Intended Put Share Amount" shall have the meaning set forth in Section
2.3.1(a).
"Investment Commitment Closing" shall have the meaning set forth in
Section 2.2.3.
"Investment Agreement" shall mean this Investment Agreement.
"Investment Commitment Opinion of Counsel" shall mean an opinion from
Company's independent counsel, substantially in the form attached as Exhibit B,
or such other form as agreed upon by the parties, as to the Investment
Commitment Closing.
"Investment Date" shall mean the date of the Investment Commitment
Closing.
"Investor" shall have the meaning set forth in the preamble hereto.
"Key Employee" shall have the meaning set forth in Section 5.18, as set
forth in Exhibit N. "Late Payment Amount" shall have the meaning set forth in
Section 2.3.8.
"Legend" shall have the meaning set forth in Section 4.7.
"Major Transaction" shall mean and shall be deemed to have occurred at
such time upon any of the following events:
(i) a consolidation, merger or other business combination or event
or transaction following which the holders of Common Stock of the Company
immediately preceding such consolidation, merger, combination or event either
(i) no longer hold a majority of the shares of Common Stock of the Company or
(ii) no longer have the ability to elect the board of directors of the Company
(a "Change of Control"); provided, however, that if the other entity involved in
such consolidation, merger, combination or event is a publicly traded company
with "Substantially Similar Trading Characteristics" (as defined below) as the
Company and the holders of Common Stock are to receive solely Common Stock or no
consideration (if the Company is the surviving entity) or solely common stock of
such other entity (if such other entity is the surviving entity), such
transaction shall not be deemed to be a Major Transaction (provided the
surviving entity, if other than the Company, shall have agreed to assume all
obligations of the Company under this Agreement and the Registration Rights
Agreement). For purposes hereof, an entity shall have Substantially Similar
Trading Characteristics as the Company if the average daily dollar trading
volume of the common stock of such entity is equal to or in excess of $200,000
for the 90th through the 31st day prior to the public announcement of such
transaction;
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
EX- 8
<PAGE> 7
(iii) a purchase, tender or exchange offer made to the holders of
outstanding shares of Common Stock, such that following such purchase, tender or
exchange offer a Change of Control shall have occurred.
"Market Price" shall equal the lowest intra-day trade price for the Common
Stock on the Principal Market for the six (6) Business Days immediately
preceding the date of the applicable Purchase Notice, provided that, for
purposes of this definition, the lowest intra-day price on an Excluded Day shall
be deemed to equal the Company Designated Minimum Put Share Price for the
applicable Purchase Period if so opted by the Company.
"Material Facts" shall have the meaning set forth in Section 2.3.6(a).
"Maximum Put Dollar Amount" shall mean the lesser of (a) the Company
Designated Maximum Put Dollar Amount, if any, specified by the Company in a Put
Notice, and (ii) $2 million.
"Maximum Offering Amount" shall mean Five Million Dollars ($5,000,000).
"Nasdaq 20% Rule" shall have the meaning set forth in Section 2.3.11.
"NASD" shall have the meaning set forth in Section 6.10.
"NYSE" shall have the meaning set forth in Section 6.10.
"Numeric Day" shall mean the numerical day of the month of the Investment
Date.
"Offering" shall mean the Company's offering of common stock and warrants
issued under this Investment Agreement.
"Officer's Certificate" shall mean a certificate, signed by an officer of
the Company, to the effect that the representations and warranties of the
Company in this Agreement required to be true for the applicable Closing are
true and correct in all material respects and all of the conditions and
limitations set forth in this Agreement for the applicable Closing are
satisfied.
"Opinion of Counsel" shall mean, as applicable, the Investment Commitment
Opinion of Counsel, the Put Opinion of Counsel and the Purchase Warrant Opinion
of Counsel.
"Payment Due Date" shall have the meaning set forth in Section 2.3.8.
"Principal Market" shall mean the Nasdaq Small Cap Market, the O.T.C.
Bulletin Board, the Nasdaq National Market, the American Stock Exchange or the
New York Stock Exchange, whichever is at the time the principal trading exchange
or market for the Common Stock.
"Proceeding" shall have the meaning as set forth Section 5.1.
"Purchase" shall have the meaning set forth in Section 2.3.7(a).
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<PAGE> 8
"Purchase Notice" shall have the meaning set forth in Section 2.3.7(c), in
the form attached as Exhibit P.
"Purchase Notice Date" shall have the meaning set forth in Section
2.3.7(c).
"Purchase Period" shall have the meaning set forth in Section 2.3.7(b).
"Purchase Period End Date" shall mean the last Business Day of any
Purchase Period.
"Purchase Period Extension" shall have the meaning set forth in Section
2.3.7(b).
"Purchase Warrants" shall have the meaning set forth in Section 2.4.2.
"Purchase Warrant Exercise Price" shall have the meaning set forth in
Section 2.4.2.
"Purchase Warrant Opinion of Counsel" shall mean an opinion from Company's
independent counsel, substantially in the form attached as Exhibit O, or such
other form as agreed upon by the parties, as to the issuance of Purchase
Warrants to the Investor.
"Put" shall have the meaning set forth in Section 2.3.1(d).
"Put Cancellation" shall have the meaning set forth in Section 2.3.13(a).
"Put Cancellation Notice Confirmation" shall have the meaning set forth in
Section 2.3.13(c), the form of which is attached hereto as Exhibit S.
"Put Cancellation Date" shall have the meaning set forth in Section
2.3.13(a).
"Put Cancellation Notice" shall have the meaning set forth in Section
2.3.13(a), the form of which is attached hereto as Exhibit Q.
"Put Closing" shall have the meaning set forth in Section 2.3.8.
"Put Closing Date" shall have the meaning set forth in Section 2.3.8.
"Put Date" shall mean the date that is specified by the Company in any Put
Notice for which the Company intends to exercise a Put under Section 2.3.1,
unless the Put Date is postponed pursuant to the terms hereof, in which case the
"Put Date" is such postponed date.
"Put Dollar Amount" shall be determined by multiplying the Put Share
Amount by the Put Share Price with respect to such Put Date, subject to the
limitations herein.
"Put Notice" shall have the meaning set forth in Section 2.3.1(d), the
form of which is attached hereto as Exhibit G.
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"Put Notice Confirmation" shall have the meaning set forth in Section
2.3.1(d), the form of which is attached hereto as Exhibit H.
"Put Opinion of Counsel" shall mean an opinion from Company's independent
counsel, in the form attached as Exhibit I, or such other form as agreed upon by
the parties, as to any Put Closing.
"Put Share Amount" shall have the meaning as set forth Section 2.3.1(b).
"Put Share Price" shall have the meaning set forth in Section 2.3.1(c).
"Put Shares" shall mean shares of Common Stock that are purchased by the
Investor pursuant to a Put.
"Registrable Securities" shall have the meaning as set forth in the
Registration Rights Agreement.
"Registration Opinion" shall have the meaning set forth in Section
2.3.6(a).
"Registration Opinion Deadline" shall have the meaning set forth in
Section 2.3.6(a).
"Registration Rights Agreement" shall mean that certain registration
rights agreement entered into by the Company and Investor on even date herewith,
in the form attached hereto as Exhibit A, or such other form as agreed upon by
the parties.
"Registration Statement" shall have the meaning as set forth in the
Registration Rights Agreement.
"Regulation D" shall have the meaning set forth in the Recitals hereto.
"Reporting Issuer" shall have the meaning set forth in Section 6.2.
"Required Put Documents" shall have the meaning set forth in Section
2.3.5.
"Risk Factors" shall have the meaning set forth in Section 3.2.4, attached
hereto as Exhibit J.
"Schedule of Exceptions" shall have the meaning set forth in Section 5,
and is attached hereto as Exhibit C.
"SEC" shall mean the Securities and Exchange Commission.
"Securities" shall mean this Investment Agreement, together with the
Common Stock of the Company, the Warrants and the Warrant Shares issuable
pursuant to this Investment Agreement.
"Semi-Annual Commitment Shortfall" shall have the meaning set forth in
Section 2.7.
"Share Authorization Increase Approval" shall have the meaning set forth
in Section 5.26.
EX- 11
<PAGE> 10
"Six Month Anniversary" shall mean the date that is the same Numeric Day
of the sixth (6th) calendar month after the Investment Date, and the date that
is the same Numeric Day of each sixth (6th) calendar month thereafter, provided
that if such date is not a Business Day, the next Business Day thereafter.
"Stockholder 20% Approval" shall have the meaning set forth in Section
6.12.
"Supplemental Registration Statement" shall have the meaning set forth in
the Registration Rights Agreement.
"Term" shall mean the term of this Agreement, which shall be a period of
time beginning on the date of this Agreement and ending on the Termination Date.
"Termination Date" shall mean the earlier of (i) the date that is three
(3) years after the date of this Agreement, or (ii) the date that is thirty (30)
Business Days after the later of (a) the Put Closing Date on which the sum of
the aggregate Put Share Price for all Put Shares equal the Maximum Offering
Amount, (b) the date that the Company has delivered a Termination Notice to the
Investor, and (c) the date that all of the Warrants have been exercised.
"Termination Notice" shall have the meaning as set forth in Section
2.3.14.
"Third Party Report" shall have the meaning set forth in Section 3.2.4.
"Transaction Documents" shall have the meaning set forth in Section 9.
"Trigger Price" shall have the meaning set forth in Section 2.3.7(b).
"Truncated Purchase Period" shall have the meaning set forth in Section
2.3.7(b).
"Truncated Put Share Amount" shall have the meaning set forth in Section
2.3.13(b).
"Unlegended Share Certificates" shall mean a certificate or certificates
(in denominations as instructed by Investor) representing the shares of Common
Stock to which the Investor is then entitled to receive, registered in the name
of Investor or its nominee (as instructed by Investor) and not containing a
restrictive legend, including but not limited to the Put Shares for the
applicable Put and Warrant Shares.
"Use of Proceeds Schedule" shall have the meaning as set forth in Section
3.2.4, attached hereto as Exhibit L.
"Variable Priced Securities" shall have the meaning set forth in Section
6.6.1.
"Warrant Shares" shall mean the Common Stock issuable upon exercise of the
Warrants.
"Warrants" shall mean Purchase Warrants.
EX- 12
<PAGE> 11
2. Purchase and Sale of Common Stock.
2.1 Offer to Subscribe.
Subject to the terms and conditions herein and the
satisfaction of the conditions to closing set forth in Sections 2.2 and 2.3
below, Investor hereby agrees to purchase such amounts of Common Stock and
accompanying Warrants as the Company may, in its sole and absolute discretion,
from time to time elect to issue and sell to Investor according to one or more
Puts pursuant to Section 2.3 below.
2.2 Investment Commitment.
2.2.1 [Intentionally Left Blank].
2.2.2 [Intentionally Left Blank].
2.2.3 Investment Commitment Closing. The closing of
this Agreement (the "Investment Commitment Closing") shall be deemed to occur
when this Agreement and the Registration Rights Agreement have been executed by
both Investor and the Company, and the other Conditions to Investor's
Obligations set forth in Section 2.2.4 below have been met.
2.2.4 Conditions to Investor's Obligations. As a
prerequisite to the Investment Commitment Closing and the Investor's obligations
hereunder, all of the following (the "Conditions to Investor's Obligations")
shall have been satisfied prior to or concurrently with the Company's execution
and delivery of this Agreement:
(a) the following documents shall have been
delivered to the Investor: (i) the Registration Rights Agreement, in the form
attached hereto as Exhibit A, or such other form as agreed upon by the parties,
(the "Registration Rights Agreement") (executed by the Company and Investor),
(ii) the Investment Commitment Opinion of Counsel (signed by the Company's
counsel), and (iii) a Secretary's Certificate as to (A) the resolutions of the
Company's board of directors authorizing this transaction, (B) the Company's
Certificate of Incorporation, and (C) the Company's Bylaws;
(b) this Investment Agreement, accepted by
the Company, shall have been received by the Investor;
(c) [Intentionally Left Blank];
(d) the Company's Common Stock shall be
listed for trading and actually trading on the O.T.C. Bulletin Board or the
Nasdaq Small Cap Market;
(e) other than continuing losses described
in the Risk Factors set forth in the Disclosure Documents (provided for in
Section 3.2.4), as of the Closing there
EX- 13
<PAGE> 12
have been no material adverse changes in the Company's business prospects or
financial condition since the date of the last balance sheet included in the
Disclosure Documents, including but not limited to incurring material
liabilities; and
(f) the representations and warranties of
the Company in this Agreement shall be true and correct in all material respects
and the conditions to Investor's obligations set forth in this Section 2.2.4
shall have been satisfied as of such Closing; and the Company shall deliver an
Officer's Certificate, signed by an officer of the Company, to such effect to
the Investor.
2.3 Puts of Common Shares to the Investor.
2.3.1 Procedure to Exercise a Put. Subject to the
Individual Put Limit, the Maximum Offering Amount and the Cap Amount (if
applicable), and the other conditions and limitations set forth in this
Agreement, at any time beginning on the date on which the Registration Statement
is declared effective by the SEC (the "Effective Date"), the Company may, in its
sole and absolute discretion, elect to exercise one or more Puts according to
the following procedure:
(a) Delivery of Advance Put Notice.At least
ten (10) Business Days but not more than twenty (20) Business Days prior to any
intended Put Date (unless otherwise agreed in writing by the Investor), the
Company shall deliver advance written notice (the "Advance Put Notice," the form
of which is attached hereto as Exhibit E, the date of such Advance Put Notice
being the "Advance Put Notice Date") to Investor stating the Put Date for which
the Company shall, subject to the limitations and restrictions contained herein,
exercise a Put and stating the number of shares of Common Stock (subject to the
Individual Put Limit and the Maximum Put Dollar Amount) which the Company
intends to sell to the Investor during the Purchase Period (the "Intended Put
Share Amount").
The Company may, at its option, also designate in an Advance Put Notice
(i) a maximum dollar amount of Common Stock, not to exceed $2,000,000, which it
shall sell to Investor during the Put (the "Company Designated Maximum Put
Dollar Amount") and/or (ii) a minimum purchase price per Put Share at which the
Investor may purchase Shares pursuant to such Put Notice during the related
Purchase Period (a "Company Designated Minimum Put Share Price"). The Company
Designated Minimum Put Share Price shall be no less than X% (as defined in
Section 2.3.1 (c)) of the Closing Bid Price of the Company's common stock on the
Advance Put Notice Date.
Notwithstanding the above, if more than two (2) Calendar Months have
passed since the date of the previous Put Closing, the Company shall deliver the
Advance Put Notice at least twenty (20) Business Days prior to any intended Put
Date, unless waived in writing by the Investor. In order to effect delivery of
the Advance Put Notice, the Company shall (i) send the Advance Put Notice by
facsimile on such date so that such notice is received by the Investor by 6:00
p.m., New York, NY time, and (ii) surrender such notice on such date to a
courier for overnight delivery to the Investor (or two (2) day delivery in the
case of a Investor residing outside of the U.S.). Upon receipt by the Investor
of a facsimile copy of the Advance Put Notice, the Investor shall, within two
(2) Business Days, send, via facsimile, a confirmation of receipt (the "Advance
Put Notice Confirmation," the
EX- 14
<PAGE> 13
form of which is attached hereto as Exhibit F) of the Advance Put Notice to the
Company specifying that the Advance Put Notice has been received and affirming
the intended Put Date and the Intended Put Share Amount.
(b) Put Share Amount. The "Put Share Amount"
is the number of shares of Common Stock that the Investor shall be obligated to
purchase in a given Put, and shall equal the lesser of (i) the Intended Put
Share Amount, and (ii) the Individual Put Limit. The "Individual Put Limit"
shall equal the lesser of (i) 20% of the sum of the daily reported trading
volume in the outstanding Common Stock on the Company's Principal Market during
each Evaluation Day (as defined below) of the Purchase Period, as extended or
shortened under the terms hereof, (ii) the number of Put Shares which, when
multiplied by their respective Put Share Prices, equals the Maximum Put Dollar
Amount, and (iii) 9.9% of the total amount of the Company's Common Stock that
would be outstanding upon completion of the Put.
(c) Put Share Price. The purchase price for
the Put Shares (the "Put Share Price") shall equal the lesser of (i) the Market
Price for such Put, minus $.05, or (ii) X% of the Market Price for such Put
where "X" is defined as follows:
EX- 15
<PAGE> 14
<TABLE>
<S> <C>
Market Price in Effect on the
Date of Purchase Notice "X"
Below $1.00 80%
$1.00 or greater, but less than $2.00 85%
$2.00 or greater 90%
</TABLE>
(d) Delivery of Put Notice. After delivery
of an Advance Put Notice, on the Put Date specified in the Advance Put Notice,
or on the sixth (6th) Business Day following the last day of the previous
Purchase Period, whichever is later, the Company shall deliver written notice
(the "Put Notice," the form of which is attached hereto as Exhibit G) to
Investor stating (i) the Put Date, (ii) the Intended Put Share Amount as
specified in the Advance Put Notice (such exercise a "Put"), (iii) the Company
Designated Maximum Put Dollar Amount (if applicable), and (iv) the Company
Designated Minimum Put Share Price (if applicable). In order to effect delivery
of the Put Notice, the Company shall (i) send the Put Notice by facsimile on the
Put Date so that such notice is received by the Investor by 6:00 p.m., New York,
NY time, and (ii) surrender such notice on the Put Date to a courier for
overnight delivery to the Investor (or two (2) day delivery in the case of a
Investor residing outside of the U.S.). Upon receipt by the Investor of a
facsimile copy of the Put Notice, the Investor shall, within two (2) Business
Days, send, via facsimile, a confirmation of receipt (the "Put Notice
Confirmation," the form of which is attached hereto as Exhibit H) of the Put
Notice to Company specifying that the Put Notice has been received and affirming
the Put Date and the Intended Put Share Amount.
(e) Delivery of Required Put Documents. On
or before the Put Date for such Put, the Company shall deliver the Required Put
Documents (as defined in Section 2.3.5 below) to the Investor (or to an agent of
Investor, if Investor so directs). Unless otherwise specified by the Investor,
the Put Shares of Common Stock shall be transmitted electronically pursuant to
such electronic delivery system as the Investor shall request; otherwise
delivery shall be by physical certificates. If the Company has not delivered all
of the Required Put Documents to the Investor on or before the Put Date, the Put
shall be automatically cancelled, unless the Investor agrees to delay the Put
Date by up to three (3) Business Days, in which case the Purchase Period begins
on the Business Day following such new Put Date. If the Company has not
delivered all of the Required Put Documents to the Investor on or before the Put
Date (or new Put Date, if applicable), and the Investor has not agreed in
writing to delay the Put Date, the Put is automatically canceled (an
"Impermissible Put Cancellation") and, unless the Put was otherwise canceled in
accordance with the terms of Section 2.3.13, the Company shall pay the Investor
$5,000 for its reasonable due diligence expenses incurred in preparation for the
canceled Put and the Company may deliver an Advance Put Notice for the
subsequent Put no sooner than ten (10) Business Days after the date that such
Put was canceled.
2.3.2 Termination of Right to Put. The Company's right
to require the Investor to purchase any subsequent Put Shares shall terminate
permanently (an "Automatic Termination"), unless waived in writing by the
Investor, upon the occurrence of any of the following:
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<PAGE> 15
(a) the Company shall not exercise a Put or
any Put thereafter if, at any time, either the Company or any director or
executive officer of the Company has engaged in a transaction or conduct related
to the Company that gives rise to (i) a Securities and Exchange Commission
enforcement action, or (ii) a civil judgment or criminal conviction for fraud or
misrepresentation, or for any other offense that, if prosecuted criminally,
would constitute a felony under applicable law;
(b) the Company shall not exercise a Put or
any Put thereafter, on any date after a cumulative time period, including both
Ineffective Periods and Delisting Events, that lasts for an aggregate of four
(4) months;
(c) the Company shall not exercise a Put or
any Put thereafter if at any time the Company has filed for and/or is subject to
any bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors instituted by or against the Company or any subsidiary of the Company;
provided that in the event that an involuntary bankruptcy petition is filed
against the Company, the Company shall have sixty (60) days to obtain dismissal
of such petition before such Put prohibition shall initiate; and
(d) the Company shall not exercise a Put
after the sooner of (i) the date that is three (3) years after the date of this
Agreement, or (ii) the Put Closing Date on which the aggregate of the Put Dollar
Amounts for all Puts equal the Maximum Offering Amount.
2.3.3 Put Limitations. The Company's right to exercise
a Put shall be limited as follows, unless waived in writing by the Investor:
(a) [Intentionally Left Blank].
(b) notwithstanding the amount of any Put,
the Investor shall not be obligated to purchase any additional Put Shares once
the aggregate Put Dollar Amount paid by Investor equals the Maximum Offering
Amount;
(c) the Investor shall not be obligated to
acquire and pay for the Put Shares with respect to any Put for which the Company
has announced a subdivision or combination, including a reverse split, of its
Common Stock or has subdivided or combined its Common Stock during the Extended
Put Period;
(d) the Investor shall not be obligated to
acquire and pay for the Put Shares with respect to any Put for which the Company
has paid a dividend of its Common Stock or has made any other distribution of
its Common Stock during the Extended Put Period;
(e) the Investor shall not be obligated to
acquire and pay for the Put Shares with respect to any Put for which the Company
has made, during the Extended Put Period, a distribution of all or any portion
of its assets or evidences of indebtedness to the holders of its Common Stock;
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<PAGE> 16
(f) the Investor shall not be obligated to
acquire and pay for the Put Shares with respect to any Put for which a Major
Transaction has occurred during the Extended Put Period;
2.3.4 Conditions Precedent to the Right of the Company
to Deliver an Advance Put Notice or a Put Notice and the Obligation of the
Investor to Purchase Put Shares. The right of the Company to deliver an Advance
Put Notice or a Put Notice and the obligation of the Investor hereunder to
acquire and pay for the Put Shares incident to a Closing is subject to the
satisfaction, on (i) the date of delivery of such Advance Put Notice or Put
Notice and (ii) the applicable Put Closing Date, of each of the following
conditions, unless waived in writing by the Investor:
(a) the Company's Common Stock shall be
listed for and actively trading on the O.T.C. Bulletin Board, the Nasdaq Small
Cap Market, the Nasdaq National Market or the New York Stock Exchange and the
Put Shares shall be so listed, and to the Company's knowledge there is no notice
of any suspension or delisting with respect to the trading of the shares of
Common Stock on such market or exchange;
(b) the Company shall have satisfied any and
all obligations pursuant to the Registration Rights Agreement, including, but
not limited to, the filing of the Registration Statement with the SEC with
respect to the resale of all Registrable Securities and the requirement that the
Registration Statement shall have been declared effective by the SEC for the
resale of all Registrable Securities and the Company shall have satisfied and
shall be in compliance with any and all obligations pursuant to this Agreement
and the Warrants;
(c) [Intentionally Left Blank].
(d) the representations and warranties of
the Company are true and correct in all material respects as if made on such
date and the conditions to Investor's obligations set forth in this Section
2.3.4 are satisfied as of such Closing, and the Company shall deliver a
certificate, signed by an officer of the Company, to such effect to the
Investor;
(e) the Company shall have reserved for
issuance a sufficient number of Common Shares for the purpose of enabling the
Company to satisfy any obligation to issue Common Shares pursuant to any Put and
to effect exercise of the Warrants;
(f) the Registration Statement is not
subject to an Ineffective Period as defined in the Registration Rights
Agreement, the prospectus included therein is current and deliverable, and to
the Company's knowledge there is no notice of any investigation or inquiry
concerning any stop order with respect to the Registration Statement; and
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<PAGE> 17
(g) if the Aggregate Issued Shares after the
Closing of the Put would exceed the Cap Amount, the Company shall have obtained
the Stockholder 20% Approval as specified in Section 6.12.
2.3.5 Documents Required to be Delivered on the Put
Date as Conditions to Closing of any Put. The Closing of any Put and Investor's
obligations hereunder shall additionally be conditioned upon the delivery to the
Investor of each of the following (the "Required Put Documents") on or before
the applicable Put Date, unless waived or extended in writing by the Investor:
(a) a number of Unlegended Share
Certificates equal to the Intended Put Share Amount, in denominations of not
more than 50,000 shares per certificate;
(b) the following documents: Put Opinion of
Counsel, Officer's Certificate, Put Notice, any required Registration Opinion,
and any report or disclosure required under Section 2.3.6 or Section 2.6;
(c) current Risk Factors; and
(d) all documents, instruments and other
writings required to be delivered on or before the Put Date pursuant to any
provision of this Agreement in order to implement and effect the transactions
contemplated herein.
2.3.6 Accountant's Letter and Registration Opinion.
(a) The Company shall have caused to be
delivered to the Investor, (i) whenever required by Section 2.3.6(b) or by
Section 2.6.3, and (ii) on the date that is three (3) Business Days prior to
each Put Date (the "Registration Opinion Deadline"), an opinion of the Company's
independent counsel, in substantially the form of Exhibit R (the "Registration
Opinion"), addressed to the Investor stating, inter alia, that no facts
("Material Facts") have come to such counsel's attention that have caused it to
believe that the Registration Statement is subject to an Ineffective Period or
to believe that the Registration Statement, any Supplemental Registration
Statement (as each may be amended, if applicable), and any related prospectuses,
contains an untrue statement of material fact or omits a material fact required
to make the statements contained therein, in light of the circumstances under
which they were made, not misleading. If a Registration Opinion cannot be
delivered by the Company's independent counsel to the Investor on the
Registration Opinion Deadline due to the existence of Material Facts or an
Ineffective Period, the Company shall promptly notify the Investor and as
promptly as possible amend each of the Registration Statement and any
Supplemental Registration Statement, as applicable, and any related prospectus
or cause such Ineffective Period to terminate, as the case may be, and deliver
such Registration Opinion and updated prospectus as soon as possible thereafter.
If at any time after a Put Notice shall have been delivered to Investor but
before the related Purchase Period End Date, the Company acquires knowledge of
such Material Facts or any Ineffective Period occurs, the Company shall promptly
notify the Investor and shall deliver a Put Cancellation Notice to the Investor
pursuant to Section 2.3.13 by facsimile and overnight courier by the end of that
Business Day.
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<PAGE> 18
(b) (i) the Company shall engage its
independent auditors to perform the procedures in accordance with the provisions
of Statement on Auditing Standards No. 71, as amended, as agreed to by the
parties hereto, and reports thereon (the "Bring Down Cold Comfort Letters") as
shall have been reasonably requested by the Investor with respect to certain
financial information contained in the Registration Statement and shall have
delivered to the Investor such a report addressed to the Investor, on the date
that is three (3) Business Days prior to each Put Date.
(ii) in the event that the Investor
shall have requested delivery of an "Agreed Upon Procedures Report" pursuant to
Section 2.6.3, the Company shall engage its independent auditors to perform
certain agreed upon procedures and report thereon as shall have been reasonably
requested by the Investor with respect to certain financial information of the
Company and the Company shall deliver to the Investor a copy of such report
addressed to the Investor. In the event that the report required by this Section
2.3.6(b) cannot be delivered by the Company's independent auditors, the Company
shall, if necessary, promptly revise the Registration Statement and the Company
shall not deliver a Put Notice until such report is delivered.
2.3.7 Mechanics of Purchase of Put Shares.
(a) Investor's Obligation and Right to
Purchase Shares. Subject to the conditions set forth in this Agreement,
following the Investor's receipt of a validly delivered Put Notice, the Investor
shall be required to purchase (each a "Purchase") from the Company during the
related Purchase Period a number of Put Shares equal to the Put Share Amount, in
the manner described below.
(b) Purchase Period. For purposes hereof,
the "Purchase Period," shall mean, unless otherwise shortened or lengthened
under the terms of this Agreement, the period beginning on the Business Day
immediately following the Put Date and ending on and including the date which is
20 Business Days after such Put Date; provided that, if a Put Cancellation
Notice has been delivered to the Investor after the Put Date, the Purchase
Period for such Put shall end at 6:00 p.m., New York City time, on the Put
Cancellation Date (a "Truncated Purchase Period").
The applicable Purchase Period shall be extended (a "Purchase
Period Extension") by one (1) Business Day for each Excluded Day during such
Purchase Period, up to a maximum extension of five (5) Business Days; provided
that no subsequent Put Notice may become effective until at least five (5)
Business Days after the end of the previous Purchase Period, as extended or
shortened.
For purposes of this Agreement:
"Trigger Price" for any Purchase Period shall mean the greater
of (i) the Company Designated Minimum Put Share Price, plus $.05, or (ii) (100%
/ X%) multiplied by the Company Designated Minimum Put Share Price, where "X" is
defined in Section 2.3.1(c) above.
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<PAGE> 19
An "Evaluation Day" shall mean each Business Day during a
Purchase Period where the lowest intra-day trading price of the Common Stock is
greater than or equal to the Trigger Price.
An "Excluded Day" shall mean each Business Day where the lowest
intra-day trading price of the Common Stock is less than the Trigger Price.
(c) Delivery of Purchase Notices. To effect
a purchase of Put Shares, during a Purchase Period the Investor shall deliver
one or more written notices to the Company (each a "Purchase Notice") at any
time and from time to time during the Purchase Period. Each Purchase Notice
shall set forth (i) the number of Put Shares being purchased pursuant to such
Purchase Notice, (ii) the Put Share Price per share, and (iii) the aggregate Put
Dollar Amount for the Put Shares being purchased by the Investor pursuant to
such Purchase Notice, as of the date of delivery of such Purchase Notice. The
"Purchase Notice Date" with respect to a Purchase Notice shall be the date on
which the Investor delivers a copy of such Purchase Notice to the Company by
facsimile transmission prior to 11:59 p.m. Eastern Time on such date.
If prior to the last day of a Purchase Period the Investor shall not
have delivered Purchase Notices covering the purchase of an aggregate number of
Put Shares equal to at least the Put Share Amount with respect to such Purchase
Period, then the Investor shall be deemed to have delivered a Purchase Notice on
the last day of such Purchase Period covering the purchase of a number of Put
Shares equal to the difference of (x) the Put Share Amount with respect to such
Purchase Period minus (y) the aggregate number of Put Shares covered by Purchase
Notices delivered by the Investor to the Company during such Purchase Period.
2.3.8 Mechanics of Put Closing. Each of the Company
and the Investor shall deliver all documents, instruments and writings required
to be delivered by either of them pursuant to this Agreement at or prior to each
Closing. Subject to such delivery and the satisfaction of the conditions set
forth in Sections 2.3.4 and 2.3.5, the closing of the purchase by the Investor
of Shares shall occur by 5:00 PM, New York City Time, on the date which is five
(5) Business Days following the applicable Purchase Notice Date (or such other
time or later date as is mutually agreed to by the Company and the Investor)
(the "Payment Due Date") at the offices of Investor. On each Closing Date, the
Investor shall deliver to the Company, in the manner specified in Section 8
below, the Put Dollar Amount to be paid for such Put Shares, determined as
aforesaid. The closing (each a "Put Closing") for each Put shall occur on the
date that both (i) the Company has delivered to the Investor all Required Put
Documents, and (ii) the Investor has delivered to the Company such Put Dollar
Amount and any Late Payment Amount, if applicable (each a "Put Closing Date").
If the Investor does not deliver to the Company the Put Dollar Amount
for such Put on or before the Payment Due Date, then the Investor shall pay to
the Company, in addition to the Put Dollar Amount, an amount (the "Late Payment
Amount") at a rate of X% per month, accruing daily, multiplied by such Put
Dollar Amount, where "X" equals one percent (1%) for the first month following
the date in question, and increases by an additional one percent (1%) for each
month that passes after the date in question, up to a maximum of five percent
(5%).
2.3.9 [Intentionally Left Blank].
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<PAGE> 20
2.3.10 Limitation on Short Sales. The Investor and its
Affiliates shall not engage in short sales of the Company's Common Stock;
provided, however, that the Investor may enter into any short sale or other
hedging or similar arrangement it deems appropriate with respect to Put Shares
after it receives a Put Notice with respect to such Put Shares so long as such
sales or arrangements do not involve more than the number of such Put Shares
specified in the Put Notice.
2.3.11 Cap Amount. If the Company becomes listed on the
Nasdaq Small Cap Market or the Nasdaq National Market, then, unless the Company
has obtained Stockholder 20% Approval as set forth in Section 6.12 or unless
otherwise permitted by Nasdaq, in no event shall the Aggregate Issued Shares
exceed the maximum number of shares of Common Stock (the "Cap Amount") that the
Company can, without stockholder approval, so issue pursuant to Nasdaq Rule
4460(i)(1)(d)(ii) (or any other applicable Nasdaq Rules or any successor rule)
(the "Nasdaq 20% Rule").
2.3.12 [Intentionally Left Blank]
2.3.13 Put Cancellation.
(a) Mechanics of Put Cancellation. If at any
time during a Purchase Period the Company discovers the existence of Material
Facts or any Ineffective Period or Delisting Event occurs , the Company shall
cancel the Put (a "Put Cancellation"), by delivering written notice to the
Investor (the "Put Cancellation Notice"), attached as Exhibit Q, by facsimile
and overnight courier. The "Put Cancellation Date" shall be the date that the
Put Cancellation Notice is first received by the Investor, if such notice is
received by the Investor by 6:00 p.m., New York, NY time, and shall be the
following date, if such notice is received by the Investor after 6:00 p.m., New
York, NY time.
(b) Effect of Put Cancellation. Anytime a
Put Cancellation Notice is delivered to Investor after the Put Date, the Put, at
the Investor's option, shall remain effective with respect to the number of Put
Shares (the "Truncated Put Share Amount"), if any, that were included in
Purchase Notices delivered by the Investor on or before 11:59 PM, New York City
time, on the Put Cancellation Date.
(c) Put Cancellation Notice Confirmation.
Upon receipt by the Investor of a facsimile copy of the Put Cancellation Notice,
the Investor shall promptly send, via facsimile, a confirmation of receipt (the
"Put Cancellation Notice Confirmation," a form of which is attached as Exhibit
S) of the Put Cancellation Notice to the Company specifying that the Put
Cancellation Notice has been received and affirming the Put Cancellation Date.
2.3.14 Investment Agreement Cancellation. The Company
may terminate (a "Company Termination") its right to initiate future Puts by
providing written notice ("Termination Notice") to the Investor, by facsimile
and overnight courier, at any time other than during an Extended Put Period,
provided that such termination shall have no effect on the parties' other rights
and obligations under this Agreement, the Registration Rights Agreement or the
Warrants.
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<PAGE> 21
Notwithstanding the above, any cancellation occurring during an Extended Put
Period is governed by Section 2.3.13.
2.3.15 Return of Excess Common Shares. In the event
that the number of Shares purchased by the Investor pursuant to its obligations
hereunder is less than the Intended Put Share Amount, the Investor shall
promptly return to the Company any shares of Common Stock in the Investor's
possession that are not being purchased by the Investor.
2.4 Warrants.
2.4.1 [Intentionally Omitted].
2.4.2 Purchase Warrants. Within five (5) Business Days
of the end of each Purchase Period, the Company shall issue and deliver to the
Investor a warrant ("Purchase Warrant"), in the form attached hereto as Exhibit
D, or such other form as agreed upon by the parties, to purchase a number of
shares of Common Stock equal to 15% of the number of Put Shares issued to
Investor in that Put. Each Purchase Warrant shall be exerciseable at a price
(the "Purchase Warrant Exercise Price") which shall initially equal 110% of the
Market Price on the Purchase Period End Date, and shall have annual reset
provisions. Each Purchase Warrant shall be immediately exercisable at the
Purchase Warrant Exercise Price, and shall have a term beginning on the date of
issuance and ending on date that is five (5) years thereafter. The Warrant
Shares shall be registered for resale pursuant to the Registration Rights
Agreement. Concurrently with the issuance and delivery of the Purchase Warrant
to the Investor, the Company shall deliver to the Investor a Purchase Warrant
Opinion of Counsel (signed by the Company's independent counsel).
2.5 [Intentionally Left Blank].
2.6 Due Diligence Review. The Company shall make available
for inspection and review by the Investor (the "Due Diligence Review"), advisors
to and representatives of the Investor (who may or may not be affiliated with
the Investor and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of Common Stock on behalf of the Investor
pursuant to the Registration Statement, any Supplemental Registration Statement,
or amendments or supplements thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective accountants
and attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
2.6.1 Treatment of Nonpublic Information. The Company
shall not disclose nonpublic information to the Investor or to its advisors or
representatives unless prior to disclosure
EX- 23
<PAGE> 22
of such information the Company identifies such information as being nonpublic
information and provides the Investor and such advisors and representatives with
the opportunity to accept or refuse to accept such nonpublic information for
review. The Company may, as a condition to disclosing any nonpublic information
hereunder, require the Investor and its advisors and representatives to enter
into a confidentiality agreement (including an agreement with such advisors and
representatives prohibiting them from trading in Common Stock during such period
of time as they are in possession of nonpublic information) in form reasonably
satisfactory to the Company and the Investor.
Nothing herein shall require the Company to disclose nonpublic
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate nonpublic information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
nonpublic information (whether or not requested of the Company specifically or
generally during the course of due diligence by and such persons or entities),
which, if not disclosed in the Prospectus included in the Registration
Statement, would cause such Prospectus to include a material misstatement or to
omit a material fact required to be stated therein in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading. Nothing contained in this Section 2.6 shall be construed to mean
that such persons or entities other than the Investor (without the written
consent of the Investor prior to disclosure of such information) may not obtain
nonpublic information in the course of conducting due diligence in accordance
with the terms of this Agreement; provided, however, that in no event shall the
Investor's advisors or representatives disclose to the Investor the nature of
the specific event or circumstances constituting any nonpublic information
discovered by such advisors or representatives in the course of their due
diligence without the written consent of the Investor prior to disclosure of
such information.
2.6.2 Disclosure of Misstatements and Omissions. The
Investor's advisors or representatives shall make complete disclosure to the
Investor's counsel of all events or circumstances constituting nonpublic
information discovered by such advisors or representatives in the course of
their due diligence upon which such advisors or representatives form the opinion
that the Registration Statement contains an untrue statement of a material fact
or omits a material fact required to be stated in the Registration Statement or
necessary to make the statements contained therein, in the light of the
circumstances in which they were made, not misleading. Upon receipt of such
disclosure, the Investor's counsel shall consult with the Company's independent
counsel in order to address the concern raised as to the existence of a material
misstatement or omission and to discuss appropriate disclosure with respect
thereto; provided, however, that such consultation shall not constitute the
advice of the Company's independent counsel to the Investor as to the accuracy
of the Registration Statement and related Prospectus.
2.6.3 Procedure if Material Facts are Reasonably
Believed to be Untrue or are Omitted. In the event after such consultation the
Investor or the Investor's counsel reasonably believes that the Registration
Statement contains an untrue statement or a material fact or omits a
EX- 24
<PAGE> 23
material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading,
(a) the Company shall file with the SEC an
amendment to the Registration Statement responsive to such alleged untrue
statement or omission and provide the Investor, as promptly as practicable, with
copies of the Registration Statement and related Prospectus, as so amended, or
(b) if the Company disputes the existence of
any such material misstatement or omission, (i) the Company's independent
counsel shall provide the Investor's counsel with a Registration Opinion and
(ii) in the event the dispute relates to the adequacy of financial disclosure
and the Investor shall reasonably request, the Company's independent auditors
shall provide to the Company a letter ("Agreed Upon Procedures Report")
outlining the performance of such "agreed upon procedures" as shall be
reasonably requested by the Investor and the Company shall provide the Investor
with a copy of such letter.
2.7 Commitment Payments. On each six (6) month anniversary of the
Investment Commitment Closing, if the Investor has not received at least an
amount equal to the applicable Semi-Annual Commitment Fee, as set forth below,
in aggregate Gross Discount Amounts for the preceding six (6) Calendar Months
(each such period a "Commitment Evaluation Period"), the Company, in
consideration of Investor's commitment costs, including, but not limited to, due
diligence expenses, shall pay to the Investor an amount (the "Semi-Annual
Commitment Shortfall") equal to the difference of (i) the applicable Semi-Annual
Commitment Fee, as defined below, minus (ii) the aggregate of the Gross Discount
Amounts received by the Investor during the preceding six (6) Calendar Months.
In the event that the Company delivers a Termination Notice to the Investor, the
Company shall pay to the Investor the greater of (i) the Semi-Annual Commitment
Fee for the applicable Commitment Evaluation Period, less the Gross Discount
Amount on amounts put to the Investor in that Commitment Evaluation Period, or
(ii) the difference of (x) $200,000, minus (y) the aggregate of the Gross
Discount Amounts for all Puts to date, and the Company shall not be required to
pay the Semi-Annual Commitment Shortfall thereafter.
For purposes hereof, the Semi-Annual Commitment Fee shall be as follows:
<TABLE>
<CAPTION>
Commitment Evaluation Period Semi-Annual Commitment Fee
---------------------------- --------------------------
<S> <C>
First 6 Calendar Months after Closing* $ 50,000**
6 through 12 Calendar Months after Closing $ 75,000
12 through 18 Calendar Months after Closing $100,000
18 through 24 Calendar Months after Closing $100,000
24 through 30 Calendar Months after Closing $125,000
30 through 36 Calendar Months after Closing $150,000
</TABLE>
* = Investment Commitment Closing
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<PAGE> 24
** = If the date of effectiveness of the Registration Statement is more than 4
Calendar Months after the date of filing of the Registration Statement, and the
Company has used its best efforts to cause such Registration Statement to become
effective as soon as possible, the Semi-Annual Commitment Fee for the First 6
Calendar Months After Closing shall be reduced to $25,000.
The Company shall not be required to deliver any payments to Investor
under this subsection until Investor has paid all Put Dollar Amounts that are
then due.
3. Representations, Warranties and Covenants of Investor. Investor
hereby represents and warrants to and agrees with the Company as follows:
3.1 Accredited Investor. Investor is an accredited investor
("Accredited Investor"), as defined in Rule 501 of Regulation D, and has checked
the applicable box set forth in Section 12 of this Agreement.
3.2 Investment Experience; Access to Information;
Independent Investigation.
3.2.1 Access to Information. Investor or Investor's
professional advisor has been granted the opportunity to ask questions of and
receive answers from representatives of the Company, its officers, directors,
employees and agents concerning the terms and conditions of this Offering, the
Company and its business and prospects, and to obtain any additional information
which Investor or Investor's professional advisor deems necessary to verify the
accuracy and completeness of the information received.
3.2.2 Reliance on Own Advisors. Investor has relied
completely on the advice of, or has consulted with, Investor's own personal tax,
investment, legal or other advisors and has not relied on the Company or any of
its affiliates, officers, directors, attorneys, accountants or any affiliates of
any thereof and each other person, if any, who controls any of the foregoing,
within the meaning of Section 15 of the Act for any tax or legal advice (other
than reliance on information in the Disclosure Documents as defined in Section
3.2.4 below and on the Opinion of Counsel). The foregoing, however, does not
limit or modify Investor's right to rely upon covenants, representations and
warranties of the Company in this Agreement.
3.2.3 Capability to Evaluate. Investor has such
knowledge and experience in financial and business matters so as to enable such
Investor to utilize the information made available to it in connection with the
Offering in order to evaluate the merits and risks of the prospective
investment, which are substantial, including without limitation those set forth
in the Disclosure Documents (as defined in Section 3.2.4 below).
3.2.4 Disclosure Documents. Investor, in making
Investor's investment decision to subscribe for the Investment Agreement
hereunder, represents that (a) Investor has received and had an opportunity to
review (i) the Company's Annual Report on Form 10-KSB for the year ended May 31,
1998, (ii) the Company's quarterly report on Form 10-QSB for the quarters ended
August 31, 1998, and November 30, 1998, (iii) the Risk Factors, attached as
Exhibit J, (the "Risk Factors") (iv) the Capitalization Schedule, attached as
Exhibit K, (the "Capitalization Schedule") and (v) the Use of Proceeds Schedule,
attached as Exhibit L, (the "Use of Proceeds
EX- 26
<PAGE> 25
Schedule"); (b) Investor has read, reviewed, and relied solely on the documents
described in (a) above, the Company's representations and warranties and other
information in this Agreement, including the exhibits, documents prepared by the
Company which have been specifically provided to Investor in connection with
this Offering (the documents described in this Section 3.2.4 (a) and (b) are
collectively referred to as the "Disclosure Documents"), and an independent
investigation made by Investor and Investor's representatives, if any; (c)
Investor has, prior to the date of this Agreement, been given an opportunity to
review material contracts and documents of the Company which have been filed as
exhibits to the Company's filings under the Act and the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and has had an opportunity to ask
questions of and receive answers from the Company's officers and directors; and
(d) is not relying on any oral representation of the Company or any other
person, nor any written representation or assurance from the Company other than
those contained in the Disclosure Documents or incorporated herein or therein.
The foregoing, however, does not limit or modify Investor's right to rely upon
covenants, representations and warranties of the Company in Sections 5 and 6 of
this Agreement. Investor acknowledges and agrees that the Company has no
responsibility for, does not ratify, and is under no responsibility whatsoever
to comment upon or correct any reports, analyses or other comments made about
the Company by any third parties, including, but not limited to, analysts'
research reports or comments (collectively, "Third Party Reports"), and Investor
has not relied upon any Third Party Reports in making the decision to invest.
3.2.5 Investment Experience; Fend for Self. Investor
has substantial experience in investing in securities and it has made
investments in securities other than those of the Company. Investor acknowledges
that Investor is able to fend for Investor's self in the transaction
contemplated by this Agreement, that Investor has the ability to bear the
economic risk of Investor's investment pursuant to this Agreement and that
Investor is an "Accredited Investor" by virtue of the fact that Investor meets
the investor qualification standards set forth in Section 3.1 above. Investor
has not been organized for the purpose of investing in securities of the
Company, although such investment is consistent with Investor's purposes.
3.3 Exempt Offering Under Regulation D.
3.3.1 [Intentionally Left Blank].
3.3.2 No General Solicitation. The Investment
Agreement was not offered to Investor through, and Investor is not aware of, any
form of general solicitation or general advertising, including, without
limitation, (i) any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio, and (ii) any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising.
3.3.3 Restricted Securities. Investor understands that
the Investment Agreement is, the Common Stock and Warrants issued at each Put
Closing will be, and the Warrant Shares will be, characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction exempt from the registration
requirements of the federal securities laws and that under such laws and
applicable regulations such
EX- 27
<PAGE> 26
securities may not be transferred or resold without registration under the Act
or pursuant to an exemption therefrom. In this connection, Investor represents
that Investor is familiar with Rule 144 under the Act, as presently in effect,
and understands the resale limitations imposed thereby and by the Act.
3.3.4 Disposition. Without in any way limiting the
representations set forth above, Investor agrees that until the Securities are
sold pursuant to an effective Registration Statement or an exemption from
registration, they will remain in the name of Investor and will not be
transferred to or assigned to any broker, dealer or depositary. Investor further
agrees not to sell, transfer, assign, or pledge the Securities (except for any
bona fide pledge arrangement to the extent that such pledge does not require
registration under the Act or unless an exemption from such registration is
available and provided further that if such pledge is realized upon, any
transfer to the pledgee shall comply with the requirements set forth herein), or
to otherwise dispose of all or any portion of the Securities unless and until:
(a) There is then in effect a registration
statement under the Act and any applicable state securities laws covering such
proposed disposition and such disposition is made in accordance with such
registration statement and in compliance with applicable prospectus delivery
requirements; or
(b) (i) Investor shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
statement of the circumstances surrounding the proposed disposition to the
extent relevant for determination of the availability of an exemption from
registration, and (ii) if reasonably requested by the Company, Investor shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of the
Securities under the Act or state securities laws. It is agreed that the Company
will not require the Investor to provide opinions of counsel for transactions
made pursuant to Rule 144 provided that Investor and Investor's broker, if
necessary, provide the Company with the necessary representations for counsel to
the Company to issue an opinion with respect to such transaction.
The Investor is entering into this Agreement for its own account
and the Investor has no present arrangement (whether or not legally binding) at
any time to sell the Common Stock to or through any person or entity; provided,
however, that by making the representations herein, the Investor does not agree
to hold the Common Stock for any minimum or other specific term and reserves the
right to dispose of the Common Stock at any time in accordance with federal and
state securities laws applicable to such disposition.
3.4 Due Authorization.
3.4.1 Authority. The person executing this Investment
Agreement, if executing this Agreement in a representative or fiduciary
capacity, has full power and authority to execute and deliver this Agreement and
each other document included herein for which a signature is required in such
capacity and on behalf of the subscribing individual, partnership, trust,
estate, corporation or other entity for whom or which Investor is executing this
Agreement. Investor has
EX- 28
<PAGE> 27
reached the age of majority (if an individual) according to the laws of the
state in which he or she resides.
3.4.2 Due Authorization. If Investor is a corporation,
Investor is duly and validly organized, validly existing and in good tax and
corporate standing as a corporation under the laws of the jurisdiction of its
incorporation with full power and authority to purchase the Securities to be
purchased by Investor and to execute and deliver this Agreement.
3.4.3 Partnerships. If Investor is a partnership, the
representations, warranties, agreements and understandings set forth above are
true with respect to all partners of Investor (and if any such partner is itself
a partnership, all persons holding an interest in such partnership, directly or
indirectly, including through one or more partnerships), and the person
executing this Agreement has made due inquiry to determine the truthfulness of
the representations and warranties made hereby.
3.4.4 Representatives. If Investor is purchasing in a
representative or fiduciary capacity, the representations and warranties shall
be deemed to have been made on behalf of the person or persons for whom Investor
is so purchasing.
4. Acknowledgments Investor is aware that:
4.1 Risks of Investment. Investor recognizes that an
investment in the Company involves substantial risks, including the potential
loss of Investor's entire investment herein. Investor recognizes that the
Disclosure Documents, this Agreement and the exhibits hereto do not purport to
contain all the information, which would be contained in a registration
statement under the Act;
4.2 No Government Approval. No federal or state agency has
passed upon the Securities, recommended or endorsed the Offering, or made any
finding or determination as to the fairness of this transaction;
4.3 No Registration, Restrictions on Transfer. As of the
date of this Agreement, the Securities and any component thereof have not been
registered under the Act or any applicable state securities laws by reason of
exemptions from the registration requirements of the Act and such laws, and may
not be sold, pledged (except for any limited pledge in connection with a margin
account of Investor to the extent that such pledge does not require registration
under the Act or unless an exemption from such registration is available and
provided further that if such pledge is realized upon, any transfer to the
pledgee shall comply with the requirements set forth herein), assigned or
otherwise disposed of in the absence of an effective registration of the
Securities and any component thereof under the Act or unless an exemption from
such registration is available;
4.4 Restrictions on Transfer. Investor may not attempt to
sell, transfer, assign, pledge or otherwise dispose of all or any portion of the
Securities or any component thereof in the absence of either an effective
registration statement or an exemption from the registration requirements of the
Act and applicable state securities laws;
EX- 29
<PAGE> 28
4.5 No Assurances of Registration. There can be no assurance
that any registration statement will become effective at the scheduled time, or
ever, or remain effective when required, and Investor acknowledges that it may
be required to bear the economic risk of Investor's investment for an indefinite
period of time;
4.6 Exempt Transaction. Investor understands that the
Securities are being offered and sold in reliance on specific exemptions from
the registration requirements of federal and state law and that the
representations, warranties, agreements, acknowledgments and understandings set
forth herein are being relied upon by the Company in determining the
applicability of such exemptions and the suitability of Investor to acquire such
Securities.
4.7 Legends. The certificates representing the Put Shares
shall not bear a Restrictive Legend. The certificates representing the Warrant
Shares shall not bear a Restrictive Legend unless they are issued at a time when
the Registration Statement is not effective for resale. It is understood that
the certificates evidencing any Warrant Shares issued at a time when the
Registration Statement is not effective for resale, subject to legend removal
under the terms of Section 6.9 below, shall bear the following legend (the
"Legend"):
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities laws,
nor the securities laws of any other jurisdiction. They may not be sold
or transferred in the absence of an effective registration statement
under those securities laws or pursuant to an exemption therefrom."
5. Representations and Warranties of the Company . The Company
hereby makes the following representations and warranties to Investor (which
shall be true at the signing of this Agreement, and as of any such later date as
contemplated hereunder) and agrees with Investor that, except as set forth in
the Schedule of Exceptions attached hereto as Exhibit C:
5.1 Organization, Good Standing, and Qualification. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, USA and has all requisite corporate
power and authority to carry on its business as now conducted and as proposed to
be conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the business or properties of the Company and its
subsidiaries taken as a whole. The Company is not the subject of any pending,
threatened or, to its knowledge, contemplated investigation or administrative or
legal proceeding (a "Proceeding") by the Internal Revenue Service, the taxing
authorities of any state or local jurisdiction, or the Securities and Exchange
Commission, The National Association of Securities Dealer, Inc., The Nasdaq
Stock Market, Inc. or any state securities commission, or any other governmental
entity, which have not been disclosed in the Disclosure Documents. None of the
disclosed Proceedings, if any, will have a material adverse effect upon the
Company or the market for the Common Stock. The Company has the following
subsidiaries: Metacomp, Inc. (a California corporation) and Plasma Scientific
Corporation (a Delaware corporation).
5.2 Corporate Condition. The Company's condition is, in all
material respects, as described in the Disclosure Documents (as further set
forth in any subsequently filed Disclosure
EX- 30
<PAGE> 29
Documents, if applicable), except for changes in the ordinary course of business
and normal year-end adjustments that are not, in the aggregate, materially
adverse to the Company. Except for continuing losses, there have been no
material adverse changes to the Company's business, financial condition, or
prospects since the dates of such Disclosure Documents. The financial statements
as contained in the 10-KSB and 10-QSB have been prepared in accordance with
generally accepted accounting principles, consistently applied (except as
otherwise permitted by Regulation S-X of the Exchange Act), subject, in the case
of unaudited interim financial statements, to customary year end adjustments and
the absence of certain footnotes, and fairly present the financial condition of
the Company as of the dates of the balance sheets included therein and the
consolidated results of its operations and cash flows for the periods then
ended,. Without limiting the foregoing, there are no material liabilities,
contingent or actual, that are not disclosed in the Disclosure Documents (other
than liabilities incurred by the Company in the ordinary course of its business,
consistent with its past practice, after the period covered by the Disclosure
Documents). The Company has paid all material taxes that are due, except for
taxes that it reasonably disputes. There is no material claim, litigation, or
administrative proceeding pending or, to the best of the Company's knowledge,
threatened against the Company, except as disclosed in the Disclosure Documents.
This Agreement and the Disclosure Documents do not contain any untrue statement
of a material fact and do not omit to state any material fact required to be
stated therein or herein necessary to make the statements contained therein or
herein not misleading in the light of the circumstances under which they were
made. No event or circumstance exists relating to the Company which, under
applicable law, requires public disclosure but which has not been so publicly
announced or disclosed.
5.3 Authorization. All corporate action on the part of the
Company by its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance and
delivery of the Common Stock being sold hereunder and the issuance (and/or the
reservation for issuance) of the Warrants and the Warrant Shares have been
taken, and this Agreement and the Registration Rights Agreement constitute valid
and legally binding obligations of the Company, enforceable in accordance with
their terms, except insofar as the enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, or other similar laws affecting
creditors' rights generally or by principles governing the availability of
equitable remedies. The Company has obtained all consents and approvals required
for it to execute, deliver and perform each agreement referenced in the previous
sentence.
5.4 Valid Issuance of Common Stock. The Common Stock and the
Warrants, when issued, sold and delivered in accordance with the terms hereof,
for the consideration expressed herein, will be validly issued, fully paid and
nonassessable and, based in part upon the representations of Investor in this
Agreement, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Warrant Shares, when issued in accordance with the
terms of the Warrants, shall be duly and validly issued and outstanding, fully
paid and nonassessable, and based in part on the representations and warranties
of Investor, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Put Shares, the Warrants and the Warrant Shares will
be issued free of any preemptive rights.
5.5 Compliance with Other Instruments. The Company is not in
violation or default of any provisions of its Certificate of Incorporation or
Bylaws, each as amended and in effect on and
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as of the date of the Agreement, or of any material provision of any material
instrument or material contract to which it is a party or by which it is bound
or of any provision of any federal or state judgment, writ, decree, order,
statute, rule or governmental regulation applicable to the Company, which would
have a material adverse effect on the Company's business or prospects, or on the
performance of its obligations under this Agreement or the Registration Rights
Agreement. The execution, delivery and performance of this Agreement and the
other agreements entered into in conjunction with the Offering and the
consummation of the transactions contemplated hereby and thereby will not (a)
result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument or contract or an event which results in the creation
of any lien, charge or encumbrance upon any assets of the Company, which would
have a material adverse effect on the Company's business or prospects, or on the
performance of its obligations under this Agreement, the Registration Rights
Agreement, (b) violate the Company's Certificate of Incorporation or By-Laws or
(c) violate any statute, rule or governmental regulation applicable to the
Company which violation would have a material adverse effect on the Company's
business or prospects.
5.6 Reporting Company. The Company is subject to the
reporting requirements of the Exchange Act, has a class of securities registered
under Section 12 of the Exchange Act, and has filed all reports required by the
Exchange Act since the date the Company first became subject to such reporting
obligations. The Company undertakes to furnish Investor with copies of such
reports as may be reasonably requested by Investor prior to consummation of this
Offering and thereafter, to make such reports available, for the full term of
this Agreement, including any extensions thereof, and for as long as Investor
holds the Securities. The Common Stock is duly listed on the O.T.C. Bulletin
Board. The Company is not in violation of the listing requirements of the O.T.C.
Bulletin Board and does not reasonably anticipate that the Common Stock will be
delisted by the O.T.C. Bulletin Board for the foreseeable future. The Company
has filed all reports required under the Exchange Act. The Company has not
furnished to the Investor any material nonpublic information concerning the
Company.
5.7 Capitalization. The capitalization of the Company as of
February 24, 1999, is, and the capitalization as of the Closing, subject to
exercise of any outstanding warrants and/or exercise of any outstanding stock
options, after taking into account the offering of the Securities contemplated
by this Agreement and all other share issuances occurring prior to this
Offering, will be, as set forth in the Capitalization Schedule as set forth in
Exhibit K. There are no securities or instruments containing anti-dilution or
similar provisions that will be triggered by the issuance of the Securities.
Except as disclosed in the Capitalization Schedule, as of the date of this
Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe for, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its subsidiaries, or
arrangements by which the Company or any of its subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
subsidiaries, and (ii) there are no agreements or arrangements under which the
Company or any of its subsidiaries is obligated to register the sale of any of
its or their securities under the Act (except the Registration Rights
Agreement).
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5.8 Intellectual Property. The Company has valid,
unrestricted and exclusive ownership of or rights to use the patents,
trademarks, trademark registrations, trade names, copyrights, know-how,
technology and other intellectual property necessary to the conduct of its
business. Exhibit M lists all patents, trademarks, trademark registrations,
trade names and copyrights of the Company. The Company has granted such licenses
or has assigned or otherwise transferred a portion of (or all of) such valid,
unrestricted and exclusive patents, trademarks, trademark registrations, trade
names, copyrights, know-how, technology and other intellectual property
necessary to the conduct of its business as set forth in Exhibit M. The Company
has been granted licenses, know-how, technology and/or other intellectual
property necessary to the conduct of its business as set forth in Exhibit M. To
the best of the Company's knowledge after due inquiry, the Company is not
infringing on the intellectual property rights of any third party, nor is any
third party infringing on the Company's intellectual property rights. There are
no restrictions in any agreements, licenses, franchises, or other instruments
that preclude the Company from engaging in its business as presently conducted.
5.9 Use of Proceeds. As of the date hereof, the Company
expects to use the proceeds from this Offering (less fees and expenses) for the
purposes and in the approximate amounts set forth on the Use of Proceeds
Schedule set forth as Exhibit L hereto. These purposes and amounts are estimates
and are subject to change without notice to any Investor.
5.10 No Rights of Participation. Other than Swartz
Investments, LLC, no person or entity, including, but not limited to, current or
former stockholders of the Company, underwriters, brokers, agents or other third
parties, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the financing contemplated
by this Agreement which has not been waived.
5.11 Company Acknowledgment. The Company hereby acknowledges
that Investor may elect to hold the Securities for various periods of time, as
permitted by the terms of this Agreement, the Warrants, and other agreements
contemplated hereby, and the Company further acknowledges that Investor has made
no representations or warranties, either written or oral, as to how long the
Securities will be held by Investor or regarding Investor's trading history or
investment strategies.
5.12 [Intentionally Left Blank].
5.13 Underwriter's Fees and Rights of First Refusal. The
Company is not obligated to pay any compensation or other fees, costs or related
expenditures in cash or securities to any underwriter, broker, agent or other
representative other than the Investor in connection with this Offering.
5.14 Availability of Suitable Form for Registration. The
Company is currently eligible and agrees to maintain its eligibility to register
the resale of its Common Stock on a registration statement on a suitable form
under the Act.
5.15 No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any of the
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Company's securities or solicited any offers to buy any security under
circumstances that would prevent the parties hereto from consummating the
transactions contemplated hereby pursuant to an exemption from registration
under Regulation D of the Act or would require the issuance of any other
securities to be integrated with this Offering under the Rules of Nasdaq. The
Company has not engaged in any form of general solicitation or advertising in
connection with the offering of the Common Stock or the Warrants.
5.16 [Intentionally Left Blank].
5.17 Foreign Corrupt Practices. Neither the Company, nor any
of its subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any subsidiary has, in the course of its
actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
5.18 Key Employees. Each "Key Employee" (as defined in
Exhibit N) is currently serving the Company in the capacity disclosed in Exhibit
N. No Key Employee, to the best knowledge of the Company and its subsidiaries,
is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each Key Employee does not
subject the Company or any of its subsidiaries to any liability with respect to
any of the foregoing matters. No Key Employee has, to the best knowledge of the
Company and its subsidiaries, any intention to terminate his employment with, or
services to, the Company or any of its subsidiaries.
5.19 Representations Correct. The foregoing representations,
warranties and agreements are true, correct and complete in all material
respects, and shall survive any Put Closing and the issuance of the shares of
Common Stock thereby.
5.20 Tax Status. The Company has made or filed all federal
and state income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject (unless and only to the extent that the
Company has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and as set aside on its books provision reasonably
adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in
any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim.
5.21 Transactions With Affiliates. Except as set forth in the
Disclosure Documents, none of the officers, directors, or employees of the
Company is presently a party to any
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transaction with the Company (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
5.22 Application of Takeover Protections. The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under Delaware law which is or could become
applicable to the Investor as a result of the transactions contemplated by this
Agreement, including, without limitation, the issuance of the Common Stock, any
exercise of the Warrants and ownership of the Common Shares and Warrant Shares.
The Company has not adopted and will not adopt any "poison pill" provision that
will be applicable to Investor as a result of transactions contemplated by this
Agreement.
5.23 Other Agreements. The Company has not, directly or
indirectly, made any agreements with the Investor under a subscription in the
form of this Agreement for the purchase of Common Stock, relating to the terms
or conditions of the transactions contemplated hereby or thereby except as
expressly set forth herein, respectively, or in exhibits hereto or thereto.
5.24 Major Transactions. There are no other Major
Transactions currently pending or contemplated by the Company.
5.25 Financings. There are no other financings currently
pending or contemplated by the Company.
5.26 Shareholder Authorization. The Company shall, at its
next annual shareholder meeting following its listing on either the Nasdaq Small
Cap Market or the Nasdaq National Market, or at a special meeting to be held as
soon as practicable thereafter, use its best efforts to obtain approval of its
shareholders to (i) authorize the issuance of the full number of shares of
Common Stock which would be issuable under this Agreement and eliminate any
prohibitions under applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Company or any of its securities with respect to the
Company's ability to issue shares of Common Stock in excess of the Cap Amount
(such approvals being the "20% Approval") and (ii) the increase in the number of
authorized shares of Common Stock of the Company (the "Share Authorization
Increase Approval") such that at least 12,000,000 shares can be reserved for
this Offering. In connection with such shareholder vote, the Company shall use
its best efforts to cause all officers and directors of the Company to promptly
enter into irrevocable agreements to vote all of their shares in favor of
eliminating such prohibitions. As soon as practicable after the 20% Approval and
the Share Authorization Increase Approval, the Company agrees to use its best
efforts to reserve 12,000,000 shares of Common Stock for issuance under this
Agreement.
6. Covenants of the Company
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6.1 Independent Auditors. The Company shall, until at least
the Termination Date, maintain as its independent auditors an accounting firm
authorized to practice before the SEC.
6.2 Corporate Existence and Taxes. The Company shall, until
at least the Termination Date, maintain its corporate existence in good standing
and remain a "Reporting Issuer" (defined as a Company which files periodic
reports under the Exchange Act) (provided, however, that the foregoing covenant
shall not prevent the Company from entering into any merger or corporate
reorganization as long as the surviving entity in such transaction, if not the
Company, assumes the Company's obligations with respect to the Common Stock and
has Common Stock listed for trading on a stock exchange or on Nasdaq and is a
Reporting Issuer) and shall pay all its taxes when due except for taxes which
the Company disputes.
6.3 Registration Rights. The Company will enter into a
registration rights agreement covering the resale of the Common Shares and the
Warrant Shares substantially in the form of the Registration Rights Agreement
attached as Exhibit A.
6.4 [Intentionally Omitted].
6.5 Asset Transfers. The Company shall not (i) transfer,
sell, convey or otherwise dispose of any of its material assets to any
Subsidiary except for a cash or cash equivalent consideration and for a proper
business purpose or (ii) transfer, sell, convey or otherwise dispose of any of
its material assets to any Affiliate, as defined below, during the Term of this
Agreement. For purposes hereof, "Affiliate" shall mean any officer of the
Company, director of the Company or owner of twenty percent (20%) or more of the
Common Stock or other securities of the Company.
6.6 Capital Raising Limitations; Rights of First Refusal.
6.6.1 Capital Raising Limitations. During the period
from the date of this Agreement until the earlier of (i) the date that is one
year after the Termination Date, or (ii) (a) in the case of a Company
Termination, the date that is one (1) year after the date of such Company
Termination, or (b) in the case of an Automatic Termination that is not waived
by the Investor, the date that is six (6) months after the date of such
Automatic Termination, the Company shall not issue or sell, or agree to issue or
sell, for cash in private capital raising transactions (the following to be
collectively referred to herein as, the "Variable Priced Securities"), any debt
or equity securities which are convertible into, exercisable or exchangeable
for, or carry the right to receive additional shares of Common Stock either (i)
at any conversion, exercise or exchange rate or other price that is based upon
and/or varies with the trading prices of or quotations for Common Stock at any
time after the initial issuance of such debt or equity security, or (ii) with a
fixed conversion, exercise or exchange price that is subject to being reset at
some future date at any time after the initial issuance of such debt or equity
security or upon the occurrence of specified contingent events directly or
indirectly related to the business of the Company or the market for the Common
Stock. During the period from the date of this Agreement until the Termination
Date, the Company shall not issue or sell, or agree to issue or sell, for cash
in private capital raising transactions any securities of the Company pursuant
to an equity line structure or format similar in nature to this Offering without
obtaining the prior written approval of the Investor of the Offering (the
limitations referred to in this sentence are collectively referred to as the
"Capital Raising Limitations"). Notwithstanding the
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above, during the period from the date of this Agreement until the date that is
two (2) weeks after the date of this Agreement, this Section shall not prevent
the Company from placing up to $750,000 in purchase price of Common Stock, which
may be accompanied by warrants, and such warrants may contain a provision
allowing for a reset of the exercise price, provided that the number of shares
of common stock included in such warrants shall not increase as a result of such
reset, and any such placement that is completed prior to the date that is two
(2) weeks after the date of this Agreement shall not be included in the
Investor's Right of First Refusal set forth in Section 6.6.2 below.
6.6.2 Investor's Right of First Refusal. For any
private capital raising transactions of Variable Priced Securities or equity
line structured investments which close after the Capital Raising Deadline and
on or prior to the date that is six (6) months after the Termination Date of
this Agreement, not including any warrants issued in conjunction with this
Investment Agreement, the Company agrees to deliver to Investor, at least ten
(10) days prior to the closing of such transaction, written notice describing
the proposed transaction, including the terms and conditions thereof, and
providing the Investor and its affiliates an option during the ten (10) day
period following delivery of such notice to purchase the securities being
offered in such transaction on the same terms as contemplated by such
transaction.
6.6.3 Exceptions to the Capital Raising Limitation and
Rights of First Refusal. Notwithstanding the above, the Capital Raising
Limitations and the Rights of First Refusal shall not apply to any transaction
involving issuances of securities in connection with a merger, consolidation,
acquisition or sale of assets, or in connection with any strategic partnership
or joint venture (the primary purpose of which is not to raise equity capital),
or in connection with the disposition or acquisition of a business, product or
license by the Company or exercise of options by employees, consultants or
directors. The Capital Raising Limitations also shall not apply to (a) the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof, (b)
the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan for the
benefit of the Company's employees, directors or consultants, or (c) the
issuance of debt securities, with no equity feature, incurred solely for working
capital purposes.
6.7 Financial 10-KSB Statements, Etc. and Current Reports on
Form 8-K. The Company shall deliver to the Investor copies of its annual reports
on Form 10-KSB, and quarterly reports on Form 10-QSB and shall deliver to the
Investor current reports on Form 8-K within two (2) days of filing for the Term
of this Agreement.
6.8 Opinion of Counsel. Investor shall, concurrent with the
purchase of the Common Stock and accompanying Warrants pursuant to this
Agreement, receive an opinion letter from the Company's legal counsel, in the
form attached as Exhibit B or in such form as agreed upon by the parties, as to
the Investment Commitment Closing and in the form attached as Exhibit I or in
such form as agreed upon by the parties, as to any Put Closing.
6.9 Removal of Legend. If the certificates representing any
Securities are issued with a restrictive Legend in accordance with the terms of
this Agreement, the Legend shall be removed and the Company shall issue a
certificate without such Legend to the holder of any Security upon which it is
stamped, and a certificate for a security shall be originally issued without the
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Legend, if (a) the sale of such Security is registered under the Act, or (b)
such holder provides the Company with an opinion of counsel, in form, substance
and scope customary for opinions of counsel in comparable transactions (the
reasonable cost of which shall be borne by the Investor), to the effect that a
public sale or transfer of such Security may be made without registration under
the Act, or (c) such holder provides the Company with reasonable assurances that
such Security can be sold pursuant to Rule 144. Each Investor agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement and to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Act.
6.10 Listing. Subject to the remainder of this Section 6.10,
the Company shall ensure that its shares of Common Stock (including all Warrant
Shares) are listed and available for trading on the O.T.C. Bulletin Board.
Thereafter, the Company shall (i) use its best efforts to continue the listing
and trading of its Common Stock on the O.T.C. Bulletin Board or to become
eligible for and listed and available for trading on the Nasdaq Small Cap
Market, the NMS, or the New York Stock Exchange ("NYSE"); and (ii) comply in all
material respects with the Company's reporting, filing and other obligations
under the By-Laws or rules of the National Association of Securities Dealers
("NASD") and such exchanges, as applicable.
6.11 The Company's Instructions to Transfer Agent. The
Company will instruct the Transfer Agent of the Common Stock, by delivering
instructions in the form of Exhibit T hereto, to issue certificates, registered
in the name of each Investor or its nominee, for the Put Shares and Warrant
Shares in such amounts as specified from time to time by the Company upon any
exercise by the Company of a Put and/or exercise of the Warrants by the holder
thereof. Such certificates shall not bear a Legend unless issuance with a Legend
is permitted by the terms of this Agreement and Legend removal is not permitted
by Section 6.9 hereof and the Company shall cause the Transfer Agent to issue
such certificates without a Legend. Nothing in this Section shall affect in any
way Investor's obligations and agreement set forth in Sections 3.3.3 or 3.3.4
hereof to resell the Securities pursuant to an effective registration statement
and to deliver a prospectus in connection with such sale or in compliance with
an exemption from the registration requirements of applicable securities laws.
If (a) a Investor provides the Company with an opinion of counsel, which opinion
of counsel shall be in form, substance and scope customary for opinions of
counsel in comparable transactions, to the effect that the Securities to be sold
or transferred may be sold or transferred pursuant to an exemption from
registration or (b) a Investor transfers Securities to an affiliate which is an
accredited investor pursuant to Rule 144, the Company shall permit the transfer,
and, in the case of Put Shares and Warrant Shares, promptly instruct its
transfer agent to issue one or more certificates in such name and in such
denomination as specified by such Investor. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to a
Investor by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 6.11 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 6.11, that a Investor shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.
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6.12 Stockholder 20% Approval. Prior to the closing of any
Put that would cause the Aggregate Issued Shares to exceed the Cap Amount, the
Company shall obtain approval of its stockholders to authorize (i) the issuance
of the full number of shares of Common Stock which would be issuable pursuant to
this Agreement but for the Cap Amount and eliminate any prohibitions under
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Company or any of its securities with respect to the Company's ability to
issue shares of Common Stock in excess of the Cap Amount (such approvals being
the "Stockholder 20% Approval").
6.13 Press Release. The Company agrees that the Investor
shall have the right to review and comment upon any press release issued by the
Company in connection with the Offering which approval shall not be unreasonably
withheld by Investor.
6.14 Change in Law or Policy. In the event of a change in
law, or policy of the SEC, as evidenced by a No-Action letter or other written
statements of the SEC or the NASD which causes the Investor to be unable to
perform its obligations hereunder, this Agreement shall be automatically
terminated and no further Commitment Fees shall be due.
7. Investor Covenant/Miscellaneous.
7.1 Representations and Warranties Survive the Closing;
Severability. Investor's and the Company's representations and warranties shall
survive the Investment Date and any Put Closing contemplated by this Agreement
notwithstanding any due diligence investigation made by or on behalf of the
party seeking to rely thereon. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, or is altered by a term required by the Securities
Exchange Commission to be included in the Registration Statement, this Agreement
shall continue in full force and effect without said provision; provided that if
the removal of such provision materially changes the economic benefit of this
Agreement to the Investor, the Investor, at its option, may terminate this
Agreement or require that other terms of the Agreement be amended to compensate
for such material economic changes.
7.2 Successors and Assigns. This Agreement shall not be
assignable without the Company's written consent, If assigned, the terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement. Investor may assign Investor's rights
hereunder, in connection with any private sale of the Common Stock of such
Investor, so long as, as a condition precedent to such transfer, the transferee
executes an acknowledgment agreeing to be bound by the applicable provisions of
this Agreement in a form acceptable to the Company and provides an original copy
of such acknowledgment to the Company.
7.3 Execution in Counterparts Permitted. This Agreement may
be executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.
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7.4 Titles and Subtitles; Gender. The titles and subtitles
used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement. The use in this
Agreement of a masculine, feminine or neither pronoun shall be deemed to include
a reference to the others.
7.5 Written Notices, Etc. Any notice, demand or request
required or permitted to be given by the Company or Investor pursuant to the
terms of this Agreement shall be in writing and shall be deemed given when
delivered personally, or by facsimile or upon receipt if by overnight or two (2)
day courier, addressed to the parties at the addresses and/or facsimile
telephone number of the parties set forth at the end of this Agreement or such
other address as a party may request by notifying the other in writing;
provided, however, that in order for any notice to be effective as to the
Investor such notice shall be delivered and sent, as specified herein, to all
the addresses and facsimile telephone numbers of the Investor set forth at the
end of this Agreement or such other address and/or facsimile telephone number as
Investor may request in writing.
7.6 Expenses. Except as set forth in the Registration Rights
Agreement, each of the Company and Investor shall pay all costs and expenses
that it respectively incurs, with respect to the negotiation, execution,
delivery and performance of this Agreement.
7.7 Entire Agreement; Written Amendments Required. This
Agreement, including the Exhibits attached hereto, the Common Stock
certificates, the Warrants, the Registration Rights Agreement, and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof, and no party shall be liable or bound to any other party in any manner
by any warranties, representations or covenants except as specifically set forth
herein or therein. Except as expressly provided herein, neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated other than
by a written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought.
7.8 Arbitration. Except as otherwise provided in Section
6.11 of this Agreement, any controversy or claim arising out of or related to
the Transaction Documents or the breach thereof, shall be settled by binding
arbitration in Wilmington, Delaware in accordance with the Expedited Procedures
(Rules 53-57) of the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"). A proceeding shall be commenced upon written demand by
Company or any Investor to the other. The arbitrator(s) shall enter a judgment
by default against any party, which fails or refuses to appear in any properly
noticed arbitration proceeding. The proceeding shall be conducted by one (1)
arbitrator, unless the amount alleged to be in dispute exceeds two hundred fifty
thousand dollars ($250,000), in which case three (3) arbitrators shall preside.
The arbitrator(s) will be chosen by the parties from a list provided by the AAA,
and if they are unable to agree within ten (10) days, the AAA shall select the
arbitrator(s). The arbitrators must be experts in securities law and financial
transactions. The arbitrators shall assess costs and expenses of the
arbitration, including all attorneys' and experts' fees, as the arbitrators
believe is appropriate in light of the merits of the parties' respective
positions in the issues in dispute. Each party submits irrevocably to the
jurisdiction of any state court sitting in Wilmington, Delaware or to the United
States District Court sitting in Delaware for purposes of enforcement of any
discovery order, judgment or award in
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connection with such arbitration. The award of the arbitrator(s) shall be final
and binding upon the parties and may be enforced in any court having
jurisdiction. The arbitration shall be held in such place as set by the
arbitrator(s) in accordance with Rule 55.
Although the parties, as expressed above, agree that all claims,
including claims that are equitable in nature, for example specific performance,
shall initially be prosecuted in the binding arbitration procedure outlined
above, if the arbitration panel dismisses or otherwise fails to entertain any or
all of the equitable claims asserted by reason of the fact that it lacks
jurisdiction, power and/or authority to consider such claims and/or direct the
remedy requested, then, in only that event, will the parties have the right to
initiate litigation respecting such equitable claims or remedies. The forum for
such equitable relief shall be in either a state or federal court sitting in
Wilmington, Delaware. Each party waives any right to a trial by jury, assuming
such right exists in an equitable proceeding, and irrevocably submits to the
jurisdiction of said Delaware court. Delaware law shall govern both the
proceeding as well as the interpretation and construction of the Transaction
Documents and the transaction as a whole.
8. Subscription and Wiring Instructions; Irrevocability.
8.1 Subscription
(a) Wire transfer of Subscription Funds.
Investor shall deliver Put Dollar Amounts (as payment towards any Put Share
Price) by wire transfer, to the Company pursuant to a wire instruction letter to
be provided by the Company, and signed by the Company.
(b) Irrevocable Subscription. Investor
hereby acknowledges and agrees, subject to the provisions of any applicable laws
providing for the refund of subscription amounts submitted by Investor, that
this Agreement is irrevocable and that Investor is not entitled to cancel,
terminate or revoke this Agreement or any other agreements executed by such
Investor and delivered pursuant hereto, and that this Agreement and such other
agreements shall survive the death or disability of such Investor and shall be
binding upon and inure to the benefit of the parties and their heirs, executors,
administrators, successors, legal representatives and assigns. If the Securities
subscribed for are to be owned by more than one person, the obligations of all
such owners under this Agreement shall be joint and several, and the agreements,
representations, warranties and acknowledgments herein contained shall be deemed
to be made by and be binding upon each such person and his heirs, executors,
administrators, successors, legal representatives and assigns.
8.2 Acceptance of Subscription. Ownership of the number of
securities purchased hereby will pass to Investor upon the Warrant Closing or
any Put Closing.
8.3 [Intentionally Omitted]
EX- 41
<PAGE> 40
9. Indemnification.
In consideration of the Investor's execution and delivery of the
Investment Agreement, the Registration Rights Agreement and the Warrants (the
"Transaction Documents") and acquiring the Securities thereunder and in addition
to all of the Company's other obligations under the Transaction Documents, the
Company shall defend, protect, indemnify and hold harmless Investor and all of
its stockholders, officers, directors, employees and direct or indirect
investors and any of the foregoing person's agents, members, partners or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorney's fees and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
documents contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby, or
(c) any cause of action, suit or claim, derivative or otherwise, by any
stockholder of the Company based on a breach or alleged breach by the Company or
any of its officers or directors of their fiduciary or other obligations to the
stockholders of the Company.
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which it
would be required to make if such foregoing undertaking was enforceable which is
permissible under applicable law.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 9, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 9, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 9 to the extent it is prejudicial.
10. [Intentionally Left Blank].
EX- 42
<PAGE> 41
11. [Intentionally Left Blank].
12. Accredited Investor. Investor is an "accredited investor"
because (check all applicable boxes):
(a) [ ] it is an organization described in Section 501(c)(3) of
the Internal Revenue Code, or a corporation, limited
duration company, limited liability company, business
trust, or partnership not formed for the specific
purpose of acquiring the securities offered, with total
assets in excess of $5,000,000.
(b) [ ] any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a
sophisticated person who has such knowledge and
experience in financial and business matters that he is
capable of evaluating the merits and risks of the
prospective investment.
(c) [ ] a natural person, who
[ ] is a director, executive officer or general partner of
the issuer of the securities being offered or sold or a
director, executive officer or general partner of a
general partner of that issuer.
[ ] has an individual net worth, or joint net worth with
that person's spouse, at the time of his purchase
exceeding $1,000,000.
[ ] had an individual income in excess of $200,000 in each
of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching the
same income level in the current year.
(d) [ ] an entity each equity owner of which is an entity
described in a - b above or is an individual who could
check one (1) of the last three (3) boxes under
subparagraph (c) above.
(e) [s] other [specify]
________________________________________________________
EX- 43
<PAGE> 42
The undersigned hereby subscribes for 100% of The Maximum Offering
Amount and acknowledges that this Agreement and the subscription represented
hereby shall not be effective unless accepted by the Company as indicated below.
IN WITNESS WHEREOF, the undersigned Investor does represent and certify
under penalty of perjury that the foregoing statements are true and correct and
that Investor by the following signature(s) executed this Agreement.
Dated this 24th day of February, 1999.
<TABLE>
<S> <C>
/s/ ERIC W. SWARTZ Swartz Private Equity, LLC
- -------------------------------------- --------------------------------------------
Your Signature PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED
Eric W. Swartz SECURITY DELIVERY INSTRUCTIONS:
- --------------------------------------------- --------------------------------------------
Name: Please Print Please type or print address where your security is to be delivered
Manager ATTN: Eric Swartz
- --------------------------------------------- ----------------------------------------
Title/Representative Capacity (if applicable)
Swartz Private Equity, LLC 200 Roswell Summit, Suite 285, 1080 Holcomb Bridge Rd.
- -------------------------------------- --------------------------------------------
Name of Company You Represent (if applicable) Street Address
Roswell, GA Roswell, GA 30076 U.S.A.
- -------------------------------------- --------------------------------------------
Place of Execution of this Agreement City, State or Province, Country, Offshore Postal Code
NOTICE DELIVERY INSTRUCTIONS: WITH A COPY DELIVERED TO:
- ----------------------------- -------------------------
Please print address where any Notice Please print address where Copy is to be delivered
is to be delivered
ATTN: ATTN:
- -------------------------------------- --------------------------------------------
Street Address Street Address
- -------------------------------------------
- -------------------------------------------
City, State or Province, Country, Offshore Postal Code City, State or Country, Offshore Postal Code
Telephone: _____________________________________ Telephone: _________________________________
Facsimile: _____________________________________ Facsimile: _________________________________
Facsimile: _____________________________________ Facsimile: _________________________________
</TABLE>
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF 100% OF THE MAXIMUM
OFFERING AMOUNT ON THE 24th DAY OF FEBRUARY 1999.
PATRIOT SCIENTIFIC CORP.
By: /S/ LOWELL W. GIFFHORN
------------------------------------
Lowell W. Giffhorn
Address: PATRIOT SCIENTIFIC CORP.
10989 Via Frontera
San Diego, CA 92127
Telephone No. (619) 674-5000
Fax: (619) 674-5005
EX- 44
<PAGE> 43
ADVANCE PUT NOTICE
PATRIOT SCIENTIFIC CORP. (the "Company") hereby intends, subject to the
Individual Put Limit (as defined in the Investment Agreement), to elect to
exercise a Put to sell the number of shares of Common Stock of the Company
specified below, to _____________________________, the Investor, as of the
Intended Put Date written below, all pursuant to that certain Investment
Agreement (the "Investment Agreement") by and between the Company and Swartz
Private Equity, LLC dated on or about February 24, 1999.
Date of Advance Put Notice: _________________
Intended Put Date :__________________________
Intended Put Share Amount: __________________
Company Designation Maximum Put Dollar Amount (Optional):
_____________________________________________.
Company Designation Minimum Put Share Price (Optional):
_____________________________________________.
PATRIOT SCIENTIFIC CORP.
By: _____________________________________
Lowell W. Giffhorn
Address: PATRIOT SCIENTIFIC CORP.
10989 Via Frontera
San Diego, CA 92127
Telephone No. (619) 674-5000
Fax: (619) 674-5005
EXHIBIT E
EX- 45
<PAGE> 44
CONFIRMATION OF ADVANCE PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of
PATRIOT SCIENTIFIC CORP.'S (the "Company") Advance Put Notice on the Advance Put
Date written below, and its intention to elect to exercise a Put to sell shares
of common stock ("Intended Put Share Amount") of the Company to the Investor, as
of the intended Put Date written below, all pursuant to that certain Investment
Agreement (the "Investment Agreement") by and between the Company and Swartz
Private Equity, LLC dated on or about February 24, 1999.
Date of Confirmation: ____________________
Date of Advance Put Notice: _______________
Intended Put Date: ________________________
Intended Put Share Amount: ________________
Company Designation Maximum Put Dollar Amount (Optional):
_____________________________________________.
Company Designation Minimum Put Share Price (Optional):
_____________________________________________.
INVESTOR(S)
____________________________________________
Investor's Name
By: ______________________________________
(Signature)
Address: __________________________________________
__________________________________________
__________________________________________
Telephone No.: __________________________________________
Facsimile No.: __________________________________________
EXHIBIT F
EX- 46
<PAGE> 45
PUT NOTICE
PATRIOT SCIENTIFIC CORP. (the "Company") hereby elects to exercise a Put to sell
shares of common stock ("Common Stock") of the Company to
_____________________________, the Investor, as of the Put Date, at the Put
Share Price and for the number of Put Shares written below, all pursuant to that
certain Investment Agreement (the "Investment Agreement") by and between the
Company and Swartz Private Equity, LLC dated on or about February 24, 1999.
Put Date :_________________
Intended Put Share Amount (from Advance Put
Notice):_________________ Common Shares
Company Designation Maximum Put Dollar Amount (Optional):
____________________________________________.
Company Designation Minimum Put Share Price (Optional):
____________________________________________.
Note: Capitalized terms shall have the meanings ascribed to them in this
Investment Agreement.
PATRIOT SCIENTIFIC CORP.
By: ___________________________________________
Lowell W. Giffhorn
Address: PATRIOT SCIENTIFIC CORP.
10989 Via Frontera
San Diego, CA 92127
Telephone No. (619) 674-5000
Fax: (619) 674-5005
EXHIBIT G
EX- 47
<PAGE> 46
CONFIRMATION OF PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of
PATRIOT SCIENTIFIC CORP. (the "Company") Put Notice and election to exercise a
Put to sell ___________________________ shares of common stock ("Common Stock")
of the Company to Investor, as of the Put Date, all pursuant to that certain
Investment Agreement (the "Investment Agreement") by and between the Company and
Swartz Private Equity, LLC dated on or about February 24, 1999.
Date of this Confirmation: ________________
Put Date :_________________
Number of Put Shares of
Common Stock to be Issued: _____________
Volume Evaluation Period: _____ Business Days
Purchase Period: _____ Business Days
INVESTOR(S)
___________________________________________
Investor's Name
By: _______________________________________
(Signature)
Address: ___________________________________________
___________________________________________
___________________________________________
Telephone No.: ___________________________________________
Facsimile No.: ___________________________________________
EXHIBIT H
EX- 48
<PAGE> 47
PURCHASE NOTICE
_________________________________, the Investor, pursuant to PATRIOT SCIENTIFIC
CORP. (the "Company") Put Notice and election to exercise a Put to sell shares
of common stock ("Common Stock") of the Company to Investor, as of the Put Date
set forth below, all pursuant to that certain Investment Agreement (the
"Investment Agreement") by and between the Company and Swartz Private Equity,
LLC dated on or about February 24, 1999, exercises its obligation to purchase
the number of Put Shares as set forth below.
Date of this Purchase Notice: _______________
Put Date for Applicable Put:_________________
Market Price for the Put Shares Being
Purchased under this Purchase Notice:_______.
(Explanation:_____________________________).
Put Share Price for the Put Shares Being
Purchased under this Purchase Notice:_______.
Number of Put Shares being Purchased Pursuant
to this Notice: _____________
Total Aggregate Number of Put Shares
Purchased under this Put to Date, Inclusive
of the Put Shares Being Purchased in this
Notice: ____________
Total Aggregate Put Dollar Amount of Put
Shares Purchased under this Put to Date,
Inclusive of the Put Shares Being Purchased
in this Notice: ____________.
Maximum Put Dollar Amount: $_______________.
(As specified by the Company in the Put
Notice, if applicable, or $2 million,
whichever is less).
EXHIBIT P
EX- 49
<PAGE> 48
INVESTOR(S)
_____________________________________________
Investor's Name
By: _________________________________________
(Signature)
Address: ____________________________________________
____________________________________________
Telephone No.: ____________________________________________
Facsimile No.: ____________________________________________
PATRIOT SCIENTIFIC CORP.
By: ____________________________________________
Lowell W. Giffhorn
Address: PATRIOT SCIENTIFIC CORP.
10989 Via Frontera
San Diego, CA 92127
Telephone No. (619) 674-5000
Fax: (619) 674-5005
EXHIBIT P (PAGE 2)
EX- 50
<PAGE> 49
PUT CANCELLATION NOTICE
PATRIOT SCIENTIFIC CORP. (the "Company") hereby cancels the Put specified below,
pursuant to that certain Investment Agreement (the "Investment Agreement") by
and between the Company and Swartz Private Equity, LLC dated on or about
February 24, 1999, as of the close of trading on the date specified below (the
"Cancellation Date," which date must be on or after the date that this notice is
delivered to the Investor), provided that such cancellation shall not apply to
the number of shares of Common Stock with respect to which the Investor has
delivered a Purchase Notice by 11:59 PM, New York City time, on the date
hereof.:
Cancellation Date: _____________________
Put Date of Put Being Canceled: __________
Number of Shares Put on Put Date: _________
Reason for Cancellation (check one):
[ ] Material Facts, Ineffective
Registration Period.
[ ] Delisting Event
The Company understands that, by canceling this Put, it must give twenty (20)
Business Days advance written notice to the Investor before effecting the next
Put.
PATRIOT SCIENTIFIC CORP.
By: _________________________________________
Lowell W. Giffhorn
Address: PATRIOT SCIENTIFIC CORP.
10989 Via Frontera
San Diego, CA 92127
Telephone No. (619) 674-5000
Fax: (619) 674-5005
EXHIBIT Q
EX- 51
<PAGE> 50
PUT CANCELLATION NOTICE CONFIRMATION
The undersigned Investor to that certain Investment Agreement (the "Investment
Agreement") by and between the Company, and Swartz Private Equity, LLC dated on
or about February 24, 1999, hereby confirms receipt of Patriot Scientific
Corp.'s (the "Company") Put Cancellation Notice, and confirms the following:
DATE OF THIS CONFIRMATION: ________________
PUT CANCELLATION DATE: ____________________
INVESTOR(S)
_____________________________________________
Investor's Name
By: _________________________________________
(Signature)
Address: _____________________________________________
_____________________________________________
Telephone No.: _____________________________________________
Facsimile No.: _____________________________________________
EXHIBIT S
EX- 52
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10Q-SB/A
Amendment No. 1 to Quarterly Report
EXHIBIT NO. 4.15
Registration Rights Agreement
EX- 53
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of
February 24, 1999, by and among Patriot Scientific Corporation, a corporation
duly incorporated and existing under the laws of the State of Delaware (the
"Company") and the subscriber as named on the signature page hereto (hereinafter
referred to as "Subscriber").
RECITALS:
WHEREAS, pursuant to the Company's offering ("Offering") of up to Five
Million Dollars ($5,000,000), excluding any funds paid upon exercise of
the Warrants, of Common Stock of the Company pursuant to that certain
Regulation D Common Stock Investment Agreement of even date herewith (the
"Investment Agreement") between the Company and the Subscriber, the
Company has agreed to sell and the Subscriber has agreed to purchase, from
time to time as provided in the Investment Agreement, shares of the
Company's Common Stock for a maximum aggregate offering amount of Five
Million Dollars ($5,000,000);
WHEREAS, pursuant to the terms of the Investment Agreement, the Company
has agreed to issue to the Subscriber, from time to time, Purchase
Warrants, as defined in the Investment Agreement, to purchase a number of
shares of Common Stock, exercisable for five years from the date of
issuance (collectively, the "Subscriber Warrants" or the "Warrants"); and
WHEREAS, pursuant to the terms of the Investment Agreement, the Company
has agreed to provide the Subscriber with certain registration rights with
respect to the Common Stock to be issued in the Offering and the Common
Stock issuable upon exercise of the Subscriber Warrants as set forth in
this Registration Rights Agreement.
TERMS:
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement (including the
Recitals above), the following terms shall have the following meanings (such
meanings to be equally applicable to both singular and plural forms of the terms
defined):
"1934 Act" shall mean the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
"Additional Registration Statement" shall have the meaning set forth
in Section 3(b).
"Agreement" shall have the meaning set forth in the preamble hereto.
"Amended Registration Statement" shall have the meaning set forth in
Section 3(b).
"Business Day" shall have the meaning set forth in the Investment
Agreement.
EX- 54
<PAGE> 3
"Closing Bid Price" shall have the meaning set forth in the
Investment Agreement.
"Common Stock" shall mean the common stock, par value $0.00001, of
the Company.
"Company" shall have the meaning set forth in the preamble hereto.
"Due Date" shall mean the date that is one hundred twenty (120) days
after the date of this Agreement.
"Effective Date" shall have the meaning set forth in Section 2.4.
"Filing Date" shall mean the date that is forty five (45) days after
the date of this Agreement.
"Holder" shall mean Subscriber, and any other person or entity
owning or having the right to acquire Registrable Securities or any permitted
assignee thereof.
"Investment Agreement" shall have the meaning set forth in the
Recitals hereto.
"Offering" shall have the meaning set forth in the recitals hereto.
"Put" shall have the meaning as set forth in the Investment
Agreement.
"Register," "Registered," and "Registration" shall mean and refer to
a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Act"), and pursuant to Rule 415 under the Act or any successor rule, and the
declaration or ordering of effectiveness of such registration statement or
document;
"Registrable Securities" shall have the meaning set forth in Section
2.1.
"Registration Period" shall have the meaning set forth in Section
2.7.
"Registration Statement" shall have the meaning set forth in Section
2.2.
"Rule 144" shall mean Rule 144, as amended, promulgated under the
Act.
"SEC" shall have the meaning set forth in Section 3(a).
"Subscriber" shall have the meaning set forth in the preamble to
this Agreement.
"Subscriber Warrants" shall have the meaning set forth in the above
Recitals.
"Supplemental Registration Statement" shall have the meaning set
forth in Section 3(b).
EX- 55
<PAGE> 4
"Warrants" shall have the meaning set forth in the above Recitals.
"Warrant Shares" shall mean shares of Common Stock issuable upon
exercise of any Warrant.
2. Required Registration.
2.1 Registrable Securities. "Registrable Securities" shall mean
those shares of the Common Stock of the Company together with any capital stock
issued in replacement of, in exchange for or otherwise in respect of such Common
Stock, that are: (i) issuable or issued to the Subscriber pursuant to the
Investment Agreement or in this Agreement, and (ii) issuable or issued upon
exercise of the Subscriber Warrants; provided, however, that notwithstanding the
above, the following shall not be considered Registrable Securities:
(a) any Common Stock which would otherwise be deemed to be
Registrable Securities, if and to the extent that those shares of Common Stock
may be resold in a public transaction without volume limitations or other
material restrictions without registration under the Act, including without
limitation, pursuant to Rule 144 under the Act; and
(b) any shares of Common Stock which have been sold in a
private transaction in which the transferor's rights under this Agreement are
not assigned.
2.2 Filing of Initial Registration Statement. The Company shall,
by the Filing Date, file a registration statement ("Registration Statement") on
Form SB-2 (or other suitable form, at the Company's discretion, but subject to
the reasonable approval of Subscriber), covering the resale of a number of
shares of Common Stock as Registrable Securities equal to at least Twelve
Million (12,000,000) shares of Common Stock, and shall cover, to the extent
allowed by applicable law, such additional shares of Common Stock, if any, that
may become registrable pursuant to Rule 416 of the Act.
2.3 [Intentionally Left Blank].
2.4 Registration Effective Date. The Company shall use its best
efforts to have the Registration Statement declared effective by the SEC (the
date of such effectiveness is referred to herein as the "Effective Date") by the
Due Date.
2.5 [Intentionally Left Blank].
2.6 [Intentionally Left Blank].
2.7 Shelf Registration. The Registration Statement shall be
prepared as a "shelf" registration statement under Rule 415, and shall be
maintained effective until the earlier of (i) the date that is one (1) year from
the Termination Date, as defined in the Investment Agreement (the "Registration
Period") or (ii) the date that all Registrable Securities are resold pursuant to
such
EX- 56
<PAGE> 5
Registration Statement.
2.8 Eligibility for Form SB-2. The Company understands that in
order to file the resale Registration Statement described herein on Form SB-2,
it must be eligible to file Form S-B2 for primary offerings. The Company
represents that it is presently eligible to effect the registration contemplated
hereby on Form SB-2 and will use its best efforts to continue to take such
actions as are necessary to maintain such eligibility. The Company covenants to
use its best efforts to use Form SB-2 (or other suitable form, at the Company's
discretion, but subject to the reasonable approval of the Holders) for the
registration required by this Section during all applicable times contemplated
by this Agreement.
2.9 Supplemental Registration Statement. Anytime the Registration
Statement does not cover a sufficient number of shares of Common Stock to cover
all outstanding Registrable Securities, the Company shall promptly prepare and
file with the SEC such Supplemental Registration Statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Act with respect to the disposition of all
such Registrable Securities and shall use its best efforts to cause such
Supplemental Registration Statement to be declared effective as soon as
possible.
3. Obligations of the Company. Whenever required under this Agreement
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously and reasonably possible:
(a) Prepare and file with the Securities and Exchange
Commission ("SEC") a Registration Statement with respect to such Registrable
Securities and use its best efforts to cause such Registration Statement to
become effective and to remain effective during the Registration Period.
(b) Prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in connection
with such Registration Statement ("Amended Registration Statement") or prepare
and file any additional registration statement ("Additional Registration
Statement," together with the Amended Registration Statement, "Supplemental
Registration Statements") as may be necessary to comply with the provisions of
the Act with respect to the disposition of all securities covered by such
Supplemental Registration Statements or such prior registration statement and to
cover the resale of all Registrable Securities.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such Registration Statement under such other securities or
Blue Sky laws of the jurisdictions in which the Holders are located and of such
other jurisdictions as shall be reasonably requested by the Holders of the
Registrable Securities covered by such Registration Statement, provided that the
Company shall
EX- 57
<PAGE> 6
not be required in connection therewith or as a condition thereto to qualify to
do business or to file a general consent to service of process in any such
states or jurisdictions.
(e) [Intentionally Omitted].
(f) As promptly as practicable after becoming aware of such
event, notify each Holder of Registrable Securities of the happening of any
event of which the Company has knowledge, as a result of which the prospectus
included in the Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, use its best efforts
promptly to prepare a supplement or amendment to the Registration Statement to
correct such untrue statement or omission, and deliver a number of copies of
such supplement or amendment to each Holder as such Holder may reasonably
request.
(g) Provide Holders with notice of the date that a
Registration Statement or any Supplemental Registration Statement registering
the resale of the Registrable Securities is declared effective by the SEC, and
the date or dates when the Registration Statement is no longer effective.
(h) Provide Holders and their representatives the opportunity
and a reasonable amount of time, based upon reasonable notice delivered by the
Company, to conduct a reasonable due diligence inquiry of Company's pertinent
financial and other records and make available its officers and directors for
questions regarding such information as it relates to information contained in
the Registration Statement.
(i) Provide Holders and their representatives the opportunity
to review the Registration Statement and all amendments or supplements thereto
prior to their filing with the SEC by giving the Holder at least ten (10)
business days advance written prior to such filing.
(j) Provide each Holder with prompt notice of the issuance by
the SEC or any state securities commission or agency of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceeding for such purpose. The Company shall use its best efforts to
prevent the issuance of any stop order and, if any is issued, to obtain the
removal thereof at the earliest possible date.
(k) Use its best efforts to list the Registrable Securities
covered by the Registration Statement with all securities exchanges or markets
on which the Common Stock is then listed and prepare and file any required
filing with the NASD and any other exchange or market on which the Common Stock
is listed.
4. [Intentionally Left Blank].
5. [Intentionally Left Blank].
6. Dispute as to Registrable Securities. In the event the Company
believes that shares sought to be registered under Section 2 by Holders do not
constitute "Registrable Securities" by virtue of Section 2.1 of this Agreement,
and the status of those shares as Registrable Securities is
EX- 58
<PAGE> 7
disputed, the Company shall provide, at its expense, an Opinion of Counsel,
reasonably acceptable to the Holders of the Securities at issue (and
satisfactory to the Company's transfer agent to permit the sale and transfer),
that those securities may be sold immediately, without volume limitation or
other material restrictions, without registration under the Act, by virtue of
Rule 144 or similar provisions.
7. Furnish Information. At the Company's request, each Holder shall
furnish to the Company such information regarding Holder, the Registrable
Securities held by it, and the intended method of disposition of such securities
to the extent required to effect the registration of its Registrable Securities
or to determine that registration is not required pursuant to Rule 144 or other
applicable provision of the Act. The Company shall include all information
provided by such Holder pursuant hereto in the Registration Statement,
substantially in the form supplied, except to the extent such information is not
permitted by law.
8. Expenses. All expenses, other than commissions and fees and expenses
of counsel to the selling Holders, incurred in connection with registrations,
filings or qualifications pursuant hereto, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, and
fees and disbursements of counsel for the Company, shall be borne by the
Company.
9. Indemnification. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the officers, directors, partners, legal
counsel, and accountants of each Holder, any underwriter (as defined in
the Act, or as deemed by the Securities Exchange Commission, or as
indicated in a registration statement) for such Holder and each person, if
any, who controls such Holder or underwriter within the meaning of Section
15 of the Act the 1934 Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Act, the 1934 Act or other federal or state law, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements or omissions: (i) any
untrue statement or alleged untrue statement of a material fact contained
in such registration statement, including any preliminary prospectus or
final prospectus contained therein or any amendments or supplements
thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the
statements therein not misleading, and the Company will reimburse each
such Holder, officer or director, underwriter or controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
subsection 9(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that
it arises out of or is based upon a violation which occurs in reliance
upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, officer,
director, underwriter or controlling person; provided however, that the
above shall not relieve the
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Company from any other liabilities which it might otherwise have.
(b) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 9,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any
other indemnifying party similarly noticed, to assume, the defense thereof
with counsel mutually satisfactory to the parties; provided, however, that
an indemnified party shall have the right to retain its own counsel, with
the reasonably incurred fees and expenses of one such counsel to be paid
by the indemnifying party, if representation of such indemnified party by
the counsel retained by the indemnifying party would be inappropriate due
to actual or potential conflicting interests between such indemnified
party and any other party represented by such counsel in such proceeding.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action, if materially
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 9, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have
to any indemnified party otherwise than under this Section 9.
(c) In the event that the indemnity provided in paragraph (a) of
this Section 9 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and each Holder agree to
contribute to the aggregate claims, losses, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the
Company and one or more of the Holders may be subject in such proportion
as is appropriate to reflect the relative fault of the Company and the
Holders in connection with the statements or omissions which resulted in
such Losses. Relative fault shall be determined by reference to whether
any alleged untrue statement or omission relates to information provided
by the Company or by the Holders. The Company and the Holders agree that
it would not be just and equitable if contribution were determined by pro
rata allocation or any other method of allocation that does not take
account of the equitable considerations referred to above. Notwithstanding
the provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 10(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. For purposes of this Section 9, each
person who controls a Holder of Registrable Securities within the meaning
of either the Securities Act or the Exchange Act and each director,
officer, partner, employee and agent of a Holder shall have the same
rights to contribution as such holder, and each person who controls the
Company within the meaning of either the Act or the Exchange Act and each
director and officer of the Company shall have the same rights to
contribution as the Company, subject in each case to the applicable terms
and conditions of this paragraph (c).
(d) The obligations of the Company and Holders under this Section
9 shall survive the resale, if any, of the Common Stock, the completion of
any offering of Registrable Securities in a Registration Statement under
this Agreement, and otherwise.
10. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the Act and
any other rule or regulation of
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<PAGE> 9
the SEC that may at any time permit a Holder to sell securities of the Company
to the public without registration, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144; and
(b) use its best efforts to file with the SEC in a timely manner
all reports and other documents required of the Company under the Act and the
1934 Act.
11. Amendment of Registration Rights. Any provision of this Agreement
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the written consent of each Holder affected
thereby. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each Holder, each future Holder, and the Company.
12. Notices. All notices required or permitted under this Agreement
shall be made in writing signed by the party making the same, shall specify the
section under this Agreement pursuant to which it is given, and shall be
addressed if to (i) the Company at: Patriot Scientific Corporation, 10989 Via
Frontera, San Diego, CA 92127, Telephone No. (619) 674-5000, Facsimile No. (619)
674-5005 (or at such other location as directed by the Company in writing) and
(ii) the Holders at their respective last address as the party as shown on the
records of the Company. Any notice, except as otherwise provided in this
Agreement, shall be made by fax and shall be deemed given at the time of
transmission of the fax.
13. Termination. This Agreement shall terminate on the date all
Registrable Securities cease to exist (as that term is defined in Section 2.1
hereof); but without prejudice to (i) the parties' rights and obligations
arising from breaches of this Agreement occurring prior to such termination (ii)
other indemnification obligations under this Agreement.
14. Assignment. No assignment, transfer or delegation, whether by
operation of law or otherwise, of any rights or obligations under this Agreement
by the Company or any Holder, respectively, shall be made without the prior
written consent of the majority in interest of the Holders or the Company,
respectively; provided that the rights of a Holder may be transferred to a
subsequent holder of the Holder's Registrable Securities (provided such
transferee shall provide to the Company, together with or prior to such
transferee's request to have such Registrable Securities included in a
Registration, a writing executed by such transferee agreeing to be bound as a
Holder by the terms of this Agreement), and the Company hereby agrees to file an
amended or supplemented registration statement including such transferee as a
selling security holder thereunder; and provided further that the Company may
transfer its rights and obligations under this Agreement to a purchaser of all
or a substantial portion of its business if the obligations of the Company under
this Agreement are assumed in connection with such transfer, either by merger or
other operation of law (which may include without limitation a transaction
whereby the Registrable Securities are converted into securities of the
successor in interest) or by specific assumption executed by the transferee.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
in and wholly to be performed
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<PAGE> 10
in that jurisdiction, except for matters arising under the Act or the Securities
Exchange Act of 1934, which matters shall be construed and interpreted in
accordance with such laws.
16. Execution in Counterparts Permitted. This Agreement may be executed
in any number of counterparts, each of which shall be enforceable against the
parties actually executing such counterparts, and all of which together shall
constitute one (1) instrument.
17. Specific Performance. The Holder shall be entitled to the remedy of
specific performance in the event of the Company's breach of this Agreement, the
parties agreeing that a remedy at law would be inadequate.
18. Indemnity. Each party shall indemnify each other party against any
and all claims, damages (including reasonable attorney's fees), and expenses
arising out of the first party's breach of any of the terms of this Agreement.
19. Entire Agreement; Written Amendments Required. This Agreement,
including the Exhibits attached hereto, the Investment Agreement, the Common
Stock certificates, and the other documents delivered pursuant hereto constitute
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof, and no party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth herein or therein. Except as expressly provided
herein, neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
this 24th day of February, 1999
PATRIOT SCIENTIFIC CORPORATION
By: /S/ LOWELL W. GIFFHORN
--------------------------------------------
Lowell W. Giffhorn, Chief Financial Officer
Address: Patriot Scientific Corporation
10989 Via Frontera
San Diego, CA 92127
Telephone No. (619) 674-5000
Facsimile No. (619) 674-5005
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<PAGE> 11
SUBSCRIBER:
SWARTZ PRIVATE EQUITY, LLC.
By: ____________________________________________
Eric S. Swartz, Manager
Address: 1080 Holcomb Bridge Road
Bldg. 200, Suite 285
Roswell, GA 30076
Telephone: (770) 640-8130
Facsimile: (770) 640-7150
EX- 63
<PAGE> 1
PATRIOT SCIENTIFIC CORPORATION
FORM 10Q-SB/A
Amendment No. 1 to Quarterly Report
EXHIBIT NO. 4.16
Form of Warrant
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<PAGE> 2
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST
RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED. SEE THE RISK FACTORS SET FORTH UNDER THAT CERTAIN REGULATION D COMMON
STOCK INVESTMENT AGREEMENT BY AND BETWEEN THE COMPANY AND HOLDER REFERENCED
THEREIN AS EXHIBIT J.
Warrant to Purchase
"N" shares
WARRANT TO PURCHASE COMMON STOCK
OF
PATRIOT SCIENTIFIC CORP.
THIS CERTIFIES that Swartz Private Equity, LLC or any subsequent holder
hereof ("Holder"), has the right to purchase from PATRIOT SCIENTIFIC CORP., a
Delaware corporation (the "Company"), up to "N" fully paid and nonassessable
shares, wherein "N" is defined below, of the Company's common stock, $.00001 par
value per share ("Common Stock"), subject to adjustment as provided herein, at a
price equal to the Exercise Price as defined in Section 3 below, at any time
beginning on the Date of Issuance (defined below) and ending at 5:00 p.m., New
York, New York time the date that is five (5) years after the Date of Issuance
(the "Exercise Period"); provided, that, with respect to each "Put," as that
term is defined in that certain Regulation D Common Stock Investment Agreement
(the "Investment Agreement") by and between the Holder and Company, "N" shall
equal fifteen percent (15%) of the number of shares of Common Stock purchased by
the Holder in that Put.
Holder agrees with the Company that this Warrant to Purchase Common Stock
of the Company (this "Warrant") is issued and all rights hereunder shall be held
subject to all of the conditions, limitations and provisions set forth herein.
1. Date of Issuance and Term.
This Warrant shall be deemed to be issued on _____________, ______ ("Date
of Issuance"). The term of this Warrant is five (5) years from the Date of
Issuance.
2. Exercise.
(a) Manner of Exercise. During the Exercise Period, this Warrant may be
exercised as to all or any lesser number of full shares of Common Stock covered
hereby
EX- 65
<PAGE> 3
(the "Warrant Shares") upon surrender of this Warrant, with the Exercise Form
attached hereto as Exhibit A (the "Exercise Form") duly completed and executed,
together with the full Exercise Price (as defined below) for each share of
Common Stock as to which this Warrant is exercised, at the office of the
Company, Attention: Lowell W. Giffhorn, Chief Financial Officer, Patriot
Scientific Corp., 10989 Via Frontera, San Diego, CA 92127 Telephone No.(619)
674-5000, Telecopy No. (619) 674-5005, or at such other office or agency as the
Company may designate in writing, by overnight mail, with an advance copy of the
Exercise Form sent to the Company and its Transfer Agent by facsimile (such
surrender and payment of the Exercise Price hereinafter called the "Exercise of
this Warrant").
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed Exercise
Form is sent by facsimile to the Company, provided that the original Warrant and
Exercise Form are received by the Company as soon as practicable thereafter.
Alternatively, the Date of Exercise shall be defined as the date the original
Exercise Form is received by the Company, if Holder has not sent advance notice
by facsimile. The Company shall not be required to deliver the shares of Common
Stock to the Holder until the requirements of Section 2(a) above are satisfied.
(c) Cancellation of Warrant. This Warrant shall be canceled upon the
Exercise of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.
(d) Holder of Record. Each person in whose name any Warrant for shares
of Common Stock is issued shall, for all purposes, be deemed to be the Holder of
record of such shares on the Date of Exercise of this Warrant, irrespective of
the date of delivery of the Common Stock purchased upon the Exercise of this
Warrant. Nothing in this Warrant shall be construed as conferring upon Holder
any rights as a stockholder of the Company.
3. Payment of Warrant Exercise Price.
The Exercise Price ("Exercise Price"), shall initially equal $Y per share
("Initial Exercise Price"), where "Y" shall equal 110% of the Market Price
ending on the Pricing Period End Date (as both are defined in the Investment
Agreement) for the applicable Put or, if the Date of Exercise is more than six
(6) months after the Date of Issuance, the lesser of (i) the Initial Exercise
Price or (ii) the "Lowest Reset Price," as that term is defined below. The
Company shall calculate a "Reset Price" on each six-month anniversary date of
the Date of Issuance which shall equal one hundred and ten percent (110%) of the
lowest Closing Bid Price of the Company's Common Stock for the five (5) trading
days ending on such six-month anniversary date of the Date of Issuance. The
"Lowest Reset Price" shall equal the lowest Reset Price determined on any
six-month anniversary date of the Date of Issuance preceding the Date of
Exercise, taking into account, as appropriate, any adjustments made pursuant to
Section 5 hereof.
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<PAGE> 4
Payment of the Exercise Price may be made by either of the following, or a
combination thereof, at the election of Holder:
(i) Cash Exercise: cash, bank or cashiers check or wire transfer; or
(ii) Cashless Exercise: subject to the last sentence of this Section 3,
surrender of this Warrant at the principal office of the Company together with
notice of cashless election, in which event the Company shall issue Holder a
number of shares of Common Stock computed using the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant is
being exercised.
A = the Market Price of one (1) share of Common Stock (for purposes
of this Section 3(ii), the "Market Price" shall be defined as the
average Closing Bid Price of the Common Stock for the five (5)
trading days prior to the Date of Exercise of this Warrant (the
"Average Closing Price"), as reported by the O.T.C. Bulletin Board,
National Association of Securities Dealers Automated Quotation
System ("Nasdaq") Small Cap Market, or if the Common Stock is not
traded on the Nasdaq Small Cap Market, the Average Closing Price in
any other over-the-counter market; provided, however, that if the
Common Stock is listed on a stock exchange, the Market Price shall
be the Average Closing Price on such exchange for the five (5)
trading days prior to the date of exercise of the Warrants. If the
Common Stock is/was not traded during the five (5) trading days
prior to the Date of Exercise, then the closing price for the last
publicly traded day shall be deemed to be the closing price for any
and all (if applicable) days during such five (5) trading day
period.
B = the Exercise Price.
For purposes hereof, the term "Closing Bid Price" shall mean the closing
bid price on the O.T.C. Bulletin Board, the National Market System ("NMS"), the
New York Stock Exchange, the Nasdaq Small Cap Market, or if no longer traded on
the O.T.C. Bulletin Board, the NMS, the New York Stock Exchange, the Nasdaq
Small Cap Market, the "Closing Bid Price" shall equal the closing price on the
principal national securities exchange or the over-the-counter system on which
the Common Stock is so traded and, if not available, the mean of the high and
low prices on the principal national securities exchange on which the Common
Stock is so traded.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is
intended, understood and acknowledged that the Common Stock issuable upon
exercise of this Warrant in a cashless exercise transaction shall be deemed to
have been acquired at the time this Warrant was issued. Moreover, it is
intended, understood and acknowledged that the holding period for the Common
Stock issuable upon exercise of this Warrant in a cashless exercise transaction
shall be deemed to have commenced on the date this Warrant was issued.
EX- 67
<PAGE> 5
Notwithstanding anything to the contrary contained herein, this Warrant
may not be exercised in a cashless exercise transaction if, on the Date of
Exercise, the shares of Common Stock to be issued upon exercise of this Warrant
would upon such issuance be then registered pursuant to an effective
registration statement filed pursuant to that certain Registration Rights
Agreement dated on or about February 24, 1999 by and among the Company and
certain investors, or otherwise be registered under the Securities Act of 1933,
as amended.
4. Transfer and Registration.
(a) Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.
(b) Registrable Securities. The Common Stock issuable upon the exercise
of this Warrant constitutes "Registrable Securities" under that certain
Registration Rights Agreement dated on or about February 24, 1999 between the
Company and certain investors and, accordingly, has the benefit of the
registration rights pursuant to that agreement.
5. Anti-Dilution Adjustments.
(a) Stock Dividend. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then Holder, upon Exercise of this Warrant
after the record date for the determination of holders of Common Stock entitled
to receive such dividend, shall be entitled to receive upon Exercise of this
Warrant, in addition to the number of shares of Common Stock as to which this
Warrant is exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
(b) Recapitalization or Reclassification. If the Company shall at any
time effect a recapitalization, reclassification or other similar transaction of
such character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which Holder shall be
entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give Holder the same notice it provides to holders of Common Stock
of any transaction described in this Section 5(b).
(c) Distributions. If the Company shall at any time distribute for no
consideration to holders of Common Stock cash, evidences of indebtedness or
other securities or assets (other than
EX- 68
<PAGE> 6
cash dividends or distributions payable out of earned surplus or net profits for
the current or preceding years) then, in any such case, Holder shall be entitled
to receive, upon Exercise of this Warrant, with respect to each share of Common
Stock issuable upon such exercise, the amount of cash or evidences of
indebtedness or other securities or assets which Holder would have been entitled
to receive with respect to each such share of Common Stock as a result of the
happening of such event had this Warrant been exercised immediately prior to the
record date or other date fixing shareholders to be affected by such event (the
"Determination Date") or, in lieu thereof, if the Board of Directors of the
Company should so determine at the time of such distribution, a reduced Exercise
Price determined by multiplying the Exercise Price on the Determination Date by
a fraction, the numerator of which is the result of such Exercise Price reduced
by the value of such distribution applicable to one share of Common Stock (such
value to be determined by the Board of Directors of the Company in its
discretion) and the denominator of which is such Exercise Price.
(d) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities or other assets of the Company or another entity or there
is a sale of all or substantially all the Company's assets (a "Corporate
Change"), then this Warrant shall be exerciseable into such class and type of
securities or other assets as Holder would have received had Holder exercised
this Warrant immediately prior to such Corporate Change; provided, however, that
Company may not affect any Corporate Change unless it first shall have given
thirty (30) days notice to Holder hereof of any Corporate Change.
(e) Exercise Price Adjusted. As used in this Warrant, the term "Exercise
Price" shall mean the purchase price per share specified in Section 3 of this
Warrant, until the occurrence of an event stated in subsection (a), (b) or (c)
of this Section 5, and thereafter shall mean said price as adjusted from time to
time in accordance with the provisions of said subsection. No such adjustment
under this Section 5 shall be made unless such adjustment would change the
Exercise Price at the time by $.01 or more; provided, however, that all
adjustments not so made shall be deferred and made when the aggregate thereof
would change the Exercise Price at the time by $.01 or more. No adjustment made
pursuant to any provision of this Section 5 shall have the net effect of
increasing the Exercise Price in relation to the split adjusted and distribution
adjusted price of the Common Stock. The number of shares of Common Stock subject
hereto shall increase proportionately with each decrease in the Exercise Price.
(f) Adjustments: Additional Shares, Securities or Assets. In the event
that at any time, as a result of an adjustment made pursuant to this Section 5,
Holder shall, upon Exercise of this Warrant, become entitled to receive shares
and/or other securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be deemed to
refer to and include such shares and/or other securities or assets; and
thereafter the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.
6. Fractional Interests.
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<PAGE> 7
No fractional shares or scrip representing fractional shares shall
be issuable upon the Exercise of this Warrant, but on Exercise of this Warrant,
Holder may purchase only a whole number of shares of Common Stock. If, on
Exercise of this Warrant, Holder would be entitled to a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon exercise shall be the next higher number of shares.
7. Reservation of Shares.
The Company shall at all times reserve for issuance such number of
authorized and unissued shares of Common Stock (or other securities substituted
therefor as herein above provided) as shall be sufficient for the Exercise of
this Warrant and payment of the Exercise Price. The Company covenants and agrees
that upon the Exercise of this Warrant, all shares of Common Stock issuable upon
such exercise shall be duly and validly issued, fully paid, nonassessable and
not subject to preemptive rights, rights of first refusal or similar rights of
any person or entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant has been issued in
a transaction exempt from the registration requirements of the Act by virtue of
Regulation D and exempt from state registration under applicable state laws. The
Warrant and the Common Stock issuable upon the Exercise of this Warrant may not
be pledged, transferred, sold or assigned except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Act and applicable state laws.
(b) Assignment. If Holder can provide the Company with reasonably
satisfactory evidence that the conditions of (a) above regarding registration or
exemption have been satisfied, Holder may sell, transfer, assign, pledge or
otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a
written notice to Company, substantially in the form of the Assignment attached
hereto as Exhibit B, indicating the person or persons to whom the Warrant shall
be assigned and the respective number of warrants to be assigned to each
assignee. The Company shall effect the assignment within ten (10) days, and
shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of
like tenor and terms for the appropriate number of shares.
9. Benefits of this Warrant.
Nothing in this Warrant shall be construed to confer upon any person
other than the Company and Holder any legal or equitable right, remedy or claim
under this Warrant and this Warrant shall be for the sole and exclusive benefit
of the Company and Holder.
10. Applicable Law.
This Warrant is issued under and shall for all purposes be governed
by and construed in accordance with the laws of the state of Delaware, without
giving effect to conflict of law provisions thereof.
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<PAGE> 8
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. Notice or Demands.
Notices or demands pursuant to this Warrant to be given or made by Holder to or
on the Company shall be sufficiently given or made if sent by certified or
registered mail, return receipt requested, postage prepaid, and addressed, until
another address is designated in writing by the Company, to the Attention:
Lowell W. Giffhorn, Chief Financial Officer, Patriot Scientific Corp., 10989 Via
Frontera, San Diego, CA 92127 Telephone No. (619) 674-5000, Telecopy No. (619)
674-5005. Notices or demands pursuant to this Warrant to be given or made by the
Company to or on Holder shall be sufficiently given or made if sent by certified
or registered mail, return receipt requested, postage prepaid, and addressed, to
the address of Holder set forth in the Company's records, until another address
is designated in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
______ day of ________________, _____.
PATRIOT SCIENTIFIC CORP.
By: ________________________________
Lowell W. Giffhorn, Chief
Financial Officer
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<PAGE> 9
EXHIBIT A
EXERCISE FORM FOR WARRANT
TO: PATRIOT SCIENTIFIC CORP.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock (the "Common Stock") of PATRIOT
SCIENTIFIC CORP., a Delaware corporation (the "Company"), evidenced by the
attached warrant (the "Warrant"), and herewith makes payment of the exercise
price with respect to such shares in full, all in accordance with the conditions
and provisions of said Warrant.
1. The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.
2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:
Dated:
- --------------------------------------------------------------------------------
Signature
- --------------------------------------------------------------------------------
Print Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- --------------------------------------------------------------------------------
EX- 72
<PAGE> 10
EXHIBIT B
ASSIGNMENT
(To be executed by the registered holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase _______ shares of the Common Stock of PATRIOT
SCIENTIFIC CORP., evidenced by the attached Warrant and does hereby irrevocably
constitute and appoint _______________________ attorney to transfer the said
Warrant on the books of the Company, with full power of substitution in the
premises.
Dated: ______________________________
Signature
Fill in for new registration of Warrant:
- -----------------------------------
Name
- -----------------------------------
Address
- -----------------------------------
Please print name and address of assignee
(including zip code number)
- --------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as written
upon the face of the attached Warrant in every particular, without alteration or
enlargement or any change whatsoever.
- --------------------------------------------------------------------------------
EX- 73
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10QSB FOR THE
QUARTERLY PERIOD ENDED NOVEMBER 30, 1998.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 39,355
<SECURITIES> 0
<RECEIVABLES> 277,908
<ALLOWANCES> 0
<INVENTORY> 220,527
<CURRENT-ASSETS> 813,253
<PP&E> 1,858,780
<DEPRECIATION> 1,262,292
<TOTAL-ASSETS> 1,579,753
<CURRENT-LIABILITIES> 1,456,438
<BONDS> 0
402
0
<COMMON> 0
<OTHER-SE> 19,471,472
<TOTAL-LIABILITY-AND-EQUITY> 1,579,753
<SALES> 836,497
<TOTAL-REVENUES> 836,497
<CGS> 569,898
<TOTAL-COSTS> 569,898
<OTHER-EXPENSES> 2,073,164
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 306,287
<INCOME-PRETAX> (2,109,133)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,109,133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,109,133)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
