<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
PATRIOT SCIENTIFIC CORPORATION
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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<PAGE> 2
Patriot Scientific Corporation Letterhead.
March 25, 2000
MESSAGE FROM THE PRESIDENT
Dear Patriot Stockholder:
Patriot Scientific is today, more than ever, in the right place and at
the right time, with the right chip technology. Key to this is the
significant ongoing activity with our featured product - the PSC1000,
the first to market, Java based microprocessor. We believe our PSC1000
is ripe to participate in the emerging embedded Java marketplace.
In addition to discussing the development progress and milestones for
the PSC1000 and its market, I will update you on our capital raising
efforts to support the chip's commercialization. I will also briefly
cover the status of our legacy products and in closing will share my
outlook for the year ahead.
First, let me begin by detailing the major milestones for our PSC1000
that have either been or will shortly be accomplished.
PSC1000 ACTIVITY
JAVA PLATFORM
Our technical development strategy this past year was to augment
internal capabilities by utilizing several outside engineering sources -
contractors and individual consultants. We wanted to draw on their
expert technical assistance for several major undertakings necessary to
make the PSC1000 as user friendly as possible. To make the PSC1000 more
marketable to customers meant making available industry leading software
packages like Personal Java from Sun Microsystems and VxWorks from Wind
River Systems. This required a very difficult task called "porting" to
make the software compatible with our PSC1000 microprocessor.
As capital resources were not available to fund these outside
activities, we increasingly turned to our internal engineering talent
and limited the use of outside assistance. In spite of our lack of
capital, our engineers have proven themselves to be among Patriot's most
creative and valuable resources! Dealing with complex software, they
have been able to complete the porting activities and are now running a
stable Java platform. This means our potential customers are now able to
develop and run Java programs on our evaluation kit, simulate the
operation of their application, and discover the advantages of the
PSC1000.
SMALLER FASTER PSC1000
In parallel with the software porting effort, our chip designers have
been able to upgrade our processor and roll these changes into a
smaller, faster version of the PSC1000 using .35 micron technology. We
have received from the foundry a prototype run of this newer, faster
version of the PSC1000. We have run nearly 1 million test vectors on
this version with great success. Once full testing is complete in early
2000, this version will replace the current .5 micron chip.
NEW PSC1000 CORE PRODUCTS
Additionally, we recognized the need to make available "soft core" and
"hard core" derivatives of the PSC1000. These two new products are
essentially intellectual property "cores" that allow Patriot access to
additional and different market segments. These segments include
customers that need access to microprocessor functions that enable them
to build custom chips specific to their
<PAGE> 3
application rather than general purpose "off the shelf" microprocessors.
The hard core version is for "performance" driven applications and the
soft core addresses "time to market" priorities.
The use of these new core products by product designers can be a
significant risk mitigation tool and having these cores available is a
definite market advantage for us. This is of particular significance for
designers of "SOC"s (systems on a chip) where production unit costs are
critical to maintaining a competitive advantage in high production
products.
As you can see we have made significant progress on the technical
development of the PSC1000 in spite of a very tight capital situation.
With the availability of capital, we plan to continue to enhance the
PSC1000 with features requested by our customers and to stay ahead of
the competition.
THE EMERGING JAVA EMBEDDED MARKET
We are seeing increasingly strong indicators that the Java embedded
market is emerging. At this year's JavaOne conference, sponsored by Sun
Microsystems, the developers of embedded Java product prototypes were
the main feature of the show. In previous years, there was more emphasis
on large and complex applications of Java. This year the emphasis was on
the embedded, smart appliance side, which potentially represents a much
larger market due to the smaller sized systems with larger quantities
and types of products. Exhibitors at this year's JavaOne conference,
which was attended by over 10,000 people, demonstrated numerous embedded
product prototypes running Java. These included two-way videophones,
pagers (including Motorola's), personal digital assistants or PDAs
(including 3 Comm's Palm Pilot) as well as industrial controller
applications. Clearly, Java is making inroads into the smart appliance
market.
The Embedded Systems Conference also echoed the same theme that Java is
emerging in the embedded market.
Why is it that Java is so important to the embedded market? There
appears to be several very good reasons. Unlike the personal computer
market, the embedded system market is lacking in standards like software
languages, processors, operating systems and interfaces. This means that
software written for embedded applications is customized to the specific
processor being used. Although similar tasks may be performed, the
software is not usually transportable to another product or processor.
This results in poor software productivity for the developer. However,
using Java allows the software to be run on any Java ported machine.
That's why we are seeing companies like Hewlett Packard and IBM
standardizing and using Java as a means to improve software
productivity.
In today's technology, software plays a major role in a product's
success. The majority of graduating software engineers has had at least
one course in Java to qualify them for the workplace. The inherent
features which make Java a natural for the embedded world, include ease
of networking and built-in security. As the usage of small, low-cost
embedded products increases, the need to be able to efficiently and
securely communicate via a network grows. A prime example is the home
automation market that allows remote controlling of hundreds of types of
home appliances from heating systems to VCRs.
Java has many advantages for products in the embedded systems market and
companies are starting to realize the wisdom of using Java. The
combination of the PSC1000 with Personal Java and VxWorks is ideally
suited to meet this need. Both Personal Java and VxWorks are leading
software products helping to standardize Java in the embedded product
market. We intend to penetrate this market both in the US and
internationally.
<PAGE> 4
CAPITAL RAISING EFFORTS
In late 1999, we went effective with a capital plan that gave us access
to $5 million. As many of you know, for almost a year, we had been
operating on minimal cash reserves that hindered our ongoing development
and marketing efforts. In late 1998 we investigated several options and
selected a new equity based arrangement known as an "equity line of
credit". Public companies normally don't attract venture capital
primarily because they are already publicly traded. As such, financing
options are usually limited. We decided on the equity line of credit
because it offered us control as to when and how much money we would
raise. Due to the increase in the market price and the trading volume in
our common stock during January 2000, we decided to bring in the
remaining balance of the $5 million equity line- approximately $4.5
million. This will allow us to greatly accelerate our efforts in
marketing and enhancing the PSC1000. We are currently in discussions
with Swartz Private Equity, the underwriter for the equity line, to
provide an additional $30 million line of credit. The additional credit
line would assure us access to capital markets for the next three years
with sufficient amounts of capital to expand on our efforts if that
became necessary. Of course, we would have control over when and how
much of the line we used, if any.
LEGACY PRODUCTS
Patriot's focus has been on the PSC1000 and we will continue to focus
our efforts on the further commercialization of the PSC1000, since this
product line offers the highest potential shareholder return.
As for our communications products, we continue to offer our legacy
products but have curtailed new development. We continue to receive
recurring orders for our standard products, and this provides a
continuing source of revenue for the company.
In August, we sold the patent rights to the Gas Plasma Antenna (GPA)
technology that was invented by our founder, Woody Norris. This
technology was developed in conjunction with our Ground Penetrating
Radar (GPR) technology.
In recent years, Patriot had been working with the U.S. Navy (under
contract) to further characterize the GPA technology and investigate
potential military use. Patriot provided only minimal capital support to
this area since our focus has rightfully been on the PSC1000. Under the
terms of the sale agreement, Patriot did receive up front cash and is
entitled to follow on royalties for a period of time. The acquiring
company has the financial resources available to further exploit the GPA
technology and Patriot will be able to benefit from their success should
they be able to market products derived from the technology. Patriot
continues to retain full rights and patents to the GPR technology.
WHAT'S NEXT??
With the combination of capital, the release of an updated Java
platform, the availability of soft and hard core versions and the
upcoming faster and smaller version of the PSC1000, Patriot is well
positioned for the Java embedded market. All indications are that the
embedded Java market is here and we at Patriot are ready to exploit it!
We intend to aggressively pursue this market, confident that we have the
most to offer at a very competitive cost.
We are continuing to fill backorders for our premium evaluation kit that
includes the recently completed Personal Java and VxWorks ported
packages. Orders will be shipped world wide to anxiously awaiting
customers. We expect this will lead to production orders which we intend
to fill with the faster .35 micron version. Moreover, our soft and hard
cores are the enabling products that can lead to additional licensing
deals. As we achieve market recognition and credibility, this will
<PAGE> 5
pave the way for key strategic partnerships that should enable Patriot
to maximize its goals while providing much improved shareholder value.
Enclosed are the Proxy materials for our upcoming Annual Shareholders
meeting which will be held on April 28, 2000 at 2:00 p.m. at the Carmel
Mountain Doubletree hotel. Please fill out the enclosed ballot to cast
your vote on each proposal. If you plan to attend the meeting, you may
vote in person. Otherwise you may mail your proxy ballot using the
enclosed information.
I thank you for your many expressions of continued support during our
challenging times. Like all of you, I look forward to a very bright
future for Patriot Scientific Corporation, and to be able to report to
you regularly about our strategic growth in a rapidly growing new market
that is continually redefining the world in which we live.
Sincerely,
/s/ James T. Lunney
James T. Lunney
Chairman, President and CEO
<PAGE> 6
PATRIOT SCIENTIFIC CORPORATION
10989 Via Frontera
San Diego, California 92127
(858) 674-5000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
to be held April 28, 2000
Notice is hereby given that the Annual Meeting of Shareholders of
PATRIOT SCIENTIFIC CORPORATION (the "Company") will be held on April 28, 2000 at
2:00 o'clock p.m. (Pacific Time) at the Carmel Mountain Doubletree Resort (El
Dorado Room), 14455 Penasquitos Dr., San Diego, California, for the following
purposes:
1. To elect directors of the Company to serve as directors
until the annual meeting of stockholders to be held in 2001,
until such directors' successor has been duly elected and
qualified or until such directors have otherwise ceased to
serve as directors.
2. To approve an amendment to the Company's Certificate of
Incorporation to increase the number of shares of common
stock, $.00001 par value, that the Company is authorized to
issue from 60,000,000 to 100,000,000.
3. To ratify the appointment of BDO Seidman as independent
accountants for the Company for the fiscal year ending May
31, 2000.
4. To transact such other business as may properly come before
the meeting or any postponements or adjournments thereof.
The Board of Directors has fixed March 20, 2000 as the record date
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting and any postponements or adjournments thereof, and only
stockholders of record at the close of business on that date are entitled to
such notice and to vote at the Annual Meeting. A list of stockholders entitled
to vote at the Annual Meeting will be available at the offices of the Company
for ten (10) days prior to the Annual Meeting.
We hope that you will use this opportunity to take an active part
in the affairs of the Company by voting on the business to come before the
Annual Meeting either by executing and returning the enclosed Proxy Card or by
casting your vote in person at the Annual Meeting.
STOCKHOLDERS UNABLE TO ATTEND THE ANNUAL MEETING IN PERSON ARE
REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE. A
STAMPED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. IF A STOCKHOLDER RECEIVES
MORE THAN ONE PROXY CARD BECAUSE HE OR SHE OWNS SHARES REGISTERED IN DIFFERENT
NAMES OR ADDRESSES, EACH PROXY CARD SHOULD BE COMPLETED AND RETURNED.
<PAGE> 7
By Order of the Board of Directors
/S/ ROBERT PUTNAM
-----------------------------
Robert Putnam
Secretary
March 25, 2000
<PAGE> 8
PATRIOT SCIENTIFIC CORPORATION
10989 VIA FRONTERA
SAN DIEGO, CALIFORNIA 92127
PROXY STATEMENT
This Proxy Statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of PATRIOT SCIENTIFIC
CORPORATION, a Delaware corporation (the "Company"), for use in connection with
an Annual Meeting of Shareholders of the Company (the "Annual Meeting"), to be
held on April 28, 2000 at the Carmel Mountain Doubletree Resort (El Dorado
Room), 14455 Penasquitos Dr., San Diego, California, at 2:00 o'clock p.m.
(Pacific Time), and any and all postponements or adjournments thereof for the
purposes set forth in the accompanying Notice of Annual Meeting. The telephone
number of the Company is (858) 674-5000 and its facsimile number is (858)
674-5005. This Proxy Statement and the accompanying form of proxy were first
mailed to stockholders on or about March 25, 2000.
RECORD DATE AND VOTING
The Board of Directors has fixed the close of business on March
20, 2000 (the "Record Date") for determining shareholders entitled to notice of
and to vote at the Annual Meeting. As of the Record Date, the Company had
50,991,374 shares of common stock, $.00001 par value per share ("Common Stock"
or "Common Shares") outstanding and entitled to vote. A majority of the shares
entitled to vote on the Record Date, present in person or represented by proxy,
will constitute a quorum at the meeting.
Each share of Common Stock issued and outstanding on the Record
Date is entitled to one vote on any matter presented for consideration and
action by the stockholders at the Annual Meeting. With respect to all matters
other then the election of directors and the proposed amendment to the Company's
Certificate of Incorporation to increase the number of shares of Common Stock
that the Company is authorized to issue from 60,000,000 to 100,000,000, the
affirmative vote of a majority of the voting shares present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
will be the act of the stockholders. Directors will be elected by a plurality of
the votes of the shares present in person or represented by proxy and entitled
to vote on the election of directors. The matter of the proposed amendment to
the Company's Certificate of Incorporation to increase the number of authorized
shares of the Company require the affirmative vote of a majority of the
outstanding shares of Common Stock on the Record Date. Abstentions will be
treated as the equivalent of a negative vote for the purpose of determining
whether this proposal has been adopted and will have no effect for the purpose
of determining whether a director has been elected. Unless otherwise instructed,
proxies solicited by the Company will be voted "FOR" the nominees named herein
for election as directors, "FOR" the approval of an amendment to the Company's
Certificate of Incorporation to increase the number of shares of Common Stock
that the Company is authorized to issue from 60,000,000 to 100,000,000, and
"FOR" the ratification of the selection of BDO Seidman LLP to provide audit
services to the Company for the fiscal year ending May 31, 2000.
New York Stock Exchange Rules ("NYSE Rules") generally require
that when shares are registered in street or nominee name, its member brokers
must receive specific instructions from the beneficial owners in order to vote
on certain proposals. However, the NYSE Rules do not require specific
instructions in order for a broker to vote on the election of directors. If a
member broker indicates on the proxy that such broker does not have
discretionary authority as to certain shares to vote on any proposal that does
require specific instructions, those shares will not be considered as present
and entitled to vote with respect to that matter. Pursuant to Delaware law, a
broker non-vote will not be treated as present or voting in person or by proxy
on the proposal. A broker non-vote will have no effect for the purpose of
determining whether a director has been elected. A stockholder giving a proxy
has the power to revoke it at any time before it is exercised by giving written
notice of revocation to the Secretary of the Company, by executing a subsequent
proxy, or by attending the Annual Meeting and, having notified the Secretary in
writing of revocation, voting in person. Subject to any such revocation, all
shares represented by properly executed proxies will be voted in accordance with
the specifications on the enclosed proxy card.
1
<PAGE> 9
AVAILABLE INFORMATION
The Company is subject to the informational and reporting
requirements of Section 13 of the Securities Exchange Act of 1934, as amended
("Exchange Act"), and in accordance with those requirements files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed with the Commission are
available for inspection and copying at the Public Reference Branch of the
Commission, located at Room 1024, 450 Fifth Street N.W., Washington, DC 20549,
at prescribed rates. The Company's filings under the Exchange Act may also be
accessed through the Commission's web site (http://www.sec.gov).
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the Record Date, the stock
ownership of each officer and director of the Company, of all officers and
directors of the Company as a group, and of each person known by the Company to
be a beneficial owner of 5% or more of its Common Stock. Except as otherwise
noted, each person listed below is the sole beneficial owner of the shares and
has sole investment and voting power over such shares. No person listed below
has any option, warrant or other right to acquire additional securities of the
Company, except as otherwise noted.
<TABLE>
<CAPTION>
Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
-------- ----------------- ---------------- --------
<S> <C> <C> <C>
Common stock Gloria Felcyn, CPA 7,089,912(1) 13.5%
par value 20440 Williams Ave.
$.00001 Saratoga, California 95070
SAME Swartz Private Equity LLC 4,196,988(2) 8.0%
200 Roswell Summit, #285
Roswell, GA 30076
SAME Jayanta K. Maitra 298,095(5) *
10989 Via Frontera
San Diego, California 92127
SAME Donald R. Bernier 125,000(3) *
10989 Via Frontera
San Diego, California 92127
SAME Philip Morettini 110,000 *
10989 Via Frontera
San Diego, California 92127
SAME Lowell W. Giffhorn 249,148(4) *
10989 Via Frontera
San Diego, California 92127
SAME James T. Lunney 346,979(6) *
10989 Via Frontera
San Diego, California 92127
</TABLE>
2
<PAGE> 10
<TABLE>
<CAPTION>
Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
-------- ----------------- ---------------- --------
<S> <C> <C> <C>
SAME Robert Putnam 75,000(3) *
10989 Via Frontera
San Diego, California 92127
SAME Helmut Falk, Jr. 38,612 *
10989 Via Frontera
San Diego, California 92127
SAME Richard Blum 1,000 *
10989 Via Frontera
San Diego, California 92127
SAME Frederick Thiel 50,000(3) *
10989 Via Frontera
San Diego, California 92127
All directors & officers 1,293,834(7) 2.5%
as a group (9 persons)
</TABLE>
* Less than 1%.
(1) As trustee of the Helmut Falk Family Trust and executor of the Helmut
Falk estate, Ms. Felcyn effectively controls the shares which were
subject to an escrow arrangement (as described in "Certain
Transactions" below) originally issued to nanoTronics in connection
with the ShBoom technology acquisition and shares that remain from
5,000,000 non-escrowed shares that were originally issued to
nanoTronics in connection with the ShBoom technology acquisition and
were subsequently transferred to the Helmut Falk Family Trust.
(2) Includes 1,052,219 shares issuable upon the exercise of outstanding
warrants.
(3) For each of Messrs. Bernier, Putnam and Thiel the amount includes
50,000 shares issuable upon the exercise of outstanding stock options.
(4) Includes 90,000 shares issuable upon the exercise of outstanding stock
options.
(5) Includes 110,753 shares issuable upon the exercise of outstanding
stock options.
(6) Includes 116,666 shares issuable upon the exercise of outstanding
stock options.
(7) Includes 826,415 shares issued and outstanding and 467,419 shares
issuable upon exercise of stock options.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 60,000,000
shares of Common Stock, $.00001 par value per share. On the Record Date, a total
of 50,991,374 Common Shares were issued and outstanding. The holders of Common
Stock are entitled to one vote for each share held. The affirmative vote of a
majority of votes
3
<PAGE> 11
cast at a meeting which commences with a lawful quorum is sufficient for
approval of most matters upon which shareholders may or must vote, including the
questions presented for approval or ratification at the Annual Meeting. However,
removal of a director from office, amendment of the certificate of incorporation
or repeal of the certificate of incorporation in its entirety require the
affirmative vote of a majority of the total voting power for approval, and
certain other matters (such as shareholder amendment of the bylaws, and
amendment, repeal or adoption of any provision inconsistent with provisions in
the certificate of incorporation regarding indemnification of directors,
officers and others, release of director liability, and the Company's election
not to be governed by statutory provisions concerning business combinations with
interested shareholders) require the affirmative vote of two-thirds of the total
voting power for approval. Common Shares do not carry cumulative voting rights,
and holders of more than 50% of the Common Stock have the power to elect all
directors and, as a practical matter, to control the Company. Holders of Common
Stock are not entitled to preemptive rights, and the Common Stock may only be
redeemed at the election of the Company.
A special meeting of shareholders may be called by or at the
request of the Chairman of the Board, the President or any two directors, and at
the request of persons owning in the aggregate not less than 20% of the issued
and outstanding Common Shares entitled to vote in elections for directors. After
the satisfaction of requirements with respect to preferential dividends, if any,
holders of Common Stock are entitled to receive, pro rata, dividends when and as
declared by the Board of Directors out of funds legally available therefor. Upon
liquidation, dissolution or winding-up of the Company, after distribution in
full of the preferential amount, if any, to be distributed to holders of any
preferred stock which may be issued, holders of Common Stock are entitled to
share ratably in the Company's assets legally available for distribution to its
shareholders.
The Company's board of directors is authorized to issue 5,000,000
shares of undesignated preferred stock, $.00001 par value, without any further
action by the stockholders. The board of directors may also divide any and all
shares of preferred stock into series and fix and determine the relative rights
and preferences of the preferred stock, such as the designation of series and
the number of shares constituting such series, dividend rights, redemption and
sinking fund provisions, liquidation and dissolution preferences, conversion or
exchange rights and voting rights, if any. Issuance of preferred stock by the
board of directors will result in such shares having dividend, voting, and/or
liquidation preferences senior to the rights of the holders of Common Stock and
could dilute the voting rights of the holders of Common Stock. There are
currently no shares of preferred stock issued and outstanding.
TRANSFER AGENT AND REGISTRAR. Interwest Transfer Company, Inc.,
1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117, acts as transfer
agent and registrar for the Common Stock of the Company. Their telephone number
is (801) 272-9294.
DIVIDEND POLICY. The declaration and payment of dividends on
Common Shares is at the absolute discretion of the Company's Board of Directors
and will depend, among other things, on the Company's earnings, financial
condition and capital requirements. The Company has not paid any cash dividends
to date, and no cash dividends will be declared or paid on the Common Stock of
the Company in the foreseeable future.
MATTERS TO BE ACTED UPON
PROPOSAL NUMBER 1: ELECTION OF DIRECTORS.
The Company's bylaws provide for a board of three to seven
directors as the Board determines, and the Board of Directors has fixed the
number of members of the board at six. All directors are elected for one-year
terms at the annual meeting of shareholders. Directors are elected by plurality
vote, meaning that (should there be more nominees than Board seats available)
the nominees who receive the most votes will be elected for the term
4
<PAGE> 12
nominated, even if the number of votes received by any one or more nominees is
less than a majority of the votes cast. Cumulative voting is not allowed in the
election of directors.
Donald R. Bernier and Helmut Falk, Jr. were elected to the Board
at the 1997 annual meeting of shareholders. Mr. Bernier has been a director
since 1995 and Mr. Falk since 1997. Mr. James T. Lunney was appointed to the
Board in April 1998. Mr. Frederick Thiel and Mr. Richard Blum were appointed to
the Board in February 1999. Mr. Lowell Giffhorn was appointed to the Board in
August 1999. Messrs. Bernier, Falk, Lunney, Thiel, Blum and Giffhorn have all
been nominated by the Board of Directors to stand for election to the Board. If
elected, they will each serve a one-year term or until their respective
successors have been elected and qualified.
UNLESS OTHERWISE SPECIFIED, ALL PROXIES RECEIVED WILL BE VOTED FOR
THE ELECTION OF ALL NOMINEES. IF ANY NOMINEE SHOULD NOT STAND FOR ELECTION FOR
ANY REASON, YOUR PROXY WILL BE VOTED FOR ANY PERSON OR PERSONS DESIGNATED BY THE
BOARD OF DIRECTORS TO REPLACE SUCH NOMINEE.
The Board has no reason to expect that any of the nominees will not
stand for election or decline to serve if elected. There is no arrangement
between any director or nominee and any other person pursuant to which such
director or nominee was or is to be selected as a director or nominee. There is
no blood relationship between or among the nominees, directors or executive
officers of the Company. The following table and biographical summaries set
forth information, including principal occupation and business experience,
concerning the nominees for the Board of Directors and the executive officers of
the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES DIRECTOR SINCE
- ---- --- -------------------- --------------
<S> <C> <C> <C>
James T. Lunney (2) 45 Chairman, President, April 1998
CEO and Director
Robert Putnam 41 Secretary n/a
Jayanta K. Maitra 50 Vice President n/a
Engineering
Lowell W. Giffhorn(1) 53 Chief Financial Officer August 1999
and Director
Donald R. Bernier(1) 57 Director January 1995
Helmut Falk, Jr.(2) 43 Director December 1997
Philip Morettini 43 Vice President Sales n/a
and Marketing
Frederick Thiel(1) 39 Director February 1999
Richard Blum(2) 69 Director February 1999
</TABLE>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
JAMES T. LUNNEY. Mr. Lunney has been the President and CEO of
Patriot since March 1998, was appointed as a Director in April 1998, and was
appointed Chairman in August 1999. From February 1997 to March 1998, he was the
President of Signal Processing Systems, a San Diego manufacturer of signal
processing technologies. From November 1992 to February 1997, he was the Manager
of Production Programs, Vice President and Business Area Manager for Signal
Processing, which was a division of Scientific Atlanta until August 1996, when
it was acquired by Global Associates Ltd. Previously, Mr. Lunney held various
managerial positions with GE Aerospace, Defense Systems Division and Ordnance
Systems Division. In 1977, he received a B.S. in Electrical Engineering from
Worcester Polytechnic Institute.
ROBERT PUTNAM. Mr. Putnam has been the Secretary of Patriot since
1989 and was a director from 1989 to April 1998. Since 1988 he has served as
Secretary of e.Digital, Inc. Since 1984 he has been a director of American
Technology Corp., where he served as Secretary/Treasurer from 1984 and as
President and CEO from
5
<PAGE> 13
February 1994 until September 1997. He received a B.A. degree in Mass
Communication/Advertising from Brigham Young University in 1983. Mr. Putnam
works only part-time for the Company.
JAYANTA K. MAITRA. Mr. Maitra was Vice President of Engineering of
Metacomp from 1990 to December 1996 when he was appointed Vice President of
Engineering of Patriot. From 1985 to 1987 he was Manager of Hardware Engineering
for Systech Corporation, a San Diego based hardware and software communications
company. From 1974 to 1985 he held various engineering positions with several
computer related technology companies. He obtained a B.S. in Electrical
Engineering from the Indian Institute of Technology in 1972 and a M.S. in
Electrical Sciences at State University of New York in 1973.
LOWELL W. GIFFHORN. Mr. Giffhorn was the principal in his own
financial management consulting firm from August 1996 until joining Patriot as
Chief Financial Officer (CFO) in May 1997. From November 1996 to May 1997, Mr.
Giffhorn, in addition to other consulting engagements, performed the duties of
Acting CFO for Patriot. From June 1992 to August 1996 and from September 1987 to
June 1990 he was the CFO of Sym-Tek Systems, Inc. and Vice President of Finance
for its successor, Sym-Tek Inc., a major supplier of capital equipment to the
semiconductor industry. He has over twenty-five years of experience in a variety
of financial positions, including eleven years as Controller for Langley
Corporation, a publicly traded, San Diego, defense contractor. Mr. Giffhorn
obtained a M.B.A. degree from National University in 1975 and he obtained a B.S.
in Accountancy from the University of Illinois in 1969.
DONALD R. BERNIER. Since 1971, Mr. Bernier has been the owner and
President of Compunetics Incorporated, a Troy, Michigan-based electronics firm
of which he is the founder. Compunetics engages in contract research and
development, specializing in microelectronics primarily for the automotive
industry.
HELMUT FALK, JR. For the past eight years, Dr. Falk has been the
Director of Anesthesia for the Johnson Memorial Hospital in Franklin, Indiana.
Dr. Falk received his D.O. from the College of Osteopathic Medicine of the
Pacific in 1987 and his B.S. in Biology from the University of California,
Irvine in 1983. Dr. Falk is the son of the late Helmut Falk, who was the sole
shareholder of nanoTronics and the Chairman and CEO of Patriot until his death
in July 1995. Dr. Falk is also an heir to the Helmut Falk Estate, which is the
beneficial owner of the Company's shares held by the Helmut Falk Family Trust
and nanoTronics Corporation.
PHILIP MORETTINI. Mr. Morettini has been the Vice President of
Sales and Marketing of Patriot since July 1997. From September 1995 to April
1997, he was the President and CEO of Sdept Computer Solutions, a San Diego
software company. From December 1993 to September 1995, he was the principal in
his own management consulting firm; and from March 1990 to September 1993, he
held several positions, including Division Manager, for Horizons Technology, a
San Diego software and services company. Previously, he held various marketing
and product development positions with Spectragraphics and Hewlett-Packard. In
1981 Mr. Morettini received a M.B.A. degree from the University of Detroit and
in 1979 he obtained a B.S. in Engineering from the University of Illinois.
FREDERICK G. THIEL. Since April 1998, Mr. Thiel has been the
President and CEO of Lantronix, Inc., an Irvine, CA based developer/manufacturer
of computer network enabling devices and systems. From July 1996 to April 1998
he was the Vice President of Marketing and General Manager for CDM Technology,
Inc., an Irvine, CA based developer of high-end storage controller and
intelligent serial input/output microprocessor technology. From June 1994 to
March 1996 he was the Director of World Wide Marketing for Standar Microsystems
Corporation, an Irvine, CA based network technology developer and manufacturer.
Mr. Thiel was educated in the United States and Europe and studied business
administration while at the Stockholm School of Economics.
RICHARD G. BLUM. Mr. Blum retired as Chairman and President of
Kysor Europe, a wholly owned subsidiary of Kysor Industrial Corporation, in
1991. Previously Mr. Blum held a variety of executive level positions with ITT
Europe and ADT Europe. He completed his undergraduate work at Oregon State and
Linfield Colleges in 1951 and post graduate work at John Carrol and Canisius
Universities in 1958.
6
<PAGE> 14
No director, executive officer or nominee for the Board has been
involved in any legal proceedings during the past five years. There are no
material proceedings adverse to the Company in which any director, executive
officer, or nominee for the Board has a material interest adverse to the
Company.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND
COMMITTEES OF THE BOARD OF DIRECTORS
COMMITTEES OF THE BOARD
During the fiscal year ended May 31, 1999 the Company had no
committees of the Board of Directors due in part to the size of the Board. The
responsibilities typically associated with committees were performed by the
entire Board. The Board of Directors established the following committees in
November 1999.
Audit Committee - The Board established an Audit Committee to
review the audit and control functions of the Company, the Company's accounting
principles, policies and practices and financial reporting, the scope of the
audit conducted by the Company's auditors, the fees and all non-audit services
of the independent auditors and the independents auditors' opinion and letter of
comment to management and management's response thereto.
Compensation Committee - The Board established a Compensation
Committee (the "Compensation Committee") to review and recommend to the Board
the salaries, bonuses and prerequisites of the Company's executive officers. The
Compensation Committee will also review and recommend to the Board any new
compensation or retirement plans and administer the Company's 1992 and 1996
Stock Option Plans.
Other than the Audit Committee and Compensation Committees, the
Company does not have any standing nominating or other committees of the Board
of Directors. During the fiscal year ended May 31, 1999, four formal meetings of
the Board of Directors were held which all directors attended.
Directors have received in the past and may receive in the future
stock options pursuant to the Company's stock option plans. Options to purchase
50,000 shares of the Company's common stock were issued to Mr. Thiel and Mr.
Blum during the fiscal year ended May 31, 1999. The Company has no other
arrangements to pay any direct or indirect remuneration to any directors of the
Company in their capacity as directors other than in the form of reimbursement
of expenses for attending directors' or committee meetings.
No director of the Company has resigned or declined to stand for
re-election to the Board of Directors because of disagreement with the Company
on any matters relating to the Company's operations, policies or practices since
the date of the last meeting of shareholders.
7
<PAGE> 15
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
There is shown below information concerning the compensation of
the Company's chief executive officers and each of the other four most highly
compensated executive officers whose salary and bonus exceeded $100,000 (each a
"Named Officer") for the fiscal years ended May 31, 1997, 1998 and 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Cash Compensation Long-Term Compensation
-------------------------------- -----------------------------------
Name and Fiscal Options All Other
Principal Position Year Salary Bonus (# of Shares) Compensation(4)
- ------------------ ---- ------ ----- ------------- ---------------
<S> <C> <C> <C> <C> <C>
James T. Lunney 1999 $137,200(5) Nil None None
President and CEO(1) 1998 $ 26,385(5) Nil 350,000 shares None
Michael A. Carenzo 1998 $164,133 Nil None None
President and CEO(2) 1997 $138,000 Nil None None
Philip J. Morettini 1999 $110,000 Nil None None
Vice President
Sales and Marketing
Lowell W. Giffhorn 1999 $107,307 Nil None None
Chief Financial
Officer
Jayanta K. Maitra(3) 1999 $120,000 Nil None None
1998 $104,500 Nil 25,000 shares None
1997 $118,700 Nil 535,753 shares $2,874
</TABLE>
(1) Mr. Lunney has served as President and CEO since March 23, 1998.
(2) Mr. Carenzo served as President and CEO from June 1, 1996 to March
1998 when Mr. James T. Lunney was appointed President and CEO.
(3) Mr. Maitra was appointed Vice President Engineering on December 26,
1996 as a result of the business combination with Metacomp. The
amounts disclosed reflect his compensation before and after the
acquisition.
(4) Represents long-term disability insurance payments made by the Company
on behalf of Mr. Maitra during the fiscal year ended May 31, 1997.
(5) Included in Mr. Lunney's cash compensation is a $600 per month car
allowance.
The Company maintains employee benefits that are generally
available to all of its employees, including medical, dental and life insurance
benefits and a 401(k) retirement savings plan. The Company did not make any
matching contributions under the 401(k) plan for any of the above named officers
during the fiscal year ended May 31, 1999.
8
<PAGE> 16
OPTION GRANTS
During the fiscal year ended May 31, 1999 the Company did not grant
any stock options to the officers reflected in the summary compensation table
shown above.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
Shown below is information on exercises of stock options and fiscal
year-end values under the Company's 1996 and 1992 Stock Option Plans to the
officers reflected in the Summary Compensation Table shown above.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
Shares May 31, 1999 May 31, 1999
Acquired Value -------------------------- ----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James T. Lunney -- -- 233,334 116,666 $ -- $ --
Michael A. Carenzo -- -- 525,691 -- $ -- $ --
Philip J. Morettini -- -- 120,000 180,000 $ -- $ --
Lowell W. Giffhorn -- -- 210,000 90,000 $ -- $ --
Jayanta Maitra -- -- 110,753 150,000 $ -- $ --
</TABLE>
The fair market value of the unexercised in-the-money options at May
31, 1999 was determined by subtracting the option exercise price from the last
sale price as reported on the over the counter bulletin board on May 31, 1999,
$.47. All options had exercise prices greater than $.47 and, therefore, were
excluded from the valuation.
The Company has not awarded stock appreciation rights to any of its
employees. The Company has no long-term incentive plans.
Under Mr. Mairta's employment contract, the board of directors
cancelled 225,000 previously granted stock options as a result of the Company
not meeting certain performance goals. The Company has no defined benefit or
actuarial plans covering any person.
The options shown above do not reflect the amendment and repricing of
existing options which happened subsequent to the end of the last fiscal year.
Such options were repriced on October 5, 1999 under the Plan, with an exercise
price equal to the fair market value of the Common Stock on such date in the
belief that it was in the best interests of the Company and its shareholders to
ensure that the intended incentives for employees and directors were maintained
in accordance with the compensation philosophy of the Board of Directors. The
Board of Directors amended and repriced (to a lower exercise price) all of the
options then held by such employees and directors that had been granted pursuant
to the Company's 1992 and 1996 Stock Option Plans. These options were amended
and repriced to reflect the fact that the market price of the Common Stock had
been negatively impacted in 1999 because of the delay in the acceptance of Java
as the programming language for embedded applications and the delay in the
registration statement related to the Investment Agreement becoming effective.
This resulted in reduced funding available to accomplish the Company's
objectives. In the opinion of the Board of Directors, the Company's management
and other personnel have dealt with the delays proactively and effectively to
manage through the slowdown in a manner that has maximized the Company's reduced
funds while positioning the Company to complete upgrading its PSC1000
microprocessor and take advantage of the anticipated upswing in hardware to
support the Java programming language. Accordingly, the Board of Directors
determined that, in light of the reduced market price of the Common Stock and
the importance of equity based compensation to the
9
<PAGE> 17
overall compensation philosophy of the Board of Directors, it was appropriate to
reprice these options to provide the continuing incentives intended under the
Plan to the affected employees and directors. These options were amended and
repriced on October 5, 1999 with an exercise price equal to the market price on
that date.
The following table sets forth certain additional information
regarding all repricings of options held by any executive officer or director
that have occurred in the last ten years.
<TABLE>
<CAPTION>
Securities Underlying Market Price Exercise Price
Number of Options of Stock At At Time of
Repriced or Amended Time of Repricing Repricing or
Name Date (#) Or Amendment($) Amendment($)
- ---- ---- --------------------- ----------------- -------------
<S> <C> <C> <C> <C>
James T. Lunney October 5, 1999 350,000 $0.32 $0.86
Lowell W. Giffhorn October 5, 1999 300,000 $0.32 $1.12
Jayanta Maitra October 5, 1999 72,000 $0.32 $1.37
October 5, 1999 128,000 $0.32 $1.17
October 5, 1999 25,000 $0.32 $0.59
Philip J. Morettini October 5, 1999 300,000 $0.32 $1.383
Robert Putnam October 5, 1999 50,000 $0.32 $0.59
Donald Bernier October 5, 1999 50,000 $0.32 $0.59
Helmut Falk, Jr October 5, 1999 50,000 $0.32 $0.59
Richard Blum October 5, 1999 50,000 $0.32 $0.48
Frederick Thiel October 5, 1999 50,000 $0.32 $0.3625
</TABLE>
EMPLOYMENT CONTRACTS
The Company entered into an employment agreement dated as of February
23, 1998 and approved by the Company's directors on March 24, 1998, with Mr.
Lunney providing for his employment as President and CEO effective March 23,
1998. The agreement is for a three year term providing for a base salary of
$130,000 per annum for the first year with an increase in the second year to at
least $140,000 per annum. The base salary may be increased at the discretion of
the Board of Directors. The agreement provides for a guaranteed bonus of 25% at
the end of the first year or on certain changes in control as defined in the
agreement. During subsequent years, Mr. Lunney is eligible for a bonus equal to
25% of the base salary conditioned on Mr. Lunney meeting certain objectives
established by the Board of Directors. In addition, the agreement provides a
$600 per month car allowance. The Company may terminate Mr. Lunney's employment
with or without cause, but termination without cause (other than disability or
death) would result in a lump sum severance payment ranging, depending on length
of service, from six to twelve months salary plus any prorated earned bonuses.
Also, upon a change of control, as defined in the agreement, Mr. Lunney may
elect to terminate employment and obtain a lump sum severance payment equal to
the base salary for the remaining months of the agreement. The Company has
granted Mr. Lunney options to purchase 350,000 common shares, 116,667 vesting on
March 23, 1998 and the balance vesting equally at the end of twelve and
twenty-four months from the date of the agreement subject to earlier vesting in
the event of a change in control of the Company.
10
<PAGE> 18
The Company entered into an employment agreement dated as of July 28,
1997 and approved by the Company's directors on August 18, 1997, with Mr.
Morettini providing for his employment as Vice President of Sales and Marketing.
The agreement is for a three year term providing for a base salary of $110,000
per annum for the first year and not less than $110,000 per annum during the
second and third years of the agreement. The base salary may be increased at the
discretion of the Board of Directors. The agreement provides for a bonus up to
50% of the annual base consideration for the applicable year. The Company may
terminate Mr. Morettini's employment with or without cause, but termination
without cause (other than disability or death) would result in a lump sum
severance payment equal to four months of the then current base salary. If
within twelve months of a change in control, as defined in the agreement, Mr.
Morettini's employment is terminated for other than cause or if Mr. Morettini
refuses to accept or voluntarily resigns from a position other than a qualified
position, as that term is defined in the agreement, then he will receive a lump
sum severance payment equal to twelve months of his then current salary. Under
the agreement, the Company granted Mr. Morettini options to purchase 300,000
common shares, 30,000 vesting on July 28, 1997 and the balance vesting one-third
per year starting July 28, 1998, subject to certain performance standards.
Options may vest earlier subject to the discretion of the Board of Directors.
The Company entered into an employment agreement dated as of July 23,
1998 with Mr. Giffhorn providing for his employment as the Chief Financial
Officer. The agreement is for a three year term providing for a base salary of
$110,000 per annum for the first year and not less than $110,000 per annum
during the second and third years of the agreement. The base salary may be
increased at the discretion of the Board of Directors. The agreement provides
for a bonus up to 50% of the annual base consideration for the applicable year.
The Company may terminate Mr. Giffhorn's employment with or without cause, but
termination without cause (other than disability or death) would result in a
lump sum severance payment equal to four months of the then current base salary.
If within twelve months of a change in control, as defined in the agreement, Mr.
Giffhorn's employment is terminated for other than cause or if Mr. Giffhorn
refuses to accept or voluntarily resigns from a position other than a qualified
position, as that term is defined in the agreement, then he will receive a lump
sum severance payment equal to twelve months of his then current salary.
The Company entered into an employment agreement dated January 1, 1997
with Mr. Maitra providing for his employment as Vice President of Engineering.
The agreement was for a three year term providing for a base salary of $104,400
per year with an increase in the second and third years as recommended by the
President and Chief Executive Officer and approved by the Board of Directors.
Mr. Maitra's salary was increased to $120,000 for the second year. The agreement
provided for incentive bonuses in certain instances of up to 50% of the total
yearly base compensation. The Company could terminate Mr. Maitra's employment
with or without cause, but termination without cause (other than disability or
death) during the first year of the agreement would have resulted in a lump sum
severance payment equal to twelve months salary. The Company originally granted
Mr. Maitra under the agreement options to purchase 500,000 common shares, 50,000
vesting on December 26, 1996 and the balance vesting one-third per year starting
December 31, 1997 subject to certain performance standards. As a result of not
meeting the performance standards, the Board of Directors cancelled 225,000 of
such options. Options may vest earlier subject to the discretion of the Board of
Directors. As of January 1, 2000 the Company and Mr. Maitra are reviewing the
terms of this agreement and are in discussions concerning extending this
agreement or entering into a new employment agreement.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who beneficially own 10% or more of a class of
securities registered under Section 12 of the Exchange Act to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission. Directors, executive officers and greater than 10%
shareholders are required by the rules and regulations of the Commission to
furnish the Company with copies of all reports filed by them in compliance with
Section 16(a).
11
<PAGE> 19
Based solely on its review of copies of the reports it received from
persons required to make such filings and its own records, the Company believes
that from the period June 1, 1998 through February 29, 2000, all persons subject
to the Section 16(a) reporting requirements timely filed the required reports.
CERTAIN TRANSACTIONS
There were no transactions, or series of transactions, during fiscal
1998 or 1999, nor are there any currently proposed transactions, or series of
transactions, to which the Company is a party, in which the amount exceeds
$60,000, and in which to its knowledge any director, executive officer, nominee,
five percent or greater shareholder, or any member of the immediate family of
any of the foregoing persons, has or will have any direct or indirect material
interest other than as described below.
Based on the asset purchase agreement and plan of reorganization dated
June 22, 1994 between the Company, nanoTronics Corporation and Helmut Falk, the
Company issued a total of 10,000,000 restricted common shares to nanoTronics,
5,000,000 of which were a contingent payment subject to the terms of an earnout
escrow. These shares were issued in consideration of technology acquired.
nanoTronics was formed in 1991 and acquired certain base technology for a
simplified 32-bit microprocessor integrated on a single chip with merged
stack/register architecture. nanoTronics expended in excess of $1.9 million
(unaudited) while engaged in further development of that technology and produced
from the basic architecture an enhanced microprocessor (ShBoom-architecture
microprocessor). In connection with the acquisition, the Company also acquired
certain fixed assets including a SunSparc 2 workstation and various terminals,
peripheral devices and software. A majority of the expenditures by nanoTronics
consisted of microprocessor and related software development costs. The result
of these efforts was a successful initial fabrication of the microprocessor in
early 1994 demonstrating technical feasibility of the ShBoom architecture.
nanoTronics also expended funds on the preparation and prosecution of patent
applications.
The shares were issued to nanoTronics of which Falk was the sole
shareholder. Although 5,000,000 of the shares issued were subject to the terms
of an earnout escrow, as more fully described below, the shares were issued for
the purpose of dividends and voting. Prior to the transaction, Mr. Falk was an
unaffiliated person with respect to the Company. At the time of issuance the
10,000,000 common shares represented approximately 36% of the Company's total
issued and outstanding shares.
Although the transaction did not result in a majority change in the
Company's board of directors, or a majority change in its stock ownership, the
issuance of new stock resulted in a large percentage ownership controlled by one
entity with the ability to have significant influence over the Company's future
affairs.
Based on the terms of the purchase agreement, 5,000,000 of the common
shares were issued to nanoTronics subject to an earnout escrow arrangement as a
contingent purchase price. The terms of the escrow arrangement, as defined in
the purchase agreement, provided for the earnout from escrow of 500,000 common
shares for each $500,000 of the Company's revenues commencing June 1, 1994 and
ending May 31, 1999. The purchase agreement also provided for full earnout on
other major corporate events including a sale of substantially all of the
Company's assets, certain mergers, combinations or consolidations, certain
tender offers and upon a liquidation or dissolution. Any shares not earned by
May 31, 1999 would be canceled. The shares could be sold, assigned or
transferred within the escrow arrangement but would still be subject to the
escrow terms. As of May 31, 1999:
o 2,000,000 shares had been released from escrow,
o an additional 1,500,000 shares had been earned and charged to
compensation costs but remained in escrow pending the resolution of
litigation between the Company, nanoTronics, and the Fish Family
Trust, and
o another 1,500,000 shares expired and were returned to the Company as
of May 31, 1999 since revenue was not sufficient to earn this
portion of the escrowed shares.
12
<PAGE> 20
The Company granted certain registration and information rights with
respect to the shares issued to nanoTronics, such rights being assignable to
Falk and the Fish Family Trust (such trust having certain rights to become a
shareholder in nanoTronics). The Company has been advised that nanoTronics has
been liquidated with the 10,000,000 shares transferred to the Helmut Falk Family
Trust which is entitled to the same registration rights. The Company is
obligated to use its best efforts to effect a registration upon written request
up to two times subject to certain limitations. The Company is also obligated to
include the shares, subject to certain limitations, in any underwriting and in
any other registration filed by it.
During January 1999 through April 1999, the Company entered into four
short-term notes with Gloria Felcyn, the trustee for the Falk Family Trust,
aggregating $175,000 all of which have been paid as of February 29, 2000. On the
issuance of each of the first three notes, the Company released 500,000 shares
from the earnout escrow. The Company is holding the remaining 1,500,000 shares
earned subject to the resolution of the Fish Family Trust lawsuit. Upon the
resolution of the lawsuit, the remaining shares held in escrow will either be
released to the Falk Family Trust, used either partially or in their entirety as
a means of settling the lawsuit, or be returned to the Company. The shares being
held in escrow were recorded as additional compensation costs during the period
in which the earnout was satisfied.
In February 1999, the Company entered into an investment agreement
with Swartz Private Equity LLC. The investment agreement entitled the Company,
at the Company's option and subject to a floor price imposed by the Company, to
issue and sell a predetermined amount of its common stock for up to an aggregate
of $5 million from time to time during a three-year period through February 24,
2002, subject to certain conditions including (1) an effective registration
statement needed to be on file with the SEC registering the resale of the common
shares, and (2) a limitation on the number of common shares which could be sold
to Swartz within a 30 day time period based on the trading volume of the stock,
among others. Swartz could purchase the common stock from the Company at a
discount ranging from 10% to 20% depending on the price of the common stock. In
addition to the common stock purchased, Swartz received warrants to purchase an
additional 15% of the common stock at a price equal to 110% of the market price
as defined in the agreement, subject to further semi-annual adjustments if the
price of the common stock goes down.
In July 1999, the Company amended and restated the investment
agreement with Swartz to eliminate the discretion of Swartz as to the timing of
its purchase of the Company's common stock. The amended and restated investment
agreement required Swartz, after the Company put shares of common stock to it,
to purchase the Company's common stock on the twentieth business day following
the put. The previous agreement enabled Swartz, in its sole discretion, to
purchase the Company's common stock at any time during a twenty business day
period following the Company's put to it.
The registration statement went effective on October 5, 1999. The Company
put 780,460, 1,784,640 and 4,449,696 shares of its common stock to Swartz with
effective closing dates of November 30 and December 27, 1999 and February 10,
2000. As a result of an increase in the market price and trading volume of the
Company's common stock, the Company completed the $5 million placement of shares
with the February 10, 2000 closing. The total number of shares placed with
Swartz was 13.9% of the total number of shares outstanding at March 20, 2000 or
7,014,796 common shares at prices ranging from $0.248 to $0.9775. The average
price per share paid by Swartz was $0.71 compared to the average closing price
during the twenty day pricing periods of $1.34 per share.
An additional 1,052,219 shares of common stock at exercise prices ranging
from $0.341 to $1.265 are issuable to Swartz on the conversion of warrants
issued under the investment agreement. None of the warrants had been exercised
as of March 20, 2000.
PROPOSAL NUMBER 2: APPROVAL OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF
THE COMPANY TO INCREASE THE AUTHORIZED SHARES OF COMMON STOCK
In June 1997, the shareholders approved an increase in the number of
shares of Common Stock that the Company is authorized to issue from 40,000,000
to 60,000,000 shares. The Company's Certificate of Incorporation
13
<PAGE> 21
has been amended to effect this change. Management believed at that time that
increase would be sufficient to meet its immediate future needs. However, due in
part to delays in the porting of a real time operating system and Personal Java
to its PSC1000 microprocessor, the acceptance of the Java programming language,
debugging the .35 micron version of the PSC1000 and continued operating losses,
the Company required additional financing which was completed in July 1999. (See
Investment Agreement described above) . This financing required the reservation
of substantially all of the authorized but unissued shares of Common Stock. As a
result, in November 1999, the Board of Directors authorized an amendment,
subject to stockholder approval, to the Company's Certificate of Incorporation;
to increase the number of shares of Common Stock that the Company is authorized
to issue from 60,000,000 to 100,000,000.
The Board of Directors considers it both desirable and essential to
have additional shares of Common Stock available for issuance from time-to-time.
The Board also advises stockholders that failure to approve the amendment could
have a material adverse effect on the Company, its business and results of
operations, in that it would limit the Company's access to equity capital.
OUTSTANDING SHARES; SHARES RESERVED FOR FUTURE ISSUANCE; AND SHARES TO BE
RESERVED OR ISSUABLE UPON THE INCREASE IN AUTHORIZED SHARES
As of the Record Date the Company had 50,991,374 shares of Common
Stock outstanding. An additional 8,063,132 shares were reserved for future
issuance under the Company's stock option plans, pursuant to the Investment
Agreement, and for additional warrants as summarized as follows:
<TABLE>
<CAPTION>
Authorized Common
Shares Reserved
For Future Issuance
<S> <C>
Stock options granted 1,438,419
Stock options available to grant 1,640,327
Stock purchase warrants 4,984,386
---------
Total unissued but reserved for issuance 8,063,132
(as of March 20, 2000)
</TABLE>
The Company is currently in discussions with Swartz for a follow-on
investment for up to $30 million with terms similar to those of the initial
Investment Agreement. However, since the Company has either issued or reserved
an aggregate of 59,054,506 of its 60,000,000 authorized shares of Common Stock,
the Company does not have sufficient authorized shares to enter into a follow-on
investment agreement, grant any significant new stock options or for any other
corporate purpose. The Company is limited in its options to raise additional
money, make acquisitions or take any other action requiring the issuance of its
Common Stock unless the authorized number of shares of Common Stock is
increased. Management believes there may be a need for additional financing due
to continued operating losses.
More information on the individual securities comprising shares
reserved for future issuance are summarized as follows:
Stock Options- The Company maintains three stock option plans. One
1992 Stock Option Plan is a non-statutory stock option plan and a second 1992
Stock Option Plan is an incentive stock option plan. Each plan entitles certain
directors, key employees and consultants of the Company to purchase common
shares of the Company. A maximum of 1,500,000 of common shares were authorized
for grant under the 1992 Plans. Options are granted at a price not less than
fair market value at the date of grant, and are subject to approval of the Board
of Directors. The 1996 Stock Option Plan entitles certain directors, key
employees and consultants of the Company to purchase common shares of the
Company. The 1996 Plan covers a maximum aggregate of 4,000,000 shares. The 1996
Plan provides for the granting of options which either qualify for treatment as
incentive stock options or non-statutory stock options.
At February 29, 2000 the Company had granted options on 1,258,456
shares of Common Stock under the 1992 Stock Option Plans and options on
2,601,217 shares of Common Stock under the 1996 Stock Option Plan, as amended.
The limited number of remaining shares available to grant may impact the ability
of the Company to
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<PAGE> 22
compensate existing or hire new technical, management or other employees or
advisors.
Stock Purchase Warrants- at February 29, 2000 the Company had stock
purchase warrants outstanding exercisable into 4,984,386 shares, which have been
reserved by the Board of Directors. Of this amount, 1,052,219 shares were a
result of the Investment Agreement, 3,781,789 were the result of short term
notes with a group of individual investors, and the balance was related to a
convertible debenture the Company entered into in 1997.
In April 1999, the Company sold shares of common stock to two
individuals in the accumulated amount of $75,000 and in June 1999 the Company
issued shares to an institutional investor upon conversion of a short term note
in the amount of $116,182. These sales occurred after the filing of a
registration statement by the Company and, therefore, by making these sales the
Company may have violated Section 5 of the Securities Act of 1933. In July 1999,
the Company amended and restated the investment agreement with Swartz to
eliminate the discretion of Swartz as to the timing of its purchase of the
Company's common stock. By entering into the amended and restated investment
agreement, the Company completed its sale of common stock to Swartz. Since this
private sale to Swartz occurred after the Company filed its registration
statement, the Company may have sold securities to Swartz in violation of
Section 5 of the Securities Act of 1933, and each placement of shares with
Swartz under the investment agreement may have been a separate violation of
Section 5. Consequently, the two individual investors, the institutional
investor and Swartz may have the right to rescind these purchases of common
stock for a one year period after the purchase of the common stock. In addition,
the Company and certain officers and directors of the Company may be subject to
civil and criminal penalties for potential violation of either or both Section 5
of the Securities Act of 1933 and applicable state law as a result of these
sales. Management believes that the possibility of damages related to these
potential violations of Section 5 of the Securities Act of 1933 is remote and
that such potential violations will have no material impact on the Company's
financial statements.
REASONS FOR INCREASING THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors believes there are a number of important
business reasons for increasing the number of shares of Common Stock.
The authorized number of shares of Common Stock are not sufficient to
enable to the Company to negotiate new financing without special consideration
for the lack of authorized shares available. For example, an equity based
financing would have to provide for limitations based on the availability of
sufficient shares of Common Stock. This factor places the Company at a distinct
disadvantage in negotiating any future transactions by negatively impacting
pricing and marketability of securities sold, as a result this could increase
the effective dilution to existing stockholders.
The authorized number of shares of Common Stock currently available is
not sufficient to enable the Company to respond to potential business
opportunities and to pursue important objectives that may be anticipated.
Accordingly, the Board of Directors believes that it is in the Company's best
interests to increase the number of authorized shares of Common Stock. The Board
of Directors also believes that the availability of such shares will provide the
Company with the flexibility to issue Common Stock for proper corporate purposes
that may be identified by the Board of Directors from time to time, such as
stock dividends (including stock splits in the form of stock dividends),
financings, acquisitions, or strategic business relationships.
Further, the Board of Directors believes the availability of
additional shares of Common Stock will help enable the Company to attract and
retain talented employees through the grant of stock options and other
stock-based incentives. An important component of the Company's business
strategy is to develop and market new products and technologies. These efforts
will require recruitment of additional technical personnel which are in high
demand and short supply in the San Diego area. The availability of stock-based
incentives is a critical element in attracting, motivating and retaining
technical and executive talent.
The Company is currently in discussions with Swartz for a follow-on $30
million credit agreement with terms similar to the initial investment agreement
discussed above. In order to consummate this agreement, additional authorized
shares are required. The Company does not, as of the date of this Proxy
Statement, have any agreements with respect to future acquisitions that would
require the issuance of shares of the Company's Common
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<PAGE> 23
Stock.
The Board of Directors believes the availability of authorized but
unissued Common Stock can be of considerable value. Because of the Company's
existing contractual requirements and its current financial condition, the
unavailability of authorized but unissued Common Stock could have a material
adverse impact on the Company and its business.
CONSEQUENCES OF FAILURE TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK
The Board of Directors believes that the Company could be at a
disadvantage in negotiating the terms of any required fundings due to the lack
of sufficient shares of Common Stock. The Board of Directors also believes it
may be unable to retain existing technical personnel or attract new technical
personnel without an increase in the authorized shares. The uncertainty
regarding the availability of shares of Common Stock, the Company's losses and
lack of collateral makes the prospects of future financings unlikely without
additional authorized Common Stock.
EFFECT OF AMENDMENT ON EXISTING STOCKHOLDERS
The increase of authorized shares of Common Stock will not alter the
par value of the Common Stock or the rights of stockholders.
The Company anticipates that it would register under an S-3 or similar
registration statement approximately 12,000,000 Common Shares as a result of a
follow-on Investment Agreement with Swartz. The actual number of shares that
would be issued under the Investment Agreement would be determined by the price
of the Company's stock during the pricing periods and the discount that Swartz
would receive. The Company could impose a floor under which it would not be
obligated to issue stock to Swartz and would set a predetermined number of
shares to be issued to Swartz for each put. In this manner, the Company
maintains the ability to have an effect on when, how much and at what price the
stock would be issued to Swartz. The following table illustrates a potential
range of the number of shares that could be issued to Swartz assuming varying
prices of the Company's Common Stock and the dilution effect on existing
shareholders assuming full dilution of existing options and warrants.
<TABLE>
<S> <C> <C> <C>
Price of Stock $4.00 $5.00 $6.00
Discount to Swartz 7% 7% 7%
Price to Swartz $3.72 $4.65 $5.58
Total number of shares on $30 million line 8,064,516 6,451,613 5,376,344
Additional shares related to warrants 1,209,677 967,742 806,452
Dilution to existing shareholders 13.6% 11.2% 9.5%
</TABLE>
There can be no assurance that the price of the Company's Common Stock
will be maintained within this range or at any other level. The issuance of
shares under the Investment Agreement, or pursuant to the exercise of options or
warrants, increases the number of shares available for sale in the market and
therefore could have a depressive effect on the price of the Common Stock.
Additional authorized but unissued shares may be issued at such time
or times, to such person or persons and for such consideration as the Board of
Directors determines to be in the best interests of the Company, without further
authorization from the shareholders except as may be required by the rules of
any stock exchange or national securities association trading system on which
the Common Stock may be listed or traded. Upon issuance, such shares will have
the same rights as the outstanding shares of Common Stock. The authorization of
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<PAGE> 24
additional shares of Common Stock will not, by itself, have any effect on the
rights of holders of existing shares. Depending on the circumstances, issuance
of additional shares of Common Stock could result in substantial dilution of the
existing stockholders' ownership interests in the Company. The Board of
Directors does not intend to issue any shares of Common Stock except to meet its
obligations and on terms which the Board deems to be in the best interests of
the Company and its then existing stockholders. The stockholders do not have
pre-emptive rights to purchase additional shares of Common Stock nor will they
have any such rights as a result of this proposal.
VOTE REQUIRED; BOARD RECOMMENDATION
The approval of the Amendment to the Certificate of Incorporation
requires the affirmative vote of a majority of the outstanding shares of Common
Stock on the record date. THEREFORE, FAILURE TO VOTE HAS THE SAME EFFECT AS A
NEGATIVE VOTE.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDMENT OF THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED SHARES OF COMMON STOCK
AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THIS PROPOSAL.
PROPOSAL NUMBER 3: APPOINTMENT OF BDO SEIDMAN AS INDEPENDENT AUDITORS AND
ACCOUNTANTS.
The firm of BDO Seidman, certified public accountants, has served as
the Company's independent auditors and accountants since the fiscal year ended
May 31, 1994 and also reported on the fiscal year ended May 31, 1993. BDO
Seidman is an international accounting firm. A representative of BDO Seidman is
not expected to be present at the Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THIS
PROPOSAL. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE VOTES CAST WILL BE REQUIRED
TO APPROVE THIS PROPOSAL.
FINANCIAL AND OTHER INFORMATION
The Company's Annual Report on Form 10-KSB for the year ended May 31,
1999, including the annual statements, as filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, constitutes the annual
report to shareholders and is being mailed with this Proxy Statement. Also
accompanying this Proxy Statement Is the Company's quarterly report on Form
10-QSB for the second fiscal quarter ended November 30, 1999.
UPON REQUEST AND PAYMENT OF A REASONABLE FEE TO COVER THE COMPANY'S
EXPENSES, THE COMPANY WILL FURNISH ANY PERSON WHO WAS A STOCKHOLDER OF THE
COMPANY AS OF THE RECORD DATE, A COPY OF ANY EXHIBIT TO THE FORM 10-KSB FOR THE
FISCAL YEAR ENDED MAY 31, 1999. ANY SUCH WRITTEN REQUEST MAY BE ADDRESSED TO
ROBERT PUTNAM, SECRETARY, PATRIOT SCIENTIFIC CORPORATION, 10989 VIA FRONTERA,
SAN DIEGO, CALIFORNIA 92127. THE WRITTEN REQUEST MUST CONTAIN A GOOD FAITH
REPRESENTATION THAT, AS OF THE RECORD DATE, THE PERSON MAKING THE REQUEST WAS
THE BENEFICIAL OWNER OF COMMON STOCK OF THE COMPANY.
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<PAGE> 25
The Common Shares of the Company are quoted on the OTC Electronic
Bulletin Board under symbol "PTSC" and traded in the over-the-counter market.
SHAREHOLDER PROPOSALS
Any shareholder intending to present a proposal before the next Annual
Meeting of Shareholders, to be held probably in November of 2000, should submit
the proposal in writing to the Secretary of the Company at 10989 Via Frontera,
San Diego, California 92127. The written proposal must be received by the
Secretary on or before July 31, 2000 in order to be considered for inclusion in
the proxy statement for that meeting.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before
the Annual Meeting. However, if any matters other than those referred to herein
should properly come before the Annual Meeting, it is the intention of the proxy
holders to vote such proxy in accordance with his or her best judgment.
SOLICITATION OF PROXIES, SHAREHOLDER PROPOSALS AND OTHER MATTERS
The Company will bear the costs of the solicitation of proxies from
its shareholders. In addition, to the use of the mails, proxies may be solicited
by the directors, officers and employees of the Company by personal interview,
telephone or telegram. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for out-of-pocket expenses in
connection with such efforts. Arrangements may also be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of stock held of record by such
persons, and the Company will reimburse such persons for reasonable expenses
incurred in forwarding such proxy material.
The directors and executive officers of the Company, together with
their respective affiliates, beneficially own approximately 3 % of the Company's
outstanding common stock, and they have indicated that they intend to vote their
shares in favor of all proposals set forth in this Proxy Statement.
By Order of the Board of Directors
/S/ ROBERT PUTNAM
-----------------------------
Robert Putnam
March 25, 2000 Secretary
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<PAGE> 26
PROXY PROXY
PATRIOT SCIENTIFIC CORPORATION
THIS PROXY RELATES TO AN ANNUAL MEETING OF THE SHAREHOLDERS TO
BE HELD APRIL 28, 2000
The undersigned hereby appoints JAMES T. LUNNEY and ROBERT PUTNAM or
either of them, with full power of substitution, as attorneys and proxies to
vote all shares of Common Stock which the undersigned is entitled to vote, with
all powers which the undersigned would possess if personally present, at the
Annual Meeting of Shareholders of PATRIOT SCIENTIFIC CORPORATION ("Company") to
be held at 2:00 o'clock p.m. (Pacific Time) at the Carmel Mountain Doubletree
Resort (El Dorado Room), 14455 Penasquitos Dr., San Diego California, on April
28, 2000, and any postponements and adjournments thereof, as follows:
1. ELECTION OF DIRECTORS.
____ FOR all nominees listed below ____ WITHHOLD AUTHORITY
(except as marked to the contrary below) (to vote for the nominee
listed below)
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE
THAT NOMINEE'S NAME ON THE LINE)
- -------------------------------------------------------------------------------
Donald R. Bernier, Helmut Falk, Jr., James T. Lunney, Richard G. Blum, Frederick
G. Thiel, and Lowell W. Giffhorn
2. PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK, $.00001 PAR
VALUE, THAT THE COMPANY IS AUTHORIZED TO ISSUE FROM 60,000,000 TO
100,000,000.
____ FOR ____ AGAINST ____ABSTAIN
3. PROPOSAL TO RATIFY BDO SEIDMAN AS INDEPENDENT AUDITORS.
____ FOR ____ AGAINST ____ABSTAIN
THIS PROXY HAS NOT BEEN SOLICITED BY OR FOR THE BENEFIT OF THE BOARD
OF DIRECTORS OF THE COMPANY. I UNDERSTAND THAT I MAY REVOKE THIS PROXY ONLY BY
AT ANY TIME BEFORE THEY ARE EXERCISED BY DELIVERING A WRITTEN NOTICE OF
REVOCATION TO MR. ROBERT PUTNAM, SECRETARY OF THE COMPANY, AT THE BELOW ADDRESS,
OR BY SUBMITTING A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY ATTENDING THE
ANNUAL MEETING AND ORALLY WITHDRAWING THE PROXY.
DATED: ___________________, 2000 Signature(s) X______________________________
Print Name ____________________________________________
(Please date and sign exactly as name or names appear on your stock
certificate(s). When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation, please sign in full
the corporate name by President or other authorized officer. If a partnership,
please sign in the partnership name by authorized person. IF THE STOCK IS HELD
JOINTLY, BOTH OWNERS MUST SIGN.)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS
SPECIFIED THIS PROXY WILL BE VOTED FOR THE PROPOSALS NOTED ABOVE AND, AS TO ANY
OTHER BUSINESS CONSIDERED AT THE ANNUAL MEETING, IN ACCORDANCE WITH THE BEST
JUDGMENT OF THE PROXIES.
Mail or Deliver this Proxy to:
PATRIOT SCIENTIFIC CORPORATION
10989 Via Frontera
San Diego, California 92127
(858) 674-5000
