SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
PATRIOT SCIENTIFIC CORPORATION
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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PATRIOT SCIENTIFIC CORPORATION
10989 Via Frontera
San Diego, California 92127
(858) 674-5000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
to be held October 16, 2003
Notice is hereby given that the Annual Meeting of Stockholders of
PATRIOT SCIENTIFIC CORPORATION (the "Company") will be held on October 16, 2003
at 10 a.m. (Pacific Time) at the Radisson Rancho Bernardo, 11520 W. Bernardo
Court, San Diego, California, for the following purpose:
1. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of common stock, $.00001
par value, from 200,000,000 to 400,000,000.
2. To consider and vote upon a proposal to approve the Company's 2003
Stock Option Plan adopted by the Board of Directors.
3. To consider and vote upon a proposal to ratify management's selection
of Nation Smith Hermes Diamond, LLP as the Company's independent
auditors.
4. To elect the board of directors.
5. To transact such other business as may properly come before the
meeting.
The Board of Directors has fixed September 5, 2003 as the record date
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting and any postponements or adjournments thereof, and only
stockholders of record at the close of business on that date are entitled to
such notice and to vote at the Annual Meeting. A list of stockholders entitled
to vote at the Annual Meeting will be available at the offices of the Company
for ten (10) days prior to the Annual Meeting.
We hope you will use this opportunity to take an active part in the
affairs of the Company by voting on the business to come before the Special
Meeting either by executing and returning the enclosed Proxy Card or by casting
your vote in person at the Special Meeting.
WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, YOU ARE URGED TO FILL OUT
THE ENCLOSED PROXY AND TO SIGN AND FORWARD IT IN THE ENCLOSED BUSINESS REPLY
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IT IS
IMPORTANT YOUR SHARES BE REPRESENTED AT THE MEETING TO ASSURE THE PRESENCE OF A
QUORUM. ANY STOCKHOLDER WHO SIGNS AND SENDS IN A PROXY MAY REVOKE IT BY
EXECUTING A NEW PROXY WITH A LATER DATE, BY WRITTEN NOTICE OF REVOCATION TO THE
SECRETARY OF THE COMPANY AT ANY TIME BEFORE IT IS VOTED OR BY ATTENDANCE AT THE
MEETING AND VOTING IN PERSON.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF STOCK YOU
HOLD. YOUR COOPERATION IN PROMPTLY RETURNING YOUR PROXY WILL HELP LIMIT EXPENSES
INCIDENT TO PROXY SOLICITATION. IF A STOCKHOLDER RECEIVES MORE THAN ONE PROXY
CARD BECAUSE HE OR SHE OWNS SHARES REGISTERED IN DIFFERENT NAMES OR ADDRESSES,
EACH PROXY CARD SHOULD BE COMPLETED AND RETURNED.
By Order of the Board of Directors
/s/ Lowell W. Giffhorn
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Lowell W. Giffhorn
Exec. V.P., Chief Financial Officer and Secretary
San Diego, California
September 16, 2003
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PATRIOT SCIENTIFIC CORPORATION
10989 VIA FRONTERA
SAN DIEGO, CALIFORNIA 92127
PROXY STATEMENT
This Proxy Statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of PATRIOT SCIENTIFIC
CORPORATION, a Delaware corporation (the "Company"), for use in connection with
the Annual Meeting of Stockholders of the Company, to be held on October 16,
2003 at the Radisson Rancho Bernardo located at 11520 W. Bernardo Court, San
Diego, California, at 10 a.m. (Pacific Time), and any and all postponements or
adjournments thereof for the purposes set forth in the accompanying Notice of
Annual Meeting. The telephone number of the Company is (858) 674-5000 and its
facsimile number is (858) 674-5005. This Proxy Statement and the accompanying
form of proxy are intended to be mailed to stockholders on or about September
16, 2003.
Accompanying this Proxy Statement is the Proxy for the Annual Meeting,
which you may use to indicate your vote as to the proposal described in this
Proxy Statement. In addition to solicitation by use of the mail, certain of the
Company's officers and employees may, without receiving additional compensation
therefor, solicit the return of proxies by telephone, telegram or personal
interview. The Company has requested that brokerage houses and custodians,
nominees and fiduciaries forward soliciting materials to their principals, the
beneficial owners of Common Stock and has agreed to reimburse them for
reasonable out-of-pocket expenses in connection therewith.
RECORD DATE AND VOTING
The Board of Directors has fixed the close of business on September 5,
2003 as the record date for determining stockholders entitled to notice of and
to vote at the Annual Meeting. As of the record date, the Company had
123,518,272 shares of common stock, $.00001 par value per share ("Common Stock"
or "Common Shares"), outstanding and entitled to vote. A majority of the shares
entitled to vote on the record date, present in person or represented by proxy,
will constitute a quorum at the meeting.
Each share of Common Stock issued and outstanding on the Record Date is
entitled to one vote on any matter presented for consideration and action by the
stockholders at the Annual Meeting. With respect to all matters other than the
election of directors, the affirmative vote of a majority of the voting shares
present in person or represented by proxy at the meeting and entitled to vote on
the subject matter will be the act of the stockholders. Directors will be
elected by a plurality of the votes of the shares present in person or
represented by proxy and entitled to vote on the election of directors.
Abstentions will have no effect for the purpose of determining whether a
director has been elected. Unless otherwise instructed, proxies solicited by the
Company will be voted "FOR" the approval of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 200,000,000 to 400,000,000, "FOR" the approval of the
Company's 2003 Stock Option Plan, "FOR" the ratification of the selection of
Nation Smith Hermes Diamond, LLP to provide audit services to the Company for
the fiscal year ending May 31, 2004 and "FOR" the nominees named herein for
election as directors.
New York Stock Exchange Rules generally require that when shares are
registered in street or nominee name, its member brokers must receive specific
instructions from the beneficial owners in order to vote on certain proposals.
If a member broker indicates on the proxy that such broker does not have
discretionary authority as to certain shares to vote on any proposal that does
require specific instructions, those shares will not be considered as present
and entitled to vote with respect to that matter. Pursuant to Delaware law, a
broker non-vote will not be treated as present or voting in person or by proxy
on the proposal. A stockholder giving a proxy has the power to revoke it at any
time before it is exercised by giving written notice of revocation to the
Secretary of the Company, by executing a subsequent proxy, or by attending the
Special Meeting and, having notified the Secretary in writing of revocation,
voting in person. Subject to any such revocation, all shares represented by
properly executed proxies will be voted in accordance with the specifications on
the enclosed proxy card.
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AVAILABLE INFORMATION
The Company is subject to the informational and reporting
requirements of Section 13 of the Securities Exchange Act of 1934, as amended
("Exchange Act"), and in accordance with those requirements files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed with the Commission are
available for inspection and copying at the Public Reference Branch of the
Commission, located at Room 1024, 450 Fifth Street N.W., Washington, DC 20549,
at prescribed rates. The Company's filings under the Exchange Act may also be
accessed through the Commission's web site (http://www.sec.gov).
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of August 26, 2003, the stock
ownership of each officer and director of the Company, of all officers and
directors of the Company as a group, and of each person known by the Company to
be a beneficial owner of 5% or more of its Common Stock. Except as otherwise
noted, each person listed below is the sole beneficial owner of the shares and
has sole investment and voting power over such shares. No person listed below
has any option, warrant or other right to acquire additional securities of the
Company, except as otherwise noted.
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Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
Common stock Gloria Felcyn, CPA 18,214,527 (1) 15.4%
par value 10989 Via Frontera
$0.00001 San Diego, CA 92127
SAME Donald R. Bernier 487,500 (2) *
10989 Via Frontera
San Diego, CA 92127
SAME Helmut Falk, Jr. 149,500 (3) *
10989 Via Frontera
San Diego, CA 92127
SAME Lowell W. Giffhorn 536,614 (4) *
10989 Via Frontera
San Diego, CA 92127
SAME SDMC, Inc. 1,020,000 (5) *
10989 Via Frontera
San Diego, CA 92127
SAME David H. Pohl 325,000 (6) *
10989 Via Frontera
San Diego, CA 92127
SAME Patrick O. Nunally 799,500 (7) *
10989 Via Frontera
San Diego, CA 92127
SAME Joey Maitra 512,342 (8) *
10989 Via Frontera
San Diego, CA 92127
SAME Carlton M. Johnson, Jr. 75,000 (9) *
10989 Via Frontera
San Diego, CA 92127
All directors & officers 22,119,983 (10) 18.2%
as a group (8 persons)
* Less than 1%
1) As trustee of the Helmut Falk Family Trust and executor of the Helmut Falk
estate, Ms. Felcyn effectively controls the shares which were subject to an
escrow arrangement (as described in "Certain Transactions" below) originally
issued to nanoTronics in connection with the ShBoom technology acquisition and
shares that remain from 5,000,000 non-escrowed shares that were originally
issued to nanoTronics in connection with the ShBoom
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technology acquisition and were subsequently transferred to the Helmut Falk
Family Trust. Includes 11,548,304 shares that are issuable on the conversion of
8% Convertible Debentures and the exercise of warrants into shares of common
stock and 50,000 shares issuable upon the exercise of outstanding stock options.
2) Includes 262,500 shares issuable upon the exercise of outstanding stock
options.
3) Includes 115,000 shares issuable upon the exercise of outstanding stock
options.
4) Includes 311,666 shares issuable upon the exercise of outstanding stock
options.
5) Includes 1,020,000 shares issuable upon the exercise of outstanding stock
options.
6) Includes 325,000 shares issuable upon the exercise of outstanding stock
options.
7) Includes 787,500 shares issuable upon the exercise of outstanding stock
options.
8) Includes 335,000 shares issuable upon the exercise of outstanding stock
options.
9) Includes 75,000 shares issuable upon the exercise of outstanding stock
options.
10) Includes 7,290,013 shares issued and outstanding and 14,829,970 shares
issuable upon exercise of stock options, conversion of convertible debentures
and exercise of warrants.
DESCRIPTION OF SECURITIES
The authorized common stock of the Company currently consists of
200,000,000 shares, $.00001 par value per share. On the record date, a total of
123,518,272 Common Shares were issued and outstanding. The holders of Common
Stock are entitled to one vote for each share held. The affirmative vote of a
majority of votes cast at a meeting that commences with a lawful quorum is
sufficient for approval of most matters upon which stockholders may or must
vote. However, removal of a director from office, amendment to the certificate
of incorporation or repeal of the certificate of incorporation in its entirety
requires the affirmative vote of a majority of the total outstanding Common
Shares for approval. Certain other matters (such as stockholder amendment of the
bylaws, and the amendment, repeal or adoption of any provision inconsistent with
provisions in the certificate of incorporation regarding indemnification of
directors, officers and others, release of director liability and the Company's
election not to be governed by statutory provisions concerning business
combinations with interested stockholders) require the affirmative vote of
two-thirds of the total outstanding Common Shares for approval. Common Shares do
not carry cumulative voting rights, and holders of more than 50% of the Common
Stock have the power to elect all directors and, as a practical matter, to
control the Company. Holders of Common Stock are not entitled to preemptive
rights, and the Common Stock may only be redeemed at the election of the
Company.
A Special Meeting of Stockholders may be called by or at the request of
(i) the Chairman of the Board, (ii) the President, (iii) any two directors or
(iv) persons owning, in the aggregate, not less than 20% of the issued and
outstanding Common Shares entitled to vote in elections for directors. After the
satisfaction of requirements with respect to preferential dividends, if any,
holders of Common Stock are entitled to receive, pro rata, dividends when and as
declared by the Board of Directors out of funds legally available therefor. The
Company has not paid any cash dividends to date, and no cash dividends will be
declared or paid on the Common Stock in the foreseeable future. Upon
liquidation, dissolution or winding-up of the Company, after distribution in
full of the preferential amount, if any, to be distributed to holders of any
preferred stock which may be issued, holders of Common Stock are entitled to
share ratably in the Company's assets legally available for distribution to its
stockholders.
The Company's board of directors is authorized to issue 5,000,000
shares of undesignated preferred stock, $.00001 par value, without any further
action by the stockholders. The board of directors may also divide any and all
shares of preferred stock into series and fix and determine the relative rights
and preferences of the preferred stock, such as the designation of series and
the number of shares constituting such series, dividend rights, redemption and
sinking
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fund provisions, liquidation and dissolution preferences, conversion or exchange
rights and voting rights, if any. Issuance of preferred stock by the board of
directors will result in such shares having dividend, voting, and/or liquidation
preferences senior to the rights of the holders of Common Stock and could dilute
the voting rights of the holders of Common Stock. There are currently no shares
of preferred stock issued and outstanding.
TRANSFER AGENT AND REGISTRAR. Interwest Transfer Company, Inc.,
1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117, acts as transfer
agent and registrar for the Common Stock of the Company. Their telephone number
is (801) 272-9294.
DIVIDEND POLICY. The declaration and payment of dividends on
Common Shares is at the absolute discretion of the Company's Board of Directors
and will depend, among other things, on the Company's earnings, financial
condition and capital requirements. The Company has not paid any cash dividends
to date, and no cash dividends will be declared or paid on the Common Stock of
the Company in the foreseeable future.
MATTERS TO BE ACTED UPON
PROPOSAL NUMBER 1
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED SHARES OF COMMON STOCK
The Company's Certificate of Incorporation currently authorizes
200,000,000 shares of Common Stock. An increase in our authorized Common Stock
to 400,000,000 shares needs to be approved by the Company's stockholders to
enable the Board of Directors to obtain access to additional equity financing
necessary to fund potential business opportunities and pursue business
objectives.
In May 2002, the stockholders approved an increase in the number of
shares of Common Stock that the Company is authorized to issue from 100,000,000
to 200,000,000 shares. The Company's Certificate of Incorporation has been
amended to effect this change. Management believed that such increase would be
sufficient to meet its immediate future needs. However, due in part to the
reduced share price of the Company's Common Stock resulting in a greater number
of shares issued to support the Company's financing activities, approval by the
Company's directors of the 2003 Stock Option Plan, and an acquisition policy
announced by the Company, the Company requires additional shares beyond those
previously authorized by the stockholders to meet its financing needs. As a
result, in July 2003, the Board of Directors authorized an amendment, subject to
stockholder approval, to the Company's Certificate of Incorporation to increase
the number of authorized shares of Common Stock from 200,000,000 to 400,000,000.
The Board of Directors considers it both desirable and essential to
have additional shares of Common Stock available for issuance from time-to-time.
The Board also advises stockholders that failure to approve the amendment could
have a material adverse effect on the Company, its business and results of
operations, in that it would limit the Company's access to equity capital.
OUTSTANDING AND RESERVED COMMON SHARES
As of the record date, the Company had 123,518,272 shares of Common
Stock outstanding. An additional 73,362,941 shares were reserved for future
issuance under the Company's stock option plans, 8% convertible debentures and
warrants summarized as follows:
5
Authorized Common Shares Reserved
For Future Issuance
Stock options granted and unexercised 5,054,000
Stock options available to grant 250,188
8% convertible debentures 26,144,868
Private placement warrants 41,913,885
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Total unissued but reserved for issuance 73,362,941
(as of September 5, 2003) ==========
The Company is currently planning to issue additional common stock and
warrants as needed for financing activities. In addition, the Company is
planning a 2003 Stock Option Plan subject to the shareholders approval. However,
since the Company has either issued or reserved an aggregate of 196,881,213 of
its 200,000,000 authorized shares of Common Stock, the Company does not have
sufficient authorized shares to continue the funding under the 8% Convertible
Debentures, pursue its acquisition strategies, grant any significant new stock
options or for any other corporate purpose. The Company has limited options to
raise additional money, make acquisitions or take any other action requiring the
issuance of its Common Stock, unless the authorized number of shares of Common
Stock is increased. Management believes there may be a need for additional
financing due to continued operating losses.
More information on the individual securities comprising shares
reserved for future issuance is summarized as follows:
STOCK OPTIONS. The Company maintains four stock option plans. One 1992
Stock Option Plan is a non-statutory stock option plan, and a second 1992 Stock
Option Plan is an incentive stock option plan. Each plan entitled the Company to
grant options to directors, key employees and consultants of the Company to
purchase Common Shares of the Company. A maximum of 1,290,203 of Common Shares
were authorized for grant under the 1992 Plans. Options were granted at a price
not less than fair market value at the date of grant, and were subject to
approval by the Board of Directors. No additional grants are authorized under
the 1992 plan which had a ten year term. However, all options currently
outstanding continue to be exercisable until the expiration date of each
individual option. The 1996 Stock Option Plan entitles the Company to grant
options to directors, key employees and consultants of the Company to purchase
Common Shares of the Company. The 1996 Plan covers a maximum aggregate of
4,000,000 Common Shares. The 1996 Plan provides for the granting of options,
which either qualify for treatment as incentive stock options or non-statutory
stock options. The 2001 Stock Option Plan entitles the Company to grant options
to directors, key employees and consultants of the Company to purchase Common
Shares. The 2001 Plan covers a maximum aggregate of 3,000,000 Common Shares. The
2001 Plan provides for the granting of options, which either qualify for
treatment as incentive stock options or non-statutory stock options.
As of September 5, 2003, the Company had granted options exercisable
into (i) 1,290,203 shares of Common Stock under the 1992 Stock Option Plans;
(ii) 3,789,812 shares of Common Stock under the 1996 Stock Option Plan, as
amended; and (iii) 2,960,000 shares of Common Stock under the 2001 Stock Option
Plan. The limited number of remaining shares available under our stock option
plans may impact the ability of the Company to compensate existing or hire new
technical, management or other employees or advisors. The Company is requesting
the shareholders to approve the 2003 Stock Option Plan for an additional
6,000,000 shares of Common Stock.
PRIVATE PLACEMENT WARRANTS. On September 5, 2003, the Company had
outstanding warrants exercisable into 71,978,928 shares of Common Stock, of
which 41,913,885 have been reserved by the Board of Directors. Of this amount,
(i) 4,306,914 shares were issued in connection with Private Placements conducted
with Swartz Private Equity LLC; (ii) 2,532,277 were the issued in connection
with short term notes with a group of individual investors; (iii) 1,375,000 were
issued for services provided by outside consultants; and (iv) 33,699,694 were
issued in connection with convertible debentures the Company entered into in
2002 and 2003. Warrants to purchase an additional 20,007,350 shares were issued
in connection with Private Placements conducted with Swartz Private Equity LLC
but have been locked-up and unreserved until the sooner of 1) March 19, 2004, or
2) 90 days after the date on which our common stock exceeds $0.375 for 10
consecutive trading days. In August 2003, warrants were issued subject to the
shareholders increasing the authorized number of common shares. The warrants are
for the issuance of up to 10,057,693 shares of Common Stock and were issued in
connection with a convertible debenture.
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REASONS FOR INCREASING THE NUMBER OF AUTHORIZED COMMON SHARES
The Board of Directors believes there are a number of important
business reasons for increasing the number of shares of Common Stock.
The authorized number of shares of Common Stock are not sufficient to
enable to the Company to negotiate new financing without special consideration
for the lack of authorized shares available. For example, an equity based
financing would have to provide for limitations based on the availability of
sufficient shares of Common Stock. This factor places the Company at a distinct
disadvantage in negotiating any future transactions and has a negative impact on
the pricing and marketability of securities sold. As a result, this could
increase the effective dilution to existing stockholders.
The authorized number of shares of Common Stock currently available is
not sufficient to enable the Company to respond to potential business
opportunities and to pursue anticipated business objectives. Accordingly, the
Board of Directors believes that it is in the Company's best interests to
increase the number of authorized shares of Common Stock. The Board of Directors
also believes that the availability of such shares will provide the Company with
the flexibility to issue Common Stock for proper corporate purposes identified
by the Board of Directors from time to time, such as stock dividends (including
stock splits in the form of stock dividends), financings, acquisitions or
strategic business relationships.
Further, the Board of Directors believes the availability of additional
shares of Common Stock will help enable the Company to attract and retain
talented employees through the grant of stock options and other stock-based
incentives. An important component of the Company's business strategy is to
develop and market new products and technologies. These efforts may require
recruitment of additional technical personnel, which are in high demand and
short supply in the San Diego area. The availability of stock-based incentives
is a critical element in attracting, motivating and retaining technical and
executive talent.
The Company is currently being funded primarily by issuance of 8%
convertible debentures which are convertible into the shares of its Common
Stock. In order to continue with this funding, additional authorized shares are
required. Also, the Company has indicated acquisitions may be an alternative
means to increasing the Company's revenue and profit.
The Board of Directors believes the availability of authorized but
unissued Common Stock can be of considerable value. Because of the Company's
existing contractual requirements and its current financial condition, the
unavailability of authorized but unissued Common Stock could have a material
adverse impact on the Company and its business.
CONSEQUENCES OF FAILURE TO INCREASE THE NUMBER OF AUTHORIZED COMMON SHARES
The Board of Directors believes the Company could be at a disadvantage
in negotiating the terms of any required fundings due to the lack of sufficient
shares of Common Stock. The Board of Directors also believes it may be unable to
retain existing technical personnel or attract new technical personnel without
an increase in the authorized shares. The uncertainty regarding the availability
of shares of Common Stock, the Company's losses and lack of collateral makes the
prospects of future financings unlikely without additional authorized Common
Stock.
EFFECT OF AMENDMENT ON EXISTING STOCKHOLDERS
The increase of authorized shares of Common Stock will not alter the
par value of the Common Stock or the rights of stockholders.
The Company anticipates conducting private placements to raise capital
for funding corporate purposes. These private placements are anticipated to take
the form of common stock and warrant issues or convertible debt or preferred
stock with warrant issuances.
7
Additional authorized but unissued shares may be issued at such time or
times, to such person or persons and for such consideration as the Board of
Directors determines to be in the best interests of the Company, without further
authorization from the stockholders except as may be required by the rules of
any stock exchange or national securities association trading system on which
the Common Stock may be listed or traded. Upon issuance, such shares will have
the same rights as the outstanding shares of Common Stock. The authorization of
additional shares of Common Stock will not, by itself, have any effect on the
rights of holders of existing shares. Depending on the circumstances, issuance
of additional shares of Common Stock could result in substantial dilution of the
existing stockholders' ownership interests in the Company. The Board of
Directors does not intend to issue any shares of Common Stock except to meet its
obligations and on terms which the Board deems to be in the best interests of
the Company and its then existing stockholders. The stockholders do not have
preemptive rights to purchase additional shares of Common Stock nor will they
have any such rights as a result of this proposal.
VOTE REQUIRED; BOARD RECOMMENDATION
The approval of the Amendment to the Certificate of Incorporation
requires the affirmative vote of a majority of the outstanding shares of Common
Stock on the record date. THEREFORE, FAILURE TO VOTE HAS THE SAME EFFECT AS A
NEGATIVE VOTE.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDMENT OF THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED SHARES OF COMMON STOCK
AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THIS PROPOSAL.
PROPOSAL NUMBER 2
PROPOSAL TO APPROVE THE 2003 STOCK OPTION PLAN
GENERAL DESCRIPTION OF EXISTING STOCK OPTION PLANS - The Board of Directors
previously adopted and the shareholders approved the 1992 Incentive Stock Option
Plan for key employees, as amended (the "1992 ISO Plan"), the 1992 Non-Statutory
Stock Option Plan for employees, directors and consultants, as amended (the
"1992 NSO Plan"), the 1996 Stock Option Plan for employees, directors and
consultants, as amended (the "1996 Plan") and the 2001 Stock Plan for employees,
directors and consultants, (the "2001 Plan"). The 1992 ISO Plan and the 1992 NSO
Plan expired on March 20, 2002. The Company has reserved 1,290,203 common shares
to be issued upon the exercise of options granted under these two plans. At May
31, 2003 the Company had 17,500 options outstanding pursuant to the 1992 ISO
Plan exercisable at $1.325 per share expiring in 2005 and had 50,000 options
outstanding pursuant to the 1992 NSO Plan exercisable at $1.325 per share
expiring in 2005. At May 31, 2003, 615,000 and 607,703 shares had been issued
under the 1992 ISO Plan and 1992 NSO Plan, respectively, as a result of option
exercises. The 1996 Plan expires on March 24, 2006. The Company has reserved a
maximum of 4,000,000 common shares to be issued upon the exercise of options
granted under this plan. At May 31, 2003 the Company had 2,026,500 options
outstanding pursuant to the 1996 Plan exercisable at prices ranging from $0.0425
to $1.325 per share expiring beginning 2004 through 2008. At May 31, 2003,
1,763,312 shares had been issued under the 1996 Plan as a result of option
exercises. The 2001 Plan expires on February 21, 2011. The Company has reserved
a maximum of 3,000,000 common shares to be issued upon the exercise of options
granted under this plan. At May 31, 2003 the Company had 2,960,000 options
outstanding pursuant to the 2001 Plan exercisable at prices ranging from $0.0425
to $0.69 per share expiring beginning 2004 through 2008. At May 31, 2003, no
shares had been issued under the 2001 Plan as a result of option exercises.
GENERAL DESCRIPTION OF THE 2003 STOCK OPTION PLAN - The Board of Directors
adopted on July 2, 2003, subject to the approval of the Company's stockholders,
the 2003 Stock Option Plan (the "2003 Stock Plan") covering an aggregate of
6,000,000 shares of the Company's common stock. Approval requires the
affirmative vote of a majority of the shares of common stock represented in
person or by proxy and eligible to vote at the Annual Meeting.
The Board of Directors has deemed it in the best interests of the
Company to adopt the 2003 Stock Plan to provide the means for the Company to
further its efforts to induce persons of outstanding ability and potential to
join and remain with the Company and to promote its future growth and success.
The following is a summary of the material provisions of the 2003 Stock
Plan, which is intended to qualify for the granting of either (i) "incentive
stock options" as defined in Section 422 of the Internal Revenue Code of 1986,
as
8
amended (the "Code") ("ISO Options") or (ii) non-qualified stock options
("NQO Options"). Unless the context clearly indicates to the contrary, the term
"option" used herein shall mean either an incentive stock option or a
non-statutory stock option and the term "optionee" shall mean any person holding
an option granted under the 2003 Stock Plan. The following summary is qualified
in its entirety by express reference to the text of the 2003 Stock Plan, a copy
of which will be furnished to any shareholder upon request.
The Company has not granted any options under the 2003 Stock Plan. If
the Company grants options under the 2003 Stock Plan and the Plan is not
approved by the shareholders of the Company within one year of its adoption by
the Board of Directors, the options granted will become null and void.
ADMINISTRATION - The 2003 Stock Plan provides for its administration by a
committee ("Committee"). The members of the Committee shall be appointed from
time to time by the Board of Directors of the Company ("Board") and shall
consist of not less than two (2) directors. The Committee has discretionary
authority to determine the individuals to whom and the times at which stock
options will be granted, whether a stock option is an ISO Option or a NQO
Option, the number of shares subject to such options and the option period. The
Committee may interpret the 2003 Stock Plan and may adopt such rules and
regulations for carrying out the purposes of the Plan. The Board may (subject to
certain limitations) make changes in or additions to the Plan as it may deem
proper and in the best interests of the Company and its shareholders and may
also suspend or terminate the 2003 Plan.
ELIGIBILITY - ISO Options shall be granted only to elected or appointed officers
or other key employees of the Company (as determined by the Committee), whether
full-time or part-time, including, without limitation, members of the Board who
are also officers or key employees at the time of grant. NQO Options may be
granted to employees (including officers) and directors of and consultants to
the Company.
CEILING OF INCENTIVE STOCK OPTION GRANTS - The aggregate fair market value
(determined at the time the option is granted) of the shares of common stock for
which ISO Options may be exercisable for the first time by any employee during
any calendar year (under all incentive stock options plans of the Company) may
not exceed $100,000. Should it be determined that any incentive stock option
granted pursuant to the 2003 Stock Plan exceeds such maximum, such incentive
stock option shall be considered a non-qualified stock option and not qualify
for treatment as an incentive stock option under Section 422 of the Code to the
extent, but only to the extent, of such excess.
OPTION PRICE - The option price of the common shares subject to an ISO Option
may not be less than the fair market value of the shares on the date the option
is granted. In the case of an optionee who owns more than 10% of the outstanding
shares of the Company of all classes or any parent or subsidiary thereof, the
option price of the shares may not be less than 110% of the fair market value of
the Company's shares on the date of grant. The option price of common shares
subject to an NQO Option may not be less than 85% of the fair market value of
the Company's shares on the date of grant. If the common shares are not then
quoted on any exchange or quotation medium at the time the option is granted,
then the Board of Directors or compensation committee will use its discretion in
selecting a good faith value believed to represent fair market value.
OPTION TERM - No option shall be exercisable after the expiration of ten years
from the date it was granted. Incentive stock options granted to any employee
owning more than 10% of the combined voting power of all classes of stock of the
Company will expire five years from the date such option is granted. However,
the Committee may designate shorter terms for individual options.
TERMINATION OF OPTION - Options granted under the 2003 Stock Plan are contingent
upon continued employment by the Company or an affiliate of the Company or
continued relationship as a director or consultant; however, if the employment
or other relationship is terminated then the optionee has the right to exercise
his or her option at any time within a three (3) month period after such
termination, but only to the extent that the optionee was otherwise entitled to
exercise the option immediately prior to such termination. If the optionee dies,
the option may be exercised at any time within six (6) months following death by
the estate or by person or persons to whom rights under the option pass by law
but only to the extent that such option was exercisable by the optionee on the
date of death.
GENERAL MATTERS - If options granted under the 2003 Stock Plan which expire for
any reason without having been exercised in full, the unpurchased shares
underlying such options will be added to the other shares available for the
grant of options under the 2003 Stock Plan. Options granted under the 2003 Stock
Plan are non-transferable except by will or the laws of descent and
distribution, so that during an optionee's life only he or she may exercise the
options.
9
Neither the grant of an option nor the existence of an option agreement
with the Company shall impose upon the Company (or any subsidiary or parent
thereof) an obligation to retain the services of the optionee for any stated
period of time. Further, the grant, holding and exercise of each option shall be
subject to such requirements as may, in the opinion of the Committee, be
necessary or advisable for the purpose of complying with applicable laws, rules
and regulations (including securities laws and regulations) and the rules of any
stock exchange upon which the shares of the Company may then be traded.
FEDERAL INCOME TAX CONSEQUENCES - Federal income tax laws have frequently been
revised and may be changed again in the future. For federal income tax purposes,
an optionee will not realize any taxable income, and the Company will not be
entitled to a deduction, at the time an ISO Option is granted. Further, there is
no taxable income to the optionee and no deduction to the Company at the time
the ISO is exercised to purchase shares.
With respect to shares purchased upon exercise of an ISO Option,
(i) If the shares are not disposed of within 2 years after the date an
ISO Option is granted or within 1 year after the shares are purchased upon
exercise of the ISO, the optionee will realize a capital gain (or loss) equal to
the difference between the ISO exercise price and the amount realized upon sale
of the shares, and the Company will not be entitled to any deduction.
(ii) If however, such shares are disposed of within 2 years after the
date the ISO Option is granted or within 1 year after the shares are purchased
upon exercise of the ISO, then the optionee will recognize ordinary income in
the year of disposition (and the Company will be entitled to a corresponding
deduction as a compensation expense) equal to the amount by which the fair
market value of the shares at the time of purchase exceeded the ISO exercise
price, or if less (and the sale is to an unaffiliated purchaser), the amount
realized on the disposition over the ISO exercise price.
Upon exercise of an ISO Option, certain optionees may become subject to
the federal "alternative minimum tax." The amount, if any, by which the fair
market value of shares purchased upon exercise of an ISO exceeds the ISO
exercise price will constitute an item of tax preference subject to the
alternative minimum tax in the year of exercise. The item of tax preference is
eliminated if the shares are disposed of in a "disqualifying disposition" - that
is, within 1 year of purchasing the shares or 2 years from the date the ISO was
granted. The Code also provides that, for purposes of determining alternative
minimum taxable income, the gain recognized upon a sale or exchange of ISO
shares will be limited to the excess of the amount received in the sale or
exchange over the fair market value of the shares at the time the ISO was
exercised.
If ISO shares are not disposed of in a disqualifying disposition, the
optionee's tax basis will be the ISO exercise price paid for the shares. If
disposed of in a disqualifying disposition, the tax basis will be the fair
market value of the shares on the date purchased. Alternative minimum tax
incurred by reason of exercise of an ISO does not result (for regular income tax
purposes) in an increase in the tax basis of the shares acquired upon exercise.
However, the Code provides that alternative minimum tax attributable to the
exercise of an ISO may be applied as a credit against regular income tax
liability in a subsequent year, subject to certain limitations.
With respect to shares purchased upon exercise of an NQO Option, an
optionee does not recognize taxable income as a result of the grant unless the
option has a readily ascertainable fair market value. Upon the grant of a NQO
Option at fair market value or higher, the Company believes that no income will
be recognized by the optionee and the Company will not be entitled to a
deduction. This is because such options are not transferable and the fair market
value of the option is not easily ascertainable. The optionee, however, may
recognize ordinary income (subject to tax withholding) upon exercise of the
option in an amount equal to the difference between the fair market value of the
common shares acquired on the date of exercise and the exercise price.
The optionee's tax basis in shares purchased will generally be equal to
the fair market value of the shares purchased (the exercise price of the option
plus the amount included in gross income of the optionee as a result of
exercising the option). Upon disposition of those shares, the optionee will
realize a capital gain (or loss) equal to the difference between the tax basis
and the amount realized upon disposition. The sale of such shares will not
result in any further tax consequences to the Company. Exercise of a NQO Option
or sale of shares thus acquired will not subject the optionee to the federal
alternative minimum tax.
10
So long as the option price is at least equal to the fair market value
of the underlying shares on the date of grant, the Company will not be entitled
to a deduction for compensation expenses or otherwise either upon the grant of a
NQO Option or at the time of NQO Option exercise. However, since the 2003 Stock
Option Plan allows the granting of NQO Options with up to a 15% discount from
fair market value, should the Committee grant options exercisable at less than
fair market value, then the Company may be entitled to a compensation deduction
for the difference and the optionee may be subject to ordinary income in a like
amount.
Any changes in the law concerning the tax treatment of options are
beyond the control of the Company and the shareholders and are not subject to
shareholder approval. The foregoing summary of federal income tax aspects is
based upon existing law and interpretations, regulations and rulings, which are
subject to change.
THE FOREGOING SUMMARY OF CERTAIN MATERIAL FEATURES OF THE PLAN DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
COMPLETE TEXT OF THE 2003 STOCK PLAN, WHICH WILL BE AVAILABLE FOR INSPECTION AT
THE ANNUAL MEETING AND A COPY WILL BE FURNISHED TO ANY SHAREHOLDER UPON REQUEST.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ADOPTION OF
THE 2003 STOCK PLAN. APPROVAL OF THE 2003 STOCK PLAN REQUIRES THE AFFIRMATIVE
VOTE OF A MAJORITY OF THE VOTES CAST AT THE ANNUAL MEETING.
PROPOSAL NUMBER 3
APPOINTMENT OF NATION SMITH HERMES DIAMOND, LLP AS INDEPENDENT AUDITORS AND
ACCOUNTANTS.
The firm of Nation Smith Hermes Diamond, LLP certified public
accountants, has served as the Company's independent auditors and accountants
since the fiscal year ended May 31, 2002. Nation Smith Hermes Diamond, LLP is an
alliance firm of BDO Seidman, LLP, an international accounting firm. A
representative of Nation Smith Hermes Diamond, LLP is expected to be present at
the Annual Meeting. They will have the opportunity to make a statement if they
desire to do so and they are expected to be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THIS
PROPOSAL. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE VOTES CAST WILL BE REQUIRED
TO APPROVE THIS PROPOSAL.
PROPOSAL NUMBER 4
ELECTION OF DIRECTORS
The Company's bylaws provide for a board of three to seven
directors as the Board determines, and the Board of Directors has fixed the
number of members of the board at six. All directors are elected for one-year
terms at the annual meeting of shareholders. Directors are elected by plurality
vote, meaning that (should there be more nominees than Board seats available)
the nominees who receive the most votes will be elected for the term nominated,
even if the number of votes received by any one or more nominees is less than a
majority of the votes cast. Cumulative voting is not allowed in the election of
directors.
Donald R. Bernier, Helmut Falk, Jr., Lowell W. Giffhorn, David H.
Pohl and Carlton M. Johnson were elected to the Board at the 2001 annual meeting
of shareholders. Mr. Bernier has been a director since 1995, Mr. Falk since
1997, Mr. Giffhorn since 1999, and Mr. Pohl and Mr. Johnson since 2001. Gloria
H. Felcyn was appointed to the Board in 2002. Messrs. Bernier, Falk, Pohl,
Johnson, Giffhorn and Felcyn have all been nominated by the Board of Directors
to stand for election to the Board. If elected, they will each serve a one-year
term or until their respective successors have been elected and qualified.
UNLESS OTHERWISE SPECIFIED, ALL PROXIES RECEIVED WILL BE VOTED FOR
THE ELECTION OF ALL NOMINEES. IF ANY NOMINEE SHOULD NOT STAND FOR ELECTION FOR
ANY
11
REASON, YOUR PROXY WILL BE VOTED FOR ANY PERSON OR PERSONS DESIGNATED BY THE
BOARD OF DIRECTORS TO REPLACE SUCH NOMINEE.
The Board has no reason to expect that any of the nominees will not
stand for election or decline to serve if elected. There is no arrangement
between any director or nominee and any other person pursuant to which such
director or nominee was or is to be selected as a director or nominee. There is
no blood relationship between or among the nominees, directors or executive
officers of the Company. The following table and biographical summaries set
forth information, including principal occupation and business experience,
concerning the nominees for the Board of Directors and the executive officers of
the Company as of August 31, 2003:
NAME Age POSITION AND OFFICES DIRECTOR SINCE
- ---- -------------------- --------------
Donald R. Bernier 61 Chairman and Director January 1995
David H. Pohl 66 Director April 2001
Jeffrey E. Wallin 55 President and CEO n/a
Lowell W. Giffhorn 56 Executive Vice President, CFO, Secretary and August 1999
Director
Carlton M. Johnson, Jr. 43 Director (1) (2) August 2001
Helmut Falk, Jr. 47 Director (2) December 1997
Gloria H. Felcyn 56 Director (1) (2) October 2002
Joey Maitra 53 Vice President Engineering n/a
Patrick Nunally 39 Vice President and CTO n/a
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
DONALD R. BERNIER. Mr. Bernier was appointed Chairman of the Board on
August 5, 2001. Since 1971, Mr. Bernier has been the owner and President of
Compunetics Incorporated, a Troy, Michigan-based electronics firm of which he is
the founder. Compunetics engages in contract research and development,
specializing in microelectronics primarily for the automotive industry.
DAVID H. POHL. Mr. Pohl has served on our board of directors since
April 2001, and served as an officer of the Company from January 2001 to March
2002. Except for his service with PTSC, Mr. Pohl has been in the private
practice of law counseling business clients since 1997, and from 1995 to 1996
was Special Counsel to the Ohio Attorney General. Previously, he was a senior
attorney with a large U.S. law firm, and held positions as a senior officer and
general counsel in large financial services corporations. Mr. Pohl earned a J.D.
degree in 1962 from the Ohio State University College of Law, and also holds a
BS in Administrative Sciences from Ohio State.
JEFFREY E. WALLIN. Mr. Wallin has served as our Chief Executive Officer
and President since March 2002. Since 1999, Mr. Wallin was president of SDMC
Inc., a consulting company serving the multimedia system integration and
communications markets. From 1996 to 1999, Mr. Wallin was President and CEO of
TV/COM International, a division of Hyundai that developed and manufactured
end-to-end digital communications systems. Previously Mr. Wallin held senior
level management positions with Snell & Wilcox, General Instrument, now a major
division of Motorola, and Teledyne Corporation. Mr. Wallin obtained a B.S.
degree from Bemidji State University in 1970.
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. Mr. Giffhorn has served on our board of
directors since August 1999. 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. 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. Mr. Giffhorn is also a director and chairman of
the audit committee of DND Technologies, Inc., a publicly held company.
12
CARLTON M. JOHNSON, JR. Mr. Johnson was appointed a Director on August
5, 2001. Mr. Johnson is in-house legal counsel for Swartz Investments, LLC, a
position he has held since June 1996. Mr. Johnson has practiced law in Alabama
since 1986, Florida since 1988, and Georgia since 1997. He has been a
shareholder in the Pensacola, Florida AV rated law firm of Smith, Sauer, DeMaria
& Johnson and as President-Elect of the 500 member Escambia-Santa Rosa Bar
Association. He also served on the Florida Bar Young Lawyers Division Board of
Governors. Mr. Johnson earned a degree in History/Political Science at Auburn
University and Juris Doctor at Samford University - Cumberland School of Law.
Mr. Johnson is also a director and member of the audit committee of Peregrine
Pharmaceuticals, Inc., a publicly held company.
HELMUT FALK, JR. Since 1992, Dr. Falk has been the Director of
Anesthesia for the Johnson Memorial Hospital in Franklin, Indiana. Dr. Falk
received his D.O. from the College of Osteopathic Medicine of the Pacific in
1987 and his B.S. in Biology from the University of California, Irvine in 1983.
Dr. Falk is the son of the late Helmut Falk, who was the sole shareholder of
nanoTronics and the Chairman and CEO of Patriot until his death in July 1995.
Dr. Falk is also an heir to the Helmut Falk Estate, which is the beneficial
owner of the Company's shares held by the Helmut Falk Family Trust.
GLORIA FELCYN. Ms. Felcyn was appointed a Director and chairman of our
audit committee on October 10, 2002. Since 1982 Ms. Felcyn has been the
principal in her own public accounting firm. Ms. Felcyn received a B.S. degree
in Business Economics for Trinity University in 1968.
PATRICK O. NUNALLY. Dr. Nunally joined us as Vice President of Business
Development and Chief Technical Officer in June 2001, previous to which he had
been providing consulting services to us since May 2000. Dr. Nunally has more
than 20 years of entrepreneurial experience in semiconductor and embedded
processor design. From December 1998 to May 2000, he was President and CEO of
Intertech, a company he founded specializing in intellectual property
development for embedded processor and communications systems. From June 1998 to
December 1998, he was President and CEO of Gruppe Telekom, Inc., a licensee of
Interactive Video and Data Service Spectrum. From April 1996 to June 1998, he
served as Chief Technical Officer and co-founder of Aristo, now PlayNet Inc., a
Java-based games company. Dr. Nunally also held other senior management
positions with Wave Interactive Network, Sensormatic Video Products Division,
Intellisys Automation Inc., E-Metrics Inc., General Dynamics Corporation and
Interstate Electronics. Dr. Nunally received his PhD in Electrical Engineering
from the Pacific Western University in 1996, a MBA from the University of
LaVerne in 1993 and a BS in Electrical and Electronics Engineering from
California State Polytechnic University in 1987.
JOEY MAITRA. Mr. Maitra was Vice President of Engineering for Metacomp
since 1990 and was appointed Vice President of Engineering of Patriot in
December 1996 through February 2001. Mr. Maitra was reappointed to the same
position in November 2001. Previously Mr. Maitra held various engineering
positions with several computer related technology companies. Mr. Maitra
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.
No director, executive officer or nominee for the Board has been
involved in any legal proceedings during the past five years. There are no
material proceedings adverse to the Company in which any director, executive
officer, or nominee for the Board has a material interest adverse to the
Company.
There is no family relationship between any of our executive officers
and directors.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND
COMMITTEES OF THE BOARD OF DIRECTORS
COMMITTEES OF THE BOARD
The Board of Directors has the following committees.
AUDIT COMMITTEE - The Audit Committee reviews the audit and
control functions of the Company, the Company's accounting principles, policies
and practices and financial reporting, the scope of the audit conducted by the
13
Company's auditors, the fees and all non-audit services of the independent
auditors and the independent auditors' opinion and letter of comment to
management and management's response thereto.
AUDIT COMMITTEE REPORT
Notwithstanding anything to the contrary set forth in any of the
company's previous or future filings under the Securities Act or the Exchange
Act that might incorporate this Proxy Statement or future filings with the SEC,
in whole or in part, the following report shall not be deemed to be incorporated
by reference into any such filing.
Membership and Role of the Audit Committee
The Audit Committee currently consists of a committee appointed by the
Company's Board of Directors. The Audit Committee operates under a written
charter adopted by the Board which is included in this Proxy Statement as
Appendix A.
The primary function of the Audit Committee is to provide advice with
respect to the company's financial matters and to assist the Board of Directors
in fulfilling its oversight responsibilities regarding finance, accounting, tax
and legal compliance. The Audit Committee's primary duties and responsibilities
are to:
oServe as an independent and objective party to monitor the company's
financial reporting process and internal control system;
o Review and appraise the audit efforts of the company's independent
accountants;
o Evaluate the company's quarterly financial performance as well as its
compliance with laws and regulations;
o Oversee management's establishment and enforcement of financial
policies and business practices; and
o Provide an open avenue of communication among the independent
accountants, financial and senior management, counsel, and the Board of
Directors.
The Audit Committee has considered whether the non-audit services
provided by the Company's auditors in connection with the year ended May 31,
2003 were compatible with the auditors' independence.
Review of the company's Audited Financial Statements for the Fiscal Year ended
May 31, 2003
The Audit Committee has reviewed and discussed the audited financial
statements of the Company for the fiscal year ended May 31, 2003 with
management. The Audit Committee has discussed with Nation Smith Hermes Diamond ,
LLP, the Company's independent public accountants, the matters required to be
discussed by Statement on Auditing Standards No. 61 (Communication with Audit
Committees), as modified.
The Audit Committee has also received the written disclosures and the
letter from Nation Smith Hermes Diamond, LLP required by Independence Standards
Board Standard No. 1 (Independence Discussion with Audit Committees) and the
Audit Committee has discussed the independence of Nation Smith Hermes Diamond,
LLP with that firm.
Based on the Audit Committee's review and discussions noted above, the
Audit Committee recommended to the Board that the Company's audited financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2003 for filing with the SEC.
The Audit Committee currently consists of two outside directors. Each
member of the Audit Committee is independent as defined under the National
Association of Securities Dealers' listing standards.
14
Audit Committee
Gloria H. Felcyn, Chairperson
Carlton M. Johnson, Jr.
COMPENSATION COMMITTEE - The Compensation Committee reviews and
recommends to the Board the salaries, bonuses and prerequisites of the Company's
executive officers. The Compensation Committee also reviews and recommends to
the Board any new compensation or retirement plans and administers the Company's
1992, 1996 and 2001 Stock Option Plans.
The Compensation Committee currently consists of three outside
directors. Each member of the Compensation Committee is independent as defined
under the National Association of Securities Dealers' listing standards.
Compensation Committee
Carlton M. Johnson
Gloria H. Felcyn
Helmut Falk, Jr.
Other than the Audit Committee and Compensation Committee, the
Company does not have any standing nominating or other committees of the Board
of Directors. During the fiscal year ended May 31, 2003 there were six formal
meetings held and each director attended at least 75% of the meetings.
Directors have received in the past and may receive in the future
stock options pursuant to the Company's stock option plans. Options to purchase
25,000 shares of the Company's common stock were issued to Mr. Bernier, Mr.
Falk, Mr. Giffhorn, Mr. Pohl and Mr. Johnson and an option to purchase 50,000
shares of the Company's common stock was issued to Ms. Felcyn during the fiscal
year ended May 31, 2003. The Company has no other arrangements to pay any direct
or indirect remuneration to any directors of the Company in their capacity as
directors other than in the form of reimbursement of expenses for attending
directors' or committee meetings.
No director of the Company has resigned or declined to stand for
re-election to the Board of Directors because of disagreement with the Company
on any matters relating to the Company's operations, policies or practices since
the date of the last meeting of shareholders.
15
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
There is shown below information concerning the compensation of
our chief executive officer and the most highly compensated executive officers
whose salary and bonus exceeded $100,000 (each a "Named Officer") for the fiscal
years ended May 31, 2003, 2002, and 2001.
Summary Compensation Table
Annual Cash Compensation Long-Term Compensation
------------------------ ----------------------
Name and Fiscal Repriced All Other
Principal Position Year Salary Bonus (# of Shares) Options Compensation
- ------------------------- -------- --------- ----- ------------- -------- ------------
Jeff Wallin 2003 $127,650 (1) Nil 250,000 None None
President and CEO 2002 $68,800 (1) Nil 1,000,000 None None
Lowell W. Giffhorn 2003 $150,779 (1) Nil 115,000 None None
Exec. V.P., CFO and Secy. 2002 $139,908 (1) Nil 255,000 None None
2001 $126,650 (1) Nil 125,000 None None
Joey Maitra 2003 $131,040 (1) Nil 100,000 None None
VP Engineering 2002 $125,058 (1) Nil 335,000 None None
2001 $120,000 Nil None None None
Patrick O. Nunally 2003 $189,521 (1) Nil 400,000 None $52,500 (2)
VP and CTO 2002 $173,046 (1) Nil 250,000 None $105,000 (2)
(1) Included in Mssr. Wallin, Giffhorn, Maitra and Nunally is cash
compensation of $400 per month for car allowance.
(2) Payments through November 30, 2002 to Dr. Nunally for assignments
to the Company of intellectual property rights. The rights were
returned to Dr. Nunally in April 2003.
The Company maintains employee benefits that are generally
available to all of its employees, including medical, dental and life insurance
benefits and a 401(k) retirement savings plan. The Company did not make any
matching contributions under the 401(k) plan for any of the above named officers
during the fiscal years ended May 31, 2003, 2002 and 2001.
OPTION GRANTS
Shown below is information on grants of stock options pursuant to the
Company's 1992, 1996 and 2001 Stock Option Plans to the Named Officers reflected
in the Summary Compensation Table shown above.
16
OPTION GRANTS TABLE FOR FISCAL YEAR ENDED MAY 31, 2003
Potential Realizable Value
Percent of Total of Assumed Annual Rates
Options Granted of Stock Price Appreciation
Number of to Employees in Exercise Expiration for Option Term (1)
Name Options Granted Fiscal Year Price Date 5% ($) 10% ($)
- ------------------ ------------------ ----------------- ----------- ---------- -------------- ------------
Jeffrey E. Wallin 250,000 20.6% $ 0.043 4/15/2008 $ 2,935 $ 6,563
Lowell W. Giffhorn 115,000 9.5% $ 0.070 8/12/2007 $ 2,224 $ 4,915
Joey Maitra 100,000 8.2% $ 0.059 1/2/2008 $ 1,630 $ 3,602
Patrick Nunally 400,000 32.9% $ 0.043 4/15/2008 $ 4,697 $ 10,379
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent upon the future
performance of the company's common stock, overall market conditions and the
executive's continued involvement with the company. The amounts represented in
this table will not necessarily be achieved.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
There were no exercises of stock options for the fiscal year ended May
31, 2003 by any of the officers reflected in the Summary Compensation Table
shown above. Shown below is information on fiscal year-end values under the
Company's 1992, 1996 and 2001 Stock Option Plans to the officers reflected in
the Summary Compensation Table shown above.
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
May 31, 2003 May 31, 2003
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- -------------- --------------- ------------- --------------
Jeffrey E. Wallin 1,020,000 250,000 $ 5,625 $ -
Lowell W. Giffhorn 311,667 183,333 $ - $ -
Joey Maitra 335,000 100,000 $ - $ 600
Patrick Nunally 787,500 162,500 $ 9,000 $ -
The fair market value of the unexercised in-the-money options at May
31, 2003 was determined by subtracting the option exercise price from the last
sale price as reported on the over the counter bulletin board on May 31, 2003,
$0.065.
17
The Company has not awarded stock appreciation rights to any of its
employees. The Company has no long-term incentive plans.
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by us to
the directors in their capacity as directors other than the granting of stock
options. We expect that, during the next twelve months, we will not pay any
direct or indirect remuneration to any directors of ours in their capacity as
directors other than in the form of stock option grants or the reimbursement of
expenses of attending directors' or committee meetings.
EMPLOYMENT CONTRACTS
The Company entered into a consulting agreement dated as of March 7,
2002, with SDMC, Inc. whereby SDMC would provide the services of Mr. Wallin to
be the President and Chief Executive Officer. The agreement is for a term
through March 18, 2004 providing for payments of $133,200 per annum. The
agreement provides for a bonus up to 50% of the annual base consideration for
the applicable year. The agreement also provides for potential bonuses to be
paid based on the increase in the price of the Company's common stock. Should
the price of the common stock reach $0.25 for twenty consecutive days, SDMC
would receive a cash payment of $10,000, $0.40- $20,000, $0.50- $20,000, $0.60-
$30,000, $0.80- $30,000, $1.00- $50,000, $1.50- $100,000, and $2.00- $150,000.
The Company may terminate SDMC's agreement with or without cause, but
termination without cause (other than disability or death) would result in
severance payments equal to the lesser of (i) four months of the then current
compensation or (ii) the balance remaining of the current compensation for the
term of his agreement. If a change in control, as defined in the agreement,
occurs during the term of his agreement, and if Mr. Wallin refuses to accept or
voluntarily resigns from a position other than a qualified position, as that
term is defined in the agreement, then SDMC will receive a lump sum severance
payment equal to twelve months of the then current compensation. Under the
agreement, the Company granted SDMC options to purchase 1,000,000 common shares,
500,000 vesting on March 7, 2002, 250,000 vesting on March 7, 2003 and 250,000
vesting on March 7, 2004. The Company also placed in escrow four months of
payments which shall be released to SDMC on the termination of Mr. Wallin's
services for any reason other than cause or his resignation.
The Company entered into an employment agreement dated as of
November 17, 2001, with Mr. Giffhorn providing for his employment as Executive
Vice President and Chief Financial Officer. The agreement is for a term through
September 4, 2004 providing for a base salary of $144,000 per annum. 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 salary for the
applicable year. The agreement also provides Mr. Giffhorn a monthly car
allowance of $400. The Company may terminate Mr.Giffhorn's employment with or
without cause, but termination without cause (other than disability or death)
would result in severance payments equal to the lesser of (i) four months of the
then current base salary or (ii) the balance remaining of the current base
salary for the term of his agreement. If a change in control, as defined in the
agreement, occurs during the term of his agreement, and if Mr. Giffhorn refuses
to accept or voluntarily resigns from a position other than a qualified
position, as that term is defined in the agreement, then he will receive a lump
sum severance payment equal to twelve months of his then current salary.
The Company entered into an employment agreement dated as of December
23, 2002, with Mr. Maitra providing for his employment as Vice President of
Engineering. The agreement is for a term through January 2, 2004 providing for a
base salary initially of $126,000 per annum. 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 salary for the applicable year. The agreement also
provides Mr. Maitra a monthly car allowance of $400. The Company may terminate
Mr.Maitra's employment with or without cause, but termination without cause
(other than disability or death) would result in severance payments equal to the
lesser of (i) four months of the then current base salary or (ii) the balance
remaining of the current base salary for the term of his agreement. If a change
in control, as defined in the agreement, occurs during the term of his
agreement, and if Mr. Maitra refuses to accept or voluntarily resigns from a
position other than a qualified position, as that term is defined in the
agreement, then he will receive a lump sum severance payment equal to twelve
months of his then current salary. Under the agreement, the Company granted Mr.
Maitra options to purchase 100,000 common shares, 50,000 vesting on January 2,
2004 and 50,000 vesting on January 2, 2005.
18
The Company entered into a letter of intent dated May 31, 2001 with Dr.
Nunally providing for his employment as the Chief Technical Officer of the
Company. The terms of the letter provide for a base salary of $180,000 per
annum. The letter provides for a bonus up to 50% of the annual base
consideration for the applicable year. In addition, the letter provided for
monthly payments of $4,500 for the purchase from Dr. Nunally of certain
intellectual property assets and assignment of worldwide patent rights. On March
30, 2001, the Company entered into an agreement with Dr. Nunally providing for
additional monthly payments of $3,000 for additional intellectual property
assets. On April 16, 2003, the agreements were amended to reflect a return of
the intellectual property assets to Dr. Nunally, forgiveness by Dr. Nunally of
payments due him for the intellectual property assets subsequent to January 1,
2003 and termination of the $7,500 per month payments accruing on the
intellectual property assets. In exchange the Company granted a stock option to
Dr. Nunally for the purchase of up to 400,000 shares of common stock at an
exercise price of $0.0425. The option vested upon grant.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's
directors, executive officers and persons who beneficially own 10% or more of a
class of securities registered under Section 12 of the Exchange Act to file
reports of beneficial ownership and changes in beneficial ownership with the
Securities and Exchange Commission. Directors, executive officers and greater
than 10% shareholders are required by the rules and regulations of the
Commission to furnish the Company with copies of all reports filed by them in
compliance with Section 16(a).
Based solely on its review of copies of the reports it
received from persons required to make such filings and its own records, the
Company believes that from the period June 1, 2002 through May 31, 2003, all
persons subject to the Section 16(a) reporting requirements timely filed the
required reports.
COMPANY STOCK PRICE PERFORMANCE
The stock price performance graph below is required by the SEC and will
not be deemed to be incorporated by reference by any general statement
incorporating by reference this Proxy Statement into any filing under the
Securities Act of 1933, as amended, or under the Securities Exchange Act of
1934, as amended, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
soliciting material or filed under such Acts.
The following graph compares the five-year cumulative total return on
the Company's Common Stock to the total returns of 1) NASDAQ Stock Market and 2)
Philadelphia Semiconductor Index. This comparison assumes in each case that $100
was invested on May 31, 1998 and all dividends were reinvested. The Company's
fiscal year ends on May 31.
19
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
[REPRESENTATION OF LINE GRAPH]
5/31/1998 5/31/1999 5/31/2000 5/31/2001 5/31/2002 5/31/2003
--------- --------- --------- --------- --------- ---------
Patroit Scientific Corp. $100 $ 63 $167 $ 67 $ 11 $ 9
NASDAQ Stock Market $100 $139 $191 $119 $ 91 $ 90
Philadelphia Semiconductors $100 $150 $385 $231 $184 $147
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Nation Smith Hermes Diamond was our principal accountant during the
year ended May 31, 2003 and for the year end audit for the year ended May 31,
2002. BDO Seidman, LLP was our principal accountant for previous fiscal years
and for the review of quarterly reports and registration statements through May
20, 2002. Presented below are the fees billed during the fiscal years ended May
31, 2003 and 2002.
Nation Smith Hermes Diamond BDO Seidman
------------------------------- -----------------------------
2003 2002 2003 2002
-------------- ------------- ------------ -------------
Audit fees $ 72,902 $ 14,875 $ - $ 121,890
Audit-related fees 40,099 - 20,000 50,550
Tax fees 635 - - 6,300
All other fees 57 - - 9,149
--------------- ------------- ------------- -------------
Total $ 113,693 $ 14,875 $ 20,000 $ 187,889
=============== ============= ============= =============
AUDIT FEES. Represents fees for professional services provided for the
audit of Patriot Scientific's annual financial statements and review of
Patriot Scientific's quarterly financial statements, and audit services
provided in connection with other statutory or regulatory filings.
AUDIT-RELATED FEES. Represents fees for assurance services related to
the audit of Patriot Scientific's financial statements. The fees are
primarily for review of registration and proxy statements.
20
TAX FEES. Represents fees for professional services provided primarily
for compliance, advice and tax return preparation.
ALL OTHER FEES. Represents fees for products and services not otherwise
included in the categories above. The 2002 fees are primarily related
to travel expenses and retention review fees.
To help ensure the independence of our independent auditor, the Audit
Committee of the Board of Directors of Patriot Scientific has approved and
adopted a Policy on Engagement of Independent Auditor, which is available on
Patriot Scientific's Web site at HTTP:/WWW.PTSC.COM.
Pursuant to the Policy on Engagement of Independent Auditor, the Audit
Committee is directly responsible for the appointment, compensation and
oversight of the independent auditor. The Audit Committee preapproves all audit
services and non-audit services to be provided by our independent auditor. The
Audit Committee may delegate to one or more of its members the authority to
grant the required approvals, provided that any exercise of such authority is
presented at the next Audit Committee meeting.
Each audit, non-audit and tax service that is approved by the Audit
Committee will be reflected in a written engagement letter or writing specifying
the services to be performed and the cost of such services, which will be signed
by either a member of the Audit Committee or by an officer of Patriot Scientific
authorized by the Audit Committee to sign on behalf of Patriot Scientific.
The Audit Committee will not approve any prohibited non-audit service or
any non-audit service that individually or in the aggregate may impair, in the
Audit Committee's opinion, the independence of our independent auditor.
In addition, beginning on January 1, 2003, our independent auditor may
not provide any services to Patriot Scientific officers or Audit Committee
members, including financial counseling and tax services.
CERTAIN TRANSACTIONS
There were no transactions, or series of transactions, during fiscal
2003, 2002 or 2001, nor are there any currently proposed transactions, or series
of transactions, to which the Company is a party, in which the amount exceeds
$60,000, and in which to its knowledge any director, executive officer, nominee,
five percent or greater shareholder, or any member of the immediate family of
any of the foregoing persons, has or will have any direct or indirect material
interest other than as described below.
In June 2000, we entered into a three-year, $80,000 secured promissory
note receivable with James T. Lunney, a previous Chairman, President and CEO.
The note bore 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. In April 2003, we negotiated an early
payment discount and Mr. Lunney paid $60,000 to retire this note.
During the fiscal years ended May 31, 2002 and 2001, we paid $70,292
and $139,253 to Webster Incorporated for design and maintenance of our web site
and for marketing support and materials. The principal in Webster Incorporated,
Christine Blum, is the daughter of our previous Chairman, President and CEO,
Richard Blum.
From June 10, 2002 through August 23, 2002, we issued to Gloria Felcyn,
Trustee of the Helmut Falk Family Trust, two 8% Convertible Debentures with
accumulative principal balances of $275,000 due June 10, 2004 through August 23,
2004. The initial exercise prices ranged from $0.0727 to $0.08616 and are
subject to a downward revisions if the price of our stock is lower on any three
month anniversary of the debentures or on the date that a statement registering
the resale of the common stock issuable upon conversion of the debentures
becomes effective. Also, in
21
conjunction with the debentures, we issued five year warrants to purchase up to
4,102,431 shares of our common stock at an initial exercise prices ranging from
$0.0727 to $0.08616 subject to reset provisions on each six month anniversary of
the issuance of the warrants. If the price of our common stock is in excess of
$0.20 per share, Ms. Felcyn has a two year option to purchase up to an
additional $275,000 of 8% Convertible Debentures on the same terms.
During October 2002 through December 2002, we entered into three 8%
short-term notes with Gloria Felcyn, the trustee for the Falk Family Trust,
aggregating $180,000 with initial maturity dates ranging from January 1 to
January 31, 2003. In July 2003 we issued a new 8% short-term note in the amount
of $200,354 with a maturity date of October 7, 2003 in exchange for cancellation
of the three 8% short term notes issued in October through December 2002, the
accrued interest on the cancelled notes and an additional $10,000 in cash.
FINANCIAL AND OTHER INFORMATION
The Company's Annual Report on Form 10-K for the year ended May 31,
2003, including the annual statements, as filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, constitutes the annual
report to shareholders and is being mailed with this Proxy Statement.
UPON REQUEST AND PAYMENT OF A REASONABLE FEE TO COVER THE COMPANY'S
EXPENSES, THE COMPANY WILL FURNISH ANY PERSON WHO WAS A STOCKHOLDER OF THE
COMPANY AS OF THE RECORD DATE, A COPY OF ANY EXHIBIT TO THE FORM 10-K FOR THE
FISCAL YEAR ENDED MAY 31, 2003. ANY SUCH WRITTEN REQUEST MAY BE ADDRESSED TO
LOWELL GIFFHORN, SECRETARY, PATRIOT SCIENTIFIC CORPORATION, 10989 VIA FRONTERA,
SAN DIEGO, CALIFORNIA 92127. THE WRITTEN REQUEST MUST CONTAIN A GOOD FAITH
REPRESENTATION THAT, AS OF THE RECORD DATE, THE PERSON MAKING THE REQUEST WAS
THE BENEFICIAL OWNER OF COMMON STOCK OF THE COMPANY.
The Common Shares of the Company are quoted on the OTC Electronic
Bulletin Board under symbol "PTSC" and traded in the over-the-counter market.
SHAREHOLDER PROPOSALS
Any shareholder intending to present a proposal before the next Annual
Meeting of Shareholders, to be held probably in October of 2004, should submit
the proposal in writing to the Secretary of the Company at 10989 Via Frontera,
San Diego, California 92127. The written proposal must be received by the
Secretary on or before June 30, 2004 in order to be considered for inclusion in
the proxy statement for that meeting.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before
the Annual Meeting. However, if any matters other than those referred to herein
should properly come before the Annual Meeting, it is the intention of the proxy
holders to vote such proxy in accordance with his or her best judgment.
SOLICITATION OF PROXIES, SHAREHOLDER PROPOSALS AND OTHER MATTERS
The Company will bear the costs of the solicitation of proxies from
its shareholders. In addition, to the use of the mails, proxies may be solicited
by the directors, officers and employees of the Company by personal interview,
telephone or telegram. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for out-of-pocket expenses in
connection with such efforts. Arrangements may also be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of stock held of record by such
persons, and the Company will reimburse such persons for reasonable expenses
incurred in forwarding such proxy material.
22
The directors and executive officers of the Company, together with
their respective affiliates, beneficially own approximately 18.2% of the
Company's outstanding common stock, and they have indicated that they intend to
vote their shares in favor of all proposals set forth in this Proxy Statement.
By Order of the Board of Directors
/s/ Lowell W. Giffhorn
----------------------------------
Lowell W. Giffhorn
Secretary
San Diego, California
September 16, 2003
23
APPENDIX A
PATRIOT SCIENTIFIC CORPORATION
AUDIT COMMITTEE CHARTER
ORGANIZATION
The Audit Committee is a standing committee of the Board of Directors.
The Audit Committee will consist of at least two members of the Board of
Directors, all of whom are "independent" as defined in applicable stock exchange
rules and are otherwise free of any relationship that in the opinion of the
Board of Directors would interfere with their exercise of independent judgment.
All committee members must be able to read and understand fundamental financial
statements, including the company's balance sheet, income statement and cash
flow statement. At least one member must have past employment experience in
finance or accounting, requisite professional certification in accounting or
other comparable experience or background which results in the individual's
financial sophistication, including a current or past position as a chief
executive or financial officer or other senior officer with financial oversight
responsibilities. The Board will designate committee members and the committee
chair annually.
STATEMENT OF POLICY
The primary objective of this committee is to assist the Board in
fulfilling its fiduciary responsibilities relating to accounting, finance and
reporting practices of the company, including its internal controls and the
integrity of its financial reports. In meeting this objective, the committee is
responsible for maintaining a free and open means of communication between the
directors, the independent accountants, and the Company's management. The
committee has the power to confer with and direct corporate officers of the
corporation to the extent necessary to accomplish its charter. The independent
accountants are ultimately accountable to the Board of Directors and the Audit
Committee.
RESPONSIBILITIES
To best carry out its responsibilities, the committee's policies and
procedures should remain flexible in order to address changing conditions.
Specific responsibilities of the committee include:
o Appointment of the independent accountants.
o Select and evaluate the independent accountants to be ratified
by the shareholders to audit the Company's accounts, or where
appropriate, the replacement of the independent accountants,
and approve the compensation of the independent accountants
for audit services.
o Evaluate the independence of the independent accountant,
including a review of non audit-related services provided by
and related fees charged by the independent accountant.
o Obtain a formal written statement, as required by the
Independence Standards Board, from the independent accountant
delineating relationships between the accountant and the
company and actively engage in dialogue with the independent
accountants regarding matters that might reasonably be
expected to affect their independence.
o Pre-approving all audit and non-audit services to be provided
by the independent accountants. The Audit Committee may
delegate the authority to grant such pre-approvals to one or
more members of the committee, provided that the per-approval
decision and related services are presented to the Audit
Committee at its next regularly scheduled meeting.
24
o Review and approve the audit activities at the Company.
o Meet with the independent accountants and financial
management of the Company to review the scope of the
proposed audit for the current year and the audit procedures
to be utilized, and upon the completion thereof review such
audit, including any comments or recommendations of the
independent accountants.
o Review financial results.
o Prior to the release of the Company's unaudited quarterly
financial results, review the results with management and
the independent accountants, considering reports from senior
finance management as to major accounting matters and any
material deviations from prior practice, and consultations
with the Company's independent accountants.
o Ensure that the independent accountant conducts a SAS 100
("Interim Financial Information") review prior to the filing
of the Company's Form 10-Q.
o Prior to the release of the Company's fiscal year end
operating results, review and discuss with Company
management and the independent accountants the audited
financial results for the fiscal year, including their
judgment about the quality, not just the acceptability, of
accounting principles, the reasonableness of significant
judgments, and the clarity of the disclosures in the
financial statements.
o At least annually discuss with the independent accountants
the matters described in SAS 61 ("Communications with Audit
Committees").
o Review with management and the independent accountants the
Company's critical accounting policies and the disclosure
regarding those policies in the Company's periodic filings
with the Securities and Exchange Commission.
o Systems and reports.
o Review with Company senior management and the independent
accountants the adequacy and effectiveness of the accounting
and financial systems controls of the Company.
o Review and discuss the audited financial statements with
management and, if necessary, the independent accountants,
prior to recommending the inclusion of the audited financial
statements in the Company's Annual Report on Form 10-K.
o Report annually in the Company's proxy statement such
information as may be required by the rules and regulations
of the Securities and Exchange Commission.
o The committee will meet at least quarterly and more often as
necessary.
o Provide sufficient opportunity for the independent accountants to
meet with the Audit Committee without members of management present.
Among the items to be discussed in these meetings are the independent
accountants' evaluation of the Company's financial, accounting and
auditing personnel and the cooperation that the independent
accountants received during the course of the audit and quarterly
reviews.
o Review corporate financial policies relating to compliance with laws
and regulations, ethics, conflicts of interest and the investigation
of misconduct and fraud.
o Review the Company's treasury policy.
o Review the Company's program of risk management, including insurance
coverage.
o Regularly prepare minutes of all meetings and report its activities
to the general meeting of the Board of Directors.
o Review and reassess the adequacy of the Audit Committee Charter on an
annual basis.
25
o Establish procedures to receive and process complaints regarding
accounting, internal auditing controls or auditing matters and for
employees to make confidential, anonymous complaints regarding
questionable accounting or auditing matters.
o Perform such other specific functions as the Board of Directors may
from time to time direct, including reviewing and approving all
transactions between the Company and any related party, and making
such investigations and reviews of the Company and its operations as
the Board of Directors may from time to time request.
RESOURCES
The Company's Chief Financial Officer will be management's primary
liaison to the committee. The committee will have access to financial
information and resources it deems necessary for it to properly carry out its
duties.
26
PROXY PROXY
PATRIOT SCIENTIFIC CORPORATION
THIS PROXY RELATES TO AN ANNUAL MEETING OF THE SHAREHOLDERS TO BE HELD OCTOBER
16, 2003
The undersigned hereby appoints JEFFREY E. WALLIN and LOWELL W.
GIFFHORN or either of them, with full power of substitution, as attorneys and
proxies to vote all shares of Common Stock which the undersigned is entitled to
vote, with all powers which the undersigned would possess if personally present,
at the Annual Meeting of Shareholders of PATRIOT SCIENTIFIC CORPORATION
("Company") to be held at 10 a.m. (Pacific Time) at the Radisson Rancho
Bernardo, 11520 W. Bernardo Court, San Diego California, on October 16, 2003,
and any postponements and adjournments thereof, as follows:
1. PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK, $.00001 PAR VALUE, FROM 200,000,000 TO 400,000,000 SHARES.
____ FOR ____ AGAINST ____ ABSTAIN
2. PROPOSAL TO APPROVE THE COMPANY'S 2003 STOCK OPTION
____ FOR ____ AGAINST ____ ABSTAIN
3. PROPOSAL TO RATIFY NATION SMITH HERMES DIAMOND, LLP AS INDEPENDENT AUDITORS.
____ FOR ____ AGAINST ____ ABSTAIN
3. ELECTION OF DIRECTORS.
FOR all nominees listed below WITHHOLD AUTHORITY
------- -------
(except as marked to the contrary below)(to vote for the nominee listed below)
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE
THAT NOMINEE'S NAME ON THE LINE)
- --------------------------------------------------------------------------------
Donald R. Bernier, Helmut Falk, Jr., David H. Pohl,
Carlton M. Johnson, Jr., Lowell W. Giffhorn, and Gloria H. Felcyn
THIS PROXY HAS NOT BEEN SOLICITED BY OR FOR THE BENEFIT OF THE BOARD
OF DIRECTORS OF THE COMPANY. I UNDERSTAND THAT I MAY REVOKE THIS PROXY ONLY BY
AT ANY TIME BEFORE THEY ARE EXERCISED BY DELIVERING A WRITTEN NOTICE OF
REVOCATION TO MR. LOWELL GIFFHORN, SECRETARY OF THE COMPANY, AT THE BELOW
ADDRESS, OR BY SUBMITTING A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY
ATTENDING THE ANNUAL MEETING AND ORALLY WITHDRAWING THE PROXY.
DATED: ________________________ , 2003 Signature(s) X____ _____________________
Print Name ____________________________________________
(Please date and sign exactly as name or names appear on your stock
certificate(s). When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation, please sign in full
the corporate name by President or other authorized officer. If a partnership,
please sign in the partnership name by authorized person. IF THE STOCK IS HELD
JOINTLY, BOTH OWNERS MUST SIGN.)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS
SPECIFIED THIS PROXY WILL BE VOTED FOR THE PROPOSALS NOTED ABOVE AND, AS TO ANY
OTHER BUSINESS CONSIDERED AT THE ANNUAL MEETING, IN ACCORDANCE WITH THE BEST
JUDGMENT OF THE PROXIES.
Mail or Deliver this Proxy to:
PATRIOT SCIENTIFIC CORPORATION
10989 Via Frontera
San Diego, California 92127
(858) 674-5000