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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _______________
Commission File Number 0-22182
PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)
Delaware 84-1070278
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(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
10989 Via Frontera, San Diego, California 92127
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(Address of principal executive offices) (Zip Code)
(858) 674-5000
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.00001 par value
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(Title of Class)
Check whether the issuer (1 ) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $716,960
The aggregate market value of the voting stock held by non-affiliates of the
registrant on August 25, 2000 was $33,902,405 based on a closing bid price of
$0.66 as reported on the OTC Electronic Bulletin Board system.
At August 25, 2000, 51,367,281 shares of common stock, par value $.00001
per share (the registrant's only class of voting stock) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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TABLE OF CONTENTS
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Page
PART I
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ITEM 1. Description of Business 3
ITEM 2. Description of Property 14
ITEM 3. Legal Proceedings 14
ITEM 4. Submission of Matters to a Vote of Security Holders 15
PART II
ITEM 5. Market for Common Equity and Related
Stockholder Matters 15
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
ITEM 7. Financial Statements 20
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; 21
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation 23
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 26
ITEM 12. Certain Relationships and Related Transactions 27
ITEM 13. Exhibits and Reports on Form 8-K 28
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB, including all documents incorporated by
reference, includes "forward-looking" statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act and the Private
Securities Litigation Reform Act of 1995, and we desire to take advantage of the
"safe harbor" provisions thereof. Therefore, we are including this statement for
the express purpose of availing ourselves of the protections of such safe harbor
with respect to all of such forward-looking statements. The forward-looking
statements in this Report reflect our current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including specifically the absence of
significant revenues, a history of losses, no assurance that technology can be
completed or that our completion will not be delayed, significant competition,
the uncertainty of patent and proprietary rights, uncertainty as to royalty
payments and indemnification risks, possible adverse effects of future sales of
shares on the market, trading risks of low-priced stocks and those other risks
and uncertainties discussed herein, that could cause actual results to differ
materially from historical results or those anticipated. In this report, the
words "anticipates," "believes," "expects," "intends," "future" and similar
expressions identify certain of the forward-looking statements. Readers are
cautioned not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. We undertake no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that may arise after the date hereof. All subsequent written
and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this section.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Patriot Scientific Corporation was organized under Delaware law on
March 24, 1992, as the successor by merger to Patriot Financial Corporation, a
Colorado corporation incorporated on June 10, 1987. Our address is 10989 Via
Frontera, San Diego, California 92127, and our telephone number is (858)
674-5000. Our home page can be located on the World Wide Web at
http://www.ptsc.com.
We are engaged in the development, marketing, and sale of patented
microprocessor technology and the sale of high-performance data communication
products. These products have applications in the Internet and computer,
networking and telecommunications markets. We also own innovative radar
technology. We sold our antenna technology in August 1999. Our strategy is to
exploit our technologies through product sales, licensing, and strategic
alliances.
In 1997, we emerged from the development stage primarily as a result
of the acquisition of Metacomp Inc. There can be no assurance that we can
achieve profitable operations, and we may need additional financial resources
during the next twelve months.
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BACKGROUND
In February 1989, we completed our initial public offering under a
registration statement on Form S-18 under the Securities Act of 1933. This
offering raised gross proceeds of $50,000 and net proceeds of approximately
$28,640 upon the sale of 2,500,000 units at $.02 per unit. Each unit sold in the
public offering consisted of one common share and one Class A common stock
purchase warrant exercisable to acquire one share of common stock and one Class
B common stock purchase warrant. All Class A and Class B warrants have since
been exercised or have lapsed.
On August 10, 1989, we acquired our ground penetrating radar
technology from the inventor, Mr. Elwood G. Norris, our founder and previous
Chairman. A description of the ground penetrating radar technology, certain
information about the industry generally, and our operational plans are
discussed below under the caption "Business".
On May 12, 1992, we redomiciled ourselves from Colorado to Delaware
by merging into a wholly owned Delaware subsidiary, Patriot Scientific
Corporation, organized for that purpose. The reincorporation resulted in a
reverse stock split. Three shares of the Colorado corporation, par value
$.00001, were converted into one share of the Delaware corporation, par value
$.00001. The reincorporation also effected a change in our charter and bylaws
and a name change to Patriot Scientific Corporation.
In May 1993, we registered under the Securities Act of 1933 a total
of 7,631,606 shares issuable upon the exercise of outstanding Class A and Class
B common stock purchase warrants. We received net proceeds of $3,343,915 upon
the exercise of those warrants and the issuance of 7,538,102 common shares. None
of such warrants remain outstanding.
Effective May 31, 1994, we entered into an asset purchase agreement
and plan of reorganization with nanoTronics Corporation located in Eagle Point,
Oregon and Helmut Falk. We issued a total of 8,500,000 restricted common shares
to nanoTronics to acquire certain microprocessor technology of nanoTronics. The
technology acquired, the ShBoom technology, is being used to develop a
sophisticated yet low cost microprocessor. 5,000,000 of the shares were issued
on a non-contingent basis, and the remaining 3,500,000 shares were issued
subject to the terms of an earnout escrow arrangement, which concluded on May
31, 1999.
Effective December 26, 1996, we acquired 96.9% of the outstanding
shares of Metacomp, Inc., a California corporation, from 56 shareholders in
exchange for the issuance of 1,272,068 shares of our common stock. Based on the
closing price of our common stock of $1.375 on the date of the acquisition, the
price of the acquisition was $1,749,094. This business combination was accounted
for as a pooling-of-interests.
BUSINESS
ORGANIZATION AND CORPORATE DEVELOPMENT. Our business involves three
technologies:
- PSC1000 microprocessor technology,
- high-speed data communications technology, and
- radar technology.
The stages of development of the three major technologies is as
follows:
- PSC1000 microprocessor. This technology is generating minor
amounts of revenue from the sale of evaluation boards,
microprocessors and initial license fees related to the
microprocessor application. We run the technology on a 0.35-micron
microprocessor, which is in current production. We have ported the
VxWorks operating system and the Sun Microsystems personalJava
virtual machine to the microprocessor. Although we anticipate the
microprocessor to be our main product line, it currently accounts
for only 9% of our revenue.
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- High-speed data communications. Revenue from this technology is
being generated primarily from mature communication products that
are nearing the end of their life cycles. We have decided to
concentrate our efforts on the PSC1000 microprocessor and have
suspended our efforts to introduce new communication products to
the market. Although the communications product line accounted for
approximately 91% of our fiscal year 2000 revenue, we anticipate
that the microprocessor will be our main product line in the
future.
- Radar and antenna. We sold the gas plasma antenna technology in
August 1999. Our radar technology has not generated any revenue
and we have suspended further development of this technology in
order to concentrate our resources on the PSC1000 microprocessor.
Due to our small size and staffing overlaps among the technologies,
certain personnel work on both the microprocessor and communication technologies
from time to time.
During at least the last three years, we have focused the majority of
our efforts on the PSC1000 and high-speed data communications technologies. The
PSC1000 technology and our initial microprocessors, the PSC1000 family, are
targeted for the embedded controller and Java language processor marketplaces.
In reviewing our communication technology markets, we determined that
we could not effectively compete in the ISDN (which stands for integrated
services digital network, a high-speed method of transmitting data over the
Internet) market. However, we continue to sell matured communication products to
a select number of customers who have requirements for older generation
products. We will continue to serve this sector of the market as long as doing
so is cost beneficial and is not disruptive to our major product line, the
PSC1000.
INTERNET GROWTH AND THE EMERGENCE OF THE JAVA PROGRAMMING LANGUAGE. The
Internet is a rapidly growing global web of computer networks. This "network of
networks" allows computers connected to the Internet to "talk" to one another.
The Internet provides organizations and individuals with new means to conduct
business. Commercial uses of the Internet include business-to-business and
business-to-consumer transactions, product marketing, advertising,
entertainment, electronic publishing, electronic services and customer support.
We believe that organizations will also increasingly use the Internet and
private Intranet networks to improve communications, distribute information,
lower operating costs and change operations. Use of the Internet has grown
rapidly impacting computer hardware, software and peripheral industries. The
rapid growth in popularity of the Internet is in part due to continuing
penetration of computers and modems into U.S. households, growth of the
informational, entertainment and commercial applications and resources of the
Internet, the growing awareness of such resources among individuals, and the
increasing availability of user-friendly navigational and utility tools which
enable easier access to the Internet's resources.
The growth of the Internet and corporate Intranets is creating a
demand for hardware, software and peripherals. Software, such as Java, is
emerging to serve the requirements of Internet users.
Java is a programming language that was originally developed for
personal digital assistant devices and television set top boxes. It was formally
announced as an object-oriented language for the Internet in May 1995 by Sun
Microsystems Inc. A large number of major computer, software, browser and
on-line service provider companies have licensed the Java language. Accordingly,
although no assurance can be given, Java appears to be emerging as a fundamental
platform for Internet related applications. A growing number of Java
applications, or applets, are now available on the Internet. These applications
not only enhance web pages but also perform many functions of traditional
computer software programs. Our PSC1000 technology lends itself to potential
markets in which the use of Java is prevalent.
With Java, data and programs do not have to be stored on the user's
computer, but can reside anywhere on the Internet to be called upon as needed.
Among its various attributes, two key features of Java are (1) its ability to
run on a variety of computer operating systems thus avoiding the problem of
incompatibility across networks, and (2) security, because Java enables the
construction of virus-resistant, tamper-resistant systems by using
resource-access control and public-key encryption. Because of Java's useful
features, it may also become a popular programming language for embedded
applications.
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Since Java is designed to run on multiple types of devices and
operating systems, it allows developers to write a program once for many types
of operating systems, instead of having to write new versions for each type.
Java does this by interpreting a program's commands into something that a
particular type of computer can understand. This interpretive design runs
programs slower than if they were tailored for each type of computer and is
resulting in a need for specialized microprocessors and compilers to increase
Java's speed.
The growth of Java is causing a number of companies to consider it as
a basis for a new style of computing tailored to the Internet and not encumbered
by the limitations of, or requiring, traditional computer operating systems
(such as Microsoft DOS). The concept is to design inexpensive access devices to
communicate via the Internet. Major companies such as Oracle and Sun
Microsystems, Inc. have made public announcements of such devices.
SHBOOM MICROPROCESSOR TECHNOLOGY.
General Background. In 1991, nanoTronics Corporation was formed and
acquired the ShBoom technology, a base technology for an advanced microprocessor
integrated on a single computer chip. nanoTronics subsequently engaged in
substantial technical development and fabricated a first-generation
microprocessor in early 1994.
Since the acquisition of the ShBoom technology from nanoTronics,
effective May 31, 1994, we have been engaged in correcting errors in the
microprocessor design, adding additional technical features to further modernize
the design, and improving and testing the new design. We initially fabricated a
prototype 0.8-micron microprocessor in late May 1996. The next generation of the
PSC1000 family was a 0.5-micron microprocessor that was delivered in September
1997. The 0.5-micron microprocessor was employed in demonstrations for
prospective customers and was shipped in limited numbers to customers as an
embedded microprocessor. The latest generation, which is in production, is a
0.35-micron microprocessor and features reduced size and improved performance.
We are currently contemplating, but have not expended funds, on future
enhancements and generations or modifications of microprocessors employing the
ShBoom technology.
Industry Background. The semiconductor logic market has three major
sectors:
- standard logic products,
- application specific standard products, and
- application specific integrated circuits.
Standard logic products, such as the Intel's X86 and Pentium and
Motorola's 680X0 microprocessor families, are neither application nor customer
specific. They are intended to be utilized by a large group of systems designers
for a broad range of applications. Because they are designed to be used in a
broad array of applications, they may not be cost effective for specific
applications. Application specific integrated circuits are designed to meet the
specific application of one customer. While cost effective for that application,
application specific integrated circuits require large sales volumes of that
application to recover their development costs. Application specific standard
processors are developed for one or more applications but are not generally
proprietary to one customer. Examples of these applications include modems,
cellular telephones, wireless communications, multimedia applications, facsimile
machines and local area networks. We have designed our microprocessor to be
combined with application specific software to serve as an embedded control
product for the application specific standard processor market sector.
Application specific standard processors are typically used in
embedded control systems by manufacturers to provide an integrated solution for
application specific control requirements. Such systems usually contain a
microprocessor or microcontroller, logic circuitry, memory and input/output
circuitry. Electronic system manufacturers combine one or more of these elements
to fit a specific application. The microprocessor provides the intelligence to
control the system. The logic circuitry provides functions specific to the end
application. The input/output circuitry may also be application specific or an
industry standard component. The memory element, if not on the microprocessor,
is usually a standard product used to store program instructions and data. In
the past, these functions have been executed through multiple integrated
circuits assembled on a printed circuit board. The requirements for reduced cost
and improved system performance have created market opportunities for
semiconductor
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suppliers to integrate some or all of these elements into a single application
specific standard processor or chip set, such as the PSC1000 family of
microprocessors which are based on the ShBoom architecture. The PSC1000 family
provides close integration of the microprocessor and input/output function with
the logic circuitry, thereby providing an advanced application specific standard
processor.
Embedded control systems enable manufacturers to differentiate their
products, replace less efficient electromechanical control devices, add product
functionality and reduce product costs. In addition, embedded control systems
facilitate the emergence of completely new classes of products. Embedded control
systems have been incorporated into thousands of products and subassemblies
worldwide, including automotive systems, remote controls, appliances, portable
computers and devices, cordless and cellular telephones, motor controls and many
other systems.
Microprocessors are generally available in 4-bit through 64-bit
architectures, which refers to the amount of data they can process. 4-bit
microprocessors are relatively inexpensive, typically less than $1.00 each.
Although they lack certain performance and features, they account for more than
40% of worldwide microcontroller volume. Also in general use today are 8-bit
architectures, generally costing $1.00 to $10.00 each and accounting for an
additional 40% of worldwide microcontroller volume. To date 16-bit, 32-bit and
64-bit architectures, with typical costs of over $10.00 each, have offered very
high performance, but are generally considered to be expensive for high-volume
embedded control applications. The use of 16-bit, 32-bit and 64-bit
architectures offers fewer internal limitations, making programming easier and
providing higher performance. Although generally more expensive per unit and
requiring more support logic and memory, these devices offer many advantages for
more sophisticated embedded control systems.
Electronic system designers, driven by competitive market forces,
seek semiconductor products with more intelligence, functionality and control
that can be used to reduce system costs and improve performance. For these
needs, the ShBoom architecture was designed to be a sophisticated 32-bit reduced
instruction set computer microprocessor with advanced features, including the
most commonly needed support logic, but at a low cost; thereby providing
improved performance to existing embedded control applications and creating the
opportunity for the development of new, cost-effective applications.
Technology Description. Conventional high-performance microprocessors
are register-based with large register sets. These registers are directly
addressable storage locations requiring a complex architecture that consumes
costly silicon. This conventional architecture provides processing power for
computer applications but complicates and slows the execution of individual
instructions and increases silicon size, thereby increasing the microprocessor
cost.
Our technology is fundamentally different from most other
microprocessors because it is stack-oriented, in that the data is stored in
groups. Our microprocessor employs certain features of both register and stack
designs. The resultant merged stack-register architecture improves program
execution for a wide range of embedded applications. Our design combines two
processors in one highly integrated package, a microprocessing unit for
performing conventional processing tasks, and an input-output processor for
performing input-output functions. This replaces many dedicated peripheral
functions supplied with other processors. The microprocessor's design simplifies
the manipulation of data. ShBoom's architecture employs instructions that are
shrunk from 32-bits to 8-bits. This simplified instruction scheme improves
execution speed for computer instructions. Our architecture incorporates many
on-chip system functions, thus eliminating the requirement of support
microprocessors and reducing system cost to users.
The 0.8-micron microprocessor was designed to operate at a speed of
50Mhz; the 0.5-micron microprocessor at a speed of 100Mhz; and the 0.35-micron
microprocessor at 150MHz. They are all compatible with a wide range of memory
technology from low cost dynamic random access memory to high-speed static
random access memory. The microprocessors can be packaged in various
surface-mount and die-form packaging. There can be no assurance that the
designed speed will be achieved with production models of the 0.5 or 0.35-micron
microprocessors or future versions or that all of the desired functions will
perform as anticipated.
The ShBoom technology is not designed or targeted to compete with
high-end processors for use in personal computers. It is targeted for embedded
control applications. We believe that the features described above differentiate
the PSC1000 family from other 8-bit to 64-bit microprocessors targeted for
embedded control
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applications. Considering the reduced requirement for support microprocessors,
the PSC1000 family is intended to be available at a high volume price that
should be price competitive with high-end 8-bit microprocessor and general
16-bit microprocessor systems but with higher performance (speed and functional
capability). The PSC1000 family has been designed to allow high-speed and
high-yield fabrication using generally available wafer fabrication technology
and facilities.
The PSC1000 Microprocessor as a Java Processor. We believe the
PSC1000 microprocessor architecture is capable of being an efficient and cost
effective Java programming language processor, because Java is designed to run
on a stack-oriented architecture and the stack-oriented ShBoom architecture
executes the virtual stack machine internal to Java efficiently. Many Java
operation codes or instructions require only a single 8-bit PSC1000 family
instruction to be executed, providing a performance advantage over other more
expensive processors that require six or more 32-bit instructions to do the same
task. This feature allows the execution of Java programs with increased speed
and reduced code size thereby enabling lower system memory costs. In addition,
the incorporation of many on-chip system functions is expected to allow the
PSC1000 family to perform most of the other functions required of an Internet
computer device or Java accelerator, thereby eliminating components. Since
Internet computers are designed to be inexpensive appliances for Internet
access, cost, speed and performance are expected to be key requirements for
designers. We believe the ShBoom technology can compete favorably on the basis
of such requirements, although there can be no assurance we can successfully
exploit Java related applications or that competitors will not create superior
Java processors.
We have ported the Java operating environment to the PSC1000 family,
which currently uses the C programming language for software support. We are a
licensee of Sun Microsystems Inc. This enables us to develop and distribute
products based on Sun's personalJava, a platform on which to run Java
applications. We have also licensed from Wind River an operating system,
VXWorks, and entered into a relationship with Forth Inc. whereby Forth will
provide software support and operating system development tools for the Forth
Programming language. We expect that successful implementation of this software
should result in a microprocessor which is competitive in the Java virtual
machine and embedded applications markets. We believe that, if the
implementation is successfully completed, the PSC1000 family will be competitive
with Java microprocessors announced by competitors. However, there can be no
assurance of successful implementation of this package of software or of a
market for a PSC1000 family Java microprocessor.
Stage of Development. In early 1994, nanoTronics initiated production
of a first generation of wafers at a contract fabrication facility using 6 inch
wafers employing 0.8-micron double-metal CMOS technology. After the May 31, 1994
acquisition, we improved the original design, added new features and performed
simulations and tests of the improved designs. In October 1995, a run of six
wafers of second generation 0.8-micron microprocessors was fabricated by a
contract fabrication facility. Subsequently, we tested these microprocessors,
while completing a C computer language compiler and preparing application
development tools. The compiler and application development tools are necessary
to enable system designers to program the PSC1000 family for specific
applications. We made corrections to the design suggested by the testing of
prototype units and produced an additional run of second generation
microprocessors from remaining wafers in May 1996. In July 1996, we employed
these microprocessors in demonstration boards for use by developers and
prospective customers and licensees.
In December 1997, we completed development of and started shipping a
0.5-micron microprocessor based on the PSC1000 technology and found that
0.5-micron double-metal CMOS technology improved operating speed, reduced power
requirements, reduced physical size and reduced fabrication cost. In May 1998,
we began a production run of a 0.35-micron microprocessor that further increases
operating speed and cost performance over the previous generations of the
PSC1000 family of microprocessors.
At each stage of development, microprocessors require extensive
testing to ascertain performance limitations and the extent and nature of errors
(bugs), if any. When significant limitations or errors are discovered,
additional rounds of design modifications and fabrication are required prior to
having functional and demonstrable microprocessors for prospective customers and
licensees. Although our 0.5 and 0.35-micron microprocessors have been sent to
prospective customers in anticipation of production orders, there can be no
assurance that we, during our continued testing of these products, will not
identify errors requiring additional rounds of design and fabrication prior to
commercial production. Additional delays could have an adverse effect on the
marketability of our technology and financial condition.
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We have developed marketing materials, product manuals and
application development tools for use by licensees and customers. The manuals
and tools are necessary to enable system designers to quickly and easily program
the PSC1000 family for specific applications.
We believe that the PSC1000 family is ready for licensing or sale and
that any additional changes encountered in current testing will be minor and can
be made during subsequent production runs of PSC1000 family microprocessors for
customers, when and if orders are obtained. We also believe the ShBoom core
technology is ready for licensing for use by others to develop custom multiple
function microprocessors. An initial licensing agreement was entered into in
December 1998. This agreement established a library arrangement with Venture
System LSI Assist Center, (or VSAC), a Japanese quasi-governmental unit. VSAC
allows our core license to be made available to qualified Japanese entities for
their evaluation and review. To be qualified, the Japanese entity must have
total capital of less than 100 million yen, have less than 300 employees, and be
a Japanese legal entity. Every qualified company that attains a volume of 1,000
units must enter into a sub-license agreement with us.
Business Strategy. The increasing demand for embedded control has
made the market for microprocessors one of the largest segments of the
semiconductor logic market. This demand will drive the need for embedded
processors. Our strategy does not entail competing directly with suppliers who
have multiple microprocessor types addressing all parts of the embedded systems
market, but on identifying certain market niches that the PSC1000 would best
address due to its low cost, low power consumption and ability to run Java
efficiently.
Because of the above factors, we intend to focus the majority of our
efforts on the Java microprocessor business, a new but relatively unpenetrated
market without an established base of microprocessor products and for which we
believe the PSC1000 has desirable technical and market advantages.
We believe that the ShBoom architecture is suited for controller
applications requiring high performance and low system cost, such as cell
phones, printers, video terminals, robotics, motion controllers, industrial
controllers, digital communication devices, video games, kiosks, cable and
satellite modems and TV set top boxes. We expect that early licensing of the
technology and product applications will focus on embedded control.
We have appointed eight international distributors for foreign
markets. We also have a full-time Vice President of Sales and Marketing to lead
marketing of the PSC1000 family and have recently filled a newly created
position for Business Development.
We believe the appropriate approach for us initially lies in a
balanced effort of cultivating licensees and developing specific product
enhancement partnerships, producing original equipment manufactured products,
and providing technical support to third parties on a contract basis. The
overall balance of these approaches will be monitored and modified as we attempt
to ascertain and capitalize on the highly dynamic and competitive embedded
microprocessor market. There can be no assurance that we can successfully
exploit our PSC1000 microprocessor technology.
Subject to the availability of financial and personnel resources,
while we are commercializing the PSC1000 family and the ShBoom core technology,
our strategy is to also design and develop future versions of the microprocessor
with more demanding sub-micron technology and with more features. However, our
resources are limited, and there can be no assurance that we will be able to
continue microprocessor enhancement.
Initial fabrications of the 0.8-micron and 0.5-micron processors were
performed by contract fabrication facilities. The 0.35-micron microprocessor is
being fabricated by a contract fabrication facility that has agreed to provide
production quantities for our customers. There can be no assurance fabrication
facilities will be available to produce the PSC1000 family in the future.
However, since there are a large number of fabrication facilities with the
capability to produce the PSC1000 family of microprocessors, we believe
microprocessors can be produced on a contract basis. Industry shortages of
fabrication facilities that may exist and are predicted to exist in the future
are generally limited to the more demanding architectures. If a shortage of
fabrication facilities develops, it could have a material adverse effect on our
financial condition.
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Competition. The semiconductor industry is intensely competitive and
has been characterized by price erosion, rapid technological change and foreign
competition in many markets. The industry consists of major domestic and
international semiconductor companies, most of which have greater financial,
technical, marketing, distribution, development and other resources than ours.
The market for microprocessors and for embedded control applications is at least
as competitive.
While our strategy is to target high-volume licensees and
microprocessor customers requiring more sophisticated but low-cost devices, we
can still expect significant competition. We may also elect to develop embedded
control system products utilizing the ShBoom architecture for ourselves or by
contract for other manufacturers.
We expect that the PSC1000 family, if successfully commercialized in
the embedded controller market, will compete with a variety of 16/64-bit
microprocessors including ARM, MIPS and the PowerPC. As a Java processor, we
expect our PSC1000 family will compete with a broad range of microprocessors
including licensees of Sun Microsystems, Inc.'s PicoJava. The producers of these
microprocessors have significantly greater resources than ours.
A new entrant, such as ours, is at a competitive disadvantage
compared to these and other established producers. A number of factors
contribute to this, including:
- the lack of product performance experience,
- lack of experience by customers in using application development
systems,
- no record of technical service and support, and
- limited marketing and sales capabilities.
HIGH SPEED DATA COMMUNICATIONS PRODUCTS.
General Background. Starting in fiscal 1995, we initiated the
development of a computer compatible plug-in card allowing high-speed,
cost-effective digital ISDN access to the Internet and other networks. In
December 1996, we acquired 96.9% of Metacomp to increase our capabilities to
include engineering, assembly, marketing and distribution. The acquisition of
Metacomp expanded the product line and added high-speed data communications
revenue and a customer base.
Metacomp, founded in 1978, was a high technology company that
designed, assembled, and sold a wide range of high performance data and
telecommunications solutions for wide area networking and high-speed data
communications requirements.
The business combination with Metacomp was treated as a
pooling-of-interests, and the Metacomp product line was combined with our ISDN
product. In addition to ISDN products, we also provide matured, high speed
communication products that are customized to meet the customer's specific
needs. This is done via software tailored for each customer. These products are
often used by businesses for wide area network applications or other high speed
industrial communication systems.
Communications Products. The communication products that we continue
to support are:
CyberShark - This low-cost basic rate ISDN adapter card has been
designed to allow small businesses and telecommuters to access
corporate networks and the Internet via ISDN. The card includes an
analog phone jack that allows the user to connect his existing analog
phone or fax machines for simultaneous voice conversation.
CyberShark/HSET - This basic rate ISDN adapter card is designed to be
used with a headset/handset used by distributed call centers and
remote agents. It offers access to and supports domestic as well as
European telecommunication protocols. The CyberShark/HSET can be used
on Windows/95, Windows/NT, and Linux operating systems.
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Other
VME Product Line - We also offer a line of intelligent high-speed
communications engines in a virtual memory European form factor. Some
of our customers for these products include the military as well as
large satellite based data communications companies.
Atcomm2/4 Product Line - We also market an intelligent two or four
channel product that is used for high-speed data communications.
Engineering and Development - The communications product line also
obtains revenue from providing contract engineering and software
development for customers. From time to time we are able to retain a
proprietary interest in developed products and in such circumstances
retain a license/royalty interest.
Our product strategy is to continue to provide data communication
solutions to our existing customer base as long as it is beneficial and does not
disrupt our primary product line, the PSC1000 family of microprocessors. We are
no longer developing or commercializing new communication products.
Production and Marketing Strategy. Our strategy is to have our
high-speed data communication products manufactured on a sub-contract basis
with, in some instances, final assembly at our facility. We test and distribute
the products. In-house marketing manages the sales of our high-speed data
communications products.
Competition. There are a number of ISDN board-level products
competitive to CyberShark offered by competitors including NetAccess, ISDN-tek,
Inc., Zyxel, Digi International and U.S. Robotics. These companies have
substantially greater resources than ours. Although not all of these companies
offer personal computer plug-in card terminal adapters directly competitive with
our product, additional direct competitors may introduce competitive products.
For these reasons, we have curtailed new communication product development and
will serve only our existing customer base as long as they have requirements for
our matured communication products.
RADAR AND ANTENNA TECHNOLOGY.
General Background. During the period from 1980-1983, Mr. Elwood
Norris, our founder and previous Chairman, developed a technique employing
microwave radiation to penetrate the earth's surface. This radar technology
relates to ground penetrating radar. This technology is one of many of a family
of geophysical tools and sensing technologies that include seismic,
electromagnetic, gravity, borehole sampling and other techniques. Ground
penetrating radar is a technique for producing profiles of subsurface strata and
features by emitting radar waves and recording the reflected signals.
We commenced active development of our ground penetrating radar
technology in April 1992. By May 1993, we were able to demonstrate the sensing,
processing and crude visualization of images from our technology, and by May
1994 we had completed our prototype device. Since May 1994, we have focused our
efforts and limited financial resources on the PSC1000 technology and
communication products, effectively suspending development and marketing efforts
related to ground penetrating radar.
Gas Antenna Technology Description.
We sold our gas plasma technology in August 1999.
RESEARCH AND DEVELOPMENT. Our current development efforts are focused
on improvement of and additional features for the PSC1000 family microprocessor.
The development of this technology has taken longer than anticipated and could
be subject to additional delays. Therefore, there can be no assurance of timely
or successful marketing of the PSC1000 family.
We incurred research and development expenditures of $1,581,206 for
our fiscal year ended May 31, 2000 and $2,149,361 for the fiscal year ended May
31, 1999. The majority of our expenditures in fiscal 2000 and 1999 have been
devoted to our PSC1000 technology. To date, we have expensed internal software
development costs
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as incurred. We believe that technical advances are essential to our success and
expect that we will continue to expend substantial funds on research and
development of our technology. However, there can be no assurance that such
research and development efforts will result in the design and development of a
competitive technology in a timely manner.
LICENSES, PATENTS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS. We
rely on a combination of patents, copyright and trademark laws, trade secrets,
software security measures, license agreements and nondisclosure agreements to
protect our proprietary technologies. Our policy is to seek the issuance of
patents that we consider important to our business to protect inventions and
technology that support our microprocessor technology.
We have six U.S. patents issued and three U.S. patents pending, most
dating back to 1989, on the ShBoom microprocessor technology. We have one ShBoom
technology patent pending in five European countries and Japan and may file
additional applications under international treaties depending on an evaluation
of the costs and anticipated benefits that may be obtained by expanding possible
patent coverage.
In addition to such factors as innovation, technological expertise
and experienced personnel, we believe that a strong patent position is becoming
increasingly important to compete effectively in the semiconductor industry. It
may become necessary or desirable in the future for us to obtain patent and
technology licenses from other companies relating to certain technology that may
be employed in future products or processes. To date, we have not received
notices of claimed infringement of patents based on our existing processes or
products; but, due to the nature of the industry, we may receive such claims in
the future. Likewise, we believe that we may have claims against other
semiconductor companies should certain of our pending patents be favorably
granted. However, there can be no assurance thereof nor any assurance that we
could successfully exploit any potential patent claims against larger
competitors.
Based on the asset purchase agreement and plan of reorganization
between Patriot, nanoTronics and Mr. Falk, we were the recipients of a number of
warranties and indemnities. We believe nanoTronics has been liquidated and, due
to Mr. Falk's death in July 1995, we may be limited in our ability to obtain
satisfaction should we have any future claims against nanoTronics or its
successor, the Falk Family Estate.
We have entered into the following licenses related to the
microprocessor technology:
- Sierra Systems. In June 1994, we entered into an agreement with
Sierra Systems whereby we could provide the C programming
language on the PSC1000. We currently provide development and
evaluation boards with the C programming language.
- Sun Microsystems Inc. In June 1997, we entered into an agreement
with Sun Microsystems, Inc. which enabled us to develop and
distribute products based on Sun's JavaOS technology. In June
1998, we exercised an option under that agreement to license from
Sun, personalJava, a smaller platform on which to run Java
applications that did not include an operating system. We
determined that personalJava was better suited to the markets
available to the PSC1000. We have ported personalJava to the
PSC1000.
- Wind River. In July 1997, we entered into an agreement with Wind
River that provided us with a license for an operating system,
VxWorks, to be used in conjunction with personalJava. We have
ported VxWorks to the PSC1000.
- Forth Inc. In July 1997, we entered into a license agreement with
Forth Inc. whereby Forth will provide software support and
operating system development tools for the Forth programming
language. Several customers are evaluating the PSC1000 as a
microprocessor using the Forth programming language.
- VSAC. In December 1998, we entered into a licensing agreement
with Venture System LSI Assist Center under which our core
license was made available for evaluation and review by qualified
Japanese companies. Certain companies attaining 1,000 unit
volumes will be required to enter into
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sub-license agreements with us.
We had one U.S. patent on our gas plasma antenna technology that was
sold in August 1999.
We have one U.S. patent on our ground penetrating radar technology.
No foreign application has been made. There are a large number of patents owned
by others in the radar field generally and in the field of ground penetrating
radar specifically. Accordingly, although we are not aware of any possible
infringement and have not received any notices of claimed infringement, we may
receive such claims in the future.
There can be no assurance that any patents will be issued from
pending or future applications or that any patents that are issued will provide
meaningful protection or other commercial advantages to us. Although we intend
to protect our rights vigorously, there can be no assurance that these measures
will be successful.
We generally require all of our employees and consultants, including
our management, to sign a non-disclosure and invention assignment agreement upon
employment with us.
MARKETING AND DISTRIBUTION. Our products are marketed through a
combination of direct sales and distributors. Approximate sales by principal
geographic area (as a percentage of sales) for fiscal years ended May 31 were as
follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Domestic sales 65% 68%
Foreign sales
Asia 7% 14%
Europe 19% 9%
North America 9% 5%
Other -- 4%
--- ---
Total sales 100% 100%
=== ===
</TABLE>
All of our operating assets are located within the United States.
While sales to certain geographic areas generally vary from year to year, we do
not expect that changes in the geographic composition of sales will have a
material adverse effect on operations.
DEPENDENCE UPON SINGLE CUSTOMERS. Ten percent (10%) or more of our
consolidated net sales for the fiscal years indicated were derived from
shipments to the following customers:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Intermec $137,000 $339,000
Sipex 138,000 --
Miel 127,000 --
VSAC -- 159,000
Microcom -- 125,000
</TABLE>
All of the above sales were for communication products, except the
sale to VSAC that was for a microprocessor license, and were shipped against
multiple purchase orders from each customer.
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EMPLOYEES. We currently have twenty three full-time and one part-time
personnel. Thirteen full-time persons are employed in research and development,
four full-time persons are engaged in manufacturing and assembly, two full-time
persons are engaged in marketing and four full-time and one part-time persons
are engaged in general and administrative activities. We also engage additional
consultants and part-time persons as needed from time to time.
Our future success depends in significant part upon the continued
service of our key technical and senior management personnel. The competition
for highly qualified personnel is intense, and there can be no assurance that we
will be able to retain our key managerial and technical employees or that we
will be able to attract and retain additional highly qualified technical and
managerial personnel in the future. None of our employees is represented by a
labor union, and we consider our relations with our employees to be good. None
of our employees is covered by key man life insurance policies.
GOVERNMENT REGULATION. To our knowledge, our products are not subject
to governmental regulation by any federal, state or local agencies that would
affect the manufacture, sale or use of our products, other than occupational
health and safety laws and labor laws which are generally applicable to most
companies. We cannot, of course, predict what sort of regulations of this type
may be imposed in the future but do not anticipate any unusual difficulties in
complying with governmental regulations which may be adopted in the future.
Our proposed ground penetrating radar device uses microwave radio
waves. The Federal Communications Commission (FCC) regulates the use of such
radio waves in a product. Since we have limited manufacturing capabilities, we
most likely would license the technology to other companies for production. The
other companies would be required to obtain the proper FCC approvals for their
products. We do not believe that the operation of the ground penetrating radar
prototype on contract analysis projects requires FCC approval.
We have not incurred costs associated with environmental laws and do
not anticipate such laws will have any significant effect on our future
business.
ITEM 2. DESCRIPTION OF PROPERTY
We have one 10,000 square foot office located at 10989 Via Frontera, San
Diego, California. The facility is leased and is currently held under an option
that will expire in July 2001. In addition, several of our employees who are
supporting the PSC1000 microprocessor are telecommuting from their homes in
northern California.
In July 2000, we entered into a purchase agreement whereby we plan to
purchase a two-story, 12,760 square foot building which is under construction
and anticipated to be completed and ready for occupancy in the second calendar
quarter of 2001. The agreement is subject to us completing our due diligence and
obtaining satisfactory financing on the completed building. The cost of the
completed project is anticipated to be approximately $2,200,000 and we
anticipate that, initially, we would rent out to third parties approximately
one-half of the total space. We believe that the new facility will be adequate
for our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In October 1998, we were 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. We
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. In March 1999, we joined with
nanoTronics and Gloria Felcyn and
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filed our response and cross-complaint against the Fish Family Trust. In
February 2000, the judge confirmed her ruling in favor of the defendants on the
counts related to the judgment for damages, a rescission of the Technology
Transfer Agreement and a restoration of the technology to the co-inventor. The
judge did rule that another issue, the defendants failure to timely issue shares
of Patriot's common stock to the Fish Family Trust as a result of the Fish
Family Trust's ownership in nanoTronics, may have merit. In settlement of this
last remaining issue, in August 2000, nanoTronics transferred to the Fish Family
Trust approximately 2.9% of the common stock it held in Patriot subject to
finalization of documentation. The judge's final ruling is subject to the normal
appeals process. We believe that, if appealed, it is unlikely that the outcome
would have a material impact on our financial position or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our fiscal 1999 Annual Meeting of Shareholders held on April 28,
2000, the following members, constituting all the members, were elected to the
Board of Directors: James T. Lunney, Lowell W. Giffhorn, Donald R. Bernier,
Richard G. Blum, Frederick Thiel and Helmut Falk Jr.
The following proposals were approved at our Annual Meeting of Shareholders:
1. Proposal to increase the number of authorized shares of common stock to
100,000,000
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
<S> <C> <C>
47,165,125 782,396 174,349
</TABLE>
2. Appointment of BDO Seidman, LLP as our Independent Auditors
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
<S> <C> <C>
47,815,908 102,660 183,310
</TABLE>
3. Election of Directors
<TABLE>
<CAPTION>
Director Votes For Votes Withheld
-------- --------- --------------
<S> <C> <C>
James T. Lunney 48,038,307 81,303
Lowell W. Giffhorn 48,043,307 76,039
Donald Bernier 48,052,001 67,609
Richard G. Blum 48,053,857 65,418
Frederick Thiel 48,055,957 64,218
Helmut Falk Jr 48,043,257 76,039
</TABLE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded in the over-the-counter market and is quoted
on the NASD OTC Bulletin Board system maintained by the National Association of
Securities Dealers, Inc. Prices reported represent prices between
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<PAGE> 16
dealers, do not include markups, markdowns or commissions and do not necessarily
represent actual transactions. The market for our shares has been sporadic and
at times very limited.
The following table sets forth the high and low closing bid quotations
for the Common Stock for the fiscal years ended May 31, 2000 and 1999.
<TABLE>
<CAPTION>
BID QUOTATIONS
--------------
HIGH LOW
<S> <C> <C>
Fiscal Year Ended May 31, 2000
First Quarter $0.66 $0.37
Second Quarter $0.46 $0.29
Third Quarter $6.25 $0.34
Fourth Quarter $6.00 $1.16
Fiscal Year Ended May 31, 1999
First Quarter $0.77 $0.41
Second Quarter $0.81 $0.38
Third Quarter $0.69 $0.25
Fourth Quarter $0.63 $0.25
</TABLE>
We have approximately 324 shareholders of record as of May 31, 2000. At
August 18, 2000, there were 51,367,281 shares of Common Stock issued and
outstanding. We have never paid a cash dividend on our Common Stock and do not
expect to pay one in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our results of operations have been and may continue to be subject to
significant variations. The results for a particular period may vary due to a
number of factors. These include:
- the overall state of the semiconductor and communications
segments of the economy,
- the development status of and demand for our products,
- economic conditions in our markets,
- the timing of orders,
- the timing of expenditures in anticipation of future sales,
- the mix of products sold by us,
- the introduction of new products,
- product enhancements by us or our competitors, and
- pricing and other competitive conditions.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 2000 AND 1999
Net sales. Total net sales for the fiscal year ended May 31, 2000
decreased 36.8% to $716,960 from $1,134,545 for the fiscal year ended May 31,
1999. Of this decrease, approximately $333,000 was due to a decrease in
follow-on shipments for our matured communication products, several of which are
approaching the end of their life cycles. Development and sales of new
communications products have not achieved a level to replace the maturing
products. We anticipate this trend in communication product revenue to continue
since many of the communication products are approaching the end of their life
cycles and our efforts are being focused on the microprocessor product
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line. In addition, during the fiscal year ended May 31, 1999, we recognized
sales of $50,000 related to the non-recurring engineering efforts on a kiosk
application that subsequently did not materialize into a production order.
Cost of sales. Cost of sales as a percentage of net sales increased to
101.1% in the fiscal year ended May 31, 2000 compared to 62.7% for the fiscal
year ended May 31, 1999. $219,000 of the increase is a result of the increase in
the reserve for obsolescence for inventory that had been used in the
communication product line. As a result of the decreased activity in the
communications product revenue, the likelihood of realizing the value of this
inventory has been reduced. The fixed manufacturing overhead being allocated to
a smaller revenue base also contributed to the increase in the cost of sales as
a percentage of net sales percentage.
Research and development expenses decreased 26.4% from $2,149,361 for
the fiscal year ended May 31, 1999 to $1,581,206 for the fiscal year ended May
31, 2000. This decrease was due primarily to a reduction in costs related to
licensed software support and update fees and a reduction in the costs related
to porting software to the microprocessor.
Selling, general and administrative expenses decreased 14.0% to
$1,350,821 for the fiscal year ended May 31, 2000 compared to $1,570,058 for the
fiscal year ended May 31, 1999. This decrease was due primarily to a reduction
in personnel and consulting costs for the fiscal year ended May 31, 2000 and a
reduction in expenses related to legal proceedings and financings.
Non-cash compensation expense of $3,739,267 was recorded in the fiscal
year ended May 31, 2000 as a result of employees and directors exercising their
stock options using a cashless exercise provision. Generally accepted accounting
principles require that such exercises must be recorded using variable exercise
provisions which reflect the incremental difference between the exercise price
and the market price on the date of exercise as though it were additional
compensation. Since no cash is exchanged in the transaction, a like amount is
recorded as additional paid-in capital. Non-cash compensation expense of
$445,000 was recorded for the fiscal year ended May 31, 1999 to reflect the
earnout from escrowed shares.
Other expense increased by 51.2% to $809,366 for the fiscal year ended
May 31, 2000 compared to $535,387 for the fiscal year ended May 31, 1999. This
increase resulted primarily from the recognition in the fiscal year ended May
31, 2000 of $995,651 of non-cash interest related to the amortization of the
debt discount as discussed in Note 4, compared to $498,604 of non-cash interest
related to the discount on convertible term debentures for the fiscal year ended
May 31, 1999, a gain of $250,000 on the sale of the gas plasma antenna
technology during the fiscal year ended May 31, 2000, and a $51,181 increase in
interest expense for the fiscal year ended May 31, 2000 related to short term
notes .
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2000, we had working capital of $1,769,340 and cash and cash
equivalents of $2,100,242. We have funded our operations primarily through the
issuance of securities and debt financings. Cash and cash equivalents increased
$2,064,429 during the fiscal year ended May 31, 2000 primarily as a result of
the sale of common stock under the $5 million equity line of credit. The net
cash used in operating activities was $3,483,050, additions to property and
equipment were $80,884, and funds generated from the sale of accounts
receivables, debt and equity financings of $6,186,950 were offset by $720,355 of
funds used to extinguish short term debt. During the fiscal year ended May 31,
2000, accounts receivable decreased $159,709 and accounts payable and accrued
expenses, including accrued past due payroll taxes, decreased $982,684.
We estimate our current cash requirements to sustain our operations for
the next twelve months through May 2001 to be $4 million. We expect that these
requirements will be provided by the current working capital of $1.8 million,
the $30 million equity line of credit, as discussed below, the exercise of
outstanding stock options and warrants, and anticipated increased microprocessor
and license revenue. In addition, we have a $500,000 factoring agreement with
our bank.
We anticipate that we may require additional equipment, fabrication,
components and supplies during the next twelve months to continue development of
our technologies. Product introductions such as those currently underway for the
PSC1000 may require significant inventory, product launch, marketing personnel
and other
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expenditures that we can not currently estimate. Further, if expanded
development is commenced or new generations of microprocessors are accelerated
beyond our current plans, additional expenditures that we can not currently
estimate, may be required. In July 2000, we entered into a purchase agreement
whereby we plan to purchase a two-story, 12,760 square foot building which is
under construction and anticipated to be completed and ready for occupancy in
the second calendar quarter of 2001. The agreement is subject to us completing
our due diligence and obtaining satisfactory financing on the completed
building. The cost of the completed project is anticipated to be approximately
$2,200,000 and we anticipate that, initially, we would rent out to third parties
approximately one-half of the total space. It is anticipated that should the new
facility be purchased, that it would be paid for partially by encumbering the
property with a mortgage. It is possible therefore, that higher levels of
expenditures may be required than we currently contemplate resulting from
changes in development plans or as required to support new developments or
commercialization activities or otherwise. We anticipate that, if needed, the
equity line of credit and revenues from the sale of the microprocessor and
licenses of the microprocessor technology will generate the additional resources
necessary to accelerate the marketing and production activity.
In April 1999, we sold 400,000 shares of our common stock to two
individuals for an aggregated amount of $75,000; in June 1999, we issued 397,205
shares of our common stock to an institutional investor upon the conversion of a
short term note plus accrued interest in the amount of $116,182; and during the
fiscal year ended May 31, 2000, we issued 7,014,796 shares of our common stock
under the investment agreement (see note 6 to the consolidated financial
statements) for $5,000,000. These sales occurred after the filing of a
registration statement for the public resale of shares sold under the investment
agreement; and, therefore, we may have violated Section 5 of the Securities Act
of 1933. As the shares may have been sold in violation of Section 5, the
investors, at their option, may have the right, for up to one year after the
purchase of the common stock, to rescind their purchases. As such, these shares
were reflected outside of equity in mezzanine equity. The investor loses this
ability to rescind during this one year period if he resells the common stock at
a profit. During fiscal year 2000, a total of 7,512,001 shares had been sold by
the investors at a profit and 300,000 shares had been held by an investor in
excess of the one year period. As a result, at May 31, 2000 such shares were no
longer subject to recision and have been reclassified in the third and fourth
quarters of fiscal 2000 and reported as components of stockholders' equity in
our consolidated balance sheet.
$30 MILLION EQUITY LINE OF CREDIT
Overview. On May 2, 2000, we entered into an investment agreement
with Swartz Private Equity, LLC. The investment agreement entitles us to issue
and sell our common stock for up to an aggregate of $30 million from time to
time during a three-year period starting June 23, 2000, the effective date of
the registration statement. This is also referred to as a put right.
Put Rights. In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the common
shares which may be issued as a consequence of the invocation of that put right.
Additionally, we must give at least ten but not more than twenty business days
advance notice to Swartz of the date on which we intend to exercise a particular
put right and we must indicate the number of shares of common stock we intend to
sell to Swartz. At our option, we may also designate a maximum dollar amount of
common stock (not to exceed $3 million) which we will sell to Swartz during the
put and/or a minimum purchase price per common share at which Swartz may
purchase shares during the put. The number of common shares sold to Swartz may
not exceed 20% of the aggregate daily reported trading volume during a period
which begins on the business day immediately following the day we invoked the
put right and ends on and includes the day which is twenty business days after
the date we invoked the put right.
Swartz will pay us a percentage of the market price for each share of
common stock under the put. If the market price is less than $2.00 per share,
the percentage will be 90%; and if the market price is $2.00 or greater, the
percentage will be 93%. Market price is defined as the lowest closing bid price
for the common stock during the applicable pricing period which consists of two
consecutive ten business day periods following the date notice of the put was
provided to Swartz. However, the market price may not be less than the
designated minimum per share price, if any, that we indicated in our notice.
Warrants. Within five business days after the end of each pricing
period, we are required to issue and deliver to Swartz a warrant to purchase a
number of shares of common stock equal to 15% of the common shares
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issued to Swartz in the applicable put. Each warrant will be exercisable at a
price which will initially equal 110% of the closing bid price on the put date
for the applicable put. The warrants will have semi-annual reset provisions.
Each warrant will be immediately exercisable and have a term beginning on the
date of issuance and ending five years thereafter.
Limitations and Conditions Precedent to Our Put Rights. Swartz is not
required to acquire and pay for any common shares with respect to any particular
put for which:
- we have announced or implemented a stock split or combination of
our common stock;
- we have paid a common stock dividend;
- we have made a distribution of our common stock or of all or any
portion of our assets between the put notice date and the date
the particular put closes; or
- we have consummated a major transaction (including a transaction,
which constitutes a change of control) between the advance put
notice date and the date the particular put closes.
Short Sales. Swartz and its affiliates are prohibited from engaging in
short sales of our common stock unless they have received a put notice and the
amount of shares involved in a short sale does not exceed the number of shares
specified in the put notice.
Cancellation of Puts. We must cancel a particular put between the date
of the advance put notice and the last day of the pricing period if:
- we discover an undisclosed material fact relevant to Swartz's
investment decision;
- the registration statement registering resales of the common
shares becomes ineffective; or
- shares are delisted from the then primary exchange.
However, we will be required to issue common shares equal to the
lesser of:
- 20% of the daily reported trading volume of our common stock
during the pricing periods up to the applicable put cancellation
date;
- the number of shares of common stock put to Swartz which when
multiplied by the applicable put share price equals the
designated maximum dollar amount for the put; or
- 9.9% of the total amount of our common stock that would be
outstanding upon completion of the put.
Shareholder Approval. We may currently issue more than 20% of our
outstanding shares. If we become listed on the Nasdaq Small Cap Market or Nasdaq
National Market, then we must get shareholder approval to issue more than 20% of
our outstanding shares. Since we are currently a bulletin board company, we do
not need shareholder approval.
Termination of Investment Agreement. We may also terminate our right to
initiate further puts or terminate the investment agreement by providing Swartz
with notice of such intention to terminate; however, any such termination will
not affect any other rights or obligations we have concerning the investment
agreement or any related agreement.
Restrictive Covenants. During the term of the investment agreement and
for a period of one-year thereafter, we are prohibited from certain
transactions. These include the issuance of any debt or equity securities in a
private transaction which are convertible or exercisable into shares of common
stock at a price based on the trading price of the common stock at any time
after the initial issuance of such securities or with a fixed conversion or
exercise price subject to adjustment. We are also prohibited from entering into
any private equity line type agreements similar to the investment agreement
without obtaining Swartz's prior written approval.
Right of First Refusal. Swartz has a right of first refusal to purchase
any variable priced securities offered by us in any private transaction which
closes on or prior to six months after the termination of the investment
agreement.
19
<PAGE> 20
Swartz's Right of Indemnification. We are obligated to indemnify Swartz
(including their stockholders, officers, directors, employees and agents) from
all liability and losses resulting from any misrepresentations or breaches we
made in connection with the investment agreement, our registration rights
agreement, other related agreements, or the registration statement.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 all fiscal quarters of all fiscal periods beginning after June 15,
2000. We believe the adoption of this statement will have no material impact on
our financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25. The company is required to adopt the Interpretation on July 1,
2000. The interpretation requires that stock options that have been modified to
reduce the exercise price be accounted for as variable. The Company has repriced
stock options on October 5, 1999 and in accordance with generally accepted
accounting principles accounts for the repriced stock options as fixed. As a
result of adopting the Interpretation, the company will be required to apply
variable accounting to these options and if the market price of the Company's
stock increases it will recognize additional compensation expense that it
otherwise would not have incurred. However, the impact cannot be determined as
it is dependent on the change in the market price of the stock from July 1, 2000
until the stock options are exercised, forfeited or expire unexercised.
In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements" which provides additional guidance in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is effective as of the fourth quarter of fiscal year ending May 31,
2001. We believe the adoption of this bulletin will have no material impact on
our financial statements.
TAX LOSS CARRYFORWARDS
As of May 31, 2000, we had approximately $18,753,000 of tax loss
carryforwards. A valuation allowance has been recorded for the net-deferred tax
asset of $10,207,000 arising primarily from tax loss carryforwards because we
cannot determine that it is more likely than not that the deferred tax asset
will be realized. See Note 9 to the Consolidated Financial Statements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item begin on page F-1 with
the index to consolidated financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
20
<PAGE> 21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of Patriot, their ages,
positions held in Patriot and duration as such, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES DIRECTOR SINCE
<S> <C> <C> <C>
James T. Lunney 45 Chairman, President, CEO and April 1998
Director
Lowell W. Giffhorn 53 Chief Financial Officer and August 1999
Director
Donald R. Bernier 58 Director January 1995
Helmut Falk, Jr. 44 Director December 1997
Philip Morettini 43 Vice President Sales and N/A
Marketing
Frederick G. Thiel 39 Director February 1999
Robert Putnam 42 Secretary N/A
Jayanta K. Maitra 50 Vice President Engineering N/A
Richard G. Blum 70 Director February 1999
</TABLE>
The terms of all directors will expire at the next annual meeting of our
shareholders, or when their successors are elected and have qualified. Directors
are elected each year, and all directors serve one-year terms. Officers serve at
the pleasure of the board of directors. No family relationship exists among our
management members. All board members were elected to the board of directors in
April 2000.
BIOGRAPHICAL INFORMATION
JAMES T. LUNNEY. Mr. Lunney has been the President and CEO of Patriot
since March 1998, was appointed 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. and was appointed Vice President in April 1993 and
a Director in 1995. Mr. Putnam was a director of American Technology Corp. from
1984 to 1997, where he served as Secretary/Treasurer until February 1994 and as
President and CEO from February 1994 until September 1997. He currently serves
as Vice President, Investor Relations for American Technology Corp. He received
a B.A. degree in Mass Communication/Advertising from Brigham Young University in
1983. Mr. Putnam works only part-time for us.
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<PAGE> 22
JAYANTA K. MAITRA. Mr. Maitra was Vice President of Engineering for
Metacomp since 1990 and was appointed Vice President of Engineering of Patriot
in December 1996. 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 the founder. Compunetics engages in contract research and
development, specializing in microelectronics primarily for the automotive
industry.
HELMUT FALK, JR. For the past seven 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 our shares held by the Helmut Falk Family Trust and
nanoTronics Corporation.
PHILIP MORETTINI. Mr. Morettini has been the Vice President of Sales and
Marketing of Patriot since July 1997. From September 1995 to April 1997, he was
the President and CEO of Sdept Computer Solutions, a San Diego software company.
From December 1993 to September 1995, he was the principal in his own management
consulting firm; and from March 1990 to September 1993, he held several
positions, including Division Manager, for Horizons Technology, a San Diego
software and services company. Previously, he held various marketing and product
development positions with Spectragraphics and Hewlett-Packard. In 1981 Mr.
Morettini received a M.B.A. degree from the University of Detroit and in 1979 he
obtained a B.S. in Engineering from the University of Illinois.
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 postgraduate work at John Carrol and Canisius Universities
in 1958.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
As permitted by Delaware law, our certificate of incorporation provides
that we will indemnify our officers, directors, employees and agents. This
includes indemnification against attorneys' fees and other expenses and
liabilities they incur to defend, settle or satisfy any civil or criminal action
brought against them arising out of their association with or activities on
behalf of us. However, they will not be indemnified if they are adjudged to have
acted
22
<PAGE> 23
with gross negligence or to have engaged in willful misconduct. We may also bear
the expenses of such litigation for any such persons upon their promise to repay
such sums if it is ultimately determined that they are not entitled to
indemnification. Such expenditures could be substantial and may not be recouped,
even if we are so entitled. We have provided for indemnification for liabilities
arising under the Securities Act of 1933 as they may be permitted to directors,
officers or persons controlling us. The SEC has informed us that such
indemnification is against public policy and may be unenforceable.
EXCLUSION OF DIRECTOR LIABILITY
In accordance with Delaware law, our certificate of incorporation
excludes personal liability on the part of our directors to us for monetary
damages based upon any violation of their fiduciary duties as directors, except
as to:
- liability for any breach of the duty of loyalty,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- acts in violation of Section 174 of the General Corporation Law of
Delaware, or
- any transaction from which a director receives an improper personal
benefit.
This exclusion of liability does not limit any right that a director may
have to be indemnified and does not affect any director's liability under
federal or applicable state securities laws.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Act")
requires our officers, directors and persons who own more than 10% of a class of
our securities registered under Section 12(g) of the Act to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than 10% shareholders are required by
SEC regulation to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of copies of the reports we have received
from persons required to make such filings and our own records, we believe that
from the period June 1, 1999 through August 15, 2000, all persons subject to the
Section 16(a) reporting requirements timely filed the required reports.
ITEM 10. EXECUTIVE COMPENSATION
There is shown below information concerning the compensation of our
chief executive officers and each of the other four most highly compensated
executive officers whose salary and bonus exceeded $100,000 (each a "Named
Officer") for the fiscal years ended May 31, 1998, 1999 and 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Cash Compensation Long-Term Compensation
------------------------ ----------------------
Name and Fiscal Options Repriced All Other
Principal Position Year Salary Bonus (# of Shares) Options Compensation
------------------ ---- ------ ----- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
James T. Lunney 2000 $137,200(3) $32,500 None 350,000 None
President and CEO(1) 1999 $137,200(3) Nil None None None
1998 $ 26,385(3) Nil 350,000 shares None None
Michael A. Carenzo 1998 $164,133 Nil None None None
President and CEO(2)
Philip J. Morettini 2000 $110,000 Nil None 300,000 None
Vice President 1999 $110,000 Nil None None None
Sales and Marketing
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Lowell W. Giffhorn 2000 $110,000 Nil None 300,000 None
Chief Financial Officer 1999 $107,307 Nil None None None
Jayanta K. Maitra 2000 $120,000 Nil None 225,000 None
Vice President 1999 $120,000 Nil None None None
Engineering (3) 1998 $104,500 Nil 25,000 shares None None
</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) Included in Mr. Lunney's cash compensation is a $600 per month car
allowance.
<TABLE>
<CAPTION>
Number of Options % of Total Options Exercise Expiration
Name Granted Granted to Employee Price Date
---- ----------------- ------------------- -------- ----------
<S> <C> <C> <C> <C>
James T. Lunney 350,000 13% $0.32 February 22, 2003
Phillip J. Morettini 300,000 11% $0.32 July 28, 2002
Lowell W. Giffhorn 300,000 11% $0.32 May 20, 2002
Jayanta K. Maitra 200,000 7% $0.32 December 26, 2001
25,000 1% $0.32 January 26, 2003
</TABLE>
We maintain employee benefits that are generally available to all of our
employees, including medical, dental and life insurance benefits and a 401(k)
retirement savings plan. We had no matching contributions under the 401(k) plan
for any of the above named officers during the fiscal year ended May 31, 2000.
OPTION GRANTS
During the fiscal year ended May 31, 2000, we did not grant any stock
options to the Named Officers reflected in the Summary Compensation Table shown
above. On October 5, 1999, we repriced the above options to the then current
market price of $0.32.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
Shown below is information on exercises of stock options and fiscal
year-end values pursuant to our 1996 and 1992 Stock Option Plans to the Named
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, 2000 May 31, 2000 (1)
Acquired Value ------------ ----------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James T. Lunney 220,313 $1,253,581 116,666 -- $108,499 $ --
Philip J. Morettini 195,678 $ 842,505 -- 90,000 $ -- $ 83,700
Lowell W. Giffhorn 203,248 $ 936,651 90,000 -- $ 83,700 $ --
Jayanta Maitra -- -- 110,753 150,000 $108,006 $139,500
</TABLE>
(1) Based on the last sale price at the close of business on the last trading
day of the fiscal year of $1.25.
We have not awarded stock appreciation rights to any of our employees
and we have no long-term incentive plans, as that term is defined in SEC
regulations.
During the fiscal year ended May 31, 1999, pursuant to Mr. Maitra's
Employment Contract, our Board of Directors cancelled 225,000 previously granted
stock options as a result of Patriot not meeting certain performance goals. We
have no defined benefit or actuarial plans covering any person.
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<PAGE> 25
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by us to
the directors in their capacity as directors other than the granting of stock
options. It is anticipated that during the next twelve months we will not pay
any direct or indirect remuneration to any of our directors in their capacity as
directors other than in the form of stock option grants or the reimbursement of
expenses of attending directors' or committee meetings.
EMPLOYMENT CONTRACTS
We entered into an employment agreement dated as of February 23, 1998
and approved by our directors on March 24, 1998, with Mr. Lunney providing for
his employment as President and CEO effective March 23, 1998. The agreement is
for a three year term 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. We may terminate Mr. Lunney's employment with or without cause, but
termination without cause (other than disability or death) would result in a
lump sum severance payment ranging, depending on length of service, from six to
twelve months salary plus any prorated earned bonuses. Also, upon a change of
control, as defined in the agreement, Mr. Lunney may elect to terminate
employment and obtain a lump sum severance payment equal to the base salary for
the remaining months of the agreement. We 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
Patriot.
We entered into an employment agreement dated as of July 28, 1997 and
approved by our directors on August 18, 1997, with Mr. Morettini providing for
his employment as Vice President of Sales and Marketing. The agreement is for a
three year term providing for a base salary of $110,000 per annum for the first
year and not less than $110,000 per annum during the second and third years of
the agreement. The base salary may be increased at the discretion of the Board
of Directors. The agreement provides for a bonus up to 50% of the annual base
consideration for the applicable year. We may terminate Mr. Morettini's
employment with or without cause, but termination without cause (other than
disability or death) would result in a lump sum severance payment equal to four
months of 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, we granted Mr.
Morettini options to purchase 300,000 common shares, 30,000 vesting on July 28,
1997 and the balance vesting one-third per year starting July 28, 1998, subject
to certain performance standards. Options may vest earlier subject to the
discretion of the Board of Directors.
We entered into an employment agreement dated as of July 23, 1998 with
Mr. Giffhorn providing for his employment as 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. We may terminate
Mr. Giffhorn's employment with or without cause, but termination without cause
(other than disability or death) would result in a lump sum severance payment
equal to four months of 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.
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<PAGE> 26
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 18, 2000, the stock
ownership of each of our officers and directors, of all of our officers and
directors as a group, and of each person known by us to be a beneficial owner of
5% or more of our Common Stock. Except as otherwise noted, each person listed
below is the sole beneficial owner of the shares and has sole investment and
voting power over such shares. No person listed below has any option, warrant or
other right to acquire additional securities of ours, except as otherwise noted.
<TABLE>
<CAPTION>
Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
-------- ----- --------- --------
<S> <C> <C> <C>
Common stock Helmut Falk Family Trust 6,659,912 (1) 12.9%
par value Gloria Felcyn, Trustee
$.00001 20440 Williams Ave.
Saratoga, California 95070
SAME Elwood G. Norris 2,762,500 5.4%
16101 Blue Crystal Trail
Poway, California 92064
SAME Jayanta K. Maitra 288,095 (2) *
10989 Via Frontera
San Diego, California 92127
SAME James T. Lunney 346,979 (2) *
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 (2) *
10989 Via Frontera
San Diego, California 92127
SAME Donald R. Bernier 125,000 (2) *
10989 Via Frontera
San Diego, California 92127
SAME Robert Putnam 75,000 (2) *
10989 Via Frontera
San Diego, California 92127
SAME Helmut Falk, Jr. 4,500 *
10989 Via Frontera
San Diego, California 92127
SAME Richard G. Blum 1,000 *
10989 Via Frontera
San Diego, California 92127
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SAME Frederick G. Thiel 50,000 (2) *
10989 Via Frontera
San Diego, California 92127
All directors & officers 1,283,834 (3) 2.5%
as a group (9 persons)
</TABLE>
* Less than 1%.
(1) These shares remain from 5,000,000 non-escrowed originally issued
shares plus 3,500,000 shares earned as a result of an earnout agreement
with nanoTronics in connection with the ShBoom technology acquisition.
These shares were subsequently transferred to the Helmut Falk Family
Trust.
(2) For each of Messrs. Bernier, Thiel and Putnam the amount includes
50,000 shares, for Mr. Maitra the amount includes 110,753 shares, for
Mr. Lunney the amount includes 116,666 and for Mr. Giffhorn the amount
includes 90,000 shares issuable upon the exercise of immediately
exercisable outstanding stock options granted pursuant to the 1996 and
1992 Stock Option Plans.
(3) Includes 816,415 shares issued and outstanding and 467,419 shares
issuable upon exercise of stock options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions, or series of transactions, during fiscal
1999 or 2000, nor are there any currently proposed transactions, or series of
transactions, to which we are a party, in which the amount exceeds $60,000, and
in which to our knowledge any director, executive officer, nominee, five percent
or greater shareholder, or any member of the immediate family of any of the
foregoing persons, has or will have any direct or indirect material interest
other than described below.
Based on the asset purchase agreement and plan of reorganization dated
June 22, 1994 between Patriot, nanoTronics Corporation and Helmut Falk, we
issued a total of 8,500,000 restricted common shares to nanoTronics, 3,500,000
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). 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 initially issued to nanoTronics who on dissolution
subsequently transferred the shares to the Helmut Falk Family Trust. Prior to
the transaction, Mr. Falk was an unaffiliated person with respect to us. At the
time of issuance the common shares represented approximately 36% of our total
issued and outstanding shares.
Although the transaction did not result in a majority change in our
board of directors, or a majority change in our stock ownership, the issuance of
new stock resulted in a large percentage ownership controlled by one entity with
the ability to have significant influence over our future affairs.
Based on the terms of the purchase agreement, 5,000,000 of the common
shares were issued to nanoTronics subject to an earnout escrow arrangement as a
contingent purchase price. The terms of the escrow arrangement, as defined in
the purchase agreement, provided for the earnout from escrow of 500,000 common
shares for each $500,000 of Patriot revenues commencing June 1, 1994 and ending
May 31, 1999. As of May 31, 2000:
- 3,500,000 shares were released from escrow, and
- the remaining 1,500,000 shares were returned to us and cancelled
since revenue was not sufficient to earn this portion of the escrowed
shares.
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<PAGE> 28
During January 1999 through April 1999, we entered into four short-term
notes with Gloria Felcyn, the trustee for the Falk Family Trust, aggregating
$175,000 with maturity dates ranging from October 22, 1999 to January 15, 2000.
The short-term notes were paid in December 1999 and January 2000.
In June 2000, we entered into a three-year, $80,000 secured promissory
note receivable with James T. Lunney, our Chairman, President and CEO. The note
bears interest at the rate of 6% with interest payments due semi-annually and
the principal due at the maturity of the note. Mr. Lunney pledged 100,000 shares
of Patriot's common stock that he held on the date of issuance as security for
this note.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list and index of Exhibits required by Item 601 of
Regulation S-B along with an indication of the location of the Exhibit:
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exh.No. Document No.
------- -------- ---
<S> <C> <C>
2.0 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 Agreement to Exchange Technology for Stock in Patriot Scientific
Corporation, incorporated by reference to Exhibit 2.1 to Form 8-K
dated August 10, 1989 (1)
2.2 Assets Purchase Agreement and Plan of Reorganization dated June 22,
1994, among the Company, nanoTronics Corporation and Helmut Falk,
incorporated by reference to Exhibit 10.4
to Form 8-K dated July 6, 1994 (1)
2.2.1 Amendment to Development Agreement dated April 23, 1996
between the Company and Sierra Systems, incorporated by
reference to Exhibit 2.2.1 to Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2 dated April 29, 1996 (1)
2.3 Form of Exchange Offer dated December 4, 1996 between the Company and
certain shareholders of Metacomp, Inc. incorporated by reference to
Exhibit 2.3 to Form 8-K dated January 9, 1997 (1)
2.4 Letter of Transmittal to Accompany Shares of Common Stock of Metacomp, Inc.
Tendered Pursuant to the Exchange Offer Dated December 4, 1996 incorporated by
reference to Exhibit 2.4 to Form 8-K dated January 9, 1997 (1)
3.0 ARTICLES AND BYLAWS.
3.1 Original Articles of Incorporation of the Company's predecessor,
Patriot Financial Corporation, incorporated by reference to
Exhibit 3.1 to registration statement on Form S-18, file no.
33-23143-FW (1)
3.2 Articles of Amendment of Patriot Financial Corporation, as filed
with the Colorado Secretary of State on July 21, 1988, incorporated
by reference to Exhibit 3.2 to registration statement on Form S-18,
File No. 33-23143-FW (1)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
<S> <C> <C>
3.3 Certificate of Incorporation of the Company, as filed with the
Delaware Secretary of State on March 24, 1992, incorporated by
reference to Exhibit 3.1 to Form 8-K dated May 12, 1992 (1)
3.3.1 Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Delaware Secretary of State
on April 18, 1995, incorporated by reference to Exhibit 3.3.1
to Form 10-KSB for the fiscal year ended May 31, 1995 (1)
3.3.2 Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Delaware Secretary of State
on June 19, 1997, incorporated by reference to Exhibit 3.3.2
to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
3.3.3 Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Delaware Secretary of State
on April 28, 2000, incorporated by reference to Exhibit 3.3.3
to Registration Statement on Form S-3 dated May 5, 2000 (1)
3.4 Articles and Certificate of Merger of Patriot Financial Corporation
into the Company dated May 1, 1992, with Agreement and Plan of
Merger attached thereto as Exhibit A, incorporated by reference to
Exhibit 3.2 to Form 8-K dated May 12, 1992 (1)
3.5 Certificate of Merger issued by the Delaware Secretary of State on
May 8, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K
dated May 12, 1992 (1)
3.6 Certificate of Merger issued by the Colorado Secretary of State on
May 12, 1992, incorporated by reference to Exhibit 3.4 to Form 8-K
dated May 12, 1992 (1)
3.7 Bylaws of the Company, incorporated by reference to Exhibit 3.5 to
Form 8-K dated May 12, 1992 (1)
4.0 INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.
4.1 Specimen common stock certificate, incorporated by reference to
Exhibit 4.1 Form 8-K dated May 12, 1992 (1)
4.2 Form of Stock Purchase Warrant (Labway Corporation) dated February 29,
1996, exercisable to purchase 253,166 common shares at $1.58 per share
until August 31, 1996, granted to investors in connection with an
offering of securities made in reliance upon Regulation S, incorporated
by reference to Exhibit 4.2 to Form 10-QSB for fiscal quarter ended
2/29/96 (1)
4.3 Form of 6% Convertible Subordinated Promissory Note due September 30,
1998 aggregating $1,500,000 to six investors incorporated by reference
to Exhibit 4.3 to Form 10-QSB for
fiscal quarter ended August 31, 1996 (1)
4.4 Form of 5% Convertible Term Debenture (CC Investments, LDC) due
June 2, 1999 aggregating $2,000,000 to two investors incorporated
by reference to Exhibit 4.4 to Form 8-K dated June 16, 1997 (1)
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C> <C>
4.5 Form of Stock Purchase Warrant (CC Investments, LDC) dated
June 2, 1997 exercisable to purchase an aggregate of 400,000 common
shares at $1.69125 per share until June 2, 2002, granted to two investors
in connection with the offering of securities in Exhibit 4.4 incorporated
by reference to Exhibit 4.5 to Form 8-K dated June 16, 1997 (1)
4.6 Registration Rights Agreement dated June 2, 1997 by and among
the Company and CC Investments, LDC and the Matthew Fund, N.V.
related to the registration of the common stock related to Exhibits
4.4 and 4.5 incorporated by reference to Exhibit 4.6 to Form 8-K
dated June 16, 1997 (1)
4.7 Form of Warrant to Purchase Common Stock (Swartz Family
Partnership, L.P.) dated June 2, 1997 exercisable to purchase an
aggregate of 211,733 common shares at $1.69125 per share until
June 2, 2002, granted to a group of investors in connection with
the offering of securities in Exhibit 4.4 incorporated by reference to
Exhibit 4.7 to Form 8-K dated June 16, 1997 (1)
4.8 Registration Rights Agreement dated June 2, 1997 by and among the
Company and Swartz Investments, LLC related to the registration of
the common stock related to Exhibit 4.7 incorporated by reference to
Exhibit 4.8 to Form 8-K dated June 16, 1997 (1)
4.9 Form of 5% Convertible Term Debenture (CC Investments, LDC) due
June 2, 1999 aggregating $1,000,000 to two investors incorporated by
reference to Exhibit 4.9 to Form 10-KSB for the year ended May 31, 1998 (1)
4.10 Form of Stock Purchase Warrant (CC Investments, LDC) dated November 24,
1997 exercisable to purchase an aggregate of 200,000 common shares at
$1.50 per share until June 2, 2002, granted to two investors in
connection with the offering of securities in Exhibit 4.9 incorporated
by reference to Exhibit 4.10 to Form 10-KSB for the year ended May 31, 1998 (1)
4.11 Form of Warrant to Purchase Common Stock (Swartz Family Partnership,
L.P.) dated November 24, 1997 exercisable to purchase an aggregate of
105,867 common shares at $1.50 per share until June 2, 2002, granted to
a group of investors in connection with the offering of securities in
Exhibit 4.9 incorporated by reference to Exhibit 4.11 to Form 10-KSB
for the year ended May 31, 1998 (1)
4.12 Form of Warrant to Purchase Common Stock (Investor Communications Group,
Inc.) dated June 16, 1997 exercisable to purchase an aggregate of
130,000 common shares at prices ranging from $2.50 to $7.50 per share
until June 15, 1999 incorporated by reference to Exhibit 4.12 to Form
10-KSB for the year ended May 31, 1998 (1)
4.13 Warrant to Purchase Common Stock issued to Spellcaster
Telecommunications, Inc. dated April 28, 1998 exercisable to purchase an
aggregate of 100,000 common shares at $1.25 per share until April 28,
2000 incorporated by reference to Exhibit 4.13 to Form 10-KSB for the
year ended May 31, 1998 (1)
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
<S> <C> <C>
4.14 Investment agreement dated February 24, 1999 by and between the Company
and Swartz Private Equity, LLC for a maximum aggregate amount of
$5,000,000 Incorporated by reference to Exhibit 4.14 to Form 10-QSB/A
for the fiscal quarter Ended November 30, 1998 (1)
4.15 Registration Rights Agreement dated February 24, 1999 by and between the
Company and Swartz Private Equity, LLC related to the registration of
the common Stock related to Exhibit 4.14 incorporated by reference to
Exhibit 4.15 to Form 10- QSB/A for the fiscal quarter ended November 30,
1998 (1)
4.16 Form of Warrant to Purchase Common Stock (Swartz Private Equity, LLC)
dated February 24, 1999 exercisable to purchase common shares in
connection with the Offering of securities in Exhibit 4.14 incorporated
by reference to Exhibit 4.16 to Form 10-QSB/A for the fiscal quarter
ended November 30, 1998 (1)
4.17 Amended and Restated Investment Agreement dated July 12, 1999 by and
between the Company and Swartz Private Equity, LLC for a maximum
aggregate amount of $5,000,000 incorporated by reference to Exhibit 4.17
to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated July 14, 1999 (1)
4.18 Investment Agreement dated April 28, 2000 by and between the Company and
Swartz Private Equity, LLC for a maximum aggregate amount of $30,000,000
incorporated by reference to Exhibit 4.18 to Registration Statement on
Form S-3 dated May 5, 2000 (1)
10.0 MATERIAL CONTRACTS.
10.1 1992 Incentive Stock Option Plan of the Company, incorporated
by reference to Exhibit 10.1 to Form 8-K dated May 12, 1992 (1)
10.1.1 Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17,
1996 (1)
10.2 1992 Non-Statutory Stock Option Plan of the Company, incorporated by
reference to Exhibit 10.2 to Form 8-K dated May 12, 1992 (1)
10.2.1 Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995
incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal
year ended May 31, 1996 (1)
10.3 Lease Agreement between the Company's subsidiary Metacomp, Inc. and
Clar-O-Wood Partnership, a California limited partnership dated April
11, 1991 as amended November 11, 1992 and November 2, 1995, incorporated
by reference to Exhibit 10.3 to Form 10-KSB for the fiscal year ended
May 31, 1997 (1)
10.4 Stock Purchase Agreement dated November 29 and 30, 1995,
between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4 to Form 8-K dated December 11, 1995 (1)
10.4.1 Letter Amendment to Stock Purchase Agreement dated February 21,
1996, between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
<S> <C> <C>
10.5 1995 Employee Stock Compensation Plan of the Company,
incorporated by reference to Exhibit 10.5 to Form 10-QSB
for fiscal quarter ended 11/30/95 (1)
10.6 Letter Stock and Warrant Agreement dated January 10, 1996
between the Company and Robert E. Crawford, Jr., incorporated
by reference to Exhibit 10.6 to Form 10-QSB for fiscal quarter ended
2/29/96 (1)
10.7 Non-Exclusive Manufacturing and Line of Credit Agreement dated
February 28, 1996, between the Company and Labway Corporation,
incorporated by reference to Exhibit 10.7 to Form 10-QSB for
fiscal quarter ended 2/29/96 (1)
10.8 Distribution and Representation Agreement dated February 28,
1996, between the Company and Innoware, Inc., incorporated by
reference to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
10.9 Employment Agreement dated November 20, 1995 between the
Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9
to Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.9.1 First Amendment to Employment Agreement dated May 17, 1996 between
the Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9.1
to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996 (1)
10.10 Employment Agreement dated November 20, 1995 between the
Company and Robert Putnam, incorporated by reference to Exhibit 10.10
to Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.11 Sales Contractual Agreement dated March 19, 1996 between the
Company and Evolve Software, Inc., incorporated by reference to
Exhibit 10.11 to Pre-Effective Amendment No. 1 to Registration
Statement on Form SB-2 dated April 29, 1996 (1)
10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to
Evolve Software, Inc. Providing for the Purchase of up to 50,000
Common Shares at $2.85, incorporated by reference to Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 dated April 29, 1996 (1)
10.12 Employment Agreement dated as of May 8, 1996 between the Company and
Michael A. Carenzo, including Schedule A - Stock Option Agreement,
incorporated by reference to Pre-Effective Amendment No. 2 to
Registration Statement on Form SB-2 dated May 23, 1996 (1)
10.12.1 First Amendment to Employment Agreement dated May 8, 1996 between the
Company and Michael A. Carenzo dated September 23, 1996, incorporated by
reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal year ended
May 31, 1997 (1)
10.13 1996 Stock Option Plan of the Company dated March 25, 1996 and approved
by the Shareholders on May 17, 1996, incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996 (1)
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
<S> <C> <C>
10.14 Sales Contractual Agreement dated June 20, 1996 between the Company
and Compunetics Incorporated incorporated by reference to Exhibit 10.14 to
Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.15 Sales Contractual Agreement dated July 31, 1996 between the Company and
Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to
Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.16 Employment Agreement dated January 1, 1997 between the Company and
Norman J. Dawson, incorporated by reference to Exhibit 10.16
to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
10.17 Employment Agreement dated January 1, 1997 between the
Company and Jayanta K. Maitra, incorporated by reference to Exhibit 10.17
to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
10.18 Technology License and Distribution Agreement dated June 23, 1997
between the Company and Sun Microsystems, Inc. , incorporated by reference
to Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31, 1997 (1)
10.19 Employment Agreement dated March 23, 1998 between the Company
and James Lunney incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998 (1)
10.20 Employment Agreement dated July 28, 1997 between the Company
and Philip Morettini incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998 (1)
10.21 Employment Agreement dated July 23, 1998 between the Company
and Lowell W. Giffhorn incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998 (1)
10.22 Secured Promissory Note dated June 12, 2000 between the Company
and James T. Lunney (2)
10.23 Purchase Agreement dated June 29, 2000 between the Company and
4S 37/38, LLC (2)
23.0 CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of BDO Seidman, LLP (2)
99.0 ADDITIONAL EXHIBITS.
99.1 Form of ISO Plan Option (Gaspar) dated May 29, 1992,
incorporated by reference to Exhibit 28.2 to registration
statement on Form SB-2, file no. 33-57858 (1)
99.2 Form of NSO Plan Option (Berlin) dated May 29, 1992,
incorporated by reference to Exhibit 28.3 to registration
statement on Form SB-2, file no. 33-57858 (1)
99.3 Form of Incentive Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreements differ as to number of shares, dates,
prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
<S> <C> <C>
99.4 Form of NonQualified Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreement differ as to number of shares, date,
prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
99.5 Press Release of the Company dated November 4, 1996 incorporated by
reference to Exhibit 99.5 to Form 8-K dated January 9, 1997 (1)
(1) Previously filed in indicated registration statement or report.
(2) Exhibit filed herewith this Annual Report on Form 10-KSB for the fiscal year
ended May 31, 2000
</TABLE>
(b) The Company did not file a report on Form 8-K for the quarter ended May 31,
2000.
34
<PAGE> 35
Patriot Scientific Corporation
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants ........................... F-2
Consolidated Balance Sheet as of May 31, 2000 ................................ F-3
Consolidated Statements of Operations for the Years Ended
May 31, 2000 and 1999 ................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended May 31, 2000 and 1999 ....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
May 31, 2000 and 1999 ................................................... F-6
Summary of Accounting Policies ............................................... F-7-F-10
Notes to Consolidated Financial Statements ................................... F-11-F-22
</TABLE>
F-1
<PAGE> 36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Patriot Scientific Corporation
San Diego, California
We have audited the accompanying consolidated balance sheet of Patriot
Scientific Corporation as of May 31, 2000 and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the two year period ended May 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Patriot Scientific
Corporation as of May 31, 2000, and the results of their operations and their
cash flows for each of the years in the two year period ended May 31, 2000 in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Denver, Colorado
July 21, 2000, except for Note 11
which is as of August 25, 2000
F-2
<PAGE> 37
PATRIOT SCIENTIFIC CORPORATION
Consolidated Balance Sheet
<TABLE>
<CAPTION>
May 31, 2000
----------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,100,242
Accounts receivable, net of allowance
of $5,000 for uncollectible accounts 61,152
Inventories (Note 1) 71,164
Prepaid expenses 60,048
----------------------------------------------------------------------------
Total current assets 2,292,606
PROPERTY AND EQUIPMENT, net (Note 2) 289,880
PATENTS AND TRADEMARKS, net of accumulated amortization
of $272,001 150,662
----------------------------------------------------------------------------
$ 2,733,148
============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 393,150
Accrued liabilities 130,116
----------------------------------------------------------------------------
Total current liabilities 523,266
COMMITMENTS AND CONTINGENCY (Notes 11 and 12)
STOCKHOLDERS' EQUITY (Notes 3, 5, 6 and 7):
Preferred stock, $.00001 par value; 5,000,000 shares
authorized: none outstanding --
Common Stock, $.00001 par value; 100,000,000 shares
authorized: issued and outstanding 51,126,675 511
Additional paid-in capital 33,559,158
Accumulated deficit (31,349,787)
----------------------------------------------------------------------------
Total stockholders' equity 2,209,882
----------------------------------------------------------------------------
$ 2,733,148
============================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-3
<PAGE> 38
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended May 31, 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Net sales (Note 13) $ 716,960 $ 1,134,545
Cost of sales:
Product costs 455,008 660,195
Inventory obsolescence 270,000 51,000
-----------------------------------------------------------------------------------
Cost of sales 725,008 711,195
-----------------------------------------------------------------------------------
Gross profit (loss) (8,048) 423,350
Operating expenses:
Research and development (exclusive
of non-cash compensation shown
below of $1,588,960 and none) 1,581,206 2,149,361
Selling, general and administrative
(exclusive of non-cash compensation
shown below of $2,150,307 and $445,000) 1,350,821 1,570,058
Non-cash compensation (Notes 3 and 7) 3,739,267 445,000
-----------------------------------------------------------------------------------
6,671,294 4,164,419
-----------------------------------------------------------------------------------
Operating loss (6,679,342) (3,741,069)
-----------------------------------------------------------------------------------
Other income (expenses):
Gain on sale of technology 250,000 -
Interest income 28,014 3,765
Interest expense (91,729) (40,548)
Non-cash interest expense
related to notes payable
(Notes 4 and 5) (995,651) (498,604)
-----------------------------------------------------------------------------------
(809,366) (535,387)
-----------------------------------------------------------------------------------
Net loss $ (7,488,708) $ (4,276,456)
===================================================================================
Basic and diluted loss
per common share (Note 8) $ (0.17) $ (0.11)
===================================================================================
Weighted average number of
common shares outstanding
during the period (Note 8) 44,156,418 38,042,734
===================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-4
<PAGE> 39
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Years Ended May 31, 2000 and 1999
Common Stock
----------------------------- Additional Accumulated Stockholders'
Shares Amount Paid-in Capital Deficit Equity (Deficit)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 1998 37,880,776 $ 379 $ 20,741,092 $(19,584,623) $ 1,156,848
Issuance of common stock at $.23 to $.35
per share (Note 7) 580,435 6 165,494 -- 165,500
Exercise of common stock warrants and
options at $.18 to $.36 per share (Note 7) 587,626 6 205,926 -- 205,932
Common stock earned under an escrow
agreement for purchased technology
at $.44-$.45 per share (Note 3) -- -- 445,000 -- 445,000
Non-cash interest expense related to
convertible notes recorded to additional
paid-in capital (Note 5) -- -- 142,830 -- 142,830
Common stock issued for services at
$.34 (Note 7) 279,326 3 125,468 -- 125,471
Conversion of 5% Convertible
term debentures plus interest
at $.30 to $.48 per share (Note 5) 1,735,752 17 575,624 -- 575,641
Value of warrants issued (Notes 4 and 5) -- -- 478,000 -- 478,000
Expiration of escrowed shares related to
purchase of ShBoom technology
(Note 3) (1,500,000) (15) 15 -- --
Net loss -- -- -- (4,276,456) (4,276,456)
----------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1999 39,563,915 396 22,879,449 (23,861,079) (981,234)
==================================================================================================================================
Issuance of common stock at $.25 to $.98
per share (Note 7) 7,014,796 70 4,999,930 -- 5,000,000
Exercise of common stock warrants and
options at $.18 to $1.46 per share (Note 7) 3,750,759 37 923,913 -- 923,950
Reclassification of stock subject to
rescission at $.18 to $.20 per share (Note 7) 400,000 4 74,996 75,000
Non-cash compensation expense (Note 7) -- -- 3,739,267 -- 3,739,267
Conversion of notes payable plus
interest at $.29 per share (Note 4) 397,205 4 116,178 -- 116,182
Value of warrants issued (Notes 4 and 5) -- -- 739,037 -- 739,037
Non-cash interest on conversion of
notes payable -- -- 86,388 -- 86,388
Net loss -- -- -- (7,488,708) (7,488,708)
----------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2000 51,126,675 $ 511 $ 33,559,158 $(31,349,787) $ 2,209,882
==================================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-5
<PAGE> 40
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years Ended May 31, 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(7,488,708) $(4,276,456)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 367,395 354,643
Provision for doubtful accounts 41,919 17,000
Provision for inventory obsolescense 270,000 51,000
Common stock and warrants issued for services -- 125,471
Non-cash interest expense related to convertible
debentures, notes payable and warrants 995,651 519,245
Gain on sale of technology (250,000) --
Amortization of debt issuance costs -- 25,900
Non-cash compensation expense 3,739,267 445,000
Changes in:
Accounts receivable (159,709) 317,180
Inventories (91,331) (70,416)
Prepaid and other assets 75,150 (48,012)
Accounts payable and accrued expenses (982,684) 997,360
--------------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,483,050) (1,542,085)
--------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property, equipment and patents (169,116) (343,311)
Proceeds from sale of technology 250,000 --
--------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 80,884 (343,311)
--------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of short term notes payable 410,000 525,500
Proceeds from issuance of common stock subject to
recision -- 75,000
Proceeds from short term notes payable to a related
party -- 175,000
Principal payments on notes payable and
long-term debt (720,355) (2,179)
Proceeds from issuance of common stock
and exercise of common stock warrants
and options 5,634,950 371,432
Proceeds from sale of accounts receivable 142,000 174,000
--------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,466,595 1,318,753
--------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,064,429 (566,643)
CASH AND CASH EQUIVALENTS, beginning of year 35,813 602,456
--------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 2,100,242 $ 35,813
========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Convertible debentures, notes payable and accrued
interest exchanged for common stock $ 405,182 $ 575,641
Cash payments for interest 102,137 15,469
Unamortized debt discount -- 170,226
--------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-6
<PAGE> 41
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Patriot Scientific Corporation (the "Company") is engaged in the development,
marketing, and sale of patented microprocessor technology and the sale of
high-performance high-speed data communication products. The Company also owns
innovative radar technology. The Company sold its antenna technology in August
1999.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Company, its majority owned subsidiaries, Metacomp, Inc. ("Metacomp") and Plasma
Scientific Corporation. All material intercompany transactions and balances have
been eliminated in consolidation.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable.
The Company's cash equivalents are placed in high quality money market accounts
with major financial institutions and high grade short-term commercial paper.
The investment policy limits the Company's exposure to concentrations of credit
risk. Money market accounts are federally insured; however, commercial paper is
not insured. The Company has not experienced any losses in such accounts.
Concentrations of credit risk with respect to accounts receivable are limited
due to the wide variety of customers and markets which comprise the Company's
customer base, as well as their dispersion across many different geographic
areas. The Company routinely assesses the financial strength of its customers
and, as a consequence, believes that its accounts receivable credit risk
exposure is limited. Generally, the Company does not require collateral or other
security to support customer receivables. As of May 31, 2000, the Company had
approximately 72% in accounts receivable from one customer.
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximated fair value because of the immediate or short-term maturity of these
instruments.
INVENTORIES
Inventories consist of raw materials, work in process and finished goods and are
valued at the weighted average cost method, which approximates cost on a
first-in, first-out basis, not in excess of market value.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful life of three to five years using the straight-line method. The
Company follows the provisions of the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
F-7
<PAGE> 42
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
to be Disposed Of." Long-lived assets and certain identifiable intangibles to be
held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company continuously evaluates the recoverability of its
long-lived assets based on estimated future cash flows from and the estimated
fair value of such long-lived assets, and provides for impairment if such
undiscounted cash flows are insufficient to recover the carrying amount of the
long-lived asset.
PATENTS AND TRADEMARKS
Patents and trademarks are carried at cost less accumulated amortization and are
amortized over their estimated useful lives of four years. The carrying value of
patents and trademarks is periodically reviewed and impairments, if any, are
recognized when the expected future benefit to be derived from individual
intangible assets is less than its carrying value determined based on the
provisions of SFAS No. 121 as discussed above.
REVENUE RECOGNITION
Revenue is recognized upon the shipment of product to the customer. Contract
engineering, licensing and royalty income is recognized when earned.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". Temporary differences are differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years.
NET LOSS PER SHARE
The Company applies SFAS No. 128, "Earnings Per Share" for the calculation of
"Basic" and "Diluted" earnings (loss) per share. Basic earnings (loss) per share
includes no dilution and is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share reflect the potential dilution
of securities that could share in the earnings (loss) of an entity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 43
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
During the year ended May 31, 2000, based upon information then available, the
Company revised its estimates regarding the recovery of certain inventories. As
a result, the Company increased existing reserves for obsolescence by $270,000.
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. A $500,000 factoring
line established by the Company with a bank enables the Company to sell selected
accounts receivable invoices to the bank with full recourse against the Company.
These transactions qualify for a sale of assets since (1) the Company has
transferred all of its right, title and interest in the selected accounts
receivable invoices to the bank, (2) the bank may pledge, sell or transfer the
selected accounts receivable invoices, and (3) the Company has no effective
control over the selected accounts receivable invoices since it may not redeem
the invoices sold previous to the invoices being greater than 90 days past due.
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 surrendered, and
derecognizes liabilities when extinguished. During fiscal 2000 and 1999, the
Company sold approximately $178,000 and $218,000, respectively, of its accounts
receivable to a bank under a factoring agreement for approximately $142,000 and
$174,000, respectively. 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. The retained amount is equal to 20% of the total accounts receivable
invoice sold to the bank less 1% of the total invoice as an administrative fee
and 1.75% per month of the total outstanding accounts receivable invoices as a
finance fee. The estimated future loss reserve for each receivable included in
the estimated value of the retained asset is based on the payment history of the
accounts receivable customer. The Company collected the entire retained amount
and there were no balances for retained amounts outstanding at May 31, 2000.
Also, at May 31, 2000, the entire line of $500,000 is available for future
factoring of accounts receivable invoices.
STOCK OPTIONS
The Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
all stock option plans. Under APB Opinion 25, compensation cost has been
recognized for stock options granted to employees when the option price is less
than the market price of the underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net income as if compensation cost for
the Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model.
F-9
<PAGE> 44
PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard No. 133 ("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 all fiscal quarters of all fiscal periods beginning after June 15,
2000. Management believes the adoption of this statement will have no material
impact on the Company's financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation An interpretation of APB
Opinion No. 25". The company is required to adopt the Interpretation on July 1,
2000. The Interpretation requires that stock options that have been modified to
reduce the exercise price be accounted for as variable. The Company has
repriced stock options on October 5, 1999 and in accordance with generally
accepted accounting principles accounts for the repriced stock options as
fixed. As a result of adopting the Interpretation, the company will be required
to apply variable accounting to these options and if the market price of the
Company's stock increases it will recognize additional compensation expense
that it otherwise would not have incurred. However, the impact cannot be
determined as it is dependent on the change in the market price of the stock
from July 1, 2000 until the stock options are exercised, forfeited or expire
unexercised.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective as of the fourth quarter of fiscal year ending May 31, 2001.
Management believes the adoption of this bulletin will have no material impact
on the Company's financial statements.
RECLASSIFICATIONS
Certain items included in the 1999 financial statements have been reclassified
to conform to the current year presentation.
F-10
<PAGE> 45
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES Inventories at May 31, 2000 consisted of the following:
<TABLE>
<S> <C>
-------------------------------------------------------
Component parts $ 332,271
Work in process 38,213
Finished goods 39,680
-------------
410,164
Reserve for obsolescence (339,000)
-------------
$ 71,164
-------------------------------------------------------
</TABLE>
2. PROPERTY AND Property and equipment consisted of the
EQUIPMENT following at May 31, 2000:
<TABLE>
------------------------------------------------------------------
<S> <C>
Computer equipment and software $ 1,474,155
Furniture and fixtures 311,264
Laboratory equipment 198,429
------------------------------------------------------------------
1,983,848
Less accumulated depreciation and amortization 1,693,968
------------------------------------------------------------------
Net property and equipment $ 289,880
------------------------------------------------------------------
Depreciation expense was $283,952 and $277,543 for the
years ended May 31, 2000 and 1999.
</TABLE>
3. PURCHASED TECHNOLOGY
SEMICONDUCTOR MICROPROCESSOR TECHNOLOGY
Effective May 31, 1994, the Company acquired certain proprietary semiconductor
microprocessor technology (the "ShBoom Technology") and related computer
software from a corporation in exchange for up to 10,000,000 restricted shares
of the Company's common stock (3,500,000 of which were released from an escrow
subject to an earnout arrangement as discussed below).
The cost of this technology of $1,875,000 was based upon the estimated current
fair market value of the 5,000,000 non-contingent shares of the Company's common
stock issued under this agreement and was fully amortized over its estimated
useful life of three years. The remaining 3,500,000 shares issued for this
technology were subject to an earnout escrow arrangement. As such, when the
escrowed shares were earned, they were charged to compensation costs. The terms
of the escrow arrangement provided for an earnout formula of 500,000 shares for
each $500,000 of revenues earned by the Company during the period from June 1,
1994 through May 31, 1999.
F-11
<PAGE> 46
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended May 31, 1999, 2,000,000 shares were earned as a result of
the arrangement and $445,000 was charged to compensation costs in that period.
In addition, 1,500,000 shares that were originally placed in escrow, but not
earned according to the earnout arrangement, were returned to the Company and
cancelled.
4. NOTES PAYABLE
During the years ended May 31, 2000 and 1999, the Company borrowed $410,000 and
$700,500 from an institutional investor and a group of individual investors, one
of which is a major shareholder in the Company. The original terms of the notes
typically included maturity dates of four months with interest rates ranging
from 10%-18%. Also during the year ended May 31, 2000, the Company paid off
short term loans aggregating $719,000 from the group of individual investors.
Also, $102,500 of a short-term loan with an institutional investor was
exchanged for convertible debt and converted into the Company's common stock.
The Debt was convertible at a discount to market and, therefore, generated a
beneficial conversion feature. The beneficial conversion feature was valued at
$86,388 and is reflected as non-cash interest expense. In addition, $289,000 of
short-term loans with a group of individual investors were settled through the
cashless exercise of warrants.
In addition to the interest on the loans, warrants exercisable for three years
were issued to investors at exercise prices ranging from $.25 to $1.12 which was
equal to the market price of the common stock on the date of the issuances.
During the years ended May 31, 2000 and 1999, warrants to purchase 1,338,342 and
1,553,462 common shares of the Company were issued related to the short term
loans placed during the year and warrants to purchase 2,443,447 and 125,000
common shares of the Company were issued to the individual investors and the
institutional investor to extend the due dates of their short term loans. These
warrants were valued using the Black-Scholes model and the value of $739,037 and
$275,226, respectively, were reflected as a discount to the debt and was
amortized over the life of the debt. In fiscal 2000, $909,263 of the debt
discount related to the warrants and $86,388 related to the conversion discussed
above, were amortized and reflected as non-cash interest expense. In fiscal
1999, $105,000 of the debt discount related to the warrants and $23,700 related
to the extension of the due dates discussed above, had been amortized and
reflected as non-cash interest expense.
5. 5% CONVERTIBLE TERM DEBENTURES
In 1997, the Company issued to a limited number of investors for cash an
aggregate of $3,000,000 of unsecured 5% Convertible Term Debentures
("Debentures") and Stock Purchase Warrants ("Warrants") with a right to purchase
an aggregate 917,600 shares of common stock, par value $.00001 per share, at
exercise prices ranging initially from $1.50 to $1.69125 per share which were
subsequently reduced to exercise prices ranging from $0.36 to $0.4375 per share.
The principal and interest amount of each Debenture could, at the election of
the holder, have been 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.
F-12
<PAGE> 47
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of May 31, 1999, the Debentures had been fully converted into 6,069,345
common shares of the Company. In addition, as of May 31, 2000, the investors had
exercised warrants to purchase 867,222 common shares of the Company.
Convertible debt instruments which were 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.
During the year ended May 31, 1999 the remaining $142,830 was expensed under
the caption "Non-cash interest expense."
6. INVESTMENT AGREEMENTS
$5 MILLION
In February 1999, the Company entered into an investment agreement with Swartz
Private Equity LLC ("Swartz"). The investment agreement entitled the Company, at
the Company's option, to issue and sell 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 must 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 equal to 110% of the market price as
determined during the pricing period, subject to further semi-annual price
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 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-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, 1999, 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 February 10, 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.
F-13
<PAGE> 48
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
An additional 1,052,219 shares of common stock at exercise prices ranging from
$0.341 to $1.075 are issuable to Swartz upon the exercise of warrants issued
under the investment agreement. None of the warrants had been exercised as of
May 31, 2000.
$30 MILLION
In May 2000, the Company entered into a second investment agreement with Swartz.
The second investment agreement entitles the Company, at the Company's option,
to issue and sell its common stock for up to an aggregate of $30 million from
time to time during a three-year period through June 23, 2003, subject to
certain conditions including (1) an effective registration statement must be on
file with the SEC registering the resale of the common shares, and (2) a
limitation on the number of common shares that can be sold to Swartz within a 30
day time period based on the trading volume of the stock, among others. Swartz
can purchase the common stock from the Company at a discount ranging from 7% to
10% depending on the price of the common stock. In addition to the common stock
purchased, Swartz will receive warrants to purchase an additional 15% of the
common stock equal to 110% of the market price as determined during the pricing
period, subject to further semi-annual price adjustments if the price of the
common stock goes down. The registration statement went effective on June 23,
2000. As of May 31, 2000, the Company did not issue any puts to Swartz under the
second investment agreement.
7. STOCKHOLDERS' EQUITY (DEFICIT)
PRIVATE OFFERINGS AND WARRANTS
During fiscal 1999, 279,326 shares of common stock were issued to the Company's
attorneys in exchange for services. The fair value (as determined by the quoted
market price) of the common stock in excess of the liability of $30,500 was
recorded as additional general and administrative expense. Also, during fiscal
1999, the Company issued 580,435 shares of common stock to individual investors
for $165,000.
At May 31, 2000, the Company had warrants outstanding to purchase 4,756,181
common shares at exercise prices ranging from $0.25 to $1.12 per share expiring
beginning in 2002 through 2005.
During fiscal 2000, the Company issued warrants to purchase 4,834,009 common
shares of stock at exercise prices ranging from $0.25 to $1.12 per share. Of
this amount, warrants to purchase 1,052,219 common shares of stock were issued
to Swartz related to the $5 million investment agreement and warrants to
purchase 3,781,790 common shares of stock were issued to individual and
institutional investors related to notes payable. See Notes 4 and 6 for further
discussion. During fiscal 1999, the Company issued warrants to purchase
1,678,462 common shares of stock at exercise prices ranging from $.25 to $.50
per share. All of these warrants to purchase common stock are related to notes
payable.
F-14
<PAGE> 49
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During fiscal 2000, individual and institutional investors exercised warrants to
purchase 2,118,890 shares of common stock at exercise prices ranging from $0.25
to $0.50 per share and one warrant to purchase 100,000 common shares at an
exercise price of $1.25 expired unexercised.
Also, during fiscal 2000, the Company's shareholders approved an increase in the
authorized number of common shares from 60,000,000 to 100,000,000.
1992 INCENTIVE STOCK OPTION PLAN ("ISO")
The Company has an ISO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the Company's common stock. The ISO Plan provides for grants
to either full or part time employees, at the discretion of the board of
directors, to purchase common stock of the Company at a price not less than the
fair market value of the shares on the date of grant. In the case of a
significant stockholder, the option price of the share is not less than 110
percent of the fair market value of the share on the date of grant. Any options
granted under the ISO Plan must be exercised within ten years of the date they
were granted (five years in the case of a significant stockholder).
1992 NON-STATUTORY STOCK OPTION PLAN("NSO")
The Company has an NSO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the Company's common stock. The NSO Plan provides, at the
discretion of the board of directors, for grants to either full or part time
employees, directors and consultants of the Company to purchase common stock of
the Company at a price not less than the fair market value of the shares on the
date of grant. Any options granted under the NSO Plan must be exercised within
ten years of the date they were granted.
1996 STOCK OPTION PLAN
Effective March 1996, the Company adopted the 1996 Stock Option Plan, which was
amended by the Stockholders in December 1997, expiring March 24, 2006, reserving
for issuance 4,000,000 shares of the Company's common stock. The 1996 Stock
Option Plan provides, at the discretion of the board of directors, for grants to
either full or part time employees, directors and consultants of the Company to
purchase common stock of the Company at a price not less than the fair market
value on the date of grant for incentive stock options or not less than 85% of
the fair market value on the date of grant for non-qualified stock options. In
the case of a significant stockholder, the option price of the share is not less
than 110 percent of the fair market value of the shares on the date of grant.
Any option granted under the 1996 Stock Option Plan must be exercised within ten
years of the date they are granted (five years in the case of a significant
stockholder). During the fiscal year ended May 31, 2000, the Company granted
options to purchase 150,000 shares of stock at market value. During the fiscal
year ended May 31, 1999, the Company granted options to purchase 725,000 shares
of stock at market value.
During fiscal 2000, the Company repriced stock options to purchase 2,706,000
shares of common stock at exercise prices originally ranging from $.3625 to
$2.30. The stock options were repriced at an exercise price of $.32.
F-15
<PAGE> 50
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Non-cash compensation expense of $3,739,267 was recorded in the fiscal year
ended May 31, 2000 as a result of employees and directors exercising their stock
options using a cashless exercise provision. Generally accepted accounting
principles require that such exercises must be recorded using variable
accounting which reflect the incremental difference between the exercise price
and the market price on the date of exercise as though it were additional
compensation. Since no cash is exchanged in the transaction, a like amount was
recorded as additional paid-in capital.
In April 1999, the Company sold 400,000 shares of its common stock to two
individuals for an aggregated amount of $75,000; in June 1999, the Company
issued 397,205 shares of its common stock to an institutional investor upon the
conversion of a short term note plus accrued interest in the amount of $116,182;
and during the fiscal year ended May 31, 2000, the Company issued 7,014,796
shares of its common stock under the investment agreement (see note 6) for
$5,000,000. These sales occurred after the filing of a registration statement
for the public resale of shares sold under the investment agreement; and,
therefore, the Company may have violated Section 5 of the Securities Act of
1933. As the shares may have been sold in violation of Section 5, the investors,
at their option, may have the right, for up to one year after the purchase of
the common stock, to rescind their purchases. As such, these shares were
reflected outside of equity in mezzanine equity. The investor loses this
ability to rescind during this one year period if he resells the common stock at
a profit. During fiscal year 2000, a total of 7,512,001 shares had been sold by
the investors at a profit and 300,000 shares had been held by an investor in
excess of the one year period. As a result, at May 31, 2000 such shares were no
longer subject to recision and have been reclassified in the third and fourth
quarters of fiscal 2000 and reported as components of stockholders' equity in
the accompanying consolidated balance sheet.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net loss and net loss per share as if
compensation costs for the Company's stock option plans and other stock awards
had been determined in accordance with the fair value based method prescribed in
SFAS No. 123. The Company estimates the fair value of each stock award at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used respectively: dividend yield of zero percent
for all years; expected volatility of 50 percent; risk-free interest rates of
5.6 to 6.1 percent; and expected lives of 3 to 5 years.
Under the accounting provisions for SFAS No. 123, the Company's net loss per
share would have been increased by the pro forma amounts indicated below:
F-16
<PAGE> 51
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
As reported
Net loss $ (7,488,708) $ (4,276,456)
=============== ==================
Pro forma
Net loss $ (7,492,658) $ (4,596,456)
=============== ==================
As reported per share
Basic and diluted loss $ (0.17) $ (0.11)
=============== ==================
Pro forma per share
Basic and diluted loss $ (0.17) $ (0.12)
=============== ==================
</TABLE>
A summary of the status of the Company's stock option plans and warrants as of
May 31, 2000 and 1999 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
Options Warrants
-------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, June 1, 1998 4,096,070 $ 1.05 1,147,600 $ 2.02
Granted 725,000 0.43 1,678,462 0.29
Cancelled (1,065,000) 1.44 (130,000) 5.38
Exercised (32,626) 0.18 (555,000) 0.36
-------------------------------------------------------------------------------------------------------------
Outstanding, May 31, 1999 3,723,444 $ 0.83 2,141,062 $ 0.36
-------------------------------------------------------------------------------------------------------------
Granted 2,856,000 0.32 4,834,009 0.40
Cancelled (3,516,251) 0.84 (100,000) 1.25
Exercised (1,631,869) 0.37 (2,118,890) 0.31
-------------------------------------------------------------------------------------------------------------
Outstanding, May 31, 2000 1,431,324 $ 0.38 4,756,181 $ 0.40
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Exercisable, May 31, 1999 2,568,778 $ 0.83 2,141,062 $ 0.36
-------------------------------------------------------------------------------------------------------------
Exercisable, May 31, 2000 851,824 $ 0.32 4,756,181 $ 0.40
-------------------------------------------------------------------------------------------------------------
Weighted average fair value of options and warrants
granted during the year ended May 31, 1999 $ 0.23 $ 0.18
Weighted average fair value of options and warrants
granted during the year ended May 31, 2000 $ 0.22 $ 0.68
-------------------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE> 52
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options and warrants
outstanding at May 31, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPTIONS
$ 0.18 35,753 1.57 $ 0.18 35,753 $ 0.18
0.32-0.34 1,317,666 2.32 0.32 813,166 0.32
0.48 75,000 4.52 0.48 -- --
1.41 2,905 2.31 1.41 2,905 1.41
--------------------------------------------------------------------------------------------
0.18 - 1.41 1,431,324 2.42 0.38 851,824 0.32
WARRANTS
$ 0.25 2,635,000 2.36 $ 0.25 2,635,000 $ 0.25
0.30-0.32 853,584 2.33 0.32 853,584 0.32
0.34-0.40 474,765 4.17 0.36 474,765 0.36
0.44-0.59 110,378 3.21 0.52 110,378 0.52
1.07-1.12 682,454 4.65 1.08 682,454 1.08
--------------------------------------------------------------------------------------------
0.25-1.12 4,756,181 2.88 0.40 4,756,181 0.40
</TABLE>
8. NET LOSS PER SHARE
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." SFAS No. 128 provides for the calculation of
"Basic" and "Diluted" earnings per share ("EPS"). Basic EPS includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
of an entity. The Company's net losses for the periods presented cause the
inclusion of potential common stock instruments outstanding to be antidilutive
and, therefore, in accordance with SFAS No. 128, the Company is not required to
present a diluted EPS. During the years ended May 31, 2000 and 1999, common
stock options and warrants convertible or exercisable into approximately
6,187,505 and 5,864,506 shares of common stock and debt convertible into none
and 187,161 common shares were not included in diluted earnings (loss) per share
as the effect was antidilutive due to the Company recording losses in each of
those years.
F-18
<PAGE> 53
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES As of May 31, 2000, the net deferred tax
asset recorded and its approximate tax effect
consisted of the following:
<TABLE>
<S> <C>
-----------------------------------------------------------------
Net operating loss carryforwards $ 7,176,000
Purchased technology 568,000
Depreciation and amortization 2,293,000
Other, net 170,000
-----------------------------------------------------------------
10,207,000
Valuation allowance 10,207,000
-----------------------------------------------------------------
Net deferred tax asset $ --
=================================================================
</TABLE>
As of May 31, 2000, a valuation allowance equal to the net deferred tax asset
recognized has been recorded, as Management has not determined that it is more
likely than not that the deferred tax asset will be realized. No current tax
provision was recorded for fiscal 2000 and 1999 due to reported losses. The
valuation allowance increased $4,756,000 from the prior year.
At May 31, 2000, the Company has net operating loss carryforwards of
approximately $18,753,000 that expire through 2020 and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended.
10. PROFIT-SHARING PLAN
Effective July 1, 1993, the Company adopted a savings and profit-sharing plan
that allows participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. At the Company's discretion, the
Company may match contributions at 20% of the employee's contribution up to 6%
of the employee's salary. The Company contributions are vested 20% per year
beginning with the first year of service. The Company made no matching
contribution in fiscal 2000 or 1999.
11. 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 Family 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
F-19
<PAGE> 54
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Court dismissed action. In March 1999, the Company joined with nanoTronics and
Gloria Felcyn and filed its response and cross-complaint against the Fish Family
Trust. In February 2000, the judge confirmed her ruling in favor of the
defendants on the counts related to the judgment for damages, a rescission of
the Technology Transfer Agreement and a restoration of the technology to the
co-inventor. The judge did rule that another issue, the defendants failure to
timely issue shares of the Company's common stock to the Fish Family Trust as a
result of the Fish Family Trust's ownership in nanoTronics, may have merit. In
settlement of this last remaining issue, in August 2000, nanoTronics transferred
to the Fish Family Trust approximately 2.9% of the common stock it held in the
company subject to finalization of documentation. The judge's final ruling is
subject to the normal appeals process. Management believes that, if appealed, it
is unlikely that the outcome would have a material impact on the Company's
financial position or cash flows.
12. COMMITMENT AND LEASE The Company, through its subsidiary,
OBLIGATIONS Metacomp, entered into an eight year
operating lease for its office and
manufacturing facilities located in San
Diego, California.
Future minimum lease payments required
under the operating lease are as follows:
<TABLE>
<CAPTION>
Years ending May 31,
----------------------------------------------
<S> <C>
2001 $ 92,026
2002 15,510
----------------------------------------------
Total minimum lease payments $ 107,536
==============================================
</TABLE>
Rent expense for fiscal 2000 and 1999 was $105,964 and $96,940,respectively.
13. SEGMENT INFORMATION
EXPORT SALES
The Company is engaged in one business segment, the development and marketing of
high technology computer and telecommunication products. For the purpose of
allocating revenues by geographic location, the Company uses the physical
location of its customers as its basis. During the fiscal years ended May 31,
2000 and 1999, the Company's sales by geographic location consisted of the
following:
F-20
<PAGE> 55
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
2000 1999
--------------------------
<S> <C> <C>
Domestic sales $ 469,000 $ 771,000
Foreign sales:
Europe 136,000 99,000
North America 64,000 55,000
Asia 47,000 161,000
Other 1,000 49,000
Total foreign sales 248,000 364,000
--------------------------
Total net product sales $ 717,000 $1,135,000
==========================
</TABLE>
The Company has no foreign assets.
SALES TO MAJOR CUSTOMERS
During the fiscal years ended May 31, 2000 and 1999, revenues from significant
customers consisted of the following:
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
Customer Sales Percent Sales Percent
-------- ----- ------- ----- -------
<S> <C> <C> <C> <C>
A $138,000 19.2% $ - -
B 137,000 19.1% 339,000 29.9%
C 127,000 17.8% - -
D - - 159,000 14.0%
E - - 125,000 11.0%
</TABLE>
14. SUBSEQUENT EVENT
In June 2000, the Company entered into a three-year, $80,000 secured promissory
note receivable with an executive officer of the Company. The note bears
interest at the rate of 6% with interest payments due semi-annually and the
principal due at the maturity of the note. The executive officer pledged 100,000
shares of Patriot's common stock that he held on the date of issuance as
security for this note.
In July 2000, the Company entered into a purchase agreement whereby it plans to
purchase a two-story, 12,760 square foot building which is under construction
and anticipated to be completed and ready for occupancy in the second calendar
quarter of 2001. The agreement is subject to the
F-21
<PAGE> 56
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company completing its due diligence and obtaining satisfactory financing on the
completed building. The cost of the completed project is anticipated to be
approximately $2,200,000 and the Company anticipates that, initially, it would
rent out to third parties approximately one-half of the total space.
F-22
<PAGE> 57
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATED: August 29, 2000 PATRIOT SCIENTIFIC CORPORATION
By: /s/ LOWELL W. GIFFHORN
----------------------------------------
Lowell W. Giffhorn
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JAMES T. LUNNEY Chairman, President, Chief Executive August 29, 2000
------------------------- Officer and Director
James T. Lunney
/s/ LOWELL W. GIFFHORN Chief Financial Officer, Principal August 29, 2000
------------------------- Financial Officer, Principal
Lowell W. Giffhorn Accounting Officer and Director
/s/ RICHARD G. BLUM Director August 29, 2000
-------------------------
Richard G. Blum
/s/ FREDERICK G. THIEL Director August 29, 2000
-------------------------
Frederick G. Thiel
/s/ DONALD BERNIER Director August 29, 2000
-------------------------
Donald Bernier
/s/ HELMUT FALK JR. Director August 29, 2000
-------------------------
Helmut Falk Jr.
</TABLE>
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exh.No. Document No.
------- -------- ---
<S> <C> <C>
2.0 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 Agreement to Exchange Technology for Stock in Patriot Scientific
Corporation, incorporated by reference to Exhibit 2.1 to Form 8-K dated
August 10, 1989 (1)
2.2 Assets Purchase Agreement and Plan of Reorganization dated June 22,
1994, among the Company, nanoTronics Corporation and Helmut Falk,
incorporated by reference to Exhibit 10.4 to Form 8-K dated July 6, 1994 (1)
2.2.1 Amendment to Development Agreement dated April 23, 1996 between the
Company and Sierra Systems, incorporated by reference to Exhibit 2.2.1
to Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2
dated April 29, 1996 (1)
2.3 Form of Exchange Offer dated December 4, 1996 between the Company and
certain shareholders of Metacomp, Inc. incorporated by reference to
Exhibit 2.3 to Form 8-K dated January 9, 1997 (1)
2.4 Letter of Transmittal to Accompany Shares of Common Stock of Metacomp,
Inc. Tendered Pursuant to the Exchange Offer Dated December 4, 1996
incorporated by reference to Exhibit 2.4 to Form 8-K dated January 9,
1997 (1)
3.0 ARTICLES AND BYLAWS.
3.1 Original Articles of Incorporation of the Company's predecessor, Patriot
Financial Corporation, incorporated by reference to Exhibit 3.1 to
registration statement on Form S-18, file no. 33-23143-FW (1)
3.2 Articles of Amendment of Patriot Financial Corporation, as filed with
the Colorado Secretary of State on July 21, 1988, incorporated by
reference to Exhibit 3.2 to registration statement on Form S-18, File
No. 33-23143-FW (1)
3.3 Certificate of Incorporation of the Company, as filed with the Delaware
Secretary of State on March 24, 1992, incorporated by reference to
Exhibit 3.1 to Form 8-K dated May 12, 1992 (1) 3.3.1 Certificate of
Amendment to the Certificate of Incorporation of the Company, as filed
with the Delaware Secretary of State on April 18, 1995, incorporated by
reference to Exhibit 3.3.1 to Form 10-KSB for the fiscal year ended May
31, 1995 (1)
3.3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company, as filed with the Delaware Secretary of State on June 19,1997,
incorporated by reference to Exhibit 3.3.2 to Form 10-KSB for the fiscal
year ended May 31, 1997 (1)
3.3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company, as filed with the Delaware Secretary of State
</TABLE>
<PAGE> 59
<TABLE>
<S> <C> <C>
on April 28, 2000, incorporated by reference to Exhibit 3.3.3 to
Registration Statement on Form S-3 dated May 5, 2000 (1)
3.4 Articles and Certificate of Merger of Patriot Financial Corporation into
the Company dated May 1, 1992, with Agreement and Plan of Merger
attached thereto as Exhibit A, incorporated by reference to Exhibit 3.2
to Form 8-K dated May 12, 1992 (1)
3.5 Certificate of Merger issued by the Delaware Secretary of State on May
8, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K dated May
12, 1992 (1)
3.6 Certificate of Merger issued by the Colorado Secretary of State on May
12, 1992, incorporated by reference to Exhibit 3.4 to Form 8-K dated May
12, 1992 (1)
3.7 Bylaws of the Company, incorporated by reference to Exhibit 3.5 to Form
8-K dated May 12, 1992 (1)
4.0 INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.
4.1 Specimen common stock certificate, incorporated by reference to Exhibit
4.1 Form 8-K dated May 12, 1992 (1)
4.2 Form of Stock Purchase Warrant (Labway Corporation) dated February 29,
1996, exercisable to purchase 253,166 common shares at $1.58 per share
until August 31, 1996, granted to investors in connection with an
offering of securities made in reliance upon Regulation S, incorporated
by reference to Exhibit 4.2 to Form 10-QSB for fiscal quarter ended
2/29/96 (1)
4.3 Form of 6% Convertible Subordinated Promissory Note due September 30,
1998 aggregating $1,500,000 to six investors incorporated by reference
to Exhibit 4.3 to Form 10-QSB for fiscal quarter ended August 31, 1996 (1)
4.4 Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2,
1999 aggregating $2,000,000 to two investors incorporated by reference
to Exhibit 4.4 to Form 8-K dated June 16, 1997 (1)
4.5 Form of Stock Purchase Warrant (CC Investments, LDC) dated June 2, 1997
exercisable to purchase an aggregate of 400,000 common shares at
$1.69125 per share until June 2, 2002, granted to two investors in
connection with the offering of securities in Exhibit 4.4 incorporated
by reference to Exhibit 4.5 to Form 8-K dated June 16, 1997 (1)
4.6 Registration Rights Agreement dated June 2, 1997 by and among the
Company and CC Investments, LDC and the Matthew Fund, N.V. related to
the registration of the common stock related to Exhibits 4.4 and 4.5
incorporated by reference to Exhibit 4.6 to Form 8-K dated June 16, 1997 (1)
4.7 Form of Warrant to Purchase Common Stock (Swartz Family Partnership,
L.P.) dated June 2, 1997 exercisable to purchase an aggregate of 211,733
common shares at $1.69125 per share until
</TABLE>
<PAGE> 60
<TABLE>
<S> <C>
June 2, 2002, granted to a group of investors in connection with the
offering of securities in Exhibit 4.4 incorporated by reference to
Exhibit 4.7 to Form 8-K dated June 16, 1997 (1)
4.8 Registration Rights Agreement dated June 2, 1997 by and among the
Company and Swartz Investments, LLC related to the registration of the
common stock related to Exhibit 4.7 incorporated by reference to Exhibit
4.8 to Form 8-K dated June 16, 1997 (1)
4.9 Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2,
1999 aggregating $1,000,000 to two investors incorporated by reference
to Exhibit 4.9 to Form 10-KSB for the year ended May 31, 1998 (1)
4.10 Form of Stock Purchase Warrant (CC Investments, LDC) dated November 24,
1997 exercisable to purchase an aggregate of 200,000 common shares at
$1.50 per share until June 2, 2002, granted to two investors in
connection with the offering of securities in Exhibit 4.9 incorporated
by reference to Exhibit 4.10 to Form 10-KSB for the year ended May 31,
1998 (1)
4.11 Form of Warrant to Purchase Common Stock (Swartz Family Partnership,
L.P.) dated November 24, 1997 exercisable to purchase an aggregate of
105,867 common shares at $1.50 per share until June 2, 2002, granted to
a group of investors in connection with the offering of securities in
Exhibit 4.9 incorporated by reference to Exhibit 4.11 to Form 10-KSB for
the year ended May 31, 1998 (1)
4.12 Form of Warrant to Purchase Common Stock (Investor Communications Group,
Inc.) dated June 16, 1997 exercisable to purchase an aggregate of
130,000 common shares at prices ranging from $2.50 to $7.50 per share
until June 15, 1999 incorporated by reference to Exhibit 4.12 to Form
10-KSB for the year ended May 31, 1998 (1)
4.13 Warrant to Purchase Common Stock issued to Spellcaster
Telecommunications, Inc. dated April 28, 1998 exercisable to purchase an
aggregate of 100,000 common shares at $1.25 per share until April 28,
2000 incorporated by reference to Exhibit 4.13 to Form 10-KSB for the
year ended May 31, 1998 (1)
4.14 Investment agreement dated February 24, 1999 by and between the Company
and Swartz Private Equity, LLC for a maximum aggregate amount of
$5,000,000 Incorporated by reference to Exhibit 4.14 to Form 10-QSB/A
for the fiscal quarter Ended November 30, 1998 (1)
4.15 Registration Rights Agreement dated February 24, 1999 by and between the
Company and Swartz Private Equity, LLC related to the registration of
the common Stock related to Exhibit 4.14 incorporated by reference to
Exhibit 4.15 to Form 10- QSB/A for the fiscal quarter ended November 30,
1998 (1)
4.16 Form of Warrant to Purchase Common Stock (Swartz Private Equity, LLC)
dated February 24, 1999 exercisable to purchase common shares in
connection with the Offering of securities in Exhibit 4.14 incorporated
by reference to Exhibit 4.16 to Form 10-QSB/A for the fiscal quarter
ended November 30, 1998 (1)
4.17 Amended and Restated Investment Agreement dated July 12, 1999 by and
between the Company and Swartz Private Equity, LLC for a maximum
aggregate amount of $5,000,000 incorporated by reference to Exhibit 4.17
to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated July 14, 1999 (1)
</TABLE>
<PAGE> 61
<TABLE>
<S> <C> <C>
4.18 Investment Agreement dated April 28, 2000 by and between the Company and
Swartz Private Equity, LLC for a maximum aggregate amount of $30,000,000
incorporated by reference to Exhibit 4.18 to Registration Statement on
Form S-3 dated May 5, 2000 (1)
10.0 MATERIAL CONTRACTS.
10.1 1992 Incentive Stock Option Plan of the Company, incorporated by
reference to Exhibit 10.1 to Form 8-K dated May 12, 1992 (1)
10.1.1 Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17,
1996 (1)
10.2 1992 Non-Statutory Stock Option Plan of the Company, incorporated by
reference to Exhibit 10.2 to Form 8-K dated May 12, 1992 (1)
10.2.1 Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995
incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal
year ended May 31, 1996 (1)
10.3 Lease Agreement between the Company's subsidiary Metacomp, Inc. and
Clar-O-Wood Partnership, a California limited partnership dated April
11, 1991 as amended November 11, 1992 and November 2, 1995, incorporated
by reference to Exhibit 10.3 to Form 10-KSB for the fiscal year ended
May 31, 1997 (1)
10.4 Stock Purchase Agreement dated November 29 and 30, 1995, between the
Company and SEA, Ltd., incorporated by reference to Exhibit 10.4 to Form
8-K dated December 11, 1995 (1)
10.4.1 Letter Amendment to Stock Purchase Agreement dated February 21, 1996,
between the Company and SEA, Ltd., incorporated by reference to Exhibit
10.4.1 to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
10.5 1995 Employee Stock Compensation Plan of the Company, incorporated by
reference to Exhibit 10.5 to Form 10-QSB for fiscal quarter ended
11/30/95 (1)
10.6 Letter Stock and Warrant Agreement dated January 10, 1996 between the
Company and Robert E. Crawford, Jr., incorporated by reference to
Exhibit 10.6 to Form 10-QSB for fiscal quarter ended 2/29/96 (1)
10.7 Non-Exclusive Manufacturing and Line of Credit Agreement dated February
28, 1996, between the Company and Labway Corporation, incorporated by
reference to Exhibit 10.7 to Form 10-QSB for fiscal quarter ended
2/29/96 (1)
10.8 Distribution and Representation Agreement dated February 28, 1996,
between the Company and Innoware, Inc., incorporated by reference to
Form 10-QSB for fiscal quarter ended 2/29/96 (1)
</TABLE>
<PAGE> 62
<TABLE>
<S> <C> <C>
10.9 Employment Agreement dated November 20, 1995 between the Company and
Elwood G. Norris, incorporated by reference to Exhibit 10.9 to
Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.9.1 First Amendment to Employment Agreement dated May 17, 1996 between the
Company and Elwood G. Norris, incorporated by reference to Exhibit
10.9.1 to Pre-Effective Amendment No. 2 to Registration Statement on
Form SB-2 dated May 23, 1996 (1)
10.10 Employment Agreement dated November 20, 1995 between the Company and
Robert Putnam, incorporated by reference to Exhibit 10.10 to
Registration Statement on Form SB-2 dated March 18, 1996 (1)
10.11 Sales Contractual Agreement dated March 19, 1996 between the Company and
Evolve Software, Inc., incorporated by reference to Exhibit 10.11 to
Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2
dated April 29, 1996 (1)
10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve
Software, Inc. Providing for the Purchase of up to 50,000 Common Shares
at $2.85, incorporated by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2 dated April 29, 1996 (1)
10.12 Employment Agreement dated as of May 8, 1996 between the Company and
Michael A. Carenzo, including Schedule A - Stock Option Agreement,
incorporated by reference to Pre-Effective Amendment No. 2 to
Registration Statement on Form SB-2 dated May 23, 1996 (1)
10.12.1 First Amendment to Employment Agreement dated May 8, 1996 between the
Company and Michael A. Carenzo dated September 23, 1996, incorporated by
reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal year ended
May 31, 1997 (1)
10.13 1996 Stock Option Plan of the Company dated March 25, 1996 and approved
by the Shareholders on May 17, 1996, incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996 (1)
10.14 Sales Contractual Agreement dated June 20, 1996 between the Company and
Compunetics Incorporated incorporated by reference to Exhibit 10.14 to
Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.15 Sales Contractual Agreement dated July 31, 1996 between the Company and
Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15
to Form 10-KSB for fiscal year ended May 31, 1996 (1)
10.16 Employment Agreement dated January 1, 1997 between the Company and
Norman J. Dawson, incorporated by reference to Exhibit 10.16 to Form
10-KSB for the fiscal year ended May 31, 1997 (1)
10.17 Employment Agreement dated January 1, 1997 between the Company and
Jayanta K. Maitra, incorporated by reference to Exhibit 10.17 to Form
10-KSB for the fiscal year ended May 31, 1997 (1)
</TABLE>
<PAGE> 63
<TABLE>
<S> <C> <C>
10.18 Technology License and Distribution Agreement dated June 23, 1997
between the Company and Sun Microsystems, Inc. , incorporated by
reference to Exhibit 10.18 to Form 10-KSB for the fiscal year ended May
31, 1997 (1)
10.19 Employment Agreement dated March 23, 1998 between the Company and James
Lunney incorporated by reference to Exhibit 10.21 to Form 10-KSB for the
fiscal year ended May 31, 1998 (1)
10.20 Employment Agreement dated July 28, 1997 between the Company and Philip
Morettini incorporated by reference to Exhibit 10.21 to Form 10-KSB for
the fiscal year ended May 31, 1998 (1)
10.21 Employment Agreement dated July 23, 1998 between the Company and Lowell
W. Giffhorn incorporated by reference to Exhibit 10.21 to Form 10-KSB
for the fiscal year ended May 31, 1998 (1)
10.22 Secured Promissory Note dated June 12, 2000 between the Company and
James T. Lunney (2)
10.23 Purchase Agreement dated June 29, 2000 between the Company and 4S 37/38,
LLC (2)
23.0 CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of BDO Seidman, LLP (2)
99.0 ADDITIONAL EXHIBITS.
99.1 Form of ISO Plan Option (Gaspar) dated May 29, 1992, incorporated by
reference to Exhibit 28.2 to registration statement on Form SB-2, file
no. 33-57858 (1)
99.2 Form of NSO Plan Option (Berlin) dated May 29, 1992, incorporated by
reference to Exhibit 28.3 to registration statement on Form SB-2, file
no. 33-57858 (1)
99.3 Form of Incentive Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreements differ as to number of shares, dates,
prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
99.4 Form of NonQualified Stock Option Agreement to the Company's 1996 Stock
Option Plan (individual agreement differ as to number of shares, date,
prices and vesting), incorporated by reference to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
1996 (1)
99.5 Press Release of the Company dated November 4, 1996 incorporated by
reference to Exhibit 99.5 to Form 8-K dated January 9, 1997 (1)
(1) Previously filed in indicated registration statement or report.
(2) Exhibit filed herewith this Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2000
</TABLE>
