sbv2za
As filed with the Securities and Exchange Commission on
July 11, 2006
Registration
No. 333-133508
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form SB-2
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
RIM SEMICONDUCTOR
COMPANY
(Name of small business issuer
in its charter)
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UTAH
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7830
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95-4545704
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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305 NE
102nd Avenue,
Suite 105, Portland, Oregon 97220
(503) 257-6700
(Address and telephone number of
principal executive offices)
305 NE
102nd Avenue,
Suite 105, Portland, Oregon 97220
(Address of principal place of
business or intended principal place of business)
Brad
Ketch
President and Chief Executive Officer
Rim Semiconductor Company
305 NE
102nd Avenue,
Suite 105
Portland, Oregon 97220
(503) 257-6700
(Name,
address and telephone number of agent for
service)
Copy to:
Lawrence
B. Mandala
Munck Butrus, P.C.
900 Three Galleria Tower
13155 Noel Road
Dallas, Texas 75240
(972) 628-3600
Approximate date of proposed sale to the
public: From time to time after the effective
date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box. þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION,
DATED ,
2006
PROSPECTUS
359,248,679 shares
of Common Stock
This prospectus relates to the resale by the selling
shareholders of up to 359,248,679 shares of our common
stock. The shares offered by this prospectus include:
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shares held by the selling shareholders;
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shares issuable to the selling shareholders upon the conversion
of principal and interest on debentures;
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shares issuable to the selling shareholders upon the exercise of
options or warrants, and
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shares we could be required to issue to the selling shareholders
in the future as liquidated damages or in the event of certain
adjustments to the conversion price of the debentures or the
exercise price of the warrants.
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We will not receive any proceeds from the resale of these shares
by the selling shareholders, but will receive proceeds if any of
the options or warrants are exercised for cash, rather than on a
cashless basis.
The selling shareholders may sell the shares from time to time
at prevailing market prices or in negotiated transactions. Sales
may be made directly to purchasers or through brokers or to
dealers, who are expected to receive customary commissions or
discounts. Each of the selling shareholders may be deemed to be
an underwriter, as such term is defined in the
Securities Act of 1933. We agreed to pay the expenses of
registering these shares.
Our common stock is quoted on the OTC Bulletin Board under
the trading symbol RSMI. On July 5, 2006, the
last reported sales price per share of our common stock was
$0.174.
Investing in our common stock involves significant risks. See
Risk
Factors beginning on page 4 to read
about factors you should consider before buying our common
stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
The date of
this prospectus is July , 2006.
TABLE OF
CONTENTS
All references in this prospectus to Rim
Semiconductor, the company, we,
us or our mean Rim Semiconductor Company
and, as the context requires, its subsidiaries.
You should rely only on the information contained in this
prospectus and any supplement to this prospectus. Neither we nor
the selling shareholders have authorized anyone to provide you
with information different from that contained or incorporated
by reference in this prospectus. If anyone provides you with
different or inconsistent information, you should not rely on
it. The selling shareholders are offering to sell, and seeking
offers to buy, shares of our common stock only in jurisdictions
where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
Rim
Semiconductortm
and
Embarqtm
are our trademarks. This prospectus may also contain trademarks
and trade names of other companies. All trademarks and trade
names appearing in this prospectus are the property of their
respective owners.
PROSPECTUS
SUMMARY
This summary highlights some information contained in this
prospectus. It is not complete and does not contain all of the
information that may be important to you. We urge you to read
the entire prospectus carefully, including the
Risk
Factors and our financial statements and the
related notes included in this prospectus, before deciding to
invest in shares of our common stock.
Our
Business
We are developing advanced transmission technology products to
enable data to be transmitted across copper telephone wire at
speeds and over distances that exceed those offered by leading
DSL technology providers. Our first chipset in a planned family
of transport processors, the
Embarqtm
E30 (Release 1.3) digital signal processor, was first shown to
several prospective customers during the first quarter of fiscal
2006. The initial evaluation by these prospective customers was
promising. We completed Release 1.4 in the third fiscal
quarter of 2006 are presently working on Release 1.5 of the E30
and Release 1.1 of the
Embarqtm E20
analog front end. Our products are designed to substantially
increase the capacity of existing copper telephone networks,
allowing telephone companies, office building managers, and
enterprise network operators to provide enhanced and secure
video, data and voice services over the existing copper
telecommunications infrastructure. We have agreements with
HelloSoft, Inc. and independent consultants to design and
develop our products. We began working on the technology
underlying our products in 2000. To date, we have not recorded
any revenues from the sale of products based on our technology
and have not secured any contracts to sell our products.
We expect that system-level products that use our technology
will have a significant advantage over existing system-level
products that use existing broadband technologies, such as
digital subscriber line (DSL), because such products will
transmit data faster, and over longer distances. We expect
products using our technology will offer numerous advantages to
the network operators that deploy them, including the ability to
support new services, the ability to offer existing and new
services to previously unreachable locations in their network,
reduction in total cost of ownership, security and reliability.
In April 2000, our NV Entertainment subsidiary entered into a
joint venture production agreement to produce a feature length
film, Step into Liquid. We own a 50% interest in the
joint venture. The financial condition and results of operations
of the joint venture are consolidated with our financial
condition and results of operations on the accompanying
consolidated financial statements. The film was released to
theaters in the United States in 2003 and is currently in
foreign and DVD distribution. During the years ended
October 31, 2005 and 2004, we recognized revenues of
$39,866 and $287,570, respectively, from the film. As a result
of impairment reviews during the years ended October 31,
2005 and 2004, we reduced the carrying value of the film to $0
on our balance sheet. We do not intend to make further
investment in our entertainment business.
We recognized revenues of $39,866 and $58,874 for the year ended
October 31, 2005 and the six months ended April 30,
2006, respectively, representing guaranteed and license payments
and foreign distribution fees from the film. We incurred net
losses of $4,690,382 and $10,974,722 for the year ended
October 31, 2005 and the six months ended April 30,
2006, respectively. Our independent auditors included an
explanatory paragraph in their report accompanying our audited
consolidated financial statements for the years ended
October 31, 2005 and 2004 relating to a substantial doubt
about our ability to continue as a going concern. As of
April 30, 2006, we had an accumulated deficit of
$70,856,278. As of the date of this prospectus, our expenses
total approximately $210,000 per month. If our revenues and
expenses do not materially change, we believe we have enough
funds to sustain our operations until at least September 2007.
Recent
Developments
In March 2006, we raised gross proceeds of $6.0 million
from the private placement to 17 institutional and individual
investors of our two-year 7% Senior Secured Convertible
Debentures. At closing, we received net proceeds of
approximately $2.61 million, after the payment of offering
related fees and expenses. We used $810,000 of these funds to
repay in full bridge loans made to us in December 2005 and
January 2006. An additional $2.7 million in net proceeds
from these debentures was released to us in April 2006 after our
filing of an amendment to our Articles of Incorporation
increasing our authorized shares of common stock from
500 million shares to 900 million shares. We intend to
use these funds for general corporate purposes.
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The debentures are convertible into our common stock at a
conversion price equal to 70% of the volume weighted average
price of our common stock for the 20 trading days ending on the
day immediately prior to the date of conversion. If the
debentures had been converted on July 6, 2006, the
conversion price would have been $0.0917, resulting in our
issuance of approximately 65.4 million shares of common
stock.
The investors were issued warrants to purchase an aggregate of
70,955,548 shares of our common stock at an exercise price
of $0.15 per share. Pond Equities, Inc., a registered
broker-dealer who served as placement agent in this transaction,
was issued a warrant to purchase 7,095,556 shares of our
common stock at an exercise price of $0.15 per share and a
warrant to purchase 7,095,556 shares of our common stock at
an exercise price of $0.1693 per share. Both the conversion
price of the debentures and the exercise price of the warrants
are subject to adjustment in certain circumstances. For a more
complete description of this financing, see
Agreements with the
Selling Shareholders.
In February 2006, we obtained a license to include HelloSoft,
Inc.s integrated voice over Internet protocol
(VoIP) software suite in the
Embarqtm
E30 semiconductor. We believe that the inclusion of VoIP
features in our products will enable customers to eliminate
components currently placed on their modems that are dedicated
to VoIP. We expect this reduction in components will lower their
cost of production by more than 20% and eliminate significant
design complexity. In exchange for such rights, we have paid to
HelloSoft a license fee and will pay certain royalties based on
our sales of products including the licensed technology.
Our
Corporate Information
We are a Utah corporation organized in 1985. Our principal
offices are located at 305 NE 102nd Avenue, Suite 105,
Portland, Oregon 97220 and our telephone number is
(503) 257-6700.
We maintain a website at www.rimsemi.com. Information contained
on our website is not part of this prospectus.
Risk
Factors
Investing in our common stock involves significant risk. We urge
you to consider the information under the caption
Risk
Factors beginning on page 4 of this prospectus
in deciding whether to purchase the common stock offered under
this prospectus.
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The
Offering
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Common stock offered by the selling shareholders |
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359,248,679 shares. This amount includes 14,967,523 shares of
common stock held by the selling shareholders; 157,597,460
shares of common stock issuable to the selling shareholders on
the conversion of principal and interest on debentures;
160,035,469 shares of common stock issuable to the selling
shareholders on the exercise of options and warrants; and
26,648,227 shares of common stock we could be required to issue
to the selling shareholders in the future as liquidated damages
or in the event of certain adjustments to the conversion price
of the debentures or the exercise price of the warrants.(1) |
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Common stock outstanding before the offering |
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324,973,732 shares |
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Use of Proceeds |
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The selling shareholders will receive all of the net proceeds
from their sale of the common stock offered by this prospectus.
We will not receive any proceeds from the sale of such common
stock. We would, however, receive proceeds from the exercise of
options or warrants to purchase up to 160,035,469 shares of
common stock that are held by the selling shareholders, to the
extent such options or warrants are exercised for cash. Under
certain circumstances, many of these options or warrants may be
exercised on a cashless basis. We will not receive proceeds from
any cashless exercises. The selling shareholders are not
obligated to exercise these options or warrants, and there can
be no assurance that they will do so. If all of these options
and warrants were exercised for cash, we would receive gross
proceeds of approximately $24.8 million. Any proceeds we
receive from the exercise of these options and warrants will be
used for working capital and general corporate purposes. |
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OTC Bulletin Board Symbol |
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RSMI |
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(1) |
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The number of shares issuable to the selling shareholders on
conversion of principal and interest on the debentures we issued
in 2005 and 2006, and the number of shares issuable to the
selling shareholders as liquidated damages or in the event of
certain adjustments to the conversion price of these debentures
or the exercise price of the warrants issued in connection with
the placement of these debentures, are based upon our current
good faith estimates of the number of shares issuable. As
required by our agreements with the purchasers of the
debentures, we estimated the number of shares issuable on
conversion of principal and interest on the debentures we issued
in 2005 and 2006 by multiplying by 150% and 200%, respectively,
the number of shares into which the principal and interest on
such debentures could have been converted on April 20, 2006. |
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RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below and the
other information in this prospectus before you purchase any of
our common stock. If any of these actually occurs, our business,
financial condition or results of operations could suffer. In
this event you could lose all or part of your investment.
Risks
Related to Our Business
We have a history of
losses and we expect these losses to continue for the
foreseeable future.
Since inception, we have incurred significant net losses. We
incurred net losses of $4,690,382 and $5,506,287 for the years
ended October 31, 2005 and 2004, respectively and
$10,974,722 for the six months ended April 30, 2006. As of
April 30, 2006, we had an accumulated deficit of
$70,856,278. We expect to continue to incur net losses for the
foreseeable future as we continue to develop our products and
semiconductor technology. We have been funding our operations
through the sale of our securities and expect to continue doing
so for the foreseeable future. Our ability to generate and
sustain significant additional revenues or achieve profitability
will depend upon the factors discussed elsewhere in this
Risk
Factors section. We cannot assure you that we will
achieve or sustain profitability or that our operating losses
will not increase in the future. If we do achieve profitability,
we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future. We
expect to increase expense levels on research and development,
engineering, manufacturing, marketing, sales and administration
as we begin to market our products, and to invest in new
semiconductor technologies. These expenditures will necessarily
precede the realization of substantial revenues from the sales
of our semiconductor products, if any, which may result in
future operating losses.
We may need to raise
additional funds in order to achieve our business objectives.
As of July 5, 2006, we had cash balances of $3,133,214.
Although management believes funds on hand will enable us to
meet our liquidity needs at least through September 2007,
circumstances may arise that would require us to raise
additional capital in order to meet our liquidity needs and
satisfy our current business plan prior to the receipt of
revenues from our semiconductor business. Even after we begin to
sell our products, we do not yet know what payment terms will be
required by our customers or if our products will be successful.
At the present time, we have no commitments for any additional
financing, and there can be no assurance that, if needed,
additional capital will be available to us on commercially
acceptable terms or at all. We may have difficulty obtaining
additional funds as and if needed, and we may have to accept
terms that would adversely affect our shareholders. Additional
equity financings are likely to be dilutive to holders of our
common stock and debt financing, if available, may involve
significant payment obligations and covenants that restrict how
we operate our business.
We also may be required to seek additional financing in the
future to respond to increased expenses or shortfalls in
anticipated revenues, accelerate product development and
deployment, respond to competitive pressures, develop new or
enhanced products, or take advantage of unanticipated
acquisition opportunities. We cannot be certain we will be able
to find such additional financing on commercially reasonable
terms, or at all. Covenants in our agreements with certain
selling shareholders may impede our ability to obtain additional
financing. See
Agreements with the
Selling Shareholders. If we are unable to obtain
additional financing when needed, we could be required to modify
our business plan in accordance with the extent of available
financing. We also may not be able to accelerate the development
and deployment of our products, respond to competitive
pressures, develop new or enhanced products or take advantage of
unanticipated acquisition opportunities.
We have no agreement
relating to revenue generating activities. No assurance can be
provided that we will successfully conclude any such agreement.
We presently have no agreement or understanding with any third
party to purchase our products or build equipment using our
products, and no assurance can be provided that we will be
successful in concluding any significant-revenue generating
agreement on terms commercially acceptable to us or at all.
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The inclusion of a going
concern qualification in our audited financial statements may
make it difficult for us to raise additional capital.
Our independent registered public accountants have included an
explanatory paragraph in their report accompanying our audited
consolidated financial statements for the years ended
October 31, 2005 and 2004 relating to a substantial doubt
about our ability to continue as a going concern. This
qualification may make it more difficult for us to raise
additional capital when needed. Our auditors believe that there
are conditions that raise substantial doubt about our ability to
continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to
the recoverability of reported assets or liabilities should we
be unable to continue as a going concern.
Our operating results may
vary significantly due to the cyclical nature of the
semiconductor industry and any such variations could adversely
affect the market price of our common stock.
We operate in the semiconductor industry, which is cyclical and
subject to rapid technological change. The semiconductor
industry, from time to time, experiences significant downturns
characterized by diminished product demand, accelerated erosion
of prices and excess production capacity. These downturns in the
semiconductor industry may be severe and prolonged, and could
delay or hinder the market acceptance of our semiconductor
technologies and seriously impact our revenues and harm our
business, financial condition and results of operations. This
industry also periodically experiences increased demand and
production capacity constraints, which may affect our ability to
ship products utilizing the semiconductor technologies in future
periods. Accordingly, our quarterly results may vary
significantly as a result of the general conditions in the
semiconductor industry, which could cause our stock price to
decline.
In addition, the worldwide telecommunications industry from time
to time has experienced a significant downturn. In such an
event, wireline telecommunications carriers may reduce their
capital expenditures, cancel or delay new service introductions,
and reduce their workforces and equipment inventories. They may
take a cautious approach to acquiring new equipment from
equipment manufacturers. Together or separately, these actions
would have a negative impact on our business. A downturn in the
worldwide telecommunications industry may cause our operating
results to fluctuate from year to year, which also may tend to
increase the volatility of the price of our common stock and
harm our business.
We have a limited
operating history in the telecommunications industry and,
consequently, there is limited historical financial data upon
which an evaluation of our business prospects could be made.
We have only been engaged in the semiconductor business since
February 2000. We have not begun commercial shipments of our
semiconductors, and therefore have not generated any revenues
from our semiconductor business. As a result, we have no
historical financial data that can be used in evaluating our
business prospects and in projecting future operating results.
For example, we cannot forecast operating expenses based on our
historical results, and we are instead required to forecast
expenses based in part on future revenue projections. In
addition, our ability to accurately forecast our revenue going
forward is limited.
You must consider our prospects in light of the risks, expenses
and difficulties we might encounter because we are at an early
stage of product introduction in a new and rapidly evolving
market. Many of these risks are described under the sub-headings
below. We may not successfully address any or all of these risks
and our business strategy may not be successful.
Our success is contingent
upon the incorporation of our products into successful products
offered by leading equipment manufacturers and the
non-incorporation of our products into such equipment could
adversely affect our business prospects.
Our products will not be sold directly to the end-user of
broadband services; rather, they will be components of other
products. As a result, we must rely upon equipment manufacturers
to design our products into their equipment. If equipment that
incorporates our products is not accepted in the marketplace, we
may not achieve adequate sales volume, which would have a
negative effect on our results of operations. Accordingly, we
must correctly anticipate the price, performance and
functionality requirements of these data equipment
manufacturers. We must also successfully develop products
containing our semiconductor
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technology that meet these requirements and make such products
available on a timely basis and in sufficient quantities.
Further, if there is consolidation in the data equipment
manufacturing industry, or if a small number of data equipment
manufacturers otherwise dominate the market for data equipment,
then our success will depend upon our ability to establish and
maintain relationships with these market leaders. If we do not
anticipate trends in the market for products enabling the
digital transmission of data, voice and video to homes and
business enterprises over existing copper wire telephone lines
and meet the requirements of equipment manufacturers, or if we
do not successfully establish and maintain relationships with
leading data equipment manufacturers, then our business,
financial condition and results of operations will be seriously
harmed.
Because we will depend on
third parties to manufacture, package and test our
semiconductors, we may experience delays in receiving
semiconductor devices.
We do not own or operate a semiconductor fabrication facility.
Rather, semiconductor devices that will contain our technology
will be manufactured at independent foundries. We intend to rely
solely on third-party foundries and other specialist suppliers
for all of our manufacturing, packaging and testing
requirements. However, these parties may not be obligated to
supply products to us for any specific period, in any specific
quantity or at any specific price, except as may be provided in
a particular purchase order that has been accepted by one of
them. As a result, we will not directly control semiconductor
delivery schedules, which could lead to product shortages, poor
quality and increases in the costs of our products. Because the
semiconductor industry is currently experiencing high demand, we
may experience delays in receiving semiconductor devices from
foundries due to foundry scheduling and process problems. We
cannot be sure that we will be able to obtain semiconductors
within the time frames and in the volumes required by us at an
affordable cost or at all. Any disruption in the availability of
semiconductors or any problems associated with the delivery,
quality or cost of the fabrication packaging and testing of our
products could significantly hinder our ability to deliver
products to our customers.
In order to secure sufficient manufacturing capacity, we may
enter into various arrangements that could be costly, including:
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option payments or other prepayments to a subcontractor;
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nonrefundable deposits in exchange for capacity commitments;
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contracts that commit us to purchase specified quantities of
products over extended periods;
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issuance of our equity securities to a subcontractor; and
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other contractual relationships with subcontractors.
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We may not be able to make any such arrangements in a timely
fashion or at all, and any arrangements may be costly, reduce
our financial flexibility and not be on terms favorable to us.
Moreover, if we are able to secure facility capacity, we may be
obligated to use all of that capacity or incur penalties. These
penalties and obligations may be expensive and require
significant capital and could harm our business.
We may incur substantial
expenses developing new products before we earn associated net
revenues and may not ultimately sell a large volume of our
products.
We are currently working on new products and we anticipate that
we will incur substantial development expenditures prior to
generating associated net revenues from a commercially
deployable version (if any). We anticipate receiving limited
orders for our products during the period that potential
customers test and evaluate them. This test and evaluation
period typically lasts from three to six months or longer, and
volume production of an equipment manufacturers product
incorporating our products typically would not begin until this
test and evaluation period has been completed. As a result, a
significant period of time may lapse between product development
and sales efforts and the realization of revenues from volume
ordering by customers of our products. In addition, achieving a
design win with a customer does not necessarily mean that this
customer will order our products. A design win is not a binding
commitment by a customer to purchase products. Rather, it is a
decision by a customer to use our products in the design process
of that customers equipment. A customer can choose at any
time to discontinue using our products in that customers
designs or product
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development efforts. Even if our products are chosen to be
incorporated into a customers equipment, we may still not
realize significant net revenues from that customer if that
customers products are not commercially successful.
We may be unable to
adequately protect our proprietary rights or may be sued by
third parties for infringement of their proprietary rights.
We outsource to independent third parties all significant
design, development and testing activities relating to our
products. Our success depends significantly on our ability to
obtain and maintain patent, trademark and copyright protection
for our intellectual property, to preserve our trade secrets and
to operate without infringing the proprietary rights of third
parties. If we are not adequately protected, our competitors
could use the intellectual property that we have developed to
enhance their products and services, which could harm our
business.
We rely on patent protection, as well as a combination of
copyright and trademark laws, trade secrets, confidentiality
provisions and other contractual provisions, to protect our
proprietary rights, but these legal means afford only limited
protection. Despite any measures taken to protect our
intellectual property, unauthorized parties may copy aspects of
our semiconductor technology or obtain and use information that
we regard as proprietary. In addition, the laws of some foreign
countries may not protect our proprietary rights as fully as do
the laws of the United States. If we litigated to enforce our
rights, it would be expensive, divert management resources and
may not be adequate to protect our intellectual property rights.
The telecommunications industry is characterized by the
existence of a large number of patents and frequent litigation
based on allegations of trade secret, copyright or patent
infringement. We may inadvertently infringe a patent of which we
are unaware. In addition, because patent applications can take
many years to issue, there may be a patent application now
pending of which we are unaware that will cause us to be
infringing when it is issued in the future. Although we are not
currently involved in any intellectual property litigation, we
may be a party to litigation in the future to protect our
intellectual property or as a result of our alleged infringement
of anothers intellectual property, forcing us to do one or
more of the following:
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Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
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Obtain from the holder of the infringed intellectual property
right a license to sell or use the relevant technology, which
license may not be available on reasonable terms; or
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Redesign those products or services that incorporate such
technology.
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A successful claim of infringement against us, and our failure
to license the same or similar technology, could adversely
affect our business, asset value or stock value. Infringement
claims, with or without merit, would be expensive to litigate or
settle, and would divert management resources.
Our market is highly
competitive and our products or technology may not be able to
compete effectively with other products or technologies.
The market for high-speed telecommunications products is highly
competitive, and we expect that it will become increasingly
competitive in the future. Our competitors, including Centillium
Communications, Inc., Conexant Systems, Inc., PMC-Sierra, Texas
Instruments Incorporated, Ikanos Communications,
ST Microelectronics N.V., Metalink Ltd., Broadcom
Corporation, Infineon Technologies A.G. and others, have
developed and are currently marketing technologies that also
address the existing technical impediments of using existing
copper networks as broadband options or are otherwise
substantially similar to our products. Our competitors include
some of the largest, most successful domestic and international
telecommunications companies and other companies with
well-established reputations in the broadband telecommunications
industry. Some of our competitors operate their own fabrication
facilities. Our competitors have longer operating histories and
possess substantially greater name recognition, financial, sales
and marketing, manufacturing, technical, personnel, and other
resources than we have. As a result, these competitors may be
able to adapt more quickly to new or emerging technologies and
changes in customer requirements. They may also be able to
devote greater resources to the promotion and sale of their
products. These competitors may also have
7
pre-existing relationships with our potential customers.
Further, in the event of a manufacturing capacity shortage,
these competitors may be able to manufacture products when we
are unable to do so. In all of our target markets, we also may
face competition from newly established competitors, suppliers
of products based on new or emerging technologies, and customers
who choose to develop wire based solutions that are functionally
similar to our products. Although we believe we will be able to
compete based on the special features of our products, they will
incorporate new concepts and may not be successful even if they
are superior to those of our competitors.
In addition to facing competition from the above-mentioned
suppliers, our semiconductors will compete with products using
other broadband access technologies, such as cable modems,
wireless, satellite and fiber optic telecommunications
technology. Commercial acceptance of any one of these competing
solutions, or new technologies, could decrease demand for our
proposed products. We cannot assure you that we will be able to
compete successfully or that competitive pressures will not
materially and adversely affect our business, financial
condition and results of operations.
We must keep pace with
rapid technological changes in the semiconductor industry and
broadband communications market in order to be competitive.
Our success will depend on our ability to anticipate and adapt
to changes in technology and industry standards. We will also
need to develop and introduce new and enhanced products to meet
our customers changing demands. The semiconductor industry
and broadband communications market are characterized by rapidly
changing technology, evolving industry standards, frequent new
product introductions and short product life cycles. In
addition, this industry and market continues to undergo rapid
growth and consolidation. A cyclical slowdown in the
semiconductor industry or other broadband communications markets
could materially and adversely affect our business, financial
condition and results of operations. Our success will also
depend on the ability of our potential telecommunications
equipment customers to develop new products and enhance existing
products for the broadband communications markets and to
introduce and promote those products successfully. The broadband
communications markets may not continue to develop to the extent
or in the timeframes that we anticipate. If new markets do not
develop as we anticipate, or if upon their deployment our
products do not gain widespread acceptance in these markets, our
business, financial condition and results of operations could be
materially and adversely affected.
Because our success is
dependent upon the broad deployment of data services by
telecommunications service providers, we may not be able to
generate substantial revenues if such deployment does not occur.
Our products are designed to be incorporated in equipment that
is targeted at end-users of data services offered by wire-line
telecommunications carriers. Consequently, the success of our
products depends upon the decision by telecommunications service
providers to broadly deploy data technologies and the timing of
such deployment. If service providers do not offer data services
on a timely basis, or if there are technical difficulties with
the deployment of these services, sales of our products would be
adversely affected, which would have a negative effect on our
results of operations. Factors that may impact data deployment
include:
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A prolonged approval process, including laboratory tests,
technical trials, marketing trials, initial commercial
deployment and full commercial deployment;
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The development of a viable business model for data services,
including the capability to market, sell, install and maintain
data services;
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Cost constraints, such as installation costs and space and power
requirements at the telecommunications service providers
central office;
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Evolving industry standards; and
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Government regulation.
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8
The complexity of our
products could result in unforeseen delays or expense and in
undetected defects, which could adversely affect the market
acceptance of new products and damage our reputation with
prospective customers.
Highly complex products such as the semiconductors that we
expect to offer frequently contain defects and bugs when they
are first introduced or as new versions are released. If our
products contain defects, or have reliability, quality or
compatibility problems, our reputation may be damaged and
customers may be reluctant to buy our semiconductors, which
could materially and adversely affect our ability to retain
existing customers or attract new customers. In addition, these
defects could interrupt or delay sales to our potential
customers. In order to alleviate these problems, we may have to
invest significant capital and other resources. Although our
suppliers and potential customers will test our products it is
possible that these tests will fail to uncover defects. If any
of these problems are not found until after we have commenced
commercial production of products, we may be required to incur
additional development costs and product recall, repair or
replacement costs. These problems may also result in claims
against us by our customers or others. In addition, these
problems may divert our technical and other resources from other
development efforts. Moreover, we would likely lose, or
experience a delay in, market acceptance of the affected
product, and we could lose credibility with our prospective
customers.
Governmental regulation
concerning the technical specifications of semiconductor
technologies that are deployed in the telephone networks could
adversely affect the market acceptance of our semiconductors.
The jurisdiction of the Federal Communication Commission
(FCC) extends to the entire US communications
industry, including potential customers for our semiconductors.
Future FCC regulations affecting the broadband access industry
may adversely affect our business. In addition, international
regulatory bodies such as The American National Standards
Institute (ANSI) and The Committee T1E1.4 in North America,
European Telecommunications Standards Institute (ETSI) in Europe
and ITU-T and the Institute of Electrical and Electronics
Engineers, Inc. (IEEE) worldwide are beginning to adopt
standards and regulations for the broadband access industry.
These domestic and foreign standards, laws and regulations
address various aspects of Internet, telephony and broadband
use, including issues relating to liability for information
retrieved from or transmitted over the Internet, online context
regulation, user privacy, taxation, consumer protection,
security of data, access by law enforcement, tariffs, as well as
intellectual property ownership, obscenity and libel. Changes in
laws, standards
and/or
regulations, or judgments in favor of plaintiffs in lawsuits
against service providers,
e-commerce
and other Internet companies, could adversely affect the
development of
e-commerce
and other uses of the Internet. This, in turn, could directly or
indirectly materially adversely impact the broadband
telecommunications and data industry in which our customers
operate. To the extent our customers are adversely affected by
laws or regulations regarding their business, products or
service offerings, this could result in a material and adverse
effect on our business, financial condition and results of
operations.
In addition, highly complex products such as the semiconductors
that we expect to offer are subject to rules, limitations and
requirements as set forth by international standards bodies such
as The American National Standards Institute (ANSI) and The
Committee T1E1.4 in North America, European Telecommunications
Standards Institute (ETSI) in Europe and ITU-T and the Institute
of Electrical and Electronics Engineers, Inc. (IEEE) worldwide,
and as adopted by the governments of each of the countries that
we intend to market in. There are some FCC regulations in the
United States pertaining to the use of the available bandwidth
spectrum that at present have been interpreted by some of our
target customers as discouraging to the technical innovations
that we are bringing to market. Further, regulations affecting
the availability of broadband access services generally, the
terms under which telecommunications service providers conduct
their business, and the competitive environment among service
providers, for example, could have a negative impact on our
business.
We depend on attracting,
motivating and retaining key personnel and the failure to
attract, motivate or retain needed personnel could adversely
affect our business.
We are highly dependent on the principal members of our
management and on our technology advisors and the technology
staff of our development partners. The loss of their services
might significantly delay or prevent the achievement of
development or strategic objectives. Our success depends on our
ability to retain
9
certain key employees and our partner relationships, and to
attract additional qualified employees. Competition for these
employees is intense. We cannot assure you that we will be able
to retain existing personnel and partners or attract and retain
highly qualified employees in the future.
Risks
Related to this Offering and Our Capital Structure
This offering may have an
adverse impact on the market price of our common stock.
This prospectus relates to the sale or distribution of up to
359,248,679 shares of common stock by the selling security
holders. We will not receive proceeds from these sales except to
the extent certain options or warrants are exercised for cash,
and have prepared this prospectus principally in order to meet
our contractual obligations to some of the selling security
holders. The sale of this block of stock, or even the
possibility of its sale, may adversely affect the trading market
for our common stock and reduce the price available in that
market.
Our shareholders will
experience significant dilution upon the conversion of our 2006
Debentures and 2005 Debentures because these debentures convert
at a discount to the market price of our common stock at the
time of conversion.
At any time and from time to time, all or any portion of the
principal amount of the two-year 7% Senior Secured
Convertible Debentures we issued in March 2006 (the 2006
Debentures) then outstanding may, at the option of the
holders of the debentures, be converted into shares of common
stock at the conversion price then in effect. Similarly,
currently and from time to time all or any portion of the
principal amount of the three-year 7% Senior Secured
Convertible Debentures we issued in May 2005 (the 2005
Debentures) then outstanding may, at the option of the
holders of the debentures, be converted into shares of common
stock at the conversion price then in effect. Additionally, all
accrued but unpaid interest on 2006 Debentures and 2005
Debentures is payable upon conversion, at our option, in shares
of common stock at the conversion price for those debentures
then in effect.
The number of shares issuable upon any conversion will be equal
to the outstanding principal amount of convertible debenture to
be converted, divided by the applicable conversion price on the
conversion date, plus (if we have elected to pay such amount in
shares of common stock) the amount of any accrued but unpaid
interest on the convertible debenture through the conversion
date, divided by the conversion price on the conversion date.
The conversion price of the 2006 Debentures is equal to the
lower of (i) 70% of the volume weighted average closing
price per share of our common stock for the 20 trading days
immediately preceding the conversion date and (ii) the
lowest purchase price or conversion price of any shares of
common stock or securities convertible into shares of common
stock that we subsequently offer or issue on or prior to the
date on which the aggregate outstanding principal amount of the
2006 Debentures is first equal to or less than
$1.5 million. The conversion price of the 2005 Debentures
is equal to 70% of the volume weighted average closing price per
share of our common stock for the five trading days immediately
preceding the conversion date. Due to the conversion mechanics
of these convertible debentures, decreases in the conversion
price result in an increase in the total number of shares
issuable upon conversion.
The number of shares to be acquired by each of the holders of
the 2006 Debentures or 2005 Debentures upon conversion cannot
exceed the number of shares that, when combined with all other
shares of common stock and securities then owned by each holder
and its affiliates, would result in any one of them owning more
than 4.99% of our then outstanding common stock.
There is an inverse relationship between our stock price and the
number of shares issuable upon conversion of the 2006 Debentures
and 2005 Debentures. That is, the higher the market price of our
common stock at the time a debenture is converted, the fewer
shares we would be required to issue, and the lower the market
price of our common stock at the time a debenture is converted,
the more shares we would be required to issue. This inverse
relationship is demonstrated by the table set forth below, which
shows the number of
10
shares into which $6 million of the 2006 Debentures would
be convertible at various prices of our common stock.
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Estimated 20-Day
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Debenture
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Number of Shares Issuable on
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VWAP of
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Conversion
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Conversion of $6 Million
Principal
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Common Stock
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Price
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Amount of Debentures
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$0.25
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$
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0.175
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34,285,714
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$0.20
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$
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0.140
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42,857,143
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$0.15
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$
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0.105
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57,142,857
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$0.10
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$
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0.070
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85,714,286
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$0.05
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$
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0.035
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171,428,571
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$0.03
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$
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0.021
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285,714,286
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We may need to increase
the amount of authorized common stock in order to meet our
obligations to holders of our derivative securities or to
conduct future equity transactions.
We have 900 million shares of common stock currently
authorized for issuance, of which 324,973,732 shares are
issued and outstanding. In addition, our outstanding warrants
and options, if exercised at July 5, 2006, would require us
to issue an additional 161,282,543 shares of common stock.
The terms of the 2005 and 2006 Debentures provide that the
debentures convert into shares of our common stock at an initial
conversion price equal to 70% of the volume-weighted closing
price per share of our common stock over a specific period of
time. To the extent our stock price falls, the number of shares
into which the debentures will convert will increase and could
exceed the number of shares currently available for issuance by
us. As a result, we may need to increase the number of shares of
common stock authorized in order to honor our obligations to
issue shares of common stock to the selling shareholders and
other holders of options, warrants, convertible promissory notes
and other derivative securities. Furthermore, a lack of
authorized shares of common stock would impair our ability to
use our equity securities for raising capital, acquisitions,
compensation and other corporate purposes. In order to increase
our authorized common stock, our shareholders must approve an
amendment to our articles of incorporation. It may take a
significant amount of time for us to obtain approval of our
shareholders, and there is no guarantee that we will be able to
obtain such approval.
Future sales of common
stock or other dilutive events may adversely affect prevailing
market prices for our common stock.
As of July 5, 2006, we had 324,973,732 shares of our
common stock issued and outstanding. As of July 5, 2006, an
additional 161,282,543 shares of common stock were reserved
for issuance upon the exercise of outstanding options and
warrants exercisable at exercise prices ranging from $0.027 to
$10.00 per share. In addition, we have outstanding
$6.0 million principal amount of 2006 Debentures and $5,577
principal amount of 2005 Debentures, all of which are
convertible into an undeterminable number of shares of our
common stock. The exercise price of such debentures is variable,
and is based upon an initial conversion price equal to 70% of
the volume-weighted closing price per share of our common stock
over a period preceding the applicable conversion date. We also
have outstanding $125,000 principal amount of convertible
debentures we issued in 2003 and 2004 (the 2003
Debentures). These debentures are convertible into our
common stock at an exercise price of $0.15 per share. Many
of the above options, warrants and debentures contain provisions
that require the issuance of increased numbers of shares of
common stock upon exercise or conversion in the event of stock
splits, redemptions, mergers or other transactions.
The occurrence of any such event or the exercise or conversion
of any of the options, warrants or debentures described above
would dilute the interest in the Company represented by each
share of common stock and may adversely affect the prevailing
market price of our common stock. Finally, we may need to raise
additional capital through the sale of shares of common stock or
other securities exercisable for or convertible into common
stock. The occurrence of any such sale would dilute the interest
in the Company represented by each share of common stock and may
adversely affect the prevailing market price of our common stock.
11
If we default under the
Securities Purchase Agreement for the 2006 Debentures, we could
lose substantially all of our assets.
To secure our obligations under the 2006 Debentures, we granted
a security interest in substantially all of our assets,
including our intellectual property, in favor of the investors
under the terms and conditions of a Security Interest Agreement
dated as of March 6, 2006. The security interest terminates
upon the earlier of (i) the date on which less than
$1.5 million in principal amount of the 2006 Debentures are
outstanding, or (ii) payment or satisfaction of all of our
obligations under the Securities Purchase Agreement. If we are
unable to perform our obligations under the Securities Purchase
Agreement, the investors could seek to foreclose and obtain
possession or force the sale of substantially all of our assets,
including our products under development. If this were to occur,
we could not continue in our current line of business and any
investment you may have in the Company would lose value.
Our board of
directors right to authorize the issuance of shares of
preferred stock could adversely impact the rights of holders of
our common stock.
Our Articles of Incorporation authorize our board of directors
to issue up to 15,000,000 shares of preferred stock in one
or more series, and to fix the rights, preferences, privileges
and restrictions granted to or imposed upon any such series,
without further vote or action by shareholders. The terms of any
series of preferred stock, which may include priority claims to
assets and dividends and special voting rights, could adversely
affect the rights of the holders of our common stock and thereby
reduce the value of our common stock. The issuance of preferred
stock could discourage certain types of transactions involving
an actual or potential change in control of our company,
including transactions in which the holders of common stock
might otherwise receive a premium for their shares over then
current prices, otherwise dilute the rights of holders of common
stock, and may limit the ability of such shareholders to cause
or approve transactions which they may deem to be in their best
interests, all of which could have a material adverse effect on
the market price of our common stock.
Our stock price may be
volatile.
The market price of our common stock will likely fluctuate
significantly in response to the following factors, some of
which are beyond our control:
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Variations in our quarterly operating results due to a number of
factors, including but not limited to those identified in this
Risk
Factors section;
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Changes in financial estimates of our revenues and operating
results by securities analysts or investors;
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Changes in market valuations of telecommunications equipment
companies;
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Announcements by us of commencement to, changes to, or
cancellation of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
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Additions or departures of key personnel;
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Future sales of our common stock;
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Stock market price and volume fluctuations attributable to
inconsistent trading volume levels of our stock;
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Commencement of or involvement in litigation; and
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Announcements by us or our competitors of technological
innovations or new products.
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In addition, the equity markets have experienced volatility that
has particularly affected the market prices of equity securities
issued by high technology companies and that often has been
unrelated or disproportionate to the operating results of those
companies. These broad market fluctuations may adversely affect
the market price of our common stock.
12
We may have violated
Section 5 of the Securities Act of 1933, as amended, in
connection with sales of our securities and could suffer
substantial losses if purchasers of our securities demand to
rescind previous sales.
We have raised substantial amounts of capital in private
placements of our securities from time to time. The securities
offered in such private placements were not registered with the
Securities and Exchange Commission (the SEC) or any
state agency in reliance upon exemptions from such registration
requirements. Such exemptions are highly technical in nature and
if we inadvertently failed to comply with the requirements of
any of such exemptive provisions, investors would have the right
to rescind their purchase of our securities or sue for damages.
If one or more of these investors were to successfully seek such
rescission or institute any such suit, we could face severe
financial demands that could materially and adversely affect our
financial position.
We do not anticipate
paying any dividends on our common stock.
We have not paid any dividends on our common stock since our
inception and do not anticipate paying any dividends on our
common stock in the foreseeable future. Instead, we intend to
retain any future earnings for use in the operation and
expansion of our business.
Additional burdens
imposed upon broker-dealers by the application of the
penny stock rules to our common stock may limit the
market for our common stock.
The SEC has adopted regulations concerning low-priced (or
penny) stocks. The regulations generally define
penny stock to be any equity security that has a
market price less than $5.00 per share, subject to certain
exceptions. If our shares continue to be offered at a market
price less than $5.00 per share, and do not qualify for any
exemption from the penny stock regulations, our shares will
continue to be subject to these additional regulations relating
to low-priced stocks.
The penny stock regulations require that broker-dealers who
recommend penny stocks to persons other than institutional
accredited investors, make a special suitability determination
for the purchaser, receive the purchasers written
agreement to the transaction prior to the sale and provide the
purchaser with risk disclosure documents that identify risks
associated with investing in penny stocks. Furthermore, the
broker-dealer must obtain a signed and dated acknowledgment from
the purchaser demonstrating that the purchaser has actually
received the required risk disclosure document before effecting
a transaction in penny stock. These requirements have
historically resulted in reducing the level of trading activity
in securities that become subject to the penny stock rules.
The additional burdens imposed upon broker-dealers by these
penny stock requirements may discourage broker-dealers from
effecting transactions in the common stock, which could severely
limit the market liquidity of our common stock and our
shareholders ability to sell our common stock in the
secondary market.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements under the
headings
Managements
Discussion and Analysis of Financial Condition and Results of
Operations,
Business
and elsewhere that involve substantial uncertainties and risks.
These statements relate to future events or our future financial
performance. You should exercise extreme caution with respect to
all forward-looking statements contained in this prospectus.
Specifically, the following statements are forward-looking:
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statements regarding our overall strategy relating to the
design, development, implementation and marketing of our
products;
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projections of our future financial performance and our
anticipated growth;
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statements regarding the plans and objectives of our management
for future operations and the size and nature of the costs we
expect to incur and the people and services we may employ;
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statements regarding trends we anticipate in our business and
the markets in which we operate;
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13
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statements regarding the future of broadband access solutions
and opportunities therein, our competition or regulations that
may affect us;
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statements regarding our ability to compete with third parties;
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any statements using the words anticipates,
believes, estimates,
expects, intends, if,
may, might, will,
should, plans, predicts,
potential, continue and similar
words; and
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any statements other than historical fact.
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Potential investors are cautioned not to place undue reliance on
these forward-looking statements. Forward-looking statements are
predictions based on our current expectations about future
events and reflect our beliefs and assumptions based upon
information available to us as of the date of this prospectus.
These statements are not guarantees of future performance and
are subject to risks, uncertainties and assumptions that are
difficult to predict. Our actual results, performance or
achievements could differ materially from those expressed or
implied by the forward-looking statements as a result of a
number of factors, including but not limited to the risks and
uncertainties discussed under the heading
Risk
Factors beginning on page 4 of this
prospectus, and in our other filings with the SEC. We undertake
no obligation to revise or update any forward-looking statement
for any reason.
USE OF
PROCEEDS
The selling shareholders will receive all of the net proceeds
from their sale of the common stock offered by this prospectus.
We will not receive any proceeds from the sale of such common
stock. We would, however, receive proceeds from the exercise of
options or warrants to purchase up to 160,035,469 shares of
common stock that are held by the selling shareholders, to the
extent such options or warrants are exercised for cash. The
warrants issued in connection with the placement of the 2006
Debentures (the 2006 Warrants) may not be exercised
on a cashless basis until March 10, 2007. The warrants
issued in connection with the placement of the 2005 Debentures
(the 2005 Warrants) may only be exercised on a
cashless basis if a registration statement covering the shares
issuable under the relevant warrants is not effective at the
time of exercise. If the options or warrants are exercised on a
cashless basis, we will not receive proceeds from those
exercises.
The selling shareholders are not obligated to exercise these
options or warrants, and there can be no assurance that they
will do so. If all of these options and warrants were exercised
for cash, we would receive gross proceeds of approximately
$24.8 million. Any proceeds we receive from the exercise of
these options and warrants will be used for working capital and
general corporate purposes.
AGREEMENTS
WITH THE SELLING SHAREHOLDERS
The following is a summary of certain provisions of
agreements among us and certain of the selling shareholders
relating to the purchase by these selling shareholders of
convertible debentures and warrants that we issued in 2006, 2005
and 2003-04. We are registering the shares offered by this
prospectus in order to satisfy our obligations to the holders of
these debentures and warrants.
Copies of the securities purchase agreements, debentures,
warrants, registration rights agreements, security interest
agreements and other transaction documents described below have
been filed as exhibits to the registration statement of which
this prospectus is a part. This summary is qualified in its
entirety by reference to each of these documents, which are
incorporated herein by reference. We urge you to read these
documents carefully for more details regarding the provisions we
describe below and for other provisions that may be important to
you.
2006
Debentures
On March 10, 2006, pursuant to a Securities Purchase
Agreement, dated as of March 6, 2006 (the Securities
Purchase Agreement), among us and 17 institutional and
individual investors, we raised gross proceeds of
$6.0 million from the private placement of our two-year
7% Senior Secured Convertible
14
Debentures (the 2006 Debentures). In connection with
the issuance of the 2006 Debentures, we issued warrants (the
2006 Warrants) to purchase 70,955,548 shares of
our common stock.
The 2006 Debentures have a term of two years and are convertible
into shares of our common stock at the holders option at
any time. The conversion price for any such conversion equals
the lower of (x) 70% of the volume weighted average price
(VWAP) of our common stock for the twenty trading
days ending on the trading day immediately preceding the
conversion date or (y) if we enter into certain financing
transactions prior to the end of the Final Lockup Period (as
defined below), the lowest purchase price or conversion price
applicable to that transaction. Interest on the 2006 Debentures
accrues at the rate of 7% per annum, payable upon conversion or
semi-annually (June 30 and December 31 of each year)
or upon maturity, whichever occurs first, and will continue to
accrue until the 2006 Debentures are fully converted
and/or paid
in full. Interest is payable, at our option, either (i) in
cash, or (2) in shares of our common stock at the then
applicable conversion price. If we fail to deliver stock
certificates upon the conversion of the 2006 Debentures at the
specified time and in the specified manner, we may be required
to make substantial payments to the holders of the 2006
Debentures.
Provided the registration statement of which this prospectus is
a part is effective, we may prepay the amounts outstanding on
the 2006 Debentures by giving advance notice and paying an
amount equal to 120% of the sum of (x) the principal being
prepaid plus (y) the accrued interest. Holders will
continue to have the right to convert their debentures prior to
the actual prepayment.
Holders of the 2006 Debentures may require us to redeem any or
all of the outstanding 2006 Debentures upon the occurrence of
any one or more of the following events of default, as generally
described below: (i) our failure to pay principal and
interest when due (subject to a 5 day grace period),
(ii) our material breach of any of the representations or
warranties made in the Securities Purchase Agreement,
(iii) our failure to have stock certificates delivered
within a specified time period after delivery of a conversion
notice if the failure continues for ten trading days after
notice, (iv) our failure to observe any undertaking
contained in the 2006 Debentures or the other transaction
documents in a material respect if the failure continues for 30
calendar days after notice, (v) our insolvency or
liquidation or a bankruptcy event, (vi) the entry of a
money judgment or similar process in excess of $500,000 if the
judgment remains unvacated for 45 days, or (vii) the
suspension of our common stock from trading on the OTC
Bulletin Board if the suspension continues for five
consecutive trading days. The redemption amount is equal to
(i) (x) the principal and accrued interest of the 2006
Debenture being redeemed, divided by (y) the applicable
conversion price, multiplied by (ii) the highest closing
sale price of our common stock from the date of the redemption
notice through the payment date.
The 2006 Warrants became first exercisable on May 14, 2006.
The 2006 Warrants are exercisable at a per share exercise price
of $0.15 through the last day of the month in which the third
anniversary of the effective date of the registration statement
occurs. Holders of the 2006 Warrants are entitled to exercise
their warrants on a cashless basis following the first
anniversary of issuance if the registration statement is not in
effect at the time of exercise.
Holders of 2006 Debentures are subject to certain limitations on
their rights to convert the debentures. The principal limitation
is that the holder may not, with certain limited exceptions,
convert into a number of shares that would, together with other
shares held by the holder, exceed 4.99% of our then outstanding
shares after such conversion. The exercise of the 2006 Warrants
is subject to a similar limitation.
To secure our obligations under the 2006 Debentures, we granted
a security interest in substantially all of our assets,
including our intellectual property, in favor of the investors
under the terms and conditions of a Security Interest Agreement
dated as of March 6, 2006. The security interest terminates
upon the earlier of (i) the date on which less than
$1.5 million in principal amount of the 2006 Debentures are
outstanding or (ii) payment or satisfaction of all of our
obligations under the Securities Purchase Agreement.
The conversion price of the 2006 Debentures and the exercise
price of the 2006 Warrants are subject to adjustment. Under the
agreements with the holders of the 2006 Debentures, we agreed
that if we made certain offers or sales of our common stock (or
securities convertible into common stock) to any third party
during the period from the closing date through the date on
which less than $2.0 million in aggregate principal
15
amount of the 2006 Debentures remain unconverted (the
Final Lockup Period), adjustments would be made to
the conversion price of the then unconverted 2006 Debentures and
to the exercise price of the then unexercised 2006 Warrants. The
above adjustments do not apply to certain specified
transactions, such as the exercise of outstanding options,
warrants, or convertible securities, the issuance of securities
pursuant to our existing option plans or a non-employee director
option plan, or the issuance of options to our directors,
officers, and employees, and advisors or consultants who have
served in that capacity for over 90 days (provided these
persons enter into a
lock-up
agreement), and transactions with strategic investors. The
exercise price of the 2006 Warrants also is subject to
adjustment in the event of certain capital adjustments or
similar transactions, such as a stock split or merger. In
addition, in certain cases, the investors may be entitled to
receive additional warrants to purchase additional shares.
We also agreed that until the end of the Final Lockup Period,
without the prior written consent of 75% of the then outstanding
2006 Debentures, we will not enter into any new transaction for
the offer or sale of our securities when the transaction
provides for a variable conversion price or a variable exercise
price. We also agreed that until the effective date of the
registration statement of which this prospectus is a part we
will not enter into any other transaction for the offer or sale
of any of our securities and, beginning on the effective date
and for six months thereafter, we will not enter into any
transaction granting the investors in that transaction
registration rights.
In addition, under certain circumstances, we may be obligated to
pay liquidated damages to the holders of the 2006 Debentures
because the registration statement was not declared effective by
the SEC by June 23, 2006. Similar payments will be required
if the registration is subsequently suspended beyond certain
agreed upon periods. The amount of liquidated damages that may
become payable may be substantial. Notwithstanding the
foregoing, our obligation to pay these liquidated damages with
respect to any late effectiveness will be waived if the
registration statement is declared effective by July 23,
2006.
Each of our directors, Walter Chen and Munck Butrus, P.C., (and
their respective family members, companies or trusts owning any
Company stock) have agreed in writing that he or it will not,
without the prior written consent of the holders of 75% of the
then outstanding principal amount of the 2006 Debentures, sell
any shares of our common stock he or it holds until 30 days
after the effective date of the registration statement.
Thereafter, without such consent, he or it will not sell more
than 10,000 shares of common stock per day for up to 15
trading days per calendar month. This limitation will expire
when the outstanding principal amount of the 2006 Debentures is
less than $2,000,000.
Pond Equities (the Placement Agent) and we entered
into a Placement Agency Agreement, dated as of March 3,
2006. Pursuant to the Placement Agency Agreement, in connection
with the placement of the 2006 Debentures, the Placement Agent
received a placement agent fee equal to 10% of the aggregate
purchase price ($600,000), and warrants (the Placement
Agents Warrants) and will receive a placement agent
fee equal to 10% of the proceeds realized in the future from the
exercise of 2006 Warrants issued to the investors. The Placement
Agents Warrants consist of (i) warrants to purchase
an aggregate of 7,095,556 shares of common stock having an
initial exercise price equal to $0.1693 per share, and
(ii) warrants to purchase an aggregate of
7,095,556 shares of common stock having an initial exercise
price equal to $0.15 per share. Except as provided above,
the Placement Agents Warrants will have terms similar to
the form of 2006 Warrant issued to the investors.
2005
Debentures
Pursuant to a Securities Purchase Agreement, dated as of
May 26, 2005 (the 2005 Securities Purchase
Agreement), among us and 26 institutional and individual
investors, we raised gross proceeds of $3.5 million from
the private placement of our three-year 7% Senior Secured
Convertible Debentures (the 2005 Debentures). As of
July 5, 2006, approximately $5,577 in principal amount of
2005 Debentures remained outstanding. The remainder has been
converted into common stock. In connection with the issuance of
the 2005 Debentures, we issued warrants (the 2005
Warrants) to purchase 33,936,650 shares of our common
stock.
16
The 2005 Debentures have a term of three years and are
convertible into shares of our common stock at the holders
option at a conversion price equal to 70% of the VWAP of our
common stock for the five trading days ending on the trading day
immediately preceding the conversion date. Interest on the 2005
Debentures accrues at the rate of 7% per annum, payable
upon conversion or semi-annually (June 30 and
December 31 of each year) or upon maturity, whichever
occurs first, and will continue to accrue until the 2005
Debentures are fully converted
and/or paid
in full. Interest is payable, at our option, either (1) in
cash, or (2) in shares of our common stock at the then
applicable conversion price. If we fail to deliver stock
certificates upon the conversion of the 2005 Debentures at the
specified time and in the specified manner, we may be required
to make substantial payments to the holders of the 2005
Debentures.
Provided the registration statement of which this prospectus is
a part is effective, we may prepay the amounts outstanding on
the 2005 Debentures by giving advance notice and paying an
amount equal to 120% of the sum of (x) the principal being
prepaid plus (y) the accrued interest. Holders will
continue to have the right to convert their debentures prior to
the actual prepayment.
Holders of the 2005 Debentures may require us to redeem any or
all of the outstanding 2005 Debentures upon the occurrence of
any one or more of the following events of default, as generally
described below: (i) our failure to pay principal and
interest when due (subject to a 5 day grace period),
(ii) our material breach of any of the representations or
warranties made in the 2005 Securities Purchase Agreement,
(iii) our failure to have stock certificates delivered
within a specified time period after delivery of a conversion
notice if the failure continues for ten trading days after
notice, (iv) our failure to observe any undertaking
contained in the 2005 Debentures or the other transaction
documents in a material respect if the failure continues for 30
calendar days after notice, (v) our insolvency or
liquidation or a bankruptcy event, (vi) the entry of a
money judgment or similar process in excess of $500,000 if the
judgment remains unvacated for 45 days, or (vii) the
suspension of our common stock from trading on the OTC
Bulletin Board if the suspension continues for five
consecutive trading days. The redemption amount is equal to
(i) (x) the principal and accrued interest of the 2005
Debenture being redeemed, divided by (y) the applicable
conversion price, multiplied by (ii) the highest closing
sale price of our common stock from the date of the redemption
notice through the payment date.
Of the 2005 Warrants originally issued, 22,624,430 (the
Class A Warrants) were exercisable at a per
share exercise price of $.3094, and 11,312,220 (the
Class B Warrants) were exercisable at a per
share exercise price of $0.1547. As of July 5, 2006,
18,470,945 of the Class A Warrants and 9,751,189 of the
Class B Warrants were outstanding. During February and
March of 2006, 11,370,624 of the 2005 Warrants were exercised at
a reduced price of $.05 per share pursuant to a temporary
agreement between the warrant holders and the Company. See
Amendment to 2005 Warrants. The 2005 Warrants
expire on August 31, 2008. Holders of the 2005 Warrants are
entitled to exercise their warrants on a cashless basis
following the first anniversary of issuance if a registration
statement covering the resale of the shares issuable on exercise
of the warrants is not in effect at the time of exercise.
Holders of 2005 Debentures are subject to certain limitations on
their rights to convert the debentures. The principal limitation
is that the holder may not, with certain limited exceptions,
convert into a number of shares that would, together with other
shares held by the holder, exceed 4.99% of our then outstanding
shares after such conversion. The exercise of the 2005 Warrants
is subject to a similar limitation.
To secure our obligations under the 2005 Debentures, we granted
a security interest in substantially all of our assets,
including our intellectual property, in favor of the investors.
The security interest terminated when less than $1,166,667 in
principal amount of the 2005 Debentures became outstanding.
The conversion price of the 2005 Debentures and the exercise
price of the 2005 Warrants are subject to adjustment in the
event of certain capital adjustments or similar transactions,
such as a stock split or merger.
In addition, under certain circumstances, we are obligated to
pay liquidated damages to the holders of the 2005 Debentures if
the registration statement covering the resale of the shares
issuable upon conversion of the debentures and exercise of the
2005 Warrants is suspended beyond certain agreed upon periods.
The amount of liquidated damages that may become payable may be
substantial.
17
In connection with the placement of the 2005 Debentures, we
issued to a finder an amount in cash equal to 10% of the
aggregate purchase price ($350,000) and agreed to issue to the
finder 10% of the proceeds realized in the future from exercise
of 2005 Warrants issued to the investors. We also issued to the
finder warrants to purchase an aggregate of
4,524,886 shares of common stock having an initial exercise
price equal to $0.3094 per share, warrants to purchase an
aggregate of 1,131,222 shares of common stock having an
initial exercise price equal to $0.1547 per share, and
2,000,000 shares of common stock. Except as provided above,
the finders warrants had terms similar to the form of 2005
Warrant issued to the investors. The finder exercised all of the
above warrants in February 2006 at an amended exercise price of
$0.05 per share. See Amendment to 2005
Warrants.
Amendment
to 2005 Warrants
On February 21, 2006, we and certain holders of the 2005
Warrants entered into an amendment (the Warrant
Amendment) to the terms of their warrants.
Pursuant to the Warrant Amendment, certain holders of the 2005
Warrants and we agreed to temporarily reduce the exercise price
of the 2005 Warrants to $0.05 per share for a period
beginning February 21, 2006 and ending at midnight, New
York City time on March 10, 2006 (the New Price
Exercise Period). The warrant holders that are parties to
the Warrant Amendment were entitled but not required to exercise
all or any portion of their 2005 Warrants for cash at a per
share price of $0.05 at any time during the New Price Exercise
Period. This reduction in the exercise price of the 2005
Warrants expired on March 10, 2006. During the New Price
Exercise Period, holders of 2005 Warrants exercised warrants to
purchase an aggregate of 11,370,624 shares of common stock,
resulting in gross proceeds to us of $568,531.
Any shares of our common stock issued with any exercise of a
2005 Warrant to a holder of the 2005 Warrants who or which
executed the Warrant Amendment, whether during the New Price
Exercise Period (on the terms contemplated in the Warrant
Amendment) or thereafter (on the original terms provided in the
2005 Warrants) were or shall be issued in restricted common
stock, but have the registration rights provided in the Warrant
Amendment. Except as expressly provided in the Warrant
Amendment, the terms and conditions of the 2005 Warrants and any
related registration rights agreement were unchanged and remain
in full force and effect.
In addition, the warrant holders who executed the Warrant
Agreement agreed to waive any claims arising out of or relating
to the failure, if any, to have available registered Warrant
Shares, as defined in the 2005 Warrants, prior to June 23,
2006.
We agreed to include the shares of common stock purchased by a
2005 Warrant holder through the exercise of each 2005 Warrant
(whether or not pursuant to the terms of the Warrant Amendment)
in the registration statement of which this prospectus is a
part. We were required to use our best efforts to have the
registration statement declared effective by June 23, 2006.
The Warrant Amendment is effective as to each 2005 Warrant
holder executing it, regardless of whether any other 2005
Warrant holders also execute the Warrant Amendment.
2003
Debentures
In December 2003, pursuant to a Securities Purchase Agreement
(the 2003 Securities Purchase Agreement), we
completed a private placement to certain individual and
institutional investors of $1,000,000 in principal amount of our
three year 7% Convertible Debentures (the 2003
Debentures). The 2003 Securities Purchase Agreement
included the investors commitments to place an additional
$1,000,000 of 2003 Debentures (the Additional
Debentures) upon the effectiveness by June 28, 2004
of a registration statement covering the common stock underlying
the 2003 Debentures. The registration statement was originally
filed on February 11, 2004. In April and May 2004, certain
holders of the 2003 Debentures waived the registration statement
effectiveness condition and purchased an aggregate of $350,000
in principal amount of 2003 Debentures, satisfying their post
effectiveness commitments. The registration statement was
declared effective by the SEC on August 16, 2004 solely
with respect to the common stock underlying the $1 million
in
18
principal amount of 2003 Debentures and related securities
issued as of December 2003. Because the registration statement
covering the common stock underlying the Additional Debentures
was not declared effective by June 28, 2004 as required by
the 2003 Securities Purchase Agreement, we did not place the
remaining $650,000 in principal amount of Additional Debentures
contemplated by the 2003 Securities Purchase Agreement.
As of July 5, 2006, $125,000 in principal amount of 2003
Debentures remained outstanding and held by two investors. The
remaining 2003 Debentures are due in December 2006. The 2003
Debentures are convertible at any time into shares of our common
stock at a conversion price of $0.15 per share. The
conversion price is subject to adjustments for stock splits,
redemptions, mergers, and certain other transactions. Interest
on the 2003 Debentures accrues at the rate of 7% per annum
and is payable on the earlier of the conversion or maturity of
the 2003 Debentures. On conversion or at maturity, we have the
option to pay accrued interest in cash or shares of our common
stock valued at the conversion price then in effect. The option
to pay interest in shares of our common stock, however, is
subject to the condition that the issuance of such shares of
common stock to the holder of a debenture cannot result in such
holder and its affiliates beneficially owning more than 4.99% of
the then outstanding shares of our common stock.
In connection with the issuance of the 2003 Debentures, we
issued warrants (2003 Warrants) to purchase up to
8,999,999 shares of our common stock at a per share
exercise price of $0.25, subject to cashless exercise
provisions. The 2003 Warrants generally expire five years after
issuance. On July 5, 2006, all of the 2003 Warrants issued
in connection with the 2003 Debentures were outstanding.
In the event of an uncured default or a non-permitted sale of
securities, the holders of the 2003 Debentures can require us to
redeem their debentures. Provided that certain conditions are
met, the 2003 Debentures automatically convert into common stock
on the third anniversary of issuance. In addition, under certain
circumstances, we can require the conversion of the 2003
Debentures before that time.
In connection with this private placement, we issued to a finder
warrants to purchase 900,000 shares of our common stock.
Warrants to purchase 666,667 shares of common stock at an
exercise price of $0.25 per share expire on
December 31, 2008, warrants to purchase 66,666 shares
of common stock at an exercise price of $0.15 per share
expire on April 20, 2009 and warrants to purchase
166,667 shares of common stock at an exercise price of
$0.15 per share expire on May 7, 2009.
Under the agreements with the purchasers of the 2003
Debentures, we were obligated to pay to the debenture holders
liquidated damages associated with the late filing of the
registration statement and the missed registration statement
required effective date of March 30, 2004. Liquidated
damages were equal to (x) 2% of the principal amount of all
the debentures during the first
30-day
period following late filing or effectiveness and (y) 3% of
the principal amount of all debentures for each subsequent
30-day
period (or part thereof). We registered an additional
1,066,667 shares of common stock in payment of liquidated
damages of approximately $160,000 due as a result of our failure
to have the registration statement effective on March 30,
2004. Accrued liquidated damages as of October 31, 2005 was
$37,550. At their option, the debenture holders are entitled to
be paid such amount in cash or shares of Common Stock at a per
share rate equal to the effective conversion price of the 2003
Debentures, which is currently $0.15.
19
MARKET
FOR COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
Our common stock is currently traded on the NASDAQ Stock
Markets
over-the-counter
bulletin board (OTC Bulletin Board) under the
trading symbol RSMI.
The following table sets forth the high and low bid prices for
the common stock on the OTC Bulletin Board for the periods
indicated. These prices represent inter-dealer quotations
without retail markup, markdown or commission and may not
necessarily represent actual transactions. Investors should not
rely on historical stock price performance as an indication of
future price performance. The closing price of our common stock
on July 5, 2006 was $0.17 per share.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
November
2005 through April 30, 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
.27
|
|
|
$
|
.02
|
|
Second Quarter
|
|
|
.27
|
|
|
|
.03
|
|
November
2004 through October 2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
.19
|
|
|
$
|
.10
|
|
Second Quarter
|
|
|
.19
|
|
|
|
.14
|
|
Third Quarter
|
|
|
.18
|
|
|
|
.05
|
|
Fourth Quarter
|
|
|
.07
|
|
|
|
.03
|
|
November
2003 through October 2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
.34
|
|
|
$
|
.16
|
|
Second Quarter
|
|
|
.36
|
|
|
|
.17
|
|
Third Quarter
|
|
|
.22
|
|
|
|
.09
|
|
Fourth Quarter
|
|
|
.18
|
|
|
|
.07
|
|
Shareholders
As of July 5, 2006, there were 1,063 holders of record
of our common stock. A significant number of shares of our
common stock are held in either nominee name or street name
brokerage accounts. The actual number of beneficial owners of
such shares is not included in the foregoing number of holders
of record.
Dividends
We have not declared or paid any cash dividends on our capital
stock and do not anticipate paying any cash dividends on our
capital stock in the foreseeable future. Payment of dividends on
the common stock is within the discretion of our board of
directors. The Board currently intends to retain future
earnings, if any, to finance our business operations and fund
the development and growth of our business. The declaration of
dividends in the future will depend upon our earnings, capital
requirements, financial condition, and other factors deemed
relevant by the board of directors.
Equity
Compensation Plan Information
We have three compensation plans (excluding individual stock
option grants outside of such plans) under which our equity
securities are authorized for issuance to employees, directors
and consultants in exchange for services the
2000 Omnibus Securities Plan (the 2000 Plan), the
2001 Stock Incentive Plan (the 2001 Plan), and the
2003 Consultant Stock Plan (the Consultant Plan)
(collectively, the Plans). Our shareholders approved
the 2000 Plan and 2001 Plan, and the Consultant Plan has not yet
been submitted to the shareholders for approval.
20
The following table presents information as of October 31,
2005 with respect to compensation plans under which equity
securities were authorized for issuance, including the 2000
Plan, the 2001 Plan, the Consultant Plan and agreements granting
options or warrants outside of these plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Number of Securities
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Remaining Available for
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Future Issuance Under
|
|
|
|
or Rights
|
|
|
or Rights
|
|
|
Equity Compensation
Plans
|
|
|
Equity compensation plans approved
by security holders
|
|
|
993,750
|
|
|
$
|
0.97
|
|
|
|
4,006,250
|
|
Equity compensation plans not
approved by security holders
|
|
|
16,500,000
|
|
|
$
|
0.28
|
|
|
|
2,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,493,750
|
|
|
$
|
0.32
|
|
|
|
6,806,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Shareholder
Approved Plans
The following is a description of options and warrants granted
to employees, directors, advisory directors, and consultants
outside of the Plans that were outstanding as of
October 31, 2005.
As of October 31, 2005, we had outstanding compensatory
options and warrants to purchase an aggregate of
16,500,000 shares of our common stock that were granted
outside of the Plans. Of this amount, outstanding options to
purchase 375,000 shares of common stock were granted during
fiscal 2001 outside of the Plans. These options, which expire
ten years from their grant date, were granted to five advisory
directors at exercise prices ranging from $1.07 to $4.00. All of
these options have vested.
We have outstanding options to purchase an aggregate of
525,000 shares of common stock that were granted during
fiscal 2002 outside of the Plans to a director and a consultant.
These options expire ten years from their grant date. 500,000 of
the options have an exercise price of $0.39, and the remaining
options have an exercise price of $1.02. All of these options
have vested.
At October 31, 2005, we had outstanding options to purchase
15,000,000 shares of common stock that were granted in
fiscal 2005 outside of the Plans, 14,000,000 of which were
canceled in January 2006. 1,000,000 options were granted to a
consultant at an exercise price per share of $0.15, and expire
four years from their grant date. 7,000,000 options were granted
to each of Brad Ketch and Ray Willenberg, Jr. at an
exercise price per share of $0.17, and were to expire ten years
from their grant date. All of these options have vested, but the
options granted to Mr. Ketch and Mr. Willenberg were
canceled by agreement effective January 1, 2006. See
Executive
Compensation Option Grants in Last
Fiscal Year and Note 18 to the accompanying audited
consolidated financial statements (at p. F-36) for more
information regarding option grants to Mr. Ketch and Mr.
Willenberg subsequent to October 31, 2005.
There are outstanding warrants to purchase an aggregate of
100,000 shares of common stock that were granted during
fiscal 2001 to a consultant. These warrants have a five year
term and an exercise price of $2.50 with respect to
50,000 shares, $5.00 with respect to 25,000 shares and
$10.00 with respect to 25,000 shares.
There are outstanding warrants that we granted during fiscal
2003 to a consultant to purchase 600,000 shares of common
stock outside of the Plans. These warrants have a
35-month
term (under certain circumstances the Company may accelerate the
expiration date) and an exercise price of $0.15.
21
There are outstanding warrants to purchase an aggregate of
100,000 shares of common stock that were granted during
fiscal 2004 to a consultant. These warrants have a three year
term and an exercise price of $0.15.
There are outstanding warrants to purchase 200,000 shares
of common stock that we granted during fiscal 2005 to a
consultant. These warrants have a term of three years and an
exercise price of $0.12.
The Consultant Plan was adopted in January 2003 and authorizes
the issuance of up to 6,000,000 non-qualified stock options or
stock awards to consultants to the Company. Directors, officers
and employees are not eligible to participate in the Consultant
Plan. To date, we have issued a total of 3,200,000 shares
of common stock under the Consultant Plan to four consultants.
22
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We urge you to read the following discussion in conjunction
with our condensed consolidated financial statements and the
notes thereto beginning on
page F-1.
This discussion may contain forward-looking statements that
involve substantial risks and uncertainties. Our actual results,
performance or achievements could differ materially from those
expressed or implied by the forward-looking statements as a
result of a number of factors, including but not limited to the
risks and uncertainties discussed under the heading
Risk
Factors beginning on page 4 of this
prospectus, and in our other filings with the SEC. See
Special
Note Regarding Forward-Looking Statements.
Overview
We are developing advanced transmission technology products to
enable data to be transmitted across copper telephone wire at
speeds and over distances that exceed those offered by leading
DSL technology providers. Our first chipset in a planned family
of transport processors, the
Embarqtm
E30 (Release 1.3) digital signal processor, was first shown to
several prospective customers during the first quarter of fiscal
2006. We completed Release 1.4 in the third fiscal quarter
of 2006 and are presently working on Release 1.5 of the E30 and
Release 1.1 of the
Embarqtm
E20 analog front end. Our products are designed to substantially
increase the capacity of existing copper telephone networks,
allowing telephone companies, office building managers, and
enterprise network operators to provide enhanced and secure
video, data and voice services over the existing copper
telecommunications infrastructure.
We expect that system-level products that use our technology
will have a significant advantage over existing system-level
products that use existing broadband technologies, such as
digital subscriber line (DSL), because such products will
transmit data faster, and over longer distances. We expect
products using our technology will offer numerous advantages to
the network operators that deploy them, including the ability to
support new services, the ability to offer existing and new
services to previously unreachable locations in their network,
reduction in total cost of ownership, security and reliability.
Our semiconductor business segment is dependent upon our ability
to generate future revenues and positive cash flow from our
advanced transmission technology products, such as the E30 and
E20. No assurance can be provided that our target customers will
purchase these products in large volumes, or at all. See
Risk Factors.
In April 2000, our NV Entertainment subsidiary entered into a
joint venture production agreement to produce a feature length
film, Step into Liquid (the Film). We
own a 50% interest in the joint venture. The financial condition
and results of operations of the joint venture are consolidated
with our financial condition and results of operations on the
accompanying consolidated financial statements. The Film was
released to theaters in the United States in 2003 and is
currently in foreign and DVD distribution. During the years
ended October 31, 2005 and 2004, we recognized revenues of
$39,866 and $287,570, respectively, from the Film. As a result
of impairment reviews during the years ended October 31,
2005 and 2004, we reduced the carrying value of the Film to $0
on our balance sheet. We do not intend to make further
investment in our entertainment business.
Restatements
On July 6, 2006, our Board of Directors, after
consultations by management and the Audit Committee with our
independent registered public accounting firm, concluded that
the classification of warrants issued in connection with the
2005 and 2006 convertible debentures was not in accordance with
interpretations of Emerging Issues Task Force (EITF)
Issue
No. 00-19
Accounting for Derivative Financial Instruments Indexed To
and Potentially Settled In, a Companys Own Stock.
Accordingly, the consolidated financial statements included in
our Quarterly Report on
Form 10-QSB
for the period ended April 30, 2006, as filed on
June 14, 2006 (the April 2006
10-QSB)
and included herein and our Annual Report on
Form 10-KSB
for the period ended October 31, 2005, as filed on
January 30, 2006 and amended on February 28, 2006 (the
2005
10-KSB)
and included herein have been restated to correct the accounting
for the warrants as
23
derivative liabilities. The previously issued consolidated
financial statements included in the April 2006
10-QSB and
the 2005
10-KSB
should not be relied upon.
As a result of this restatement, $10,419,140 included in
stockholders equity at April 30, 2006 should have
been recorded as a derivative liability and we should have
recorded additional interest expense of $5,673,953 for the three
months and six months ended April 30, 2006. This expense
was principally related to the amount ($5,608,156) by which the
fair value of warrants issued to purchasers of debentures sold
by the Company in March 2006 exceeded the debt discount
allocated to such warrants. See Note 8 to the accompanying
condensed consolidated financial statements at and for the
periods ended April 30, 2006 and 2005 included in this
prospectus. In addition, we should have recorded losses of
$460,400 and $484,538, respectively, for the three and six
months ended April 30, 2006, on the change in fair value of
derivative liabilities. The treatment of this non-cash
accounting item results in an increase in the Companys net
loss for the three months and six months ended April 30,
2006 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended April 30,
2006
|
|
|
Ended April 30,
2006
|
|
|
|
(As Reported)
|
|
|
(As Restated)
|
|
|
(As Reported)
|
|
|
(As Restated)
|
|
|
Net Loss
|
|
$
|
(3,542,493
|
)
|
|
$
|
(9,676,846
|
)
|
|
$
|
(4,816,231
|
)
|
|
$
|
(10,974,722
|
)
|
Basic and diluted net loss per
share of common stock
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
The correction of the above also results in the following
changes to the Companys stockholders equity
(deficiency) and liabilities at April 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
(As Reported)
|
|
|
(As Restated)
|
|
|
Total liabilities
|
|
$
|
5,308,577
|
|
|
$
|
14,850,433
|
|
Stockholders equity
(deficiency)
|
|
$
|
6,793,959
|
|
|
$
|
(2,747,897
|
)
|
In addition, as a result of this restatement, $86,062 included
in stockholders equity at October 31, 2005 should
have been recorded as a derivative liability and the Company
should have recorded a gain of $2,233,004 on the change in fair
value of derivative liabilities for the fiscal year ended
October 31, 2005. The treatment of this non-cash accounting
item results in a decrease in the Companys net loss for
the fiscal year ended October 31, 2005 as follows:
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Year
|
|
|
|
Ended October 31, 2005
|
|
|
|
(As Reported)
|
|
|
(As Restated)
|
|
|
Net loss
|
|
$
|
(6,923,386
|
)
|
|
$
|
(4,690,382
|
)
|
Basic and diluted net loss per
share of common stock
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
The correction of the above results in the following changes to
the Companys stockholders equity and liabilities at
October 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
(As Reported)
|
|
|
(As Restated)
|
|
|
Total liabilities
|
|
$
|
4,778,329
|
|
|
$
|
4,864,391
|
|
Stockholders equity
|
|
$
|
1,726,636
|
|
|
$
|
1,640,574
|
|
Critical
Accounting Policies
The preparation of our condensed consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires us to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. Our estimates
are based on historical experience, other information that is
currently available to us and various other assumptions that we
believe to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions or
conditions and the variances could be material.
24
Our critical accounting policies are those that affect our
condensed consolidated financial statements materially and
involve difficult, subjective or complex judgments by
management. We have identified the following critical accounting
policies that affect the more significant judgments and
estimates used in the preparation of our condensed consolidated
financial statements.
Convertible
Debentures
Proceeds of the 2006 and 2005 Debentures are recorded as a
liability net of a debt discount consisting of the fair values
attributed to the related warrants and to the embedded
conversion features. In accordance with EITF issue
No. 00-19
Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Companys Own Stock, due
to certain factors, including an uncapped liquidated damages
provision in the registration rights agreement and an
indeterminate amount of shares to be issued upon conversion of
the debentures, we separately value and account for the embedded
conversion features, related warrants, and registration rights
as derivative liabilities. Accordingly, these derivative
liabilities are measured at fair value with changes in fair
value reported in earnings as long as they remain classified as
liabilities. The Company reassesses the classification at each
balance sheet date. If the classification required under EITF
No. 00-19
changes as a result of events during the period, the contract
should be reclassified as of the date of the event that caused
the reclassification.
Stock-Based
Compensation
On November 1, 2005, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment, (SFAS 123(R))
which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees and
directors including stock options based on estimated fair
values. SFAS 123(R) supersedes our previous accounting
under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) for periods beginning on
November 1, 2005. In March 2005, the Securities and
Exchange Commission issued Staff Accounting
Bulletin No. 107 (SAB 107) relating
to SFAS 123(R). We have applied the provisions of
SAB 107 in our adoption of SFAS 123(R).
We early adopted SFAS 123(R) using the modified prospective
transition method, as of November 1, 2005, the first day of
our fiscal year 2006. Our condensed consolidated financial
statements as of and for the six months ended April 30,
2006 reflect the impact of SFAS 123(R). In accordance with
the modified prospective transition method, our condensed
consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS 123(R).
Stock-based compensation expense recognized in our condensed
consolidated statement of operations for the six months ended
April 30, 2006 included compensation expense for
share-based payment awards granted prior to, but not yet vested
as of October 31, 2005 based on the grant date fair value
estimated in accordance with the pro-forma provisions of
SFAS 123 and compensation expense for the share-based
payment awards granted subsequent to October 31, 2005 based
on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). We have continued to attribute
the value of stock-based compensation to expense on the
straight-line single option method.
Stock-based compensation expense recognized under
SFAS 123(R) related to employee stock options was $378,802
and $447,839 for the three months and six months ended
April 30, 2006, respectively. Stock based-compensation
expense for share-based payment awards granted prior to, but not
yet vested as of October 31, 2005 based on the grant date
fair value estimated in accordance with the pro-forma provisions
of SFAS 123 was $0 and $247,057 for the three months and
six months ended April 30, 2006, respectively. Stock-based
compensation expense recognized for non-employees under other
accounting standards was $292,766 and $315,674 for the three
months and six months ended April 30, 2006, respectively.
Stock-based compensation expense related to employee stock
options under other accounting standards was $20,915 and $20,915
for the three months and six months ended April 30, 2005,
respectively. Stock based-compensation expense recognized for
non-employees under other accounting standards was $135,967 and
$415,515 for the three months and six months ended
April 30, 2005, respectively.
25
As stock-based compensation expense recognized in the condensed
consolidated statement of operations for the six months ended
April 30, 2006 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures.
SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. In our
pro-forma information required under SFAS 123 for the
periods prior to fiscal 2006, we accounted for forfeitures as
they occurred.
Revenue
Recognition
We recognize revenue from the sale of our semiconductor products
when evidence of an arrangement exists, the sales price is
determinable or fixed, legal title and risk of loss has passed
to the customer, which is generally upon shipment of our
products to our customers, and collection of the resulting
receivable is probable. To date we have not recognized any
revenues related to the sale of our semiconductor products.
We recognize revenue from the distribution of our Film and
related products when earned and reasonably estimable in
accordance with Statement of Position
00-2 Accounting by Producers or
Distributors of Films
(SOP 00-2).
The following are the conditions that must be met in order to
recognize revenue in accordance with
SOP 00-2:
(i) persuasive evidence of a sale or licensing arrangement
with a customer exists;
(ii) the film is complete and, in accordance with the terms
of the arrangement, has been delivered or is available for
immediate and unconditional delivery;
(iii) the license period of the arrangement has begun and
the customer can begin its exploitation, exhibition or sale;
(iv) the arrangement fee is fixed or determinable; and
(v) collection of the arrangement fee is reasonably assured.
Under a rights agreement with our distributor for our Film, we
share with the distributor in the profits of the Film after the
distributor recovers its marketing, distribution and other
predefined costs and fees. The agreement provides for the
payment of minimum guaranteed license fees, usually payable on
delivery of the completed film, that are subject to further
increase based on the actual distribution results.
In accordance with the provisions of
SOP 00-2,
a film is classified as a library title after three years from
the films initial release. The term library title is used
solely for the purpose of classification and for identifying
previously released films in accordance with the provisions of
SOP 00-2.
Revenue recognition for such titles is in accordance with our
revenue recognition policy for film revenue.
Film
in Distribution
SOP 00-2
requires that film costs be capitalized and reported as a
separate asset on the balance sheet. Film costs include all
direct negative costs incurred in the production of a film, as
well as allocations of production overhead and capitalized
interest. Direct negative costs include cost of scenario, story,
compensation of cast, directors, producers, writers, extras and
staff, cost of set construction, wardrobe, accessories, sound
synchronization, rental of facilities on location and post
production costs.
SOP 00-2
also requires that film costs be amortized and participation
costs accrued, using the individual-film-forecast- computation
method, which amortizes or accrues such costs in the same ratio
that the current period actual revenue (numerator) bears to the
estimated remaining unrecognized ultimate revenue as of the
beginning of the fiscal year (denominator). We make certain
estimates and judgments of future gross revenue to be received
for the Film based on information received by its distributor,
historical results and managements knowledge of the
industry. Revenue and cost forecasts are continually reviewed by
management and revised when warranted by changing conditions. A
change to the estimate of gross revenues for the Film may result
in an increase or decrease to the percentage of amortization of
capitalized film costs relative to a previous period.
In addition,
SOP 00-2
also requires that if an event or change in circumstances
indicates that an entity should assess whether the fair value of
a film is less than its unamortized film costs, then an entity
should
26
determine the fair value of the film and write-off to the
statement of operations the amount by which the unamortized film
costs exceeds the films fair value. As a result of
impairment reviews during the years ended October 31, 2005
and 2004, we wrote down the carrying value attributed to the
Film to $0.
Capitalized
Software Development Costs
Capitalization of computer software development costs begins
upon the establishment of technological feasibility.
Technological feasibility for our computer software is generally
based upon achievement of a detail program design free of
high-risk development issues and the completion of research and
development on the product hardware in which it is to be used.
The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized computer software
development costs require considerable judgment by management
with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross
revenue, estimated economic life and changes in software and
hardware technology.
Amortization of capitalized computer software development costs
commences when the related products become available for general
release to customers. Amortization is provided on a
product-by-product
basis. The annual amortization is the greater of the amount
computed using (a) the ratio that current gross revenue for
a product bears to the total of current and anticipated future
gross revenue for that product, or (b) the straight-line
method over the remaining estimated economic life of the
product. The estimated useful life of our existing product is
seven years.
We periodically perform reviews of the recoverability of our
capitalized software development costs. At the time a
determination is made that capitalized amounts are not
recoverable based on the estimated cash flows to be generated
from the applicable software, the capitalized costs of each
software product is then valued at the lower of its remaining
unamortized costs or net realizable value.
No assurance can be given that products we release based upon
the licensed technology will receive market acceptance. If we
determine in the future that our capitalized costs are not
recoverable, the carrying amount of the technology license would
be reduced, and such reduction could be material.
We commenced amortization of capitalized software development
costs during December 2005 and have recorded amortization
expense of $212,536 and $315,232 during the three months and six
months ended April 30, 2006, respectively.
Research
and Development
Research and development expenses relate to the design and
development of advanced transmission technology products. We
outsource to independent third parties all of our design and
development activities. Payments made to independent software
developers under development agreements are capitalized to
software development costs once technological feasibility is
established or if the development costs have an alternative
future use. Prior to establishing technological feasibility,
software development costs are expensed to research and
development costs and to cost of sales subsequent to
confirmation of technological feasibility. Internal development
costs are capitalized to software development costs once
technological feasibility is established. Technological
feasibility is evaluated on a
product-by-product
basis.
Research and development expenses generally consist of salaries,
related expenses for engineering personnel and third-party
development costs incurred.
Technology
Licenses
We have entered into two technology license agreements that may
impact our future results of operations. Royalty payments, if
any, under each license would be reflected in our consolidated
statements of operations as a component of cost of sales.
In April, 2002, we entered into a development and license
agreement with Adaptive Networks, Inc. (Adaptive),
to acquire a worldwide, perpetual license to Adaptives
Powerstreamtm
technology, intellectual property and patent portfolio. The
licensed
Powerstreamtm
technology provides the core technology for our
27
semiconductor products. We have also jointly developed
technology with Adaptive that enhances the licensed technology.
In consideration of the development services provided and the
licenses granted to us by Adaptive, we paid Adaptive an
aggregate of $5,571,000 between 2002 and 2004 consisting of cash
and our assumption of certain Adaptive liabilities. In addition
to the above payments, Adaptive is entitled to a percentage of
any net sales of products sold by us and any license revenue we
receive from the licensed and co-owned technologies, less the
first $5,000,000 that would otherwise be payable to them under
this royalty arrangement.
In February 2006, we obtained a license to include HelloSoft,
Inc.s integrated VoIP software suite in the
Embarqtm
E30 semiconductor. We believe the inclusion of VoIP features in
our products will eliminate VoIP dedicated components currently
needed in modems and thereby lower their production costs by
more than 20%. In consideration of this license, we have paid
HelloSoft a license fee and will pay certain royalties based on
our sales of products including the licensed technology.
Results
of Operations
Comparison of the Three
Months and Six Months Ended April 30, 2006 and the Three
Months and Six Months Ended April 30, 2005
Revenues. Revenues for the three months and
six months ended April 30, 2006 were $18,698 and $58,874,
respectively. Of this amount, $698 and $6,932 was in the form of
guarantee
and/or
license payments related to the U.S. distribution of the
Film and $18,000 and $51,942 was related to foreign distribution
of the Film during the three months ended and six months ended
April 30, 2006, respectively. Revenues for the three months
and six months ended April 30, 2005 were $7,397 and
$16,198, respectively and were from our entertainment business.
Revenues increased 153% or $11,301 for the three months ended
April 30, 2006 and 263% or $42,676 for the six months ended
April 30, 2006 due primarily to an increase in the number
and value of license agreements for distribution of the Film or
portions of the Film in foreign markets. No revenues were
recorded in connection with our semiconductor business during
the three months and six months ended April 30, 2006 and
2005.
Operating Expenses. Operating expenses
included cost of sales, amortization of technology license and
capitalized software development fee, research and development
expenses in connection with the semiconductor business, and
selling, general and administrative expenses.
Total operating expenses increased 85% or $834,385 to $1,814,093
for the three months ended April 30, 2006 from $979,708 for
the three months ended April 30, 2005. The increase in
total operating expenses for the three months ended
April 30, 2006 was due primarily to increases in
amortization of technology license and capitalized software
development fee of $212,536, research and development expenses
of $52,556, and selling, general and administrative expenses of
$574,613, offset by a decrease in cost of sales of $5,320. Total
operating expenses increased 77% or $1,218,572 to $2,808,904 for
the six months ended April 30, 2006 from $1,590,332 for the
six months ended April 30, 2005. The increase in total
operating expenses for the six months ended April 30, 2006
was due primarily to increases in amortization of technology
license and capitalized software development fee of $315,232,
research and development expenses of $130,547, and selling,
general and administrative expenses of $784,738, offset by a
decrease in cost of sales of $11,945.
Cost of sales for the three months and six months ended
April 30, 2005 were $5,320 and $11,945, respectively. The
cost of sales represents the amortization of film cost for the
Film. The decrease for the three months and six months ended
April 30, 2006 was a result of the impairment of the Film
costs in 2005 which reduced the carrying value of the Film costs
to $0.
Amortization of technology license and capitalized software
development fee was $212,536 and $315,232 for the three months
and six months ended April 30, 2006 due to the commencement
of amortization related to the market release of the E30
(Release 1.3) to prospective customers for evaluation and
testing during December 2005. No amortization was recorded prior
to this period.
28
Research and development expenses increased by $52,556 to for
the three months ended April 30, 2006 from $0 for the three
months ended April 30, 2005. Research and development
expenses increased 1,851% or $130,547 to $137,600 for the six
months ended April 30, 2006 from $7,053 for the six months
ended April 30, 2005. The increase is principally the
result of additional payments made to HelloSoft, Inc.
(HelloSoft) in accordance with the terms of our
services agreement, as amended, and the issuance of stock
options in connection with research and development activities.
Total selling, general and administrative expenses increased 59%
or $574,613 to $1,549,001 for the three months ended
April 30, 2006 from $974,388 for the three months ended
April 30, 2005. Total selling, general and administrative
expenses increased 50% or $784,738 to $2,356,072 for the six
months ended April 30, 2006 from $1,571,334 for the six
months ended April 30, 2005. The increases are primarily
the result of an increase in salaries and wages due to an
increase in employees, professional fees related to the filing
of a registration statement in April 2006, and stock-based
compensation related to options and restricted common stock
issued to key employees, directors, consultants, and service
providers.
Other (Income) Expenses. Other expenses
included interest expense, a loss on the change in fair value of
derivative liabilities, amortization of deferred financing
costs, and a loss on exchange of notes payable into common stock.
Total Other (Income) Expenses increased 2,665% or $7,596,417 to
$7,881,451 for the three months ended April 30, 2006 from
$285,034 for the three months ended April 30, 2005. Total
Other (Income) Expenses increased 1,298% or $7,636,257 to
$8,224,692 for the six months ended April 30, 2006 from
$588,435 for the six months ended April 30, 2005. The
increases are primarily for the reasons noted below.
Interest expense increased 1,744% or $6,291,949 to $6,652,813
for the three months ended April 30, 2006 from $360,864 for
the three months ended April 30, 2005. Interest expense
increased 1,135% or $7,258,123 to $7,897,769 for the six months
ended April 30, 2006 from $639,646 for the three months
ended April 30, 2005. The increases are primarily due to
the value allocated to the warrants related to the 2006
Debentures, interest on the 2006 Debentures, and the
amortization and write-off of debt discount due to conversions
of the convertible debentures and repayment of a note payable.
We recorded a loss on the change in fair value of derivative
liabilities of $460,400 and $484,538 for the three months and
six months ended April 30, 2006. There were no derivative
liabilities outstanding during the three months and six months
ended April 30, 2005.
The amortization of deferred financing costs increased 1,040% or
$296,362 to $324,852 for the three months ended April 30,
2006 from $28,490 for the three months ended April 30,
2005. The amortization of deferred financing costs increased
971% or $515,710 to $568,819 for the six months ended
April 30, 2006 from $53,109 for the six months ended
April 30, 2005. The increase is primarily a result of the
conversions of the 2005 Debentures, repayment of a note payable,
and the amortization of additional deferred financing costs
related to the 2006 Debentures. Upon conversion or repayment of
debt prior to its maturity date, a pro-rata share of debt
discount and deferred financing costs are written off and
recorded as expense.
Other expenses also increased in the three months and six months
ended April 30, 2006 due to the loss recognized on exchange
of notes payable into common stock of $446,386.
Other income in the six months ended April 30, 2006
consisted primarily of a gain on forgiveness of principal and
interest on a promissory note (the Zaiq Note) to
Zaiq Technologies, Inc. (Zaiq) of $1,169,820. The
Zaiq Note was entered into in April 2005, had an original
principal amount of $2,392,000 and was originally due and
payable in April 2007. Pursuant to the terms of the note, the
principal amount of the note decreased by $797,333.33 on each of
the six and 12 month anniversaries of the note. In December
2005, when we would not have otherwise been required to make a
payment under the Zaiq Note, we entered into a letter agreement
with Zaiq pursuant to which we agreed to repurchase from Zaiq
for $200,000 the remaining balance of the Zaiq Note and
5,180,474 shares of our common stock held of record by Zaiq. We
had the right to assign any or all of our purchase commitment
under the letter agreement. We assigned to an unaffiliated third
party that had been a prior investor in the Company the right to
purchase 4,680,620 of the Zaiq shares. On December 20, 2005, we
purchased the Zaiq Note and 499,854 shares of our common stock
29
held by Zaiq for an aggregate purchase price of $129,789. The
Zaiq shares we repurchased have been accounted for as treasury
stock, carried at cost, and reflected as a reduction to
stockholders equity. The remaining principal and accrued
interest of $1,292,111 on the Zaiq Note was canceled resulting
in a gain of $1,169,820.
Other income in the six months ended April 30, 2005
consisted primarily of a gain on sale of property and equipment
of $20,000, a gain on exchange of Redeemable Series B
Preferred Stock into common stock of $55,814, and other
miscellaneous gains of $28,506.
Net Loss. For the three months ended
April 30, 2006 our net loss increased 670% or $8,419,501 to
$9,676,846 from $1,257,345 as the result of higher interest
costs, a loss on the change in fair value of derivative
liabilities, higher amortization of deferred financing costs,
higher selling, general, and administrative expense, and higher
research and development expenses, partially offset by an
increase in revenues and the gain on the forgiveness of
principal and interest on the promissory note to Zaiq
Technologies, Inc. discussed above. For the six months ended
April 30, 2006, the net loss increased 407% or $8,812,153
to $10,974,722 from $2,162,569 for primarily the same reasons
noted above.
Comparison of the year
ended October 31, 2005 (the 2005 period) and
the year ended October 31, 2004 (the 2004
period)
Revenues. Revenues for the 2005 period were
$39,866. Of this amount, $29,066 was in the form of guarantee
and/or
license payments relating to the U.S. distribution of the
Film and the remainder was fees relating to foreign distribution
of the Film. No revenues were recorded in connection with our
semiconductor business for the 2005 and 2004 periods. Revenues
for the 2004 period were $287,570, of which $94,788 was in the
form of guaranteed and license payments and the remainder was
foreign distribution fees for the Film. Revenues for the 2005
period decreased 86% or $247,704 from the 2004 period due to an
overall decline in the level of guarantee and license payments
in addition to a decrease in the number and value of license
agreements for distribution of the Film or portions of the Film
in foreign markets.
Operating Expenses. Operating expenses
included cost of sales, research and development expenses in
connection with the semiconductor business, compensatory element
of stock issuances, selling, general and administrative
expenses, and the impairment charge relating to the Film.
Total operating expenses decreased 9% to $4,339,953 for the 2005
period from $4,746,677 for the 2004 period, a $406,724 decrease.
Cost of sales for 2005 and 2004 of $11,945 and $142,691,
respectively, represent the amortization of film cost for the
Film. The decrease for the 2005 period when compared with the
2004 period was a result of lower revenues generated from the
Film as cost of sales are directly related to the revenues
recognized under SOP-00-2. Research and development expenses
increased $181,306 to $366,306 for the 2005 period, principally
as the result of our issuance of additional shares of common
stock to HelloSoft, Inc. (HelloSoft) in accordance
with the terms of our services agreement, as amended. Selling,
general and administrative expenses decreased 14% or $489,262 to
$2,951,925 primarily as a result of a decrease in headcount in
administrative personnel, including the elimination of executive
level positions, and lower compensation relating to issuing
stock for services.
In October 2004, we performed a review to determine if the fair
value of the Film was less than its unamortized film costs. As a
result of this review, the Company wrote-down the carrying value
of the Film to $1,021,722. This resulted in an impairment charge
of $977,799 which is included in our consolidated statement of
operations for the year ended October 31, 2004. In July
2005, we performed another review, and it was determined that
the unamortized film costs exceeded the fair value of the Film.
As a result of this review, the Company wrote-down the remaining
carrying value attributed to the Film to $0. This resulted in an
impairment charge of $1,009,777, which is included in our
consolidated statement of operations for the year ended
October 31, 2005.
Other (Income) Expenses. Other expenses
included interest expense and amortization of deferred financing
costs and unearned financing costs. Interest expense increased
$2,143,555 primarily as a result of issuing $3,500,000 of
convertible debentures in May 2005 as well as the increase in
amortization of debt discount. Amortization of deferred
financing costs increased to $602,182 from $78,427 as a result
of the
30
additional deferred financing costs primarily related to the
issuance of $3,500,000 of convertible debentures. Both the
amortization of debt discount, which is included in interest
expense, and the amortization of deferred financing costs,
increased significantly due to the increase in conversions of
convertible debentures into common stock. Upon conversion or
repayment of debt prior to its maturity date, a pro-rata share
of debt discount and deferred financing costs are written off
and recorded as expense. Amortization of unearned financing
costs decreased to $0 from $85,161 as a result of there being no
unearned financing costs as of the beginning of the 2005 period.
Other income in the 2005 period included gains totaling
$3,239,034 related to the gain on the change in the fair value
of derivative liabilities ($2,233,004), the sale of property and
equipment ($20,000), the exchange of Redeemable Series B
Preferred Stock into common stock ($55,814), the conversion of
accrued expenses into convertible notes payable ($33,514), and
the forgiveness of liabilities ($896,702). The forgiveness of
liabilities consisted primarily of the forgiveness of
liabilities to service providers and the reduction of principal
owed on the promissory note to Zaiq Technologies, Inc.
($797,333). The terms of the Zaiq Technologies, Inc. promissory
note provide for the forgiveness in the outstanding principal
amount by $797,333 on each of the six-month and twelve-month
anniversaries of the date of the promissory note. In October
2005, $797,333 was forgiven in accordance with these terms.
There were no derivative liabilities outstanding in the 2004
period.
Net Loss. During the 2005 period our net loss
decreased $815,905 or 15% from $5,506,287 to $4,690,382 as the
result of a decrease in the gross profit generated on the Film
($116,958), higher interest costs ($2,143,555), higher
amortization of deferred financing costs ($523,755), a larger
impairment of the Film ($31,978), and higher research and
development expenses ($181,306), offset by lower selling,
general and administrative expenses ($489,262), lower
amortization of unearned financing costs ($85,161), and gains
totaling $3,239,034 as discussed under Other (Income) Expenses
above.
Liquidity
and Capital Resources
Cash balances totaled $3,133,214 at July 5, 2006,
$4,007,470 at April 30, 2006 and $373,481 at
October 31, 2005.
Net cash used in operating activities was $1,350,482 for the six
months ended April 30, 2006, compared to $816,866 for the
six months ended April 30, 2005. The increase in cash used
in operations was principally the result of the following items:
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an increase in the net loss, which was $10,974,722, compared
with $2,162,569 for the six months ended April 30,
2005; and
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an increase for the six months ended April 30, 2006 of
accounts payable and accrued liabilities of $199,687, compared
to a decrease of accounts payable and accrued liabilities for
the six months ended April 30, 2005 of $22,329, resulting
in a net decrease in cash used of $177,358;
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impacted by the following non-cash items:
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interest expense related to fair value of Investors
warrants at issuance in excess of debt discount of $5,608,156
during the six months ended April 30, 2006;
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loss on the change in fair value of derivative liabilities of
$484,538 during the six months ended April 30, 2006
relating to warrants issued in connection with the 2005 and 2006
debentures;
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increased amortization of deferred financing costs, which were
$568,819 for the six months ended April 30, 2006, compared
to $53,109 for the six months ended April 30, 2005,
principally due to increased conversions of the May 2005
debentures, the repayment of a note payable, and the
amortization of additional deferred financing costs related to
the 2006 Debentures;
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increased amortization of debt discount on notes, which was
$2,168,904 for the six months ended April 30, 2006,
compared to $520,169 for the six months ended April 30,
2005, principally due to
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increased conversions of the May 2005 Debentures, the repayment
of a note payable, and the amortization of additional debt
discount related to the 2006 Debentures;
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increased amortization of technology license and capitalized
software development fee, which was $315,232 for the six months
ended April 30, 2006, compared to $0 for the six months
ended April 30, 2005, due to the commencement of
amortization related to the market release of the E30 (Release
1.3) to prospective customers for evaluation and testing;
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gain on forgiveness of principal and interest on the promissory
note to Zaiq Technologies, Inc. of $1,169,820 during the six
months ended April 30, 2006;
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increased stock-based compensation expense, which was $1,010,570
for the six months ended April 30, 2006 compared to
$888,930 for the six months ended April 30, 2005; and
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loss on exchange of notes payable into common stock of $446,386
during the six months ended April 30, 2006.
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Net cash used by investing activities was $204,499 for the six
months ended April 30, 2006 compared to $0 in the six
months ended April 30, 2005. The increase was due to the
acquisition of property and equipment of $4,499 and a technology
license and development fee of $200,000.
Net cash provided by financing activities was $5,188,970 for the
six months ended April 30, 2006 compared to $1,041,466 for
the six months ended April 30, 2005. Net cash provided by
financing activities for the six months ended April 30,
2006 was the result of proceeds from the 2006 Debentures of
$6,000,000, proceeds from the exercise of warrants of $568,531,
and proceeds from the issuance of a note payable of $750,000,
offset by capitalized financing costs of $742,450, and total
payments of $1,379,613 in connection with the repayment of notes
payable of $944,291 and convertible notes payable of $435,322.
Net cash provided by financing activities for the six months
ended April 30, 2005 was the result of proceeds from the
issuance of common stock in the amount of $800,100 and proceeds
from notes payable of $300,000, offset by capitalized financing
costs of $33,029, and repayments of convertible notes payable of
$25,625.
Our liquidity improved significantly as a result of a series of
transactions completed during the six months ended
April 30, 2006.
First, as described above under the caption
Agreements with the
Selling Shareholders, we raised gross proceeds of
$6.0 million in March 2006 from the private placement to 17
institutional and individual investors of our 2006 Debentures.
We received net proceeds of approximately $4.5 million from
the proceeds of the 2006 Debentures, after the payment of
offering related fees and expenses and after the repayment in
full of bridge loans, made in December 2005 and January 2006, in
the aggregate amount of $810,000.
Second, we received approximately $570,000 from the exercise of
warrants to purchase 11,370,624 shares of our common stock.
Third, we reduced our current liabilities by approximately
$845,000 by issuing 12,064,494 shares of restricted common
stock to several holders of notes payable.
These transactions increased our working capital by over
$5.9 million upon their completion during the six months
ended April 30, 2006.
Since inception, we have funded our operations primarily through
the issuance of our common stock and debt securities. Our recent
financings are discussed below.
In December 2005 and January 2006, we entered into secured
bridge loan agreements with a third party pursuant to which we
borrowed $750,000 from the lender. After payment of due
diligence fees and transaction related fees and expenses, we
received net proceeds of $672,470. An amount equal to 108% of
the principal amount of the loans was due and payable on the
earlier of May 25, 2006 or the date we effected a financing
transaction or series of transactions resulting in gross
proceeds to us of at least $2,000,000. We repaid the loans in
their entirety from the proceeds of the 2006 Debentures.
32
In May 2005, we sold $3,500,000 in aggregate principal amount of
our 2005 Debentures, receiving net proceeds of approximately
$3.11 million after the payment of offering related costs.
As of April 30, 2006, $3,459,436 of principal amount and
$108,509 of interest of the 2005 Debentures had been converted
into 170,376,861 shares of our common stock and there was
$40,564 of principal amount of the 2005 Debentures outstanding.
As of July 5, 2006, as a result of additional conversions
into 443,814 shares of our common stock, $5,577 principal
amount of the 2005 Debentures was outstanding. The 2005
Debentures mature in May 2008.
In December 2003, April 2004 and May 2004, we raised net
proceeds of approximately $1,024,000 from the private placement
to certain private and institutional investors of our three year
7% Convertible Debentures. $125,000 principal amount of the
debentures issued in December 2003 was outstanding as of
July 5, 2006 and matures in December 2006.
As of July 5, 2006, we had cash balances of $3,133,214. As
of the date of this prospectus, our expenses total approximately
$210,000 per month. Although management believes funds on
hand will enable us to meet our liquidity needs through at least
September 30, 2007, we will need to raise additional funds
to fulfill our business plan and to meet our future operating
requirements, prior to the receipt of revenues from our
semiconductor business.
We may not be successful in our efforts to raise additional
funds. Our cash needs could be heavier than anticipated in which
case we could be forced to raise additional capital. Even after
we begin to sell our products, we do not yet know what payment
terms will be required by our customers or if our products will
be successful. At the present time, we have no commitments for
any additional financing, and there can be no assurance that, if
needed, additional capital will be available to us on
commercially acceptable terms or at all.
Additional equity financings are likely to be dilutive to
existing holders of our common stock and debt financing, if
available, may involve significant payment obligations and
covenants that restrict how we operate our business.
Going
Concern Consideration
We have had continued losses in each of our years of operation
and negative cash flow, and have had liquidity problems. Our
independent registered public accounting firms report
accompanying our audited consolidated financial statements for
the years ended October 31, 2005 and 2004 includes an
explanatory paragraph relating to the uncertainty about our
ability to continue as a going concern. This qualification may
make it more difficult for us to raise additional capital when
needed. The accompanying consolidated financial statements do
not include any adjustments relating to the recoverability of
reported assets or liabilities should we be unable to continue
as a going concern.
We have been able to continue based upon our receipt of funds
from the issuance of equity securities and borrowings, and by
acquiring assets or paying expenses by issuing stock. Although
our liquidity improved significantly as a result of a series of
transactions completed during the six months ended
April 30, 2006, and Management believes funds on hand will
enable us to meet our liquidity needs through at least
September 30, 2007, our continued existence beyond that
date may be dependent upon our continued ability to raise funds
through the issuance of securities or borrowings, and our
ability to acquire assets or satisfy liabilities by the issuance
of stock. Managements plans in this regard are to obtain
other debt and equity financing until profitable operation and
positive cash flow are achieved and maintained.
Impact
of Recently Issued Accounting Standards
In June 2005, the FASB published Statement of Financial
Accounting Standards No. 154, Accounting Changes and
Error Corrections (SFAS 154).
SFAS 154 establishes new standards on accounting for
changes in accounting principles. Pursuant to the new rules, all
such changes must be accounted for by retrospective application
to the financial statements of prior periods unless it is
impracticable to do so. SFAS 154 completely replaces
Accounting Principles Bulletin No. 20 and SFAS 3,
though it carries forward the guidance in those pronouncements
with respect to accounting for changes in estimates, changes in
the reporting entity,
33
and the correction of errors. The requirements in SFAS 154
are effective for accounting changes made in fiscal years
beginning after December 15, 2005. We will apply these
requirements to any accounting changes after the implementation
date.
The Emerging Issues Task Force (EITF) reached a
tentative conclusion on EITF Issue
No. 05-1,
Accounting for the Conversion of an Instrument That
Becomes Convertible upon the Issuers Exercise of a Call
Option that no gain or loss should be recognized upon the
conversion of an instrument that becomes convertible as a result
of an issuers exercise of a call option pursuant to the
original terms of the instrument. The adoption of this
pronouncement is not expected to have an impact on our
consolidated financial position, results of operations, or cash
flows.
In June 2005, the FASB ratified EITF Issue
No. 05-2,
The Meaning of Conventional Convertible Debt
Instrument in EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock (EITF
No. 05-2),
which addresses when a convertible debt instrument should be
considered conventional for the purpose of applying
the guidance in EITF
No. 00-19.
EITF
No. 05-2
also retained the exemption under EITF
No. 00-19
for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date
may qualify for the exemption provided under EITF
No. 00-19
for conventional convertible debt if the instruments
economic characteristics are more similar to debt than equity.
EITF
No. 05-2
is effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. We have
applied the requirements of EITF
No. 05-2
since the required implementation date. The adoption of this
pronouncement did not have an impact on our consolidated
financial position, results of operations, or cash flows.
EITF Issue
No. 05-4
The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
(EITF
No. 05-4)
addresses financial instruments, such as stock purchase
warrants, which are accounted for under EITF
No. 00-19
that may be issued at the same time and in contemplation of a
registration rights agreement that includes a liquidated damages
clause. The consensus of EITF No.
05-4 has not
been finalized. The adoption of this pronouncement is not
expected to have an impact on our consolidated financial
position, results of operations, or cash flows.
In September 2005, the FASB ratified EITF Issue
No. 05-7,
Accounting for Modifications to Conversion Options
Embedded in Debt Instruments and Related Issues
(EITF
No. 05-7),
which addresses whether a modification to a conversion option
that changes its fair value affects the recognition of interest
expense for the associated debt instrument after the
modification and whether a borrower should recognize a
beneficial conversion feature, not a debt extinguishment, if a
debt modification increases the intrinsic value of the debt (for
example, the modification reduces the conversion price of the
debt). EITF
No. 05-7
is effective for the first interim or annual reporting period
beginning after December 15, 2005. We adopted EITF
No. 05-7
as of the beginning of our interim reporting period that began
on February 1, 2006. The adoption of this pronouncement did
not have an impact on our consolidated financial position,
results of operations, or cash flows.
In September 2005, the FASB ratified EITF Issue
No. 05-8,
Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature (EITF
No. 05-8),
which addresses the treatment of convertible debt issued with a
beneficial conversion feature as a temporary difference under
the guidance in SFAS 109. In addition, deferred taxes
recognized for a temporary difference of debt with a beneficial
conversion feature should be recognized as an adjustment of
additional paid-in capital. Entities should apply the guidance
in EITF
No. 05-8
in the first interim or annual reporting period that begins
after December 15, 2005. Its provisions should be applied
retrospectively under the guidance in SFAS 154 to all
convertible debt instruments with a beneficial conversion
feature accounted for under the guidance in EITF
No. 00-27
Application of EITF Issue
No. 98-5
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios. We have applied the requirements of
EITF
No. 05-8
to all previously existing convertible debt instruments with a
beneficial conversion feature and will apply the requirements of
EITF
No. 05-8
for all new convertible debt instruments with a beneficial
conversion feature.
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The adoption of this pronouncement for new convertible debt
instruments with a beneficial conversion feature is not expected
to have an impact on our consolidated financial position,
results of operations or cash flows.
In February 2006, the FASB published Statement of Financial
Accounting Standards No. 155, Accounting for Certain
Hybrid Financial Instruments an amendment of
FASB Statements No. 133 and 140
(SFAS 155). SFAS 155 resolves issues
addressed in SFAS 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests
in Securitized Financial Assets. The requirements in
SFAS 155 are effective for all financial instruments
acquired or issued after the beginning of an entitys first
fiscal year that begins after September 15, 2006. The
adoption of this pronouncement is not expected to have an impact
on our consolidated financial position, results of operations,
or cash flows.
BUSINESS
Overview
We are developing advanced transmission technology products to
enable data to be transmitted across copper telephone wire at
speeds and over distances that exceed those offered by leading
DSL technology providers. In September 2005, the Company changed
its name from New Visual Corporation to Rim Semiconductor
Company. Our common stock trades on the OTC Bulletin Board
under the symbol RSMI. Our corporate headquarters are located at
305 NE 102nd Avenue, Portland, Oregon 97220 and our
telephone number is
(503) 257-6700.
Our initial chipset in a planned family of transport processors,
the
Embarqtm
E30 (Release 1.3) digital signal processor, was first shown to
several prospective customers during the first quarter of fiscal
2006. The initial evaluation by these prospective customers was
promising. We completed Release 1.4 in the third fiscal
quarter of 2006 and are presently working on Release 1.5 of
the E30 and Release 1.1 of the
Embarqtm E20
analog front end. We estimate that we will complete them in the
fourth fiscal quarter of 2006. Significant enhancements are
currently being designed for both products that are intended to
reduce the cost and increase the functionality of the products.
These enhancements will be incorporated in Release 1.5 and
1.6 of the E30 and Release 1.1 and 1.2 of the E20. To date,
we have not recorded any revenues from the sale of products
based on our technology and have not secured any contracts to
sell our products.
We expect that system-level products that use our technology
will have a significant advantage over existing system-level
products that use existing broadband technologies, such as
digital subscriber line (DSL), because such products will
transmit data faster, and over longer distances. We expect
products using our technology will offer numerous advantages to
the network operators that deploy them, including the ability to
support new services, the ability to offer existing and new
services to previously unreachable locations in their network,
reduction in total cost of ownership, security and reliability.
Our
Telecommunications Business
The
Technology Underlying Our Proposed Solution
In April 2002, we entered into a development and license
agreement with Adaptive Networks, Inc. (Adaptive) to
acquire a worldwide, perpetual license to Adaptives
Powerstreamtm
technology, intellectual property, and patent portfolio for use
in products relating all applications in the field of the copper
telephone wire telecommunications network. Adaptive is engaged
in the research, development and sales of silicone embedded
networking technology of use in wiring environments.
Powerstreamtm
technology refers to technologies that enable data transmission
across wiring infrastructures inside buildings. Under the
agreement with Adaptive, we have a license under 12 issued
patents (five in the United States) pertaining to methodologies
for modifying data in order to transmit it more efficiently on
metallic media. The licensed technology provides the core
technology for our semiconductor products.
In addition to the licensed technology, we and Adaptive have
also jointly developed technology and intellectual property that
enhances the licensed technology. Under the agreement with
Adaptive, we co-own 10 pending patent applications (two in
the United States) pertaining to these enhancements.
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In consideration of the development services provided and the
licenses granted to us by Adaptive, we paid Adaptive an
aggregate of $5,751,000 between 2002 and 2004 consisting of cash
and our assumption of certain Adaptive liabilities. This amount
represents all payments for development that we are required to
make to Adaptive for both the licensed and the co-owned
technologies and related intellectual property. In addition to
the above payments, Adaptive is entitled to a percentage of any
net sales of products sold by us and any license revenue we
receive from the licensed and co-owned technologies, less the
first five million dollars that would otherwise be payable to
them under this royalty arrangement.
In February 2006, we obtained a license to include HelloSoft
Inc.s integrated VoIP software suite in the
Embarqtm E30
semiconductor. We believe that the inclusion of VoIP features in
our products will enable customers to eliminate components
currently placed on their modems that are dedicated to VoIP. We
expect this reduction in components will lower their cost of
production by more than 20% and eliminate significant design
complexity. In exchange for such rights, we have paid to
HelloSoft a license fee and will pay certain royalties based on
our sales of products including the licensed technology.
Our
Product Line
We are developing an advanced transmission technology to enable
data to be transmitted across copper telephone wire at faster
speeds and over greater distances than is presently offered by
leading digital subscriber line (DSL) technology providers. We
do not currently have any products being manufactured and have
not contracted with any telecommunications providers to
incorporate our technology in its products. We believe our
technology, using the name
Embarqtm
offers significant improvements over existing broadband
technologies by:
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optimizing the bandwidth used and taking advantage of dynamic
changes in the available signal to noise ratio
(SNR). Bandwidth is maximized by dynamically
operating as close as possible to the theoretically available
bandwidth, specifically by taking advantage of dynamic
improvements in the SNR. Telephone wiring has a static, known
function of attenuation versus frequency, while there are
dynamic characteristics that present both significant and
exploitable dynamic changes during transmission;
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utilizing offset quadrature amplitude modification (OQAM), large
subchannel sizes, short frame sizes and other data manipulation
techniques; and
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processing ethernet based data traffic in a more efficient way.
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Our solution takes advantage of these innovations, resulting in
dramatically improved achievable throughput.
Broadband
Opportunities Over Metallic Media
We believe the value of the existing copper-based telephone
network is directly related to the amount of data that it can
deliver. We also believe there are substantial business
opportunities for companies that can develop technologies that
increase the data-bearing capability, or bandwidth of this
network, enabling telephone network operators to increase their
offering of services and reduce the cost of network upgrades.
Worldwide, this network contains over 950 million copper
lines, and currently delivers to end users most of the
worlds telephone traffic and much of its broadband access.
Virtually every home, business and governmental location in the
United States, Europe and East Asia is served with an existing
copper wire connection.
But the existing copper wire connections were not engineered by
service providers to support high speed data. Originally buried
in the ground or strung on aerial cables to only carry voice
calls, these wires are ill-suited to carrying high speed data.
The single most important technical limitation is that the
amount of data that a given piece of copper wire is capable of
bearing reduces as a function of its length. Thus, shorter wires
can support higher data rates, and longer wires must support
lower data rates. This lack of suitability has been the largest
driving force behind the telephone companies recent
capital investments in new fiber optic and wireless last
mile networks. When either of these technologies are
introduced into a previously copper-based network, the copper
wires are either shortened or eliminated entirely. While the
introduction of our
36
technologies are not likely to completely eliminate the need for
fiber optics or for wireless deployments, we believe that it
could reduce or forestall them. Such reduction or delay
positively reduces the capital expenditures of the service
providers. Thus, we believe that the existing worldwide copper
wire base offers significant advantages over these alternative
networks as a medium for providing broadband access, and that
telephone companies adopting our technologies will enjoy these
benefits:
Low Cost Deployment. First, these solutions
enable the service provider to leverage a huge existing
infrastructure, avoiding the high costs associated with
replacing the local loop with fiber, laying new cable or
upgrading existing cable connections, or deploying relatively
new wireless or satellite communications technologies. Because
our technology uses the existing local loop, they can be less
expensive to deploy than other high-speed data transmission
technologies.
Limited Service Degradation and Improved Security Over
Alternative Technologies. In contrast to cable
delivery systems, our technology is a
point-to-point
technology that connects the end user to the service
providers central office or to an intermediate hub over
copper wire. Our technology therefore does not encounter service
degradation as other subscribers are added to the system, and
also allows a higher level of security. Alternative
technologies, such as cable, are shared systems and may suffer
degradation and increased security risk as the number of end
users on the system increases.
Rapid Deployment. Because virtually every home
and business in the United States, Europe and East Asia
have existing copper telephone wire connections, copper
wire-based broadband solutions can be rapidly deployed to a
large number of potential end users.
Competition
The market for high-speed telecommunications products is highly
competitive, and we expect that it will become increasingly
competitive in the future. Our competitors, including Centillium
Communications, Inc., Conexant Systems, Inc., PMC-Sierra, Texas
Instruments Incorporated, Ikanos Communications, ST
Microelectronics N.V., Metalink Ltd., Broadcom Corporation,
Infineon Technologies A.G. and others, have developed and are
currently marketing technologies that also address the existing
technical impediments of using existing copper networks as
broadband options or are otherwise substantially similar to our
products. Our competitors include some of the largest, most
successful domestic and international telecommunications
companies and other companies with well-established reputations
in the broadband telecommunications industry. Our competitors
possess substantially greater name recognition, financial, sales
and marketing, manufacturing, technical, personnel, and other
resources than we have. These competitors may also have
pre-existing relationships with our potential customers. These
competitors may compete effectively with us because in addition
to the above-listed factors, they more quickly introduce new
technologies, more rapidly or effectively address customer
requirements or devote greater resources to the promotion and
sale of their products than we do. Further, in the event of a
manufacturing capacity shortage, these competitors may be able
to manufacture products when we are unable to do so. In all of
our target markets, we also may face competition from newly
established competitors, suppliers of products based on new or
emerging technologies, and customers who choose to develop wire
based solutions that are functionally similar to our
semiconductor technologies.
We believe we will be able to compete with these companies
because our products are designed to increase the data transfer
rates of broadband transmission over copper telephone wire at
rates not yet achieved by competing wire based technologies.
Although we believe we will be able to compete based on the
special features of our products, they will incorporate new
concepts and may not be successful even if they are superior to
those of our competitors. In addition to facing competition from
providers of DSL-based products, we will compete with products
using other broadband technologies, such as cable modems,
wireless, satellite, and fiber optic telecommunications
technology. Commercial acceptance of any one of these competing
solutions could decrease demand for our products.
37
We also face competition from new technologies that are
currently under development that may result in new competitors
entering the market with products that may make ours obsolete.
We cannot predict the competitive impact of these new
technologies and competitors.
Proprietary
Rights
We currently rely on a combination of trade secret, patent,
copyright and trademark law, as well as non-disclosure
agreements and invention-assignment agreements, to protect our
proprietary information. However, such methods may not afford
complete protection and there can be no assurance that other
competitors will not independently develop similar processes,
concepts, ideas and documentation. Under our agreement with
Adaptive, we have a license under 12 issued patents (five in the
United States) and 10 pending patent applications (four in the
United States) pertaining to methodologies for modifying data in
order to transmit it more efficiently on metallic media. Our
license under each of the Adaptive patents generally remains in
effect for the life of the applicable patent. In addition to the
licensed technology, we and Adaptive have also jointly developed
technology and intellectual property that enhances the licensed
technology. Under the agreement with Adaptive, we co-own 10
pending patent applications (two in the United States)
pertaining to these enhancements. Adaptive generally maintains,
at its expense, these U.S. and foreign patent rights and files
and/or
prosecutes the relevant patent applications in the U.S. and
foreign countries. We also rely upon trade secrets, know-how,
continuing technological innovations and licensing opportunities
to develop our competitive position. Our policy is to protect
our technology by, among other things, filing, or requiring the
applicable licensor to file, patent applications for technology
that we consider important to the development of our business.
We intend to file additional patent applications, when
appropriate, relating to our technology, improvements to the
technology, and to specific products we develop.
Our policy is to require our employees, consultants, other
advisors, as well as software design collaborators, to execute
confidentiality agreements upon the commencement of employment,
consulting or advisory relationships. These agreements generally
provide that all confidential information developed or made
known to the individual by us during the course of the
individuals relationship with us is to be kept
confidential and not to be disclosed to third parties except in
specific circumstances. In the case of employees and
consultants, the agreements provide that inventions conceived by
the individual in the course of their employment or consulting
relationship shall be our exclusive property. There can be no
assurance, however, that these agreements will provide
meaningful protection or adequate remedies for trade secrets in
the event of unauthorized use or disclosure of such information.
Government
Regulation
Our products are likely to be subject to extensive regulation by
each country and in the United States by federal and state
agencies, including the Federal Communications Commission (the
FCC), and various state public utility and service
commissions. There are some regulations pertaining to the use of
the available bandwidth spectrum at present that have been
interpreted by our target customers as discouraging to the
technical innovations that we are bringing to market, though we
do not believe this to be the case. Further, regulations
affecting the availability of broadband access services
generally, the terms under which telecommunications service
providers conduct their business, and the competitive
environment among service providers, for example, could have a
negative impact on our business.
Our
Joint Venture
In April 2000, our NV Entertainment subsidiary entered into a
joint venture production agreement to produce a feature length
film, Step Into Liquid (the Film) for
theatrical distribution. We own a 50% interest in the joint
venture. We provided the funding for the production in the
amount of approximately $2,335,101. The financial condition and
results of operations of the joint venture are consolidated with
our financial condition and results of operations on the
accompanying consolidated financial statements. The Film was
released to theaters in the United States in 2003 and is
currently in foreign and DVD distribution. During the years
ended October 31, 2005 and 2004, we recognized revenues of
$39,866 and $287,570, respectively,
38
from the Film. We recorded amortization expense of $11,945 and
$142,691 related to the Film for the years ended
October 31, 2005 and 2004, respectively.
Based upon information received from the Films
distributor, Lions Gate Entertainment, in January 2005, we
recorded an impairment charge of $977,799 during the year ended
October 31, 2004 that reduced the carrying value of the
Film on our balance sheet to $1,021,722. The impairment charge
was due to higher than expected distribution costs and lower
than expected average retail selling price for the DVD. In
addition, based upon information received from Lions Gate
Entertainment in July 2005, which indicated that sales were
lower than expected, we recorded an impairment charge of
$1,009,777 during the year ended October 31, 2005, which
reduced the carrying value of the Film to $0 on our balance
sheet.
Research
and Development
We outsource all of the development activities with respect to
our products to independent third party developers. During
fiscal years 2005 and 2004 we expended $366,306 and $185,000,
respectively, on research and development with respect to the
work on our semiconductors.
Manufacturing
and Suppliers
We intend to contract with third party manufacturers to produce
our products and will rely on third party suppliers to obtain
the raw materials essential to our products production.
Manufacturing of products utilizing our semiconductor
technologies will be a complex process and we cannot assure you
that we will not experience production problems or delays. Any
interruption in operations could materially and adversely affect
our business and operating results.
There may be a limited number of suppliers of some of the
components necessary for the manufacture of products utilizing
our semiconductor technologies. The reliance on a limited number
of suppliers, particularly if such suppliers are foreign, poses
several risks, including a potential inability to obtain an
adequate supply of required components, low manufacturing yields
and reduced control over pricing, quality and timely delivery of
components. We cannot assure you that we will be able to obtain
adequate supplies of raw materials. Certain key components of
the semiconductor technologies may involve long lead times, and
in the event of an unanticipated increase in the demand for our
products, we could be unable to manufacture certain products in
a quantity sufficient to satisfy potential demand. If we cannot
obtain adequate deliveries of key components, we may be unable
to ship products on a timely basis. Low manufacturing yields
could cause us to incur substantially higher costs of goods
sold. Delays in shipment could damage our relationships with
customers and could harm our business and operating results.
Our
Employees
We currently have five full-time employees and one part-time
employee. We anticipate that we will need to hire additional
employees and other personnel. We may, from time to time,
supplement our regular work force as necessary with temporary
and contract personnel. None of our employees is represented by
a labor union.
Our future performance depends highly upon the continued service
of the senior members of our management team. We believe that
our future success will also depend upon our continuing ability
to identify, attract, motivate, train and retain other highly
skilled managerial, technical, sales and marketing personnel.
Hiring for such personnel is intensely competitive, and there
can be no assurance that we will be able to retain our key
employees or attract, assimilate or retain the qualified
personnel necessary for our business in a timely manner or at
all.
39
Our
Property
We do not own any real property. Our corporate headquarters are
located at 305 NE 102nd Avenue, Suite 105, Portland,
Oregon 97220. The premises are occupied under a lease that
expires in March 2009. The current monthly rental under this
lease is $3,989. We also lease approximately 200 square
feet of space in La Jolla, California that we use for
administrative offices under a lease that expires in February
2007. Our monthly rental payment under this lease is $1,450. We
believe our properties are generally in good condition and
suitable to carry on our business. We also believe that, if
required, suitable alternative or additional space will be
available to us on commercially reasonable terms.
Legal
Proceedings
There are no material pending legal proceedings to which we are
a party or to which any of our properties are subject. There are
no material proceedings known to us to be contemplated by any
governmental authority.
40
MANAGEMENT
The names, ages and positions of our directors, executive
officers and key employees are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Brad Ketch
|
|
|
44
|
|
|
President, Chief Executive
Officer, Secretary, Principal Financial Officer and Director
|
Ray Willenberg, Jr.
|
|
|
54
|
|
|
Chairman of the Board and
Executive Vice President
|
Jack L. Peckham
|
|
|
65
|
|
|
Director(1)
|
Thomas J. Cooper
|
|
|
57
|
|
|
Director(2)
|
|
|
|
(1) |
|
Audit Committee and Compensation Committee Member |
|
(2) |
|
Compensation Committee Member |
The business experience, principal occupations and employment,
as well as the periods of service, of each of our directors and
executive officers during at least the last five years are set
forth below.
Brad Ketch has served the Company in various roles since
March 2002. In March 2002, Mr. Ketch became a consultant
with us on our broadband technology and served in that capacity
until July 2002, when he became our Chief Marketing Officer. He
has served as our President and Chief Executive Officer, as well
as a director, since December 2002. With over 19 years
experience creating shareholder value through broadband
telecommunications products and services, Mr. Ketch, from
October 2001 to March 2002, served as CEO of Kentrox LLC, a
manufacturer and marketer of data networking equipment. At
Kentrox, Mr. Ketch was responsible for a company with 260
employees and $90 million in annual revenues. From January
2001 to October 2001 Mr. Ketch implemented strategic plans
for telecom service providers and equipment manufacturers
through his telecommunications consulting company, Brad
Ketch & Associates, of which he was founder and
President. From February 1999 to January 2001 he was Senior Vice
President of Sales and Marketing for HyperEdge Corporation, a
company he co-founded. HyperEdge acquired and integrated
broadband access equipment manufacturers to further enable
service providers to deliver broadband access to the Last
Mile. From August 1997 through February 1999,
Mr. Ketch implemented strategic business and technical
plans for competitive local exchange carrier network access and
created products targeted at the incumbent local exchange
carrier market as a consultant to various telecommunications
companies as a consultant with Brad Ketch & Associates.
Prior to August 1997 he served in various capacities at Nortel,
Advanced Fibre Communications and Cincinnati Bell.
Mr. Ketch has a Bachelor of Arts degree in Economics from
Wheaton College and a MBA from Northwestern University.
Ray Willenberg, Jr. served as our President, Chief
Executive Officer and Chairman of the Board from April 1997 to
March 2002, and was elected a director in October 1996.
Mr. Willenberg joined us as Vice President and corporate
Secretary in 1996. He currently serves as our Executive Vice
President and Chairman of the board of directors. From 1972 to
1995, Mr. Willenberg was Chief Executive Officer of Mesa
Mortgage Company in San Diego, California.
Jack L. Peckham is a founder and director of Heritage
Bank of Commerce in San Jose, California, and serves on its
audit and compensation committees. Mr. Peckham has served
as a member of the Board since March 2005. He is currently the
Chairman and CEO of Broadband Graphics, a company that owns and
licenses intellectual property in the areas of video and desktop
computing. From 1985 through 1998, Mr. Peckham held various
positions at ATMEL Corporation (www.atmel.com), retiring as its
General Manager. He received an MA and a BA in Finance and
marketing from Burdette College, Boston.
Thomas J. Cooper has served as a member of our board of
directors since March 2002. From June 1 to December 2,
2002, Mr. Cooper served as our President and Chief
Executive Officer. Mr. Cooper has been engaged in the
development, creation and management of global sales and
marketing platforms for businesses operating in the areas of
high technology, real estate, office automation, and
telecommunications for the past 30 years. Mr. Cooper
is currently the Senior Vice President of Sales and Marketing of
Artimi, Inc. (www.artimi.com) a fabless semiconductor firm based
in Santa Clara, California serving new markets with
41
Ultra Wideband wireless technology and products. From 1994 to
2002, Mr. Cooper served in various high-ranking positions
at Conexant (formerly Virata), most recently as Senior Vice
President, Corporate Development (from July 1999 to February
2002), where he was responsible for the development and
implementation of long range growth strategies, including
defining global partnership initiatives; identifying potential
acquisition and joint venture candidates; and directing
strategic investment of corporate capital into select ventures
in which the company acquired minority stakes. From 1994 until
1999, Mr. Cooper served as Viratas Senior Vice
President, Worldwide Sales and Marketing, where he oversaw all
aspects of the companys product sales and marketing,
corporate marketing/communications and public relations.
Mr. Cooper has a Bachelor of Arts degree in English
Literature from Hamilton College and an MBA from the University
of Toledo, Ohio.
Board
of Directors; Election of Officers
All directors hold office until the next annual meeting of
shareholders and until their successors is duly elected and
qualified. Any vacancy occurring in the board of directors may
be filled by the shareholders, the board of directors, or if the
Directors remaining in office constitute less than a quorum of
the board of directors, they may fill the vacancy by the
affirmative vote of a majority of the Directors remaining in
office. A director elected to fill a vacancy is elected for the
unexpired term of his predecessor in office. Any directorship
filled by reason of an increase in the number of directors shall
expire at the next shareholders meeting in which directors
are elected, unless the vacancy is filled by the shareholders,
in which case the term shall expire on the later of (i) the
next meeting of the shareholders or (ii) the term
designated for the director at the time of creation of the
position being filled.
Our executive officers are elected by and serve at the pleasure
of our board of directors.
Compensation
of Directors
It is our policy to pay each outside director $2,000 for each
meeting of our Board of Directors attended and for each
committee meeting attended. We also reimburse our directors for
reasonable expenses incurred in traveling to and from board or
committee meetings. Upon his resignation as a director of the
Company in March 2005, Ivan Berkowitz was paid $57,251,
representing deferred meeting fees, expense reimbursements and
fees for service as Vice Chairman of the Board of Directors
accrued and unpaid though the date of his resignation.
In addition, we have granted stock and stock options to the
directors to compensate them for their services. During the
fiscal year ended October 31, 2005 we issued 200,000 and
300,000 shares of common stock valued at approximately
$30,000 and $45,000 to Mr. Cooper and Mr. Peckham,
respectively, to compensate them for their services as
directors. Our directors are eligible to receive stock option
grants under our 2000 Omnibus Securities Plan. We did not grant
options to our non-employee directors in 2005. During 2006, we
granted each of our non-employee directors an option to purchase
1,000,000 shares of common stock at an exercise price of
$0.0319 per share. For information regarding option grants
to our employee directors, see Executive
Compensation.
42
EXECUTIVE
COMPENSATION
The following table sets forth all compensation for each of the
last three fiscal years awarded to, or earned by, our Chief
Executive Officer and all other executive officers serving as
such at the end of 2005 whose salary and bonus exceeded $100,000
for the year ended October 31, 2005 or who, as of
October 31, 2005, was being paid a salary at a rate of at
least $100,000 per year.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal
|
|
|
|
|
|
|
|
|
|
|
Other Annual
|
|
|
Securities
|
|
Position(s)
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Compensation
|
|
|
Underlying Options
|
|
|
Brad Ketch
|
|
|
2005
|
|
|
$
|
250,000
|
|
|
$
|
70,000
|
|
|
$
|
170,000
|
(1)
|
|
|
7,000,000
|
|
President and Chief Executive
Officer
|
|
|
2004
|
|
|
$
|
250,000
|
(2)
|
|
|
|
|
|
$
|
86,667
|
(3)
|
|
|
|
|
(and Principal Financial Officer)
|
|
|
2003
|
|
|
$
|
244,167
|
(4)
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
Ray
Willenberg, Jr.
|
|
|
2005
|
|
|
$
|
84,896
|
|
|
$
|
212,450
|
(5)
|
|
$
|
170,000
|
(6)
|
|
|
7,000,000
|
|
Chairman of the Board, Executive
|
|
|
2004
|
|
|
$
|
175,000
|
(7)
|
|
$
|
152,176
|
|
|
$
|
176,667
|
(8)
|
|
|
|
|
Vice President
|
|
|
2003
|
|
|
$
|
175,000
|
(9)
|
|
$
|
154,677
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the issuance to Mr. Ketch in April 2005 of
1,000,000 shares of common stock. |
|
(2) |
|
Includes $45,380 paid in 2005. |
|
(3) |
|
Represents the issuance to Mr. Ketch in December 2003 of
40,000 shares of common stock in lieu of $10,000 of
deferred payroll, and the issuance to Mr. Ketch in March
2004 of 333,333 shares of common stock valued at $76,333. |
|
(4) |
|
Includes $43,000 paid in 2005. |
|
(5) |
|
These amounts were accrued but unpaid at October 31, 2005. |
|
(6) |
|
Represents the issuance to Mr. Willenberg in April 2005 of
1,000,000 shares of common stock. |
|
(7) |
|
Includes $46,250 paid in 2005. |
|
(8) |
|
Represents the issuance to Mr. Willenberg in December 2003
of 400,000 shares of common stock in lieu of $100,000 of
unpaid bonuses, and the issuance to Mr. Willenberg in March
2004 of 333,333 shares of common stock valued at $76,667. |
|
(9) |
|
Includes $9,269 paid in 2005. |
In accordance with the rules of the SEC, other compensation in
the form of perquisites and other personal benefits has been
omitted for the named executive officers because the aggregate
amount of these perquisites and other personal benefits was less
than the lesser of $50,000 or 10% of annual salary and bonuses
for the named executive officers.
Option
Grants In The Last Fiscal Year
The following table sets forth information concerning individual
grants of stock options made during the year ended
October 31, 2005 to each of the named executive officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
% of Total Options
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Granted to
|
|
|
|
|
|
|
|
|
|
Underlying Options
|
|
|
Employees in Fiscal
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
Year
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
|
Brad Ketch
|
|
|
1,000,000
|
(1)
|
|
|
7.1
|
%
|
|
$
|
0.17
|
|
|
|
April 5, 2015
|
|
|
|
|
6,000,000
|
(1)
|
|
|
42.9
|
%
|
|
$
|
0.17
|
|
|
|
April 5, 2015
|
|
Ray Willenberg, Jr.
|
|
|
1,000,000
|
(1)
|
|
|
7.1
|
%
|
|
$
|
0.17
|
|
|
|
April 5, 2015
|
|
|
|
|
6,000,000
|
(1)
|
|
|
42.9
|
%
|
|
$
|
0.17
|
|
|
|
April 5, 2015
|
|
|
|
|
(1) |
|
These options were canceled by agreement effective
January 1, 2006. In January 2006, each of
Mr. Willenberg and Mr. Ketch was granted an option to
purchase up to 10,700,000 shares of common stock. These
options have an exercise price of $0.027 per share and vest
between February and July 2006. |
43
Aggregate
Options Exercised in 2005 and Year-End Option Values
The named executive officers did not exercise any stock options
during the year ended October 31, 2005. The following table
sets forth information as of October 31, 2005 concerning
options held by the named executive officers. None of these
options were
in-the-money
as of October 31, 2005, and all such options were canceled
by agreement effective January 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Value of Unexercised
|
|
|
|
Shares
|
|
|
|
|
|
Underlying Unexercised
|
|
|
In-The-Money
|
|
|
|
Acquired on
|
|
|
Value
|
|
|
Options at Fiscal Year
End
|
|
|
Options at Fiscal Year
End
|
|
|
|
Exercise (#)
|
|
|
Realized ($)
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Brad Ketch
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
6,000,000
|
|
|
$
|
|
|
|
$
|
|
|
Ray Willenberg, Jr.
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
Employment
Agreements with Executive Officers
Brad Ketch. On December 2, 2002, we
entered into an employment agreement with Brad Ketch pursuant to
which Mr. Ketch was retained as our Chief Executive
Officer. The agreement had a three-year initial term and
provided for Mr. Ketch to receive an initial base salary of
$250,000, with an annual bonus to be paid at the discretion of
the board of directors in either cash or stock. In December
2005, this agreement was automatically renewed for an additional
one year term. If Mr. Ketch is terminated without
cause or leaves Rim Semiconductor for good
reason, each as defined in his agreement, he will receive
a severance payment equal to two years of his base salary on the
date of termination. If he is terminated without cause or with
good reason within one year after a change of
control, as defined in his agreement, he will receive a
severance payment equal to two years of his base salary and an
amount equal to two times the amount of his last bonus received.
Ray Willenberg, Jr. We entered into an employment
agreement with Mr. Willenberg, dated as of March 1,
2006, pursuant to which he continues to serve as our Executive
Vice President. The agreement terminates on March 3, 2008
and provides for Mr. Willenberg to receive a base salary of
$250,000 per year, subject to the earlier of
(i) Mr. Willenbergs death or Disability (as
defined in the agreement); (ii) the termination of the
agreement by either party without cause on written notice; or
(iii) termination of the agreement by us for Cause (as
defined in the agreement).
During Mr. Willenbergs employment, the agreement
provides for his nomination to our board of directors and, if
elected, his appointment as chairman. Mr. Willenberg would
resign from the Board upon the termination of his employment.
Under his employment agreement, we also granted
Mr. Willenberg a right of first refusal to purchase our
equity interest in Top Secret Productions, LLC in the case of a
bona fide third-party offer to purchase that interest or our
determination to offer that interest for sale at a specified
price.
Certain
Relationships and Related Transactions
On July 21, 2004, we entered into a one-year $100,000
revolving line of credit with a bank. Ray Willenberg, Jr.,
our Executive Vice President and Chairman, guaranteed the
repayment of the line of credit, and we agreed to indemnify
Mr. Willenberg for any losses or expenses he may incur as a
result of providing such security. The line of credit expired on
August 10, 2005.
On March 7, 2006, we issued a convertible promissory note
in the principal amount of $301,196.55 (the New
Note) to Mr. Willenberg. The New Note replaced a
promissory note in the principal amount of $383,910.72 dated
March 25, 2005 (the Old Note), between the
Company and Mr. Willenberg, which had a remaining balance
due of $88,746.55. All of the amounts represented by the Old
Note and the New Note represented amounts owed to
Mr. Willenberg for deferred compensation. The principal
amount of the New Note, with 8% interest, would have been due on
the earlier of March 3, 2008 or the date on which
Mr. Willenbergs employment was terminated by the
Company. The New Note was convertible, at the option of
Mr. Willenberg, into shares of our common stock at a
conversion price per share equal to the closing price
44
of the common stock on the
Over-the-Counter
Bulletin Board on the date of conversion. The Old Note was
non-interest-bearing, convertible on the same terms as the New
Note, and provided for monthly payments equal to at least the
monthly base salary paid by us to our chief executive officer.
In April 2006, we paid the New Note in full.
BENEFICIAL
OWNERSHIP OF CERTAIN SHAREHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
The following table sets forth information as of the close of
business on July 5, 2006, concerning shares of our common
stock beneficially owned by each director and named executive
officer and by all directors and executive officers as a group.
We are not aware of any persons beneficially owning more than 5%
of our common stock.
In accordance with the rules of the SEC, the table gives effect
to the shares of common stock that could be issued upon the
exercise of outstanding options and warrants within 60 days
of July 5, 2006. Unless otherwise noted in the footnotes to
the table and subject to community property laws where
applicable, the following individuals have sole voting and
investment control with respect to the shares beneficially owned
by them. We have calculated the percentages of shares
beneficially owned based on 324,973,732 shares of common
stock outstanding at July 5, 2006. The address for each of
the directors and executive officers set forth below is
c/o Rim Semiconductor Company, 305 NE 102nd Avenue,
Suite 105, Portland, Oregon 97220.
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
Owned
|
|
Person or Group
|
|
Number
|
|
|
Percent(1)
|
|
|
Brad Ketch
|
|
|
12,133,333
|
(2)
|
|
|
3.61
|
%
|
Ray Willenberg, Jr.
|
|
|
14,381,613
|
(3)
|
|
|
4.28
|
%
|
Jack L. Peckham
|
|
|
1,300,000
|
(4)
|
|
|
*
|
|
Thomas J. Cooper
|
|
|
1,832,258
|
(5)
|
|
|
*
|
|
All executive officers and
directors as a group (4 persons)
|
|
|
29,647,204
|
(6)
|
|
|
8.50
|
%
|
|
|
|
(1) |
|
Percentage of beneficial ownership as to any person as of a
particular date is calculated by dividing the number of shares
beneficially owned by such person by the sum of the number of
shares outstanding as of such date and the number of unissued
shares as to which such person has the right to acquire voting
and/or
investment power within 60 days. |
|
|
|
(2) |
|
Includes options to purchase 10,700,000 shares of common
stock. |
|
|
|
(3) |
|
Includes options to purchase 10,700,000 shares of common
stock. |
|
|
|
(4) |
|
Includes options to purchase 1,000,000 shares of common
stock. |
|
(5) |
|
Includes options to purchase 1,500,000 shares of common
stock. |
|
|
|
(6) |
|
Includes options to purchase 23,900,000 shares of common
stock. |
SELLING
SHAREHOLDERS
All of the shares of our common stock being offered in this
prospectus are being offered by the selling shareholders listed
below. We have registered this offering because of registration
rights we granted to certain of the selling shareholders when we
sold securities to them. See
Agreements with the
Selling Shareholders. The selling shareholders are
not required to sell all or any of the shares listed below.
Other than as disclosed in the notes to the table below, no
selling shareholder has had any position, office or other
material relationship with us during the past three years.
The following table sets forth the number of shares that are, to
our knowledge, beneficially owned as of July 5, 2006, by
the selling shareholders prior to the offering contemplated by
this prospectus, the number of shares each selling shareholder
is offering by this prospectus and the number of shares which
each would own
45
beneficially if all such offered shares are sold. Each selling
shareholder may sell all, some or none of his or its shares in
this offering.
In accordance with the rules of the SEC, the table gives effect
to the shares of common stock that could be issued upon the
exercise of outstanding options and warrants within 60 days
of July 5, 2006. However, each of the selling shareholders
that is the holder of 2006 Debentures, 2005 Debentures, 2006
Warrants or 2005 Warrants or warrants issued in connection with
the placement thereof may not convert its convertible debentures
or exercise its warrants if such conversion or exercise would
cause such holders beneficial ownership of our common
stock (excluding shares underlying any unconverted debentures or
unexercised warrants) to exceed 4.99% of the outstanding shares
of common stock immediately after the conversion or exercise. If
the holder subsequently disposed of some or all of its holdings,
it could again convert its debenture or exercise its warrant,
subject to the same limitation. As a result of this limitation,
the number of shares of common stock listed below for some
selling shareholders may include shares that would not be
subject to purchase within 60 days of July 5, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
Owned
|
|
|
Number of Shares
|
|
|
After Offering
|
|
Selling Shareholder
|
|
Before Offering
|
|
|
Offered
|
|
|
Shares
|
|
|
Percent
|
|
|
Levi Shapira
|
|
|
10,822,652
|
|
|
|
10,822,652(1
|
)
|
|
|
0
|
|
|
|
0
|
|
Ellis International Ltd.
|
|
|
10,406,398
|
|
|
|
10,406,398(2
|
)
|
|
|
0
|
|
|
|
0
|
|
Puritan LLC
|
|
|
14,096,918
|
|
|
|
14,096,918(3
|
)
|
|
|
0
|
|
|
|
0
|
|
Generation Capital Associates
|
|
|
12,106,291
|
|
|
|
12,106,291(4
|
)
|
|
|
0
|
|
|
|
0
|
|
Bristol Investment Fund, Ltd.
|
|
|
17,750,235
|
|
|
|
17,750,235(5
|
)
|
|
|
0
|
|
|
|
0
|
|
Double U Master Fund LP
|
|
|
52,057,226
|
|
|
|
52,057,226(6
|
)
|
|
|
0
|
|
|
|
0
|
|
Nite Capital LP
|
|
|
32,188,807
|
|
|
|
32,188,807(7
|
)
|
|
|
0
|
|
|
|
0
|
|
Brio Capital LP
|
|
|
10,406,398
|
|
|
|
10,406,398(8
|
)
|
|
|
0
|
|
|
|
0
|
|
Gross Foundation, Inc.
|
|
|
23,694,985
|
|
|
|
23,694,985(9
|
)
|
|
|
0
|
|
|
|
0
|
|
Bursteine and Lindsay Securities
Corp.
|
|
|
10,406,398
|
|
|
|
10,406,398(10
|
)
|
|
|
0
|
|
|
|
0
|
|
Notzer Chesed
|
|
|
9,448,364
|
|
|
|
9,448,364(11
|
)
|
|
|
0
|
|
|
|
0
|
|
Cong. Sharei Chaim
|
|
|
6,242,294
|
|
|
|
6,242,294(12
|
)
|
|
|
0
|
|
|
|
0
|
|
Platinum Long Term Growth III
|
|
|
12,487,677
|
|
|
|
12,487,677(13
|
)
|
|
|
0
|
|
|
|
0
|
|
CMS Capital
|
|
|
11,472,977
|
|
|
|
11,472,977(14
|
)
|
|
|
0
|
|
|
|
0
|
|
Professional Traders Fund, LLC
|
|
|
7,677,084
|
|
|
|
7,677,084(15
|
)
|
|
|
0
|
|
|
|
0
|
|
Professional Offshore Opportunity
Fund, Ltd.
|
|
|
14,568,956
|
|
|
|
14,568,956(16
|
)
|
|
|
0
|
|
|
|
0
|
|
Alpha Capital AG
|
|
|
26,617,493
|
|
|
|
26,617,493(17
|
)
|
|
|
0
|
|
|
|
0
|
|
Yokim Asset Management Corp.
|
|
|
3,090,714
|
|
|
|
3,090,714(18
|
)
|
|
|
0
|
|
|
|
0
|
|
Whalehaven Capital
Fund Limited
|
|
|
2,429,451
|
|
|
|
2,429,451(19
|
)
|
|
|
0
|
|
|
|
0
|
|
Clearview International
Investment, Ltd.
|
|
|
3,324,048
|
|
|
|
3,324,048(20
|
)
|
|
|
0
|
|
|
|
0
|
|
Truk Opportunity Fund, LLC
|
|
|
1,367,162
|
|
|
|
1,367,162(21
|
)
|
|
|
0
|
|
|
|
0
|
|
First Mirage, Inc.
|
|
|
1,545,358
|
|
|
|
1,545,358(22
|
)
|
|
|
0
|
|
|
|
0
|
|
JM Investors LLC
|
|
|
969,618
|
|
|
|
969,618(23
|
)
|
|
|
0
|
|
|
|
0
|
|
Republic Aggressive Growth
|
|
|
969,618
|
|
|
|
969,618(24
|
)
|
|
|
0
|
|
|
|
0
|
|
Barucha Pension LLC
|
|
|
969,618
|
|
|
|
969,618(25
|
)
|
|
|
0
|
|
|
|
0
|
|
Bessie Weiss Family Partnership
|
|
|
1,016,697
|
|
|
|
1,016,697(26
|
)
|
|
|
0
|
|
|
|
0
|
|
Ronald Kimelman
|
|
|
727,214
|
|
|
|
727,214(27
|
)
|
|
|
0
|
|
|
|
0
|
|
Quines Financial S.A.
|
|
|
818,143
|
|
|
|
818,143(28
|
)
|
|
|
0
|
|
|
|
0
|
|
Alexander Hasenfeld, Inc. Profit
Sharing and Retirement Plan
|
|
|
545,929
|
|
|
|
545,929(29
|
)
|
|
|
0
|
|
|
|
0
|
|
HSI Partnership
|
|
|
545,929
|
|
|
|
545,929(30
|
)
|
|
|
0
|
|
|
|
0
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
Owned
|
|
|
Number of Shares
|
|
|
After Offering
|
|
Selling Shareholder
|
|
Before Offering
|
|
|
Offered
|
|
|
Shares
|
|
|
Percent
|
|
|
David Klugmann Associates, Inc.
Plan
|
|
|
1,151,476
|
|
|
|
1,151,476(31
|
)
|
|
|
0
|
|
|
|
0
|
|
Truk International Fund, LP
|
|
|
87,266
|
|
|
|
87,266(32
|
)
|
|
|
0
|
|
|
|
0
|
|
Advisor Associates, Inc.
|
|
|
8,656,108
|
|
|
|
8,656,108(33
|
)
|
|
|
0
|
|
|
|
0
|
|
Brad Ketch
|
|
|
10,533,333(34
|
)
|
|
|
10,700,000(35
|
)
|
|
|
1,433,333
|
|
|
|
*
|
|
Ray Willenberg
|
|
|
12,581,613(34
|
)
|
|
|
10,700,000(36
|
)
|
|
|
3,681,613
|
|
|
|
*
|
|
Tom Cooper
|
|
|
1,832,258(34
|
)
|
|
|
1,500,000(37
|
)
|
|
|
332,258
|
|
|
|
*
|
|
Jack Peckham
|
|
|
1,300,000(34
|
)
|
|
|
1,000,000(38
|
)
|
|
|
300,000
|
|
|
|
*
|
|
Walter Chen
|
|
|
1,040,000
|
|
|
|
1,000,000(39
|
)
|
|
|
40,000
|
|
|
|
*
|
|
Munck Butrus, P.C.
|
|
|
2,000,000
|
|
|
|
2,000,000(40
|
)
|
|
|
0
|
|
|
|
0
|
|
Pond Equities, Inc.
|
|
|
15,610,223
|
|
|
|
15,610,223(41
|
)
|
|
|
0
|
|
|
|
0
|
|
Gamma Opportunity Capital
Partners, LP
|
|
|
1,070,001
|
|
|
|
1,070,001(42
|
)
|
|
|
0
|
|
|
|
0
|
|
Wayne Saker
|
|
|
666,667
|
|
|
|
666,667(43
|
)
|
|
|
0
|
|
|
|
0
|
|
Blumfield Investments, Inc.
|
|
|
333,333
|
|
|
|
333,333(44
|
)
|
|
|
0
|
|
|
|
0
|
|
Inglewood Holdings Ltd
|
|
|
666,667
|
|
|
|
666,667(45
|
)
|
|
|
0
|
|
|
|
0
|
|
Gersh Korsinsky
|
|
|
333,334
|
|
|
|
333,334(46
|
)
|
|
|
0
|
|
|
|
0
|
|
Vertical Ventures, LLC
|
|
|
333,334
|
|
|
|
333,334(47
|
)
|
|
|
0
|
|
|
|
0
|
|
Tuva Financial Ltd.
|
|
|
1,000,000
|
|
|
|
1,000,000(48
|
)
|
|
|
0
|
|
|
|
0
|
|
Melton Management Ltd.
|
|
|
600,000
|
|
|
|
600,000(49
|
)
|
|
|
0
|
|
|
|
0
|
|
Aboudi & Brounstein
|
|
|
100,000
|
|
|
|
100,000(50
|
)
|
|
|
0
|
|
|
|
0
|
|
Harborview Master Fund LP
|
|
|
969,618
|
|
|
|
969,618(51
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
|
(1) |
|
Includes 6,764,035 shares of common stock issuable on
conversion of $260,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 3,074,740 shares of
common stock issuable upon the exercise of 2006 Warrants and
983,877 shares of common stock representing our good faith
estimate of additional shares of common stock potentially
issuable to the selling shareholder as liquidated damages
through the projected effective date of the registration
statement of which this prospectus is a part, or in the event of
certain adjustments to the conversion price of the 2006
Debentures and the number of shares issuable on exercise of the
2006 Warrants (Adjustment Shares). |
|
|
|
(2) |
|
Includes 6,503,880 shares of common stock issuable on
conversion of $250,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 2,956,482 shares of
common stock issuable upon the exercise of 2006 Warrants and
946,036 Adjustment Shares. Wilhelm Ungar is a director of the
selling shareholder and has voting control and investment
discretion over the shares held by the selling shareholder. |
|
|
|
(3) |
|
Includes 148,630 shares of common stock,
6,503,880 shares of common stock issuable on conversion of
$250,000 principal amount plus interest thereon until maturity
of 2006 Debentures, 5,898,566 shares of common stock
issuable upon the exercise of 2003 Warrants, 2005 Warrants and
2006 Warrants and 1,240,245 Adjustment Shares. Also includes
305,598 shares of common stock issuable upon conversion of
$25,000 principal amount plus interest thereon until maturity of
our 2005 Debentures. Miriam Gross and Chara Friedman are members
of the selling shareholder and have voting control and
investment discretion over the shares held by the selling
shareholder. |
|
|
|
(4) |
|
Includes 6,503,880 shares of common stock issuable on
conversion of $250,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 4,501,840 shares of
common stock issuable upon the exercise of 2003 Warrants, 2005
Warrants and 2006 Warrants and 1,100,572 Adjustment Shares. Mr.
David A. Rapaport, the Executive Vice President and General
Counsel of the selling shareholder, Fred A. Brasch, the Chief
Financial Officer of the selling shareholder, and Frank E. Hart,
the general partner of |
47
|
|
|
|
|
the selling shareholder, have voting control and investment
discretion over the shares held by the selling shareholder.
Messrs. Rapaport, Brasch and Hart each disclaim beneficial
ownership over the shares held by the selling shareholder. |
|
|
|
(5) |
|
Includes 10,406,207 shares of common stock issuable on
conversion of $400,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 5,730,370 shares of
common stock issuable upon the exercise of 2006 Warrants and
1,613,658 Adjustment Shares. Bristol Capital Advisors, LLC
(BCA) is the investment advisor to the selling
shareholder. Paul Kessler is the Manager of BCA and as such has
voting control and investment discretion over the shares held by
the selling shareholder. Mr. Kessler disclaims beneficial
ownership of the shares held by the selling shareholder. |
|
|
|
(6) |
|
Includes 2,181,642 shares of common stock,
26,015,518 shares of common stock issuable on conversion of
$1,000,000 principal amount plus interest thereon until maturity
of 2006 Debentures, 19,325,922 shares of common stock
issuable upon the exercise of 2005 Warrants and 2006 Warrants
and and warrants issued in connection with a bridge financing
during 2006, and 4,534,144 Adjustment Shares. Double U
Master Fund LP is a master fund in a master-feeder
structure with B & W Equities, LLC as its general
partner. Isaac Winehouse, Manager of B & W Equities,
LLC, has ultimate voting control and investment discretion over
the shares held by the selling shareholder. Mr. Winehouse
disclaims beneficial ownership of the shares held by the selling
shareholder. |
|
|
|
(7) |
|
Includes 969,618 shares of common stock,
19,511,639 shares of common stock issuable on conversion of
$750,000 principal amount plus interest thereon until maturity
of 2006 Debentures, 8,869,442 shares of common stock
issuable upon the exercise of 2005 Warrants and 2006 Warrants
and 2,838,108 Adjustment Shares. Keith A. Goodman is the
Manager of the general partner of the selling shareholder and
has voting control and investment discretion over the shares
held by the selling shareholder. Mr. Goodman disclaims
beneficial ownership of the shares held by the selling
shareholder. |
|
|
|
(8) |
|
Includes 6,503,880 shares of common stock issuable on
conversion of $250,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 2,956,482 shares of
common stock issuable upon the exercise of 2006 Warrants and
946,036 Adjustment Shares. Shaye Hirsch is the Manager of
Brio Capital Management, LLC, the general partner of the selling
shareholder, and has voting control and investment discretion
over the shares held by the selling shareholder. Mr. Hirsch is a
principal of Pond Equities, Inc., an NASD registered
broker-dealer. The selling shareholder purchased the securities
in the ordinary course of business and did not have any
understanding or arrangement in place with any other person to
either directly or indirectly sell or distribute the shares held
by the selling shareholder. Mr. Hirsch disclaims beneficial
ownership of the shares held by the selling shareholder. |
|
|
|
(9) |
|
Includes 13,007,759 shares of common stock issuable on
conversion of $500,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 8,518,867 shares of
common stock issuable upon the exercise of 2003 Warrants, 2005
Warrants and 2006 Warrants and 2,152,663 Adjustment Shares.
Also includes 15,697 shares of common stock issuable upon
conversion of $1,284 principal amount plus interest thereon
until maturity of our 2005 Debentures. Chaim Gross is the
President of the selling shareholder and has voting control and
investment discretion over the shares held by the selling
shareholder. Mr. Gross disclaims beneficial ownership of
the shares held by the selling shareholder. |
|
|
|
(10) |
|
Includes 6,503,880 shares of common stock issuable on
conversion of $250,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 2,956,482 shares of
common stock issuable upon the exercise of 2006 Warrants and
946,036 Adjustment Shares. |
|
|
|
(11) |
|
Includes 4,682,793 shares of common stock issuable on
conversion of $180,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 3,808,629 shares of
common stock issuable upon the exercise of 2003 Warrants, 2005
Warrants and 2006 Warrants, 849,142 Adjustment Shares and
107,800 shares of common stock. Abraham Nussbaum and
Tanchum Alder have voting control and investment discretion over
the shares held by the selling shareholder. |
|
|
|
(12) |
|
Includes 596,899 shares of common stock,
2,861,707 shares of common stock issuable on conversion of
$110,000 principal amount plus interest thereon until maturity
of 2006 Debentures, 2,270,470 shares of common stock
issuable upon the exercise of 2005 Warrants and 2006 Warrants
and 513,218 Adjustment |
48
|
|
|
|
|
Shares. Sholom Babad is President of the selling shareholder
and has voting control and investment discretion over the shares
held by the selling shareholder. |
|
|
|
(13) |
|
Includes 7,804,655 shares of common stock issuable on
conversion of $300,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 3,547,778 shares of
common stock issuable upon the exercise of 2006 Warrants and
1,135,243 Adjustment Shares. Mark Nordlicht is President of
the selling shareholder and has voting control and investment
discretion over the shares held by selling shareholders. |
|
|
|
(14) |
|
Includes 6,503,880 shares of common stock issuable on
conversion of $250,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 3,926,100 shares of
common stock issuable upon the exercise of 2005 Warrants and
2006 Warrants and 1,042,998 Adjustment Shares. Mr. Menachem
Lipskier is Secretary, Chief Operating Officer and a Director of
the selling shareholder. Mr. Lipskier disclaims beneficial
ownership of the shares held by the selling shareholder. |
|
|
|
(15) |
|
Includes 3,902,328 shares of common stock issuable on
conversion of $150,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 3,076,840 shares of
common stock issuable upon the exercise of 2003 Warrants, 2005
Warrants and 2006 Warrants and 1,042,998 Adjustment Shares.
Marc Swickle and Howard Berger are the managers of the selling
shareholder and have voting control and investment discretion
over the shares held by the selling shareholder.
Messrs. Swickle and Berger disclaim beneficial ownership of
the shares held by the selling shareholder. |
|
|
|
(16) |
|
Includes 9,105,431 shares of common stock issuable on
conversion of $350,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 4,139,074 shares of
common stock issuable upon the exercise of 2006 Warrants and
1,324,451 Adjustment Shares. Marc Swickle and Howard Berger
are the managers of the selling shareholder and have voting
control and investment discretion over the shares held by the
selling shareholder. Messrs. Swickle and Berger disclaim
beneficial ownership of the shares held by the selling
shareholder. |
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(17) |
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Includes 13,007,759 shares of common stock issuable on
conversion of $500,000 principal amount plus interest thereon
until maturity of 2006 Debentures, 10,639,961 shares of
common stock issuable on the exercise of 2003 Warrants, 2005
Warrants and 2006 Warrants and 2,364,772 Adjustment Shares.
Also includes 605,001 shares issuable upon conversion of
$75,000 principal plus interest thereon until maturity of 2003
Debentures. Konrad Ackerman and Rainer Posch are directors of
the selling shareholder. Messrs. Ackerman and Posch
disclaim beneficial ownership of the shares held by the selling
shareholder. |
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(18) |
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Includes 2,795,706 shares of common stock issuable upon the
exercise of 2003 Warrants and 2005 Warrants and
295,008 shares of common stock. Norma Nuzzo is a director
of the selling shareholder and has voting control and investment
discretion over the shares held by the selling shareholder. Ms.
Nuzzo disclaims beneficial ownership of the shares held by the
selling shareholder. |
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(19) |
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Include 2,424,047 shares of common stock issuable upon the
exercise of 2005 Warrants. Also includes 5,404 shares
issuable upon conversion of $442 principal amount plus interest
thereon until maturity of our 2005 Debentures. Derek Wood,
Arthur E.M. Jones and Trevor Williams are directors of the
selling shareholder and have voting control and investment
discretion over the shares held by the selling shareholder.
Messrs. Wood, Jones and Williams disclaim beneficial ownership
of the shares held by the selling shareholder. |
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(20) |
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Includes 3,204,034 shares of common stock issuable upon the
exercise of 2005 Warrants and 2006 Warrants as well as warrants
issued in connection with selling shareholders services as
a finder and 120,014 shares of common stock. Jacob Abramsky
is Director of the selling shareholder and has voting control
and investment discretion over the shares held by the selling
shareholder. Mr. Abramsky disclaims beneficial ownership of the
shares held by the selling shareholder. |
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(21) |
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Represents shares of common stock issuable upon the exercise of
2005 Warrants. Michael E. Fein and Stephen E. Saltzstein, as
principals of Atoll Asset Management, LLC, the Managing Member
of the selling shareholder, exercise voting control and
investment discretion over the securities held by the selling
shareholder. Messrs. Fein and Saltzstein both disclaim
beneficial ownership of the securities held by the selling
shareholder. |
49
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(22) |
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Represents shares of common stock issuable upon the exercise of
2003 Warrants and 2005 Warrants. Mr. David A. Rapaport, the
Executive Vice President and General Counsel of the selling
shareholder, Fred A. Brasch, the Chief Financial Officer of the
selling shareholder, and Frank E. Hart, the general partner of
the selling shareholder, have voting control and investment
discretion over the shares held by the selling shareholder.
Messrs. Rapaport, Brasch and Hart each disclaim beneficial
ownership over the shares held by the selling shareholder. |
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(23) |
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Represents shares of common stock issuable upon the exercise of
2005 Warrants. Jeffrey Rubin is the manager of the selling
shareholder and has voting control and investment discretion
over the shares held by the selling shareholder. Mr. Rubin
disclaims beneficial ownership of the shares held by the selling
shareholder. |
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(24) |
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Represents shares of common stock issuable upon the exercise of
2005 Warrants. |
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(25) |
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Represents shares of common stock issuable upon the exercise of
2005 Warrants. Caroline Birnbaum is trustee of the selling
shareholder and has voting control and investment discretion
over the shares held by the selling shareholder. The selling
shareholder is an affiliate of Pond Equities, a NASD member. The
selling shareholder purchased the securities in the ordinary
course of business and did not have any understanding or
arrangement in place with any other person to either directly or
indirectly sell or distribute the shares held by the selling
shareholder. |
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(26) |
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Includes 969,618 shares of common stock issuable upon the
exercise of 2005 Warrants and 47,079 shares of common stock
issuable upon conversion of $3,851 principal amount plus
interest thereon until maturity of our 2005 Debentures. |
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(27) |
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Includes 55,000 shares of common stock issuable upon the
exercise of 2005 Warrants and 672,214 shares of common
stock. |
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(28) |
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Includes 568,171 shares of common stock issuable upon the
exercise of 2005 Warrants and 249,972 shares of common
stock. Simcha Hecht has voting control and investment discretion
over the shares held by the selling shareholder. |
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(29) |
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Includes 484,809 shares of common stock issuable upon the
exercise of 2003 Warrants and 2005 Warrants and
61,120 shares of common stock issuable upon conversion of
$5,000 principal amount of our 2005 Debentures. Nachum Stein is
trustee of the selling shareholder and has voting control and
investment discretion over the shares held by the selling
shareholder. Mr. Stein disclaims beneficial ownership of the
shares held by the selling shareholder. |
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(30) |
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Includes 484,809 shares of common stock issuable upon the
exercise of 2005 Warrants and 61,120 shares of common stock
issuable upon conversion of $5,000 principal amount of our 2005
Debentures. Nachum Stein is a partner in the selling shareholder
and has voting control and investment discretion over the shares
held by the selling shareholder. Mr. Stein disclaims beneficial
ownership of the shares held by the selling shareholder. |
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(31) |
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Represents shares of common stock issuable upon the exercise of
2003 Warrants and 2005 Warrants. David Klugmann and Ester
Klugman have voting control and investment discretion over the
shares held by the selling shareholder. |
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(32) |
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Represents shares of common stock issuable upon the exercise of
2005 Warrants. Michael E. Fein and Stephen E. Saltzstein, as
principals of Atoll Asset Management, LLC, the Managing Member
of the selling shareholder, exercise voting control and
investment discretion over the securities held by the selling
shareholder, Messrs. Fein and Saltzstein both disclaim
beneficial ownership of the securities held by the selling
shareholder. |
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(33) |
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Represents shares of common stock issuable upon the exercise of
2005 Warrants and warrants issued in connection with the selling
shareholders services as a finder. Shifra Weinhouse,
President of selling shareholder and Isaac Winehouse Secretary,
have voting control and investment discretion over the shares
held by the selling shareholder and disclaim beneficial
ownership of the shares held by the selling shareholder. Advisor
Associates, Inc. is a consultant to us and has served as a
finder in connection with prior financings by us, including the
2005 Debentures. |
50
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(34) |
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See Beneficial
Ownership of Certain Shareholders, Directors and Executive
Officers and
Directors and
Executive Officers of the Registrant.
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(35) |
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Represents shares underlying stock options granted to
Mr. Ketch. Mr. Ketch is the President and Chief
Executive Officer of the Company as well as a member of the
board of directors. |
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(36) |
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Represents shares underlying stock options granted to
Mr. Willenberg. Mr. Willenberg is the Chairman of the
board of directors and our Executive Vice President.
Mr. Willenberg served as our President and Chief Executive
Officer from April 1997 until March 2002. |
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(37) |
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Represents shares underlying stock options granted to
Mr. Cooper. Mr. Cooper is a member of the board of
directors and from June 1 to December 2, 2002, served
as our President and Chief Executive Officer. |
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(38) |
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Represents shares underlying stock options granted to
Mr. Peckham. Mr. Peckham is a member of our Board of
Directors. |
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(39) |
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Represents shares underlying stock options granted to the
selling shareholder. Mr. Chen serves as a member of the
Companys Advisory Board. |
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(40) |
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Represents shares underlying stock options granted to the
selling shareholder, which provides legal services to the
Company. Ted Ainsworth is the Chief Financial Officer of the
selling shareholder and has voting control and investment
discretion over the shares beneficially held by the selling
shareholder. Mr. Ainsworth disclaims beneficial ownership
of the shares underlying the stock options held by selling
shareholder. |
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(41) |
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Includes 1,419,111 Adjustment Shares and
14,191,112 shares of common stock issuable upon the
exercise of warrants issued in connection with the selling
shareholders services as placement agent for the Company
with respect to the placement of the 2006 Debentures.
Mr. Ezra Birnbaum is the President of the selling
shareholder and has voting control and investment discretion
over the shares held by the selling shareholder. The selling
shareholder received warrants as a part of compensation pursuant
to a placement agency agreement between us and selling
shareholder. Accordingly, such shares are restricted in
accordance with Rule 2710(g)(1) of the NASD Conduct Rules. |
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(42) |
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Includes 666,667 shares of common stock issuable upon the
exercise of 2003 Warrants and 403,334 shares of common
stock issuable upon conversion of $50,000 principal plus
interest thereon until maturity of our 2003 Debentures. Jonathan
P. Knight is President and Director of the selling shareholder
and has voting control and investment discretion over the shares
held by the selling shareholder. Mr. Knight disclaims beneficial
ownership of the shares held by the selling shareholder. |
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(43) |
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Represents shares of common stock issuable upon the exercise of
2003 Warrants. |
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(44) |
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Represents shares of common stock issuable upon the exercise of
2003 Warrants. |
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(45) |
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Represents shares of common stock issuable upon the exercise of
2003 Warrants. Isaac Ableson has voting control and investment
discretion over the shares held by the selling shareholder. |
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(46) |
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Represents shares of common stock issuable upon the exercise of
2003 Warrants. |
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(47) |
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Represents shares of common stock issuable upon the exercise of
2003 Warrants. Joshua Silverman has voting control and
investment discretion over the shares held by the selling
shareholder. |
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(48) |
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Represents shares of common stock issuable upon the exercise of
2003 Warrants. Nina Ledereich has voting control and investment
discretion of the shares issuable upon exercise of the warrants. |
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(49) |
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Represents shares of common stock issuable upon the exercise of
warrants issued in connection with a November 2003 bridge loan
to the Company. Yehuda Breitkope has voting control and
investment discretion of the shares issuable upon exercise of
the warrants held by the selling shareholder. |
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(50) |
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Represents shares of common stock issuable upon the exercise of
warrants issued in connection with legal services provided to
the Company. The selling shareholder has provided legal services
to the Company. David Aboudi and Gerald Brounstein have voting
control and investment discretion over the warrants and disclaim
beneficial ownership of the shares underlying such warrants. |
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(51) |
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Represents shares of common stock issuable upon exercise of 2005
Warrants. Richard Rosenblum and David Stefansky are principals
of the general partner of the selling shareholder. Both Mr.
Rosenblum and Mr. Stefansky disclaim beneficial ownership of the
shares underlying such warrants. |
51
PLAN OF
DISTRIBUTION
The selling shareholders and any of their pledgees, donees,
transferees, assignees and
successors-in-interest
may, from time to time, sell any or all of the shares that are
included in the registration statement of which this prospectus
forms a part on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These
sales may be at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated
prices.
The selling shareholders may use any one or more of the
following methods when selling shares:
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directly as principals;
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ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
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block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
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purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
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an exchange distribution in accordance with the rules of the
applicable exchange;
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privately negotiated transactions;
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to cover short sales made in compliance with applicable laws and
regulations;
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broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
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a combination of any such methods of sale; and
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any other method permitted pursuant to applicable law.
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The selling shareholders may also sell shares under
Rule 144 under the Act if available, rather than under this
prospectus.
The shares of common stock underlying the warrants issued to
those selling shareholders who, as indicated in the Selling
Shareholder table above, received such warrants as part of
compensation pursuant to a placement agency agreement between us
and such selling shareholders are restricted in accordance with
Rule 2710(g)(1) of the NASD Conduct Rules. Accordingly,
those selling shareholders shall not directly or indirectly
offer, sell, agree to offer or sell, transfer, assign, pledge,
hypothecate or subject to hedging, short sale, derivative, put
or call transaction such shares for a period of 180 days
after the effective date of this registration statement.
Broker-dealers engaged by the selling shareholders may arrange
for other broker-dealers to participate in sales. Broker-dealers
may receive commissions or discounts from the selling
shareholders (or, if any broker-dealer acts as an agent for the
purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these
commissions and discounts to exceed what is customary in the
types of transactions involved. We are not aware of any
definitive selling arrangement at the date of this prospectus
between any selling shareholder and any broker-dealer or agent.
Upon our being notified by a selling shareholder that any
material arrangement has been entered into with a broker-dealer
for the sale of shares through a block trade, special offering,
exchange distribution or secondary distribution or a purchase by
a broker or dealer, a supplement to this prospectus will be
filed by us, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:
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The name of each such selling shareholder and of the
participating broker-dealer(s);
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The number of shares involved;
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The price at which such shares were sold;
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The commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
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52
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That such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus; and
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Other facts material to the transaction.
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The selling shareholders may from time to time pledge or grant a
security interest in some or all of the shares owned by them
and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell
shares from time to time under this prospectus, or under an
amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act amending the list of
selling shareholders to include the pledgee, transferee or other
successors in interest as selling shareholders under this
prospectus.
The selling shareholders may also transfer the shares in other
circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for
purposes of this prospectus.
The selling shareholders and any broker-dealers or agents that
are involved in selling the shares may be deemed to be
underwriters within the meaning of the Securities
Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the
Securities Act. Discounts, concessions, commissions and similar
selling expenses, if any, that can be attributed to the sale of
securities will be paid by the applicable selling shareholder
and/or the
purchasers.
If a selling shareholder uses this prospectus for any sale of
the shares, it will be subject to the prospectus delivery
requirements of the Securities Act. The selling shareholders
will be responsible to comply with the applicable provisions of
the Securities Act and the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder,
including, without limitation, Regulation M, as applicable
to such selling shareholders in connection with resales of their
respective shares under this registration statement.
We are required to pay all fees and expenses incident to the
registration of the shares being offered by the selling
shareholders, but we will not receive any proceeds from the sale
of the shares except for, upon exercise, the exercise price of
options and warrants exercised on a cash basis. We have agreed
to indemnify certain selling shareholders against certain
losses, claims, damages and liabilities, including liabilities
under the Securities Act.
DESCRIPTION
OF SECURITIES
The following is a summary of certain rights of our common stock
and preferred stock and related provisions of our articles of
incorporation and bylaws. For more detailed information, please
see our articles of incorporation and bylaws, which are filed as
exhibits to the registration statement of which this prospectus
is a part.
We are authorized to issue 900,000,000 shares of common
stock, $0.001 par value per share, and
15,000,000 shares of preferred stock, $0.01 par value
per share. As of July 5, 2006, there were
324,973,732 shares of common stock and no shares of
preferred stock issued and outstanding.
Common
Stock
Holders of shares of our common stock are entitled to one vote
for each share held of record on all matters to be voted on by
shareholders. The holders of shares of our common stock do not
have cumulative voting rights for the election of directors and,
accordingly, the holders of more than 50% of the shares of
common stock are able to elect all directors. Holders of shares
of common stock are entitled to receive dividends when, as and
if declared by the board of directors from funds legally
available therefor, subject to the rights of preferred
shareholders, if any. Upon our liquidation, dissolution or
winding up, the holders of our common stock are entitled to
receive, pro-rata, that portion of our assets which are legally
available for distribution to shareholders, subject to the
rights of preferred shareholders, if any. Holders of our common
stock are not entitled to preemptive rights.
53
Preferred
Stock
Our board of directors has the authority, without approval by
the shareholders, to issue up to a total of
15,000,000 shares of preferred stock in one or more series.
The board of directors may establish the number of shares to be
included in each such series and may fix the designations,
preferences, powers and other rights of the shares of a series
of preferred stock, including without limitation voting powers,
conversion or dividend rights, redemption privileges and
liquidation preferences. The board could authorize the issuance
of preferred stock with voting or conversion rights that could
dilute the voting power or rights of the holders of common
stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect
of delaying, deferring or preventing a change in control of Rim
Semiconductor and might harm the market price of our common
stock. We have no current plans to issue any shares of preferred
stock.
Anti-Takeover
Effects of Our Articles of Incorporation and Bylaws
The provisions of our articles of incorporation and bylaws
summarized below could have the effect of delaying, deferring or
discouraging another party from acquiring control of us. These
provisions are expected to discourage coercive takeover
practices and inadequate takeover bids and are designed to
encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the
benefits of increased protection of our potential ability to
negotiate with an unfriendly or unsolicited acquiror outweigh
the disadvantages of discouraging a proposal to acquire us
because negotiation of these proposals could result in an
improvement of their terms.
Undesignated Preferred Stock. The ability to
authorize undesignated preferred stock makes it possible for our
board of directors to issue preferred stock with voting or other
rights or preferences that could impede the success of an
attempt to acquire us. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in
control or management of our company.
Requirements for Advance Notification of Shareholder
Nominations and Proposals. Our bylaws establish
advance notice procedures with respect to shareholder proposals
and the nomination of candidates for election as directors,
other than nominations made by or at the direction of the board
of directors or a committee of the board of directors. The
bylaws do not give the board of directors the power to approve
or disapprove shareholder nominations of candidates or proposals
regarding business to be conducted at a special or annual
meeting of the shareholders. However, our bylaws may have the
effect of precluding the conduct of certain business at a
meeting if the proper procedures are not followed. These
provisions may also discourage or deter a potential acquiror
from conducting a solicitation of proxies to elect the
acquirors own slate of directors or otherwise attempting
to obtain control of our company.
DISCLOSURE
OF SEC POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
We are a Utah corporation.
Section 16-10a-902
of the Utah Revised Business Corporation Act (the Revised
Act) provides that a corporation may indemnify any
individual who was, is or is threatened to be made a named
defendant or respondent (a Party) in any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or
informal (a Proceeding), because he or she is or was
a director of the corporation or, while a director of the
corporation, is or was serving at its request as a director,
officer, partner, trustee, employee, fiduciary or agent of
another corporation or other person or of an employee benefit
plan (an Indemnifiable Director), against any
obligation incurred with respect to a Proceeding, including any
judgment, settlement, penalty, fine or reasonable expenses
(including attorneys fees), incurred in the Proceeding if:
(i) his or her conduct was in good faith; (ii) he or
she reasonably believed that his or her conduct was in, or not
opposed to, the best interests of the corporation and
(iii) in the case of any criminal proceeding, had no
reasonable cause to believe such conduct was unlawful; provided,
however, that pursuant to Subsection 902(4):
(a) indemnification under Section 902 in connection
with a Proceeding by or in the right of the corporation is
limited to payment of reasonable expenses (including
attorneys fees) incurred in connection with the Proceeding
and (b) the
54
corporation may not indemnify an Indemnifiable Director in
connection with a Proceeding by or in the right of the
corporation in which the Indemnifiable Director was adjudged
liable to the corporation, or in connection with any other
Proceeding charging that the Indemnifiable Director derived an
improper personal benefit, whether or not involving action in
his or her official capacity, in which Proceeding he or she was
adjudged liable on the basis that he or she derived an improper
personal benefit.
Section 16-10a-903
of the Revised Act provides that, unless limited by its articles
of incorporation, a corporation shall indemnify an Indemnifiable
Director who was successful, on the merits or otherwise, in the
defense of any Proceeding, or in the defense of any claim, issue
or matter in the Proceeding, to which he or she was a Party
because he or she is or was an Indemnifiable Director of the
corporation, for reasonable expenses (including attorneys
fees) incurred in connection with the Proceeding or claim with
respect to which he or she has been successful.
Section 16-10a-904
of the Revised Act provides that a corporation may pay for or
reimburse the reasonable expenses (including attorneys
fees) incurred by an Indemnifiable Director who is a Party to a
Proceeding in advance of the final disposition of the Proceeding
upon the satisfaction of certain conditions.
In addition to the indemnification provided by Sections 902
and 903,
Section 16-10a-905
of the Revised Act provides that, unless otherwise limited by a
corporations articles of incorporation, an Indemnifiable
Director may apply for indemnification to the court conducting
the Proceeding or to another court of competent jurisdiction.
Section 16-10a-907
of the Revised Act provides that, unless a corporations
articles of incorporation provide otherwise, (i) an officer
of the corporation is entitled to mandatory indemnification
under Section 903 and is entitled to apply for
court-ordered indemnification under Section 905, in each
case to the same extent as an Indemnifiable Director;
(ii) the corporation may indemnify and advance expenses to
an officer, employee, fiduciary or agent of the corporation to
the same extent as an Indemnifiable Director and (iii) a
corporation may also indemnify and advance expenses to an
officer, employee, fiduciary or agent who is not an
Indemnifiable Director to a greater extent than the right of
indemnification granted to an Indemnifiable Director, if not
inconsistent with public policy, and if provided for by its
articles of incorporation, bylaws, general or specific action of
its board of directors or contract.
Section 16-10a-908
of the Revised Act authorizes a corporation to purchase and
maintain liability insurance for a director, officer, employee,
fiduciary or agent of the corporation.
Our Bylaws (the Bylaws) provide that subject to the
limitations and conditions as provided below and in
Section 9 of the Revised Act, a Party in a Proceeding or an
appeal, inquiry or investigation that could lead to a
Proceeding, by reason of the fact that he or she is or was an
Indemnifiable Director shall be indemnified by us against
judgments, fines, settlements and reasonable expenses
(including, attorneys fees) actually incurred by them in
connection with such Proceeding, if it is determined that such
person: (i) conducted himself or herself in good faith;
(ii) reasonably believed that his or her conduct was in, or
not opposed to, our best interest and (iii) in the case of
any criminal proceeding, had no reasonable cause to believe his
or her conduct was unlawful. Reasonableness of expenses shall be
determined by the directors, a committee, by special legal
counsel or by a vote of the shareholders. However, if a person
is found liable to us or is found liable on the basis that
personal benefit was improperly received by such person,
indemnification is limited to reasonable expenses actually
incurred by such person in connection with the Proceeding and
will not be made in respect of any Proceeding in which such
person shall have been found liable for willful or intentional
misconduct in the performance of his or her duty to us.
Indemnification may involve indemnification for negligence or
under theories of strict liability.
Our Bylaws further provide that indemnification rights granted
are contract rights, and no amendment of the Bylaws will limit
or deny any such rights with respect to actions taken or
Proceedings arising prior to any amendment. Indemnification
rights may include the right to be paid the reasonable expenses
incurred by an Indemnifiable Director who was, is or is
threatened to be made a named defendant or respondent in a
Proceeding in advance of the final disposition of the Proceeding
and without any determination as to the persons ultimate
entitlement to indemnification; provided, however, that the
payment of such expenses will be
55
made only (i) upon delivery to us of a written affirmation
by such director or officer of his or her good faith belief that
he or she has met the standard of conduct necessary for
indemnification; (ii) delivery of a written undertaking, by
or on behalf of such person, to repay all amounts so advanced if
it shall ultimately be determined that such indemnified person
is not entitled to be indemnified pursuant to the Bylaws or
otherwise and (iii) a determination that the facts then
known to those making the determination would not preclude
indemnification. We, by adoption of a resolution of the
directors, may indemnify and advance expenses to an officer,
employee, fiduciary or agent to the same extent and subject to
the same conditions under which we may indemnify and advance
expenses to directors. We may pay or reimburse expenses incurred
by a director or officer in connection with his or her
appearance as a witness or other participation in a Proceeding
at a time when he or she is not a named defendant or respondent
in the Proceeding. We may purchase and maintain liability
insurance. If any portion of the Bylaws relating to
indemnification are invalidated we shall nevertheless indemnify
each director, officer or any other person indemnified pursuant
to the Bylaws as to costs to the full extent permitted by any
applicable portion of the Bylaws that have not been invalidated
and to the fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted for our directors, officers and
controlling persons pursuant to the foregoing provisions or
otherwise, we have been advised that in the opinion of the SEC,
such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
LEGAL
MATTERS
The validity of the shares of common stock offered under this
prospectus will be passed on for us by Munck Butrus, P.C.,
Dallas, Texas. In February 2006, we issued to Munck
Butrus, P.C. for legal services an option to purchase up to
2 million shares of our common stock at an exercise price
of $0.0319 per share. The shares underlying such option are
included in the registration statement.
EXPERTS
The consolidated financial statements of Rim Semiconductor
Company as of and for the years ended October 31, 2005 and
2004 included in this prospectus have been audited by
Marcum & Kliegman LLP, independent registered public
accounting firm, as stated in their report appearing elsewhere
herein. Such financial statements have been included in this
prospectus in reliance upon the report of Marcum &
Kliegman LLP given on the authority of such firm as experts in
accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any
materials we file with the SEC at the following location of the
SEC:
Public Reference Room
100 F Street, NE, Room 1580
Washington, D.C. 20549
You may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
Our SEC filings are also available to the public over the
Internet at the SECs Web site at http:\\www.sec.gov.
This prospectus is part of a registration statement we have
filed with the SEC relating to the common stock offered hereby.
As permitted by SEC rules, this prospectus does not contain all
of the information included in the registration statement and
the accompanying exhibits and schedules we file with the SEC.
You may refer to the registration statement and the exhibits and
schedules for more information about us and our common stock.
The registration statement and exhibits and schedules are also
available at the SECs Public Reference Room or through its
Web site.
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Rim Semiconductor Company
(formerly New Visual Corporation)
We have audited the accompanying consolidated balance sheets of
Rim Semiconductor Company (formerly New Visual Corporation) and
Subsidiaries (the Company) as of October 31,
2005 and 2004 and the related consolidated statements of
operations, stockholders equity (deficiency), and cash
flows for the years ended October 31, 2005 and 2004. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor are we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys control over
financial reporting. Accordingly, we express no opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Rim Semiconductor Company and Subsidiaries at
October 31, 2005 and 2004 and the results of their
operations and their cash flows for the years ended
October 31, 2005 and 2004 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As shown in the consolidated financial statements, the
Company incurred net losses of $4,690,382 and $5,506,287 during
the years ended October 31, 2005 and 2004, respectively. As
of October 31, 2005, the Company had a working capital
deficiency of approximately $4,009,620. These conditions raise
substantial doubt about the Companys ability to continue
as a going concern. Managements plans in regard to these
matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 2, the accompanying financial
statements have been restated to correct for the accounting of
the warrants described therein.
/s/ MARCUM &
KLIEGMAN LLP
New York, New York
January 28, 2006, except for Notes 1, 2, 3
(Stock-Based Compensation) and 10, which are as of July 6,
2006.
F-2
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Restated)
|
|
|
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
373,481
|
|
|
$
|
127,811
|
|
Other current assets
|
|
|
34,031
|
|
|
|
7,984
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
407,512
|
|
|
|
135,795
|
|
Property and
equipment net
|
|
|
9,922
|
|
|
|
23,873
|
|
Technology license and capitalized
software development fee
|
|
|
5,751,000
|
|
|
|
5,751,000
|
|
Film in
distribution net
|
|
|
|
|
|
|
1,021,722
|
|
Deferred financing
costs net
|
|
|
326,307
|
|
|
|
187,413
|
|
Other assets
|
|
|
10,224
|
|
|
|
7,434
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,504,965
|
|
|
$
|
7,127,237
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY (DEFICIENCY)
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Convertible notes payable (net of
debt discount of $20,875 and $0, respectively)
|
|
$
|
736,997
|
|
|
$
|
913,000
|
|
Convertible debentures (net of
debt discount of $0 and $512,778, respectively)
|
|
|
|
|
|
|
197,222
|
|
Notes payable
|
|
|
1,834,073
|
|
|
|
1,002,310
|
|
Conversion option liability
|
|
|
778,167
|
|
|
|
|
|
Derivative
liabilities warrants
|
|
|
86,062
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
981,833
|
|
|
|
2,007,871
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
4,417,132
|
|
|
|
4,120,403
|
|
Long-term portion of convertible
debentures (net of debt discount of $1,601,586 and $268,750,
respectively)
|
|
|
339,125
|
|
|
|
53,750
|
|
Long-term portion of notes payable
|
|
|
108,134
|
|
|
|
|
|
Redeemable Series B Preferred
Stock
|
|
|
|
|
|
|
3,192,000
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
4,864,391
|
|
|
|
7,366,153
|
|
|
|
|
|
|
|
|
|
|
Commitments, Contingencies and
Other Matters
|
|
|
|
|
|
|
|
|
Stockholders Equity
(Deficiency):
|
|
|
|
|
|
|
|
|
Preferred
stock $0.01 par value;
15,000,000 shares authorized; Series A junior
participating preferred stock; -0- shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common
stock $0.001 par value;
500,000,000 shares authorized; 184,901,320 and
84,781,959 shares issued and outstanding at
October 31, 2005 and 2004, respectively
|
|
|
184,902
|
|
|
|
84,782
|
|
Additional paid-in capital
|
|
|
61,359,999
|
|
|
|
55,031,976
|
|
Unearned compensation
|
|
|
(22,771
|
)
|
|
|
(164,500
|
)
|
Accumulated deficit
|
|
|
(59,881,556
|
)
|
|
|
(55,191,174
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
(Deficiency)
|
|
|
1,640,574
|
|
|
|
(238,916
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity (Deficiency)
|
|
$
|
6,504,965
|
|
|
$
|
7,127,237
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
October 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Restated)
|
|
|
|
|
|
Revenues
|
|
$
|
39,866
|
|
|
$
|
287,570
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
11,945
|
|
|
|
142,691
|
|
Impairment of film in distribution
|
|
|
1,009,777
|
|
|
|
977,799
|
|
Research and development expenses
(including stock based compensation of $296,667 and $92,500,
respectively)
|
|
|
366,306
|
|
|
|
185,000
|
|
Selling, general and
administrative expenses (including stock based compensation of
$1,131,184 and $1,359,882, respectively)
|
|
|
2,951,925
|
|
|
|
3,441,187
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
4,339,953
|
|
|
|
4,746,677
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(4,300,087
|
)
|
|
|
(4,459,107
|
)
|
|
|
|
|
|
|
|
|
|
Other Expenses (Income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,027,147
|
|
|
|
883,592
|
|
Derivative gain
|
|
|
(2,233,004
|
)
|
|
|
|
|
Amortization of deferred financing
costs
|
|
|
602,182
|
|
|
|
78,427
|
|
Amortization of unearned financing
costs
|
|
|
|
|
|
|
85,161
|
|
Gain on sale of property and
equipment
|
|
|
(20,000
|
)
|
|
|
|
|
Gain on exchange of Redeemable
Series B Preferred Stock into common stock
|
|
|
(55,814
|
)
|
|
|
|
|
Gain on conversion of accrued
expenses into convertible notes payable
|
|
|
(33,514
|
)
|
|
|
|
|
Gain on forgiveness of liabilities
|
|
|
(896,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses
|
|
|
390,295
|
|
|
|
1,047,180
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,690,382
|
)
|
|
$
|
(5,506,287
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss Per
Common Share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of
Common Shares Outstanding
|
|
|
114,687,798
|
|
|
|
78,052,498
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Financing
|
|
|
Unearned
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Costs
|
|
|
Compensation
|
|
|
Deficit
|
|
|
(Deficiency)
|
|
|
Balance at October 31,
2004
|
|
|
84,781,959
|
|
|
$
|
84,782
|
|
|
$
|
55,031,976
|
|
|
$
|
|
|
|
$
|
(164,500
|
)
|
|
$
|
(55,191,174
|
)
|
|
$
|
(238,916
|
)
|
Issuance of common stock for cash
|
|
|
10,289,026
|
|
|
|
10,289
|
|
|
|
824,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
835,100
|
|
Issuance of common stock under
consulting agreements
|
|
|
2,837,500
|
|
|
|
2,838
|
|
|
|
339,162
|
|
|
|
|
|
|
|
(342,000
|
)
|
|
|
|
|
|
|
|
|
Issuance of common stock for
services
|
|
|
5,073,015
|
|
|
|
5,073
|
|
|
|
309,594
|
|
|
|
|
|
|
|
(314,667
|
)
|
|
|
|
|
|
|
|
|
Issuance of common stock to key
employees and directors
|
|
|
2,750,000
|
|
|
|
2,750
|
|
|
|
449,750
|
|
|
|
|
|
|
|
(452,500
|
)
|
|
|
|
|
|
|
|
|
Issuance of common stock for
conversion of notes payable, convertible debentures, and accrued
interest
|
|
|
72,763,232
|
|
|
|
72,763
|
|
|
|
2,636,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,708,956
|
|
Issuance of common stock for
liquidated damages
|
|
|
803,331
|
|
|
|
804
|
|
|
|
97,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,450
|
|
Issuance of common stock for Below
Market Issuance
|
|
|
529,311
|
|
|
|
529
|
|
|
|
(529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in payment
of accounts payable and accrued expenses
|
|
|
422,783
|
|
|
|
423
|
|
|
|
71,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,911
|
|
Issuance of common stock in
exchange for surrender of convertible preferred stock
|
|
|
4,651,163
|
|
|
|
4,651
|
|
|
|
739,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
744,186
|
|
Stock options issued for
professional services
|
|
|
|
|
|
|
|
|
|
|
165,869
|
|
|
|
|
|
|
|
(165,869
|
)
|
|
|
|
|
|
|
|
|
Stock offering costs
|
|
|
|
|
|
|
|
|
|
|
(39,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,105
|
)
|
Reclassification of conversion
option liability
|
|
|
|
|
|
|
|
|
|
|
721,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721,833
|
|
Warrants issued for professional
services
|
|
|
|
|
|
|
|
|
|
|
11,776
|
|
|
|
|
|
|
|
(11,776
|
)
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,428,541
|
|
|
|
|
|
|
|
1,428,541
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,690,382
|
)
|
|
|
(4,690,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31,
2005
|
|
|
184,901,320
|
|
|
$
|
184,902
|
|
|
$
|
61,359,999
|
|
|
$
|
|
|
|
$
|
(22,771
|
)
|
|
$
|
(59,881,556
|
)
|
|
$
|
1,640,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Consolidated Statements
of Stockholders Equity (Deficiency)
For The Years Ended October 31, 2005 (Restated) and
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Financing
|
|
|
Unearned
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Costs
|
|
|
Compensation
|
|
|
Deficit
|
|
|
(Deficiency)
|
|
|
Balance at October 31,
2003
|
|
|
70,676,682
|
|
|
$
|
70,677
|
|
|
$
|
51,131,622
|
|
|
$
|
(15,674
|
)
|
|
$
|
(404,582
|
)
|
|
$
|
(49,684,887
|
)
|
|
$
|
1,097,156
|
|
Issuance of common stock for cash
|
|
|
4,907,085
|
|
|
|
4,907
|
|
|
|
589,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594,000
|
|
Issuance of common stock for
extension of promissory notes
|
|
|
310,003
|
|
|
|
310
|
|
|
|
49,071
|
|
|
|
(49,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in payment
for deferred payroll
|
|
|
40,000
|
|
|
|
40
|
|
|
|
9,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Issuance of common stock for
compensation
|
|
|
1,003,999
|
|
|
|
1,004
|
|
|
|
230,076
|
|
|
|
|
|
|
|
(230,000
|
)
|
|
|
|
|
|
|
1,080
|
|
Issuance of common stock under
consulting agreements
|
|
|
4,002,227
|
|
|
|
4,002
|
|
|
|
976,048
|
|
|
|
|
|
|
|
(980,050
|
)
|
|
|
|
|
|
|
|
|
Issuance of common stock for
services
|
|
|
468,047
|
|
|
|
468
|
|
|
|
109,739
|
|
|
|
|
|
|
|
(2,250
|
)
|
|
|
|
|
|
|
107,957
|
|
Issuance of common stock for
conversion of notes payable
|
|
|
2,209,631
|
|
|
|
2,210
|
|
|
|
329,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331,445
|
|
Issuance of common stock for
liquidated damages
|
|
|
283,333
|
|
|
|
283
|
|
|
|
23,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,000
|
|
Issuance of common stock for
research and development services
|
|
|
880,952
|
|
|
|
881
|
|
|
|
91,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,500
|
|
Stock offering costs
|
|
|
|
|
|
|
|
|
|
|
(20,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,475
|
)
|
Warrants issued with convertible
debentures
|
|
|
|
|
|
|
|
|
|
|
577,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
577,896
|
|
Value assigned to beneficial
conversions
|
|
|
|
|
|
|
|
|
|
|
772,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
772,104
|
|
Warrants issued to placement agent
|
|
|
|
|
|
|
|
|
|
|
121,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,018
|
|
Value assigned to warrants issued
for extension of convertible notes
|
|
|
|
|
|
|
|
|
|
|
15,992
|
|
|
|
(15,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for professional
services
|
|
|
|
|
|
|
|
|
|
|
21,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,147
|
|
Value assigned to warrants issued
for convertible notes
|
|
|
|
|
|
|
|
|
|
|
4,114
|
|
|
|
(4,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,452,382
|
|
|
|
|
|
|
|
1,452,382
|
|
Amortization of unearned financing
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,161
|
|
|
|
|
|
|
|
|
|
|
|
85,161
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,506,287
|
)
|
|
|
(5,506,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31,
2004
|
|
|
84,781,959
|
|
|
$
|
84,782
|
|
|
$
|
55,031,976
|
|
|
$
|
|
|
|
$
|
(164,500
|
)
|
|
$
|
(55,191,174
|
)
|
|
$
|
(238,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
October 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Restated)
|
|
|
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,690,382
|
)
|
|
$
|
(5,506,287
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Consulting fees and other
compensatory elements of stock issuances
|
|
|
1,428,541
|
|
|
|
1,452,382
|
|
Derivative gain
|
|
|
(2,233,004
|
)
|
|
|
|
|
Interest paid in stock
|
|
|
|
|
|
|
13,946
|
|
Penalties paid in stock
|
|
|
|
|
|
|
24,000
|
|
Warrants issued for services
|
|
|
|
|
|
|
21,147
|
|
Impairment of film in distribution
|
|
|
1,009,777
|
|
|
|
977,799
|
|
Gain on sale of property and
equipment
|
|
|
(20,000
|
)
|
|
|
|
|
Gain on exchange of Redeemable
Series B Preferred Stock into common stock
|
|
|
(55,814
|
)
|
|
|
|
|
Gain on conversion of accrued
expenses into convertible notes payable
|
|
|
(33,514
|
)
|
|
|
|
|
Gain on forgiveness of liabilities
|
|
|
(896,702
|
)
|
|
|
|
|
Amortization of unearned financing
costs
|
|
|
|
|
|
|
85,161
|
|
Amortization of deferred financing
costs
|
|
|
602,182
|
|
|
|
78,427
|
|
Amortization of film in production
costs
|
|
|
11,945
|
|
|
|
142,691
|
|
Amortization on debt discount on
notes
|
|
|
2,692,581
|
|
|
|
568,471
|
|
Depreciation
|
|
|
25,112
|
|
|
|
17,428
|
|
Change in assets (increase)
decrease:
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
(26,047
|
)
|
|
|
(2,969
|
)
|
Other assets
|
|
|
(2,790
|
)
|
|
|
5,602
|
|
Change in liabilities increase
(decrease):
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
(224,084
|
)
|
|
|
474,524
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating
Activities
|
|
|
(2,412,199
|
)
|
|
|
(1,647,678
|
)
|
|
|
|
|
|
|
|
|
|
Cash Used in Investing
Activities
|
|
|
|
|
|
|
|
|
Acquisition of technology license
and development fee
|
|
|
|
|
|
|
(95,000
|
)
|
Acquisition of property and
equipment
|
|
|
(11,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing
Activities
|
|
|
(11,161
|
)
|
|
|
(95,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
835,100
|
|
|
|
594,000
|
|
Offering costs related to stock
issuances
|
|
|
|
|
|
|
(20,475
|
)
|
Proceeds from convertible
debentures
|
|
|
3,500,000
|
|
|
|
1,350,000
|
|
Proceeds from notes payable
|
|
|
300,000
|
|
|
|
262,000
|
|
Proceeds from convertible notes
payable
|
|
|
|
|
|
|
100,000
|
|
Capitalized financing costs
|
|
|
(422,010
|
)
|
|
|
(144,822
|
)
|
Repayments of convertible
debentures
|
|
|
|
|
|
|
(300,000
|
)
|
Repayments of notes payable
|
|
|
(1,010,021
|
)
|
|
|
|
|
Repayments of convertible notes
payable
|
|
|
(534,039
|
)
|
|
|
(290,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing
Activities
|
|
|
2,669,030
|
|
|
|
1,550,703
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in
Cash
|
|
|
245,670
|
|
|
|
(191,975
|
)
|
Cash Beginning
of Year
|
|
|
127,811
|
|
|
|
319,786
|
|
|
|
|
|
|
|
|
|
|
Cash Ending of
Year
|
|
$
|
373,481
|
|
|
$
|
127,811
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Consolidated Statements
of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October
31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Restated)
|
|
|
|
|
|
Supplemental Disclosure of Cash
Flow
Information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
203,539
|
|
|
$
|
14,565
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and
Financing
Activities:
|
|
|
|
|
|
|
|
|
Compensation satisfied by issuance
of common stock
|
|
$
|
|
|
|
$
|
119,037
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for conversion
of convertible debentures, notes payable and accrued interest
|
|
$
|
2,708,956
|
|
|
$
|
331,445
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses satisfied by issuance of common stock
|
|
$
|
71,911
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for accrued
liquidated damages
|
|
$
|
98,450
|
|
|
$
|
24,000
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses converted to notes payable
|
|
$
|
55,251
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Value assigned to beneficial
conversion in connection with issuance of convertible debentures
|
|
$
|
|
|
|
$
|
772,104
|
|
|
|
|
|
|
|
|
|
|
Value assigned to warrants issued
to purchasers of convertible debentures
|
|
$
|
2,000,000
|
|
|
$
|
577,896
|
|
|
|
|
|
|
|
|
|
|
Value assigned to conversion
option liability in connection with issuance of convertible
debentures
|
|
$
|
1,500,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Value assigned to warrants issued
to placement agent
|
|
$
|
319,066
|
|
|
$
|
121,018
|
|
|
|
|
|
|
|
|
|
|
Value assigned to warrants issued
for extension of convertible notes
|
|
$
|
|
|
|
$
|
20,106
|
|
|
|
|
|
|
|
|
|
|
Redeemable Series B Preferred
Stock exchanged into notes payable
|
|
$
|
2,392,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Series B Preferred
Stock (recorded at $800,000) exchanged into common stock
|
|
$
|
744,186
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation converted to
convertible note payable (see footnote 9 (6))
|
|
$
|
383,911
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of conversion
option liability to equity
|
|
$
|
721,833
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
1. Principles
of Consolidation, Business and Continued Operations
The consolidated financial statements include the accounts of
Rim Semiconductor Company (formerly New Visual
Corporation)(Rim Semi) and its wholly owned
operating subsidiaries, NV Entertainment, Inc. (NV
Entertainment), and NV Technology, Inc. (NV
Technology collectively, the Company). Top
Secret Productions, LLC is a 50% owned subsidiary of NV
Entertainment. All significant intercompany balances and
transactions have been eliminated. The Company consolidates its
50% owned subsidiary Top Secret Productions, LLC due to the
Companys control of management and financial matters of
such entity.
Rim Semiconductor Company was incorporated under the laws of the
State of Utah on December 5, 1985. In November of 1999, the
Company began to focus its business activities on the
development of new Semiconductor Technologies. Pursuant to such
plan, in February of 2000, the Company acquired NV Technology.
The Companys technology business has generated no revenues
to date.
The Company operates in two business segments, the production of
motion pictures, films and videos (Entertainment Segment) and
development of new semiconductor technologies (Semiconductor
Segment). The Companys Entertainment Segment is dependent
on future revenues from the Companys film Step Into
Liquid (Film). The Semiconductor Segment is
dependent on the Companys ability to successfully
commercialize its developed technology.
Through its subsidiary NV Entertainment the Company has
operating revenues for its Entertainment Segment, but may
continue to report operating losses for this segment. The
Semiconductor Segment will have no operating revenues until
successful commercialization of its developed technology, but
will continue to incur substantial operating expenses,
capitalized costs and operating losses.
Going
Concern Uncertainty (Restated)
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate
continuation of the Company as a going concern and the
realization of assets and the satisfaction of liabilities in the
normal course of business.
The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or
settlement values. The Company has suffered significant
recurring operating losses, used substantial funds in its
operations, and needs to raise additional funds to accomplish
its objectives. For the years ended October 31, 2005 and
2004 the Company incurred net losses of approximately
$4.7 million and $5.5 million, respectively, and as of
October 31, 2005 had a working capital deficiency of
approximately $4.0 million. In addition, management
believes that the Company will continue to incur net losses and
cash flow deficiencies from operating activities through at
least October 31, 2006. These conditions raise substantial
doubt about the Companys ability to continue as a going
concern.
As more fully described in the notes below, the Company funded
its operations during 2005 and 2004 through sales of its common
stock, par value $0.001 per share (the Common
Stock), proceeds from notes, convertible notes and
convertible debentures resulting in approximate net proceeds to
the Company of $4,635,000 and $2,306,000, respectively.
The Companys ability to continue to operate as a going
concern is dependent on its ability to generate sufficient cash
flows to meet its obligations on a timely basis, to obtain
additional financing and to ultimately attain profitability.
Management of the Company is continuing its efforts to secure
funds through equity
and/or debt
instruments for its operations. The Company will require
additional funds for its operations and to pay down its
liabilities, as well as finance its expansion plans consistent
with its business plan. However, there can be no
F-9
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
assurance that the Company will be able to secure additional
funds and that if such funds are available, whether the terms or
conditions would be acceptable to the Company and whether the
Company will be able to turn into a profitable position and
generate positive operating cash flow. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty and these
adjustments may be material.
2. Restatement
On July 6, 2006, the Companys Board of Directors,
after consultations by management and the Audit Committee with
the Companys independent registered public accounting
firm, concluded that the classification of warrants in
connection with the 2005 convertible debentures was not in
accordance with interpretations of Emerging Issues Task Force
(EITF) Issue
No. 00-19
Accounting for Derivative Financial Instruments Indexed To
and Potentially Settled In, a Companys Own Stock.
Accordingly, the consolidated financial statements included in
the Companys Annual Report on
Form 10-KSB
for the period ended October 31, 2005, as filed on
January 30, 2006 and amended on February 28, 2006 (the
2005
10-KSB),
and included herein have been restated to correct the accounting
for the warrants as derivative liabilities. The previously
issued consolidated financial statements included in the 2005
Form 10-KSB
should not be relied upon. As a result of this restatement,
$86,062 included in stockholders equity at
October 31, 2005 should have been recorded as a derivative
liability and the Company should have recorded a gain of
$2,233,004 for the change in fair value of derivative
liabilities for the fiscal year ended October 31, 2005. The
treatment of this non-cash accounting item results in a decrease
in the Companys net loss for the fiscal year ended
October 31, 2005 as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
October 31, 2005
|
|
|
|
(As Reported)
|
|
|
(As Restated)
|
|
|
Net loss
|
|
$
|
(6,923,386
|
)
|
|
$
|
(4,690,382
|
)
|
Basic and diluted net loss per
share of common stock
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
The correction of the above results in the following changes to
the Companys stockholders equity and liabilities at
October 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
(As Reported)
|
|
|
(As Restated)
|
|
|
Total liabilities
|
|
$
|
4,778,329
|
|
|
$
|
4,864,391
|
|
Stockholders equity
|
|
$
|
1,726,636
|
|
|
$
|
1,640,574
|
|
3. Summary
of Significant Accounting Policies
Accounting
Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates
include impairment analysis for long-lived assets, the
individual-film-forecast computation method, and valuation of
derivative instruments. Actual results could differ from those
estimates.
Fair
Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets
for cash, accounts payable, accrued expenses, convertible notes
payable, and notes payable approximate fair value because of
their immediate or short-term nature. The fair value of
long-term notes payable and convertible debentures approximates
their
F-10
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
carrying value because the stated rates of the debt either
reflect recent market conditions or are variable in nature.
Property
and Equipment
Property and equipment are stated at cost. Depreciation is
computed on a straight-line method over the estimated useful
lives of the assets, which generally range from five to seven
years. Maintenance and repair expenses are charged to operations
as incurred.
Film
in Distribution
Statement of Position 00-2, Accounting by Producers or
Distributors of Films (SOP-00-2) requires that
film costs be capitalized and reported as a separate asset on
the balance sheet. Film costs include all direct negative costs
incurred in the production of a film, as well as allocations of
production overhead and capitalized interest. Direct negative
costs include cost of scenario, story, compensation of cast,
directors, producers, writers, extras and staff, cost of set
construction, wardrobe, accessories, sound synchronization,
rental of facilities on location and post production costs.
SOP-00-2 also requires that film costs be amortized and
participation costs accrued, using the
individual-film-forecast-computation method, which amortizes or
accrues such costs in the same ratio that the current period
actual revenue (numerator) bears to the estimated remaining
unrecognized ultimate revenue as of the beginning of the fiscal
year (denominator). The Company makes certain estimates and
judgments of its future gross revenue to be received for each
film based on information received by its distributors,
historical results and managements knowledge of the
industry. Revenue and cost forecasts are continually reviewed by
management and revised when warranted by changing conditions. A
change to the estimate of gross revenues for an individual film
may result in an increase or decrease to the percentage of
amortization of capitalized film costs relative to a previous
period.
In addition, SOP-00-2 also requires that if an event or change
in circumstances indicates that an entity should assess whether
the fair value of a film is less than its unamortized film
costs, then an entity should determine the fair value of the
film and write-off to the statements of operations the amount by
which the unamortized film costs exceeds the Films fair
value.
During January 2005, the Company performed its review, and it
was determined that the unamortized film costs exceeded the
Films fair value. The Company determined that its previous
estimation of the expenses incurred by the Films
distributor were too low and the estimation of future revenue
were too high. As a result of this review, the Company
wrote-down the carrying value attributed to its Film In
Distribution to $1,021,722 at October 31, 2004. This
resulted in an impairment of $977,799 which is included in the
consolidated statement of operations for the year ended
October 31, 2004.
During July 2005, the Company performed its review, and it was
determined that the unamortized film costs exceeded the
Films fair value. The conclusion was based upon
information the Company received from the films
distributor relating to lower than expected sales. As a result
of this review, the Company wrote-down the remaining carrying
value attributed to the Film to $0. This resulted in an
impairment of $1,009,777 which is included in the consolidated
statement of operations for the year ended October 31, 2005.
Income
Taxes
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, Accounting
for Income Taxes (SFAS No. 109).
SFAS No. 109 employs an asset and liability method of
accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for tax
consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to the difference
between the financial statement carrying amounts and the tax
bases of existing assets and
F-11
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
liabilities. Under SFAS No. 109, the effect on
deferred income taxes of a change in tax rates is recognized in
operations in the period that includes the enactment date.
Revenue
Recognition
The Company recognizes film revenue from the distribution of its
feature film and related products when earned and reasonably
estimable in accordance with
SOP 00-2.
The following conditions must be met in order to recognize
revenue in accordance with
SOP 00-2:
|
|
|
|
|
persuasive evidence of a sale or licensing arrangement with a
customer exists;
|
|
|
|
the film is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate
and unconditional delivery;
|
|
|
|
the license period of the arrangement has begun and the customer
can begin its exploitation, exhibition or sale;
|
|
|
|
the arrangement fee is fixed or determinable; and
|
|
|
|
collection of the arrangement fee is reasonably assured.
|
Under a rights Agreement with Lions Gate Entertainment
(LGE) the domestic distributor for its Film entitled
Step Into Liquid, the Company shares with LGE in the profits of
the Film after LGE recovers its marketing, distribution and
other predefined costs and fees. The agreement provides for the
payment of minimum guaranteed license fees, usually payable on
delivery of the respective completed film, that are subject to
further increase based on the actual distribution results in the
respective territory. Minimum guaranteed license fees totaled
approximately $27,000 and $95,000 during the years ended
October 31, 2005 and 2004, respectively and were recorded
as revenue.
Research
and Development
Research and development costs are charged to expense as
incurred. Amounts allocated to
acquired-in-process
research and development costs, from business combinations, are
charged to operations at the consummation of the acquisition.
Capitalized
Software Development Costs
Capitalization of computer software development costs begins
upon the establishment of technological feasibility.
Technological feasibility for the Companys computer
software is generally based upon achievement of a detail program
design free of high-risk development issues and the completion
of research and development on the product hardware in which it
is to be used. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized
computer software development costs require considerable
judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility,
anticipated future gross revenue, estimated economic life and
changes in software and hardware technology.
Amortization of capitalized computer software development costs
commences when the related products become available for general
release to customers. Amortization is provided on a
product-by-product
basis. The annual amortization is the greater of the amount
computed using (a) the ratio that current gross revenue for
a product bears to the total of current and anticipated future
gross revenue for that product, or (b) the straight-line
method over the remaining estimated economic life of the product.
The Company periodically performs reviews of the recoverability
of such capitalized software costs. At the time a determination
is made that capitalized amounts are not recoverable based on
the estimated cash
F-12
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
flows to be generated from the applicable software, the
capitalized costs of each software product is then valued at the
lower of its remaining unamortized costs or net realizable value.
No assurance can be given that the Companys technology
will receive market acceptance. Accordingly it is possible that
the carrying amount of the technology license may be reduced
materially in the near future.
The Company has no amortization expense for the years ended
October 31, 2005 and 2004 for its capitalized software
development costs.
Redeemable
Series B Preferred Stock
Redeemable Series B Preferred Stock, which includes
characteristics of both liabilities and equity, is classified as
a long-term liability in accordance with the provisions of
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity. In April 2005, the Redeemable Series B
Preferred Stock was cancelled in exchange for the issuance of
common stock and a promissory note. See Note 8 for further
discussion.
Loss
Per Common Share
Basic loss per common share is computed based on weighted
average shares outstanding and excludes any potential dilution.
Diluted loss per share reflects the potential dilution from the
exercise or conversion of all dilutive securities into common
stock based on the average market price of common shares
outstanding during the period. No effect has been given to
outstanding options, warrants or convertible debentures in the
diluted computation, as their effect would be anti-dilutive.
The number of potentially dilutive securities excluded from
computation of diluted loss per share was approximately
172,755,614 (see Note 14) and 38,509,190, for the
years ended October 31, 2005 and 2004, respectively.
Stock-Based
Compensation (Restated)
The Company follows Statement of Financial Accounting Standards
No. 123 (SFAS No. 123),
Accounting for Stock-Based Compensation.
SFAS No. 123 establishes accounting and reporting
standards for stock-based employee compensation plans. This
statement allows companies to choose between the fair
value-based method of accounting as defined in this statement
and the intrinsic value-based method of accounting as prescribed
by Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to
Employees.
The Company has elected to continue to follow the accounting
guidance provided by APB 25, as permitted for stock-based
compensation relative to the Company employees. Stock and
options granted to other parties in connection with providing
goods and services to the Company are accounted for under the
fair value method as prescribed by SFAS No. 123.
In December 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 148,
Accounting for Stock-Based
Compensation Transition and
Disclosure an Amendment of FASB Statement
No. 123. This statement amends SFAS No. 123
to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for
stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS No. 148
also requires that those effects be disclosed more prominently
by specifying the form, content, and location of those
disclosures.
F-13
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
October 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Restated)
|
|
|
|
|
|
Net loss, as reported
|
|
$
|
(4,690,382
|
)
|
|
$
|
(5,506,287
|
)
|
Add: Stock-based employee
compensation expense included in reported net loss
|
|
|
|
|
|
|
|
|
Less: Total stock-based employee
compensation expense determined under the fair value-based
method for all awards
|
|
|
(1,029,125
|
)
|
|
|
(333,500
|
)
|
|
|
|
|
|
|
|
|
|
Net loss, pro-forma
|
|
$
|
(5,719,507
|
)
|
|
$
|
(5,839,787
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss per
Common Share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Impairment
of Long-Lived Assets
Pursuant to SFAS No. 144, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, the Company evaluates its long-lived assets
for financial impairment, and continues to evaluate them as
events or changes in circumstances indicate that the carrying
amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the
estimated undiscounted future cash flows associated with them.
At the time such evaluations indicate that the future
undiscounted cash flows of certain long-lived assets are not
sufficient to recover the carrying value of such assets, the
assets are adjusted to their fair values.
Impact
of Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation Number 46,
Consolidation of Variable Interest Entities
(FIN 46). This interpretation of Accounting
Research Bulletin (ARB) No. 51,
Consolidated Financial Statements, provides guidance
for identifying a controlling interest in a variable interest
entity (VIE) established by means other than voting
interests. FIN 46 also requires consolidation of a VIE by
an enterprise that holds such a controlling interest. In
December 2003, the FASB completed its deliberations regarding
the proposed modification to FIN 46 and issued
Interpretation Number 46(R), Consolidation of Variable
Interest Entities-an Interpretation of ARB No. 51
(FIN 46(R)). The decisions reached included a
deferral of the effective date and provisions for additional
scope exceptions for certain types of variable interest.
Application of FIN 46(R) is required in financial
statements of public entities that have interests in VIEs or
potential VIEs commonly referred to as special-purpose entities
for periods ending after December 15, 2003. Application by
public small business issuers entities is required in all
interim and annual financial statements for periods ending after
December 15, 2004. The adoption of this pronouncement did
not have an impact on the Companys consolidated financial
position, results of operations or cash flows.
In April 2005, the Securities and Exchange Commission issued
release
number 33-8568,
AMENDMENT TO
RULE 4-01(A)
OF
REGULATION S-X
REGARDING THE COMPLIANCE DATE FOR STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 123 (REVISED 2004), SHARE BASED
PAYMENT. This release delays the date for compliance with
Statement of Financial Accounting Standards No. 123
(Revised 2004), Share Based Payment
(SFAS 123R) to the registrants first
interim or annual reporting period beginning on or after
December 15, 2005. SFAS 123R requires public entities
to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair
value
F-14
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
of the award, and no longer allows companies to apply the
intrinsic value based method of accounting for stock
compensation described in APB 25. The Company has elected
to early adopt SFAS 123R and will apply its requirements as
of November 1, 2005.
The Company has elected to use the modified prospective
application transition method and accordingly, measurement and
attribution of compensation cost for awards that are outstanding
as of the adoption date will be based on the original grant date
fair value and the same attribution method that the Company
previously used. The Company expects these transition provisions
to result in the recognition of approximately $250,000 in stock
based compensation expense during the three months ended
January 31, 2006 related to the vesting of options
previously granted in April 2005 as further discussed in
Note 14.
The Company estimates that options granted to the Companys
Chief Executive Officer and Executive Vice President in January
2006, as further discussed in Note 18, will result in stock
based compensation expense of approximately $575,000 under the
measurement requirements of SFAS 123R and expects this to
be recognized through the service period of July 2006.
In June 2005, the FASB published Statement of Financial
Accounting Standards No. 154, Accounting Changes and
Error Corrections (SFAS 154).
SFAS 154 establishes new standards on accounting for
changes in accounting principles. Pursuant to the new rules, all
such changes must be accounted for by retrospective application
to the financial statements of prior periods unless it is
impracticable to do so. SFAS 154 completely replaces
Accounting Principles Bulletin No. 20 and SFAS 3,
though it carries forward the guidance in those pronouncements
with respect to accounting for changes in estimates, changes in
the reporting entity, and the correction of errors. The
requirements in SFAS 154 are effective for accounting
changes made in fiscal years beginning after December 15,
2005. The Company will apply these requirements to any
accounting changes after the implementation date.
The Emerging Issues Task Force (EITF) reached a
tentative conclusion on EITF Issue
No. 05-1,
Accounting for the Conversion of an Instrument That
Becomes Convertible upon the Issuers Exercise of a Call
Option that no gain or loss should be recognized upon the
conversion of an instrument that becomes convertible as a result
of an issuers exercise of a call option pursuant to the
original terms of the instrument. The adoption of this
pronouncement is not expected to have an impact on the
Companys consolidated financial position, results of
operations, or cash flows.
In June 2005, the FASB ratified EITF Issue
No. 05-2,
The Meaning of Conventional Convertible Debt
Instrument in EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock (EITF
No. 05-2),
which addresses when a convertible debt instrument should be
considered conventional for the purpose of applying
the guidance in EITF
No. 00-19.
EITF
No. 05-2
also retained the exemption under EITF
No. 00-19
for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date
may qualify for the exemption provided under EITF
No. 00-19
for conventional convertible debt if the instruments
economic characteristics are more similar to debt than equity.
EITF
No. 05-2
is effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. The
Company has applied the requirements of EITF
No. 05-2
since the required implementation date. The adoption of this
pronouncement did not have an impact on the Companys
consolidated financial position, results of operations or cash
flows.
EITF Issue
No. 05-4
The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock (EITF
No. 05-4)
addresses financial instruments, such as stock purchase
warrants, which are accounted for under
EITF No. 00-19
that may be issued at the same time and in contemplation of a
registration rights agreement that includes a liquidated damages
clause. The consensus of
F-15
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
EITF No.
05-4 has not
been finalized. The adoption of this pronouncement is not
expected to have an impact on the Companys consolidated
financial position, results of operations, or cash flows.
In September 2005, the FASB ratified EITF Issue
No. 05-7,
Accounting for Modifications to Conversion Options
Embedded in Debt Instruments and Related Issues
(EITF
No. 05-7),
which addresses whether a modification to a conversion option
that changes its fair value affects the recognition of interest
expense for the associated debt instrument after the
modification and whether a borrower should recognize a
beneficial conversion feature, not a debt extinguishment, if a
debt modification increases the intrinsic value of the debt (for
example, the modification reduces the conversion price of the
debt). EITF
No. 05-7
is effective for the first interim or annual reporting period
beginning after December 15, 2005. The Company will adopt
EITF
No. 05-7
as of the beginning of the Companys interim reporting
period that begins on February 1, 2006. The Company is
currently in the process of evaluating the effect that the
adoption of this pronouncement will have on its financial
statements.
In September 2005, the FASB ratified EITF Issue
No. 05-8,
Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature (EITF
No. 05-8),
which addresses the treatment of convertible debt issued with a
beneficial conversion feature as a temporary difference under
the guidance in SFAS 109. In addition, deferred taxes
recognized for a temporary difference of debt with a beneficial
conversion feature should be recognized as an adjustment of
additional paid-in capital. Entities should apply the guidance
in EITF
No. 05-8
in the first interim or annual reporting period that begins
after December 15, 2005. Its provisions should be applied
retrospectively under the guidance in SFAS 154 to all
convertible debt instruments with a beneficial conversion
feature accounted for under the guidance in EITF
No. 00-27
Application of EITF Issue
No. 98-5
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios. The Company has applied the
requirements of EITF
No. 05-8
to all previously existing convertible debt instruments with a
beneficial conversion feature and will apply the requirements of
EITF
No. 05-8
beginning on February 1, 2006 for all new convertible debt
instruments with a beneficial conversion feature. The adoption
of this pronouncement for new convertible debt instruments with
a beneficial conversion feature is not expected to have an
impact on the Companys consolidated financial position,
results of operations or cash flows.
Reclassifications
Certain prior year balances have been reclassified to conform to
the current year presentation.
4. Property
and Equipment
Property and equipment, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
At October 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Furniture and fixtures
|
|
$
|
6,525
|
|
|
$
|
54,097
|
|
Camera equipment
|
|
|
|
|
|
|
298,109
|
|
Office equipment
|
|
|
4,636
|
|
|
|
109,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,161
|
|
|
|
461,721
|
|
Less: accumulated depreciation
|
|
|
1,239
|
|
|
|
437,848
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,922
|
|
|
$
|
23,873
|
|
|
|
|
|
|
|
|
|
|
For the years ended October 31, 2005 and 2004, depreciation
expense was $25,112 and $17,428, respectively.
F-16
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
5. Technology
License and Development Agreement
On April 17, 2002, the Company entered into a development
and license agreement with Adaptive Networks, Inc.
(Adaptive) to acquire a worldwide, perpetual license
to Adaptives
Powerstreamtm
technology, intellectual property, and patent portfolio for use
in products relating to all applications in the field of the
copper telephone wire telecommunications network. In
consideration of the grant of the license, the Company assumed
certain debt obligations of Adaptive to Zaiq Technologies, Inc.
(Zaiq) and TLSI, Inc. (TLSI). The
Company then issued 3,192 shares of its Redeemable
Series B Preferred Stock, valued at $3,192,000, with a
liquidation preference of $1,000 per share and paid $250,000 in
cash to Zaiq in satisfaction of the Zaiq debt. The Company also
issued 624,480 shares of common stock, valued at $750,000,
to TLSI in satisfaction of the TLSI debt. The value of the
consideration issued by the Company in connection with the
license agreement totaled $4,192,000.
The Company also paid Adaptive a development fee of $1,559,000
for software development services and agreed to pay Adaptive a
royalty equal to a percentage of the net sales of products sold
by the Company and license revenue received by the Company.
The Company capitalized the consideration issued in connection
with the license fee and development fee totaling $5,751,000.
The Companys technical employees and advisors concluded
that as of March 2002 the Company had established technological
feasibility for its ultimate telecommunication product to be
marketed. Additional development services and testing, to be
performed principally by HelloSoft, Inc. (HelloSoft)
of San Jose, California, a third party consultant, are
necessary to complete the commercialization of the product
development. The Company and HelloSoft are parties to a services
agreement, dated as of March 31, 2004, under which
HelloSoft provides continuing development services relating to
the Companys semiconductor chipset. See Note 16 for
further details.
In December 2005, the Company made available to target customers
the E30 Release 1.3. No assurance can be given that the Company
can complete development of such technology, or that with
respect to such technology that is fully developed, it can be
commercialized on a large-scale basis or at a feasible cost. No
assurance can be given that such technology will receive market
acceptance. Accordingly it is possible that the carrying amount
of the technology license may be reduced materially in the near
future.
The agreement with Adaptive was amended November 26, 2004.
Under the Amended Agreement, the Company has accepted from
Adaptive final delivery of the source code, the intellectual
property rights related thereto and other materials related to
certain technologies that were to be developed by Adaptive. The
Company and Adaptives joint ownership rights will continue
with respect to any improvements, developments, discoveries or
other inventions that are developed under the agreement with
HelloSoft. In addition, under the Amended Agreement, Adaptive
has agreed that the first $5 million of royalties otherwise
payable by the Company to Adaptive thereunder from proceeds of
the sale or license of the semiconductor technologies are to be
offset by a credit in the same amount.
6. Film
in Distribution
In April 2000, the Company entered into a joint venture
production agreement to produce a feature length film
(Step Into Liquid) for theatrical distribution. The
Company agreed to provide 100% of the funding for the production
in the amount of up to $2,250,000 and, in exchange, received a
50% share in all net profits from worldwide distribution and
merchandising, after receiving funds equal to its initial
investment of up to $2,250,000. As of October 31, 2005 the
Company has funded a net of $2,335,101 for completion of the
film. The film is currently in foreign and DVD distribution.
Based upon information received from the Companys film
distributor in January 2005, the Company recorded an impairment
charge of $977,799 during the year ended October 31, 2004
which reduced the
F-17
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
carrying value of its film in distribution to $1,021,722. The
impairment charge was due to higher than expected distribution
costs and lower than expected average retail selling price for
the DVD. In addition, based upon information received from the
Companys film distributor in July 2005, which indicated
that sales were lower than expected, the Company recorded an
impairment charge of $1,009,777 during the year ended
October 31, 2005 which reduced the carrying value of its
film in distribution to $0.
The Company recognized revenues of $39,866 and $287,570 for the
years ended October 31, 2005 and 2004, respectively. The
Company had amortization costs of $11,945 and $142,691 for the
years ended October 31, 2005 and 2004, respectively.
7. Deferred
Financing Cost
At October 31, 2005, deferred financing cost consists of
costs incurred and warrants issued in connection with the sale
of $3,500,000 of 2005 Debentures, $1,350,000 of
7% convertible debentures, and a promissory note:
|
|
|
|
|
Deferred financing cost
|
|
$
|
1,006,916
|
|
Less: accumulated amortization
|
|
|
(680,609
|
)
|
|
|
|
|
|
Deferred financing cost, net
|
|
$
|
326,307
|
|
|
|
|
|
|
Costs incurred in connection with debt financings are
capitalized as deferred financing costs and amortized over the
term of the related debt. If any or all of the related debt is
converted or repaid prior to its maturity date, a pro-rata share
of the related deferred financing costs are written off and
recorded as amortization expense in the period of the conversion
or repayment in the consolidated statement of operations. For
the years ended October 31, 2005 and 2004, amortization of
deferred financing cost was $602,182 and $78,427, respectively.
8. Exchange
Agreement
In April 2005, the Company entered into an Exchange Agreement
(the Exchange Agreement) with
Zaiq Technologies, Inc. (Zaiq), pursuant to
which the Company issued 4,651,163 shares of common stock
with a value of $744,186 and a promissory note in the principal
amount of $2,392,000 (see Note 11) in exchange for the
surrender by Zaiq of 3,192 shares of Redeemable
Series B Preferred Stock. The Company issued the Redeemable
Series B Preferred Stock to Zaiq pursuant to a Receivables
Purchase and Stock Transfer Restriction Agreement dated as of
April 17, 2002. These shares had an aggregate liquidation
preference of $3,192,000, constituted all of the Redeemable
Series B Preferred Stock issued and outstanding as of the
date of the Exchange Agreement, and were cancelled upon the
closing of the Exchange Agreement. The fair value of the common
stock and promissory note on the closing date was determined to
be less than the aggregate liquidation preference of the
Redeemable Series B Preferred Stock and accordingly a gain
of $55,814 was recognized during the year ended October 31,
2005.
The Exchange Agreement provides that, subject to certain
exceptions, if the Company, at any time prior to the payment in
full of the amount due under the promissory note, issues common
stock or securities convertible into or exercisable for shares
of common stock at a price below the fair market value of the
common stock or such securities (a Below Market
Issuance), then the Company will issue to Zaiq additional
shares of common stock in an amount that is determined in
accordance with a formula that takes into consideration both the
number of shares of common stock or other securities issued and
the total consideration received by the Company in the Below
Market Issuance. During the year ended October 31, 2005,
the Company issued 529,311 additional shares of common stock
with an aggregate par value of $529 and a fair value of $18,504
to Zaiq as a result of Below Market Issuances.
F-18
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
Under the terms of the agreements with Zaiq, a portion of the
proceeds of any new financing consummated by the Company through
the first anniversary of the agreement are to be applied to the
prepayment of the note. See Note 11.
In December 2005, the Company entered into an agreement with
Zaiq to repurchase shares of common stock held of record by Zaiq
and retire the promissory note with Zaiq at a discount. See
Note 18 for further details.
9. Convertible
Notes Payable
The Company entered into several convertible promissory note
agreements with various trusts and individuals to fund the
operations of the Company. The Company agreed to pay the
principal and an additional amount equal to 50% of the principal
on all notes below except for one note for $10,000 which accrues
interest at the rate of 9% per annum and the March 2005
convertible promissory note discussed in the following
paragraph.
The outstanding convertible notes are summarized in the table
below:
|
|
|
|
|
|
|
|
|
|
|
At October 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Note payable(1)
|
|
$
|
97,000
|
|
|
$
|
140,000
|
|
Notes payable (ten notes)(2)
|
|
|
478,000
|
|
|
|
483,000
|
|
Notes payable, 9% interest(3)
|
|
|
10,000
|
|
|
|
10,000
|
|
Notes payable (four notes), 12%
interest(4)
|
|
|
|
|
|
|
180,000
|
|
Notes payable (eight notes), 12%(5)
|
|
|
|
|
|
|
100,000
|
|
Note
payable related party(6)
|
|
|
172,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
757,872
|
|
|
$
|
913,000
|
|
less: unamortized debt discount
|
|
|
(20,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
736,997
|
|
|
$
|
913,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The note was issued in October 2001 in the amount of $250,000,
and due only when receipts received by the Company from its Top
Secret Productions, LLC joint venture exceed $375,000. The note
and any accrued and unpaid interest may be converted at any
time, in whole or in part, into shares of common stock at a
conversion price per share of $0.40. The Company made payments
of $43,000 and $110,000 during the years ended October 31,
2005 and 2004, respectively. |
|
|
|
(2) |
|
The notes were issued during the period from March 2002 through
July 2003 in the aggregate amount of $478,000, and due only when
receipts received by the Company from its Top Secret
Productions, LLC joint venture exceed $2,250,000. The notes and
any accrued and unpaid interest may be converted at any time, in
whole or in part, into shares of common stock at conversion
prices per share ranging from $0.33 to $1.00. Principal of
$5,000 and accrued interest of $2,500 was converted into
17,857 shares of common stock during the year ended
October 31, 2005. |
|
|
|
(3) |
|
The note was issued in July 2003, in the amount of $10,000, and
due only when receipts received by the Company from its Top
Secret Productions, LLC joint venture exceed $750,000. The note
and any accrued and unpaid interest may be converted at any
time, in whole or in part, into shares of common stock at a
conversion price per share of $0.60. |
|
|
|
(4) |
|
The notes were issued in May 2003 and had an original due date
of November 21, 2003. The note holders extended the due
date until January 7, 2004 in exchange for
160,000 shares of common stock. In January |
F-19
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
|
|
|
|
|
2004, the Company paid $180,000 of principal payments and
further extended the remaining notes until the next round of
financing was completed. The remaining principal of $180,000 was
repaid in June 2005 from the proceeds of the private placement
of the 2005 Debentures further discussed in Note 10, and
accrued interest of $1,800 was paid on the 21st of each
month through May 2005. |
|
|
|
(5) |
|
In September 2004, the Company entered into eight identical loan
agreements in the aggregate amount of $100,000. The principal
amount of the notes and any accrued and unpaid interest was due
and payable on June 21, 2005. These notes and accrued
interest were repaid in June 2005 from proceeds of the private
placement of the 2005 Debentures further discussed in
Note 10. |
|
|
|
(6) |
|
In March 2005, the Company issued in favor of the Companys
executive vice president, a non-interest bearing convertible
promissory note in the principal amount of $383,911. The
convertible promissory note was issued in evidence of the
Companys obligation for deferred compensation. In
accordance with APB 21, imputed interest (at an effective
rate of 15%) was calculated to arrive at the fair value of the
convertible promissory note. The difference between the face
amount and the present value upon issuance of the convertible
promissory note is shown as a discount that is amortized as
interest expense over the life of the convertible promissory
note. For the year ended October 31, 2005 amortization of
debt discount on this note was $12,639. The convertible
promissory note is payable in monthly installments, on the first
day of each month, beginning on April 1, 2005. Each month,
the Company must pay to the executive vice president an amount
not less than the monthly base salary paid to the Companys
chief executive officer. However, if the Company determines in
its sole discretion that it has the financial resources
available, it may pay up to $20,833 per month. The Company
made payments of $211,039 during the year ended October 31,
2005. The note may be converted into shares of common stock at a
conversion price per share equal to the closing price of the
common stock on the
Over-the-Counter
Bulletin Board on the date of conversion. |
For all the above convertible notes, the fair values of the
conversion options at October 31, 2005 were nominal due to
the conversion price being substantially out-of-the money.
10. Convertible
Debentures
2005
Debentures (Restated)
On May 26, 2005, the Company completed a private placement
to certain individual and institutional investors of $3,500,000
in principal amount of its three-year 7% Senior Secured
Convertible Debentures (the 2005 Debentures). All
principal is due and payable on May 26, 2008. The 2005
Debentures are convertible into shares of common stock at a
conversion price equal to the lower of (x) 70% of the
5 day volume weighted average price of the Companys
common stock immediately prior to conversion or (y) if the
Company entered into certain financing transactions subsequent
to the closing date, the lowest purchase price or conversion
price applicable to that transaction.
The Company received net proceeds of approximately
$3.11 million, following repayment of offering related
expenses. These offering related expenses were recorded as
deferred financing costs and are being charged to interest
expense (See Note 7). The Company used a portion of the
proceeds to repay the principal and accrued interest on notes
payable and convertible notes payable (See Notes 8 and 11).
Interest on the 2005 Debentures accrues at the rate of
7% per annum and is payable on a bi-annual basis,
commencing December 31, 2005, or on conversion and may be
paid, at the option of the Company, either in cash or in shares
of common stock. The Company may prepay the amounts outstanding
on the 2005 Debentures by giving advance notice and paying an
amount equal to 120% of the sum of (x) the principal being
prepaid plus (y) the accrued interest thereon.
F-20
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
In connection with the issuance of the 2005 Debentures, the
Company issued to the purchasers thereof warrants (the
Investor Warrants) to purchase
33,936,650 shares of common stock valued at $2,000,000 on
the issuance date, with warrants for 11,312,220 shares
being exercisable through the last day of the month in which the
first anniversary of the effective date of the Registration
Statement occurs (August 31, 2006) at a per share
exercise price of $0.1547 and warrants for
22,624,430 shares being exercisable through the last day of
the month in which the third anniversary of the effective date
of the Registration Statement occurs (August 31,
2008) at a per share exercise price of $0.3094.
In connection with the issuance of the 2005 Debentures, the
Company also issued to a placement agent warrants to purchase up
to 5,656,108 shares of Common Stock (the Compensation
Warrants) valued at $319,066 on the issuance date. This
amount was recorded as a deferred financing cost and is being
charged to interest expense over the term of the 2005
Debentures. Warrants to purchase up to 2,262,443 shares are
exercisable through the last day of the month in which the third
anniversary of the effective date of the Registration Statement
occurs (August 31, 2008) at a per share exercise price
of $0.3094. Warrants to purchase up to 2,262,443 shares are
exercisable through the last day of the month in which the third
anniversary of the closing occurs (May 31, 2008) at a
per share exercise price of $0.1547. Warrants to purchase up to
1,131,222 shares are exercisable through the last day of
the month in which the first anniversary of the effective date
of the Registration Statement occurs (August 31,
2006) at a per share exercise price of $0.1547. The
Compensation Warrants are otherwise exercisable on substantially
the same terms and conditions as the Investor Warrants.
Holders of the Investor Warrants are entitled to exercise those
warrants on a cashless basis following the first anniversary of
issuance if the Registration Statement is not in effect at the
time of exercise.
The gross proceeds of $3,500,000 were recorded net of a debt
discount of 3,500,000. The debt discount consisted of a
$2,000,000 value related to the Investor Warrants and a
$1,500,000 value related to the embedded conversion feature in
accordance with EITF issue No. 00-19 Accounting for
Derivative Financial Instruments Indexed to and Potentially
Settled in a Companys Own Stock. Due to certain
factors, including an uncapped liquidated damages provision in
the registration rights agreement and an indeterminate amount of
shares to be issued upon conversion of the debentures, the
Company separately values and accounts for the embedded
conversion feature related to the 2005 Debentures, the Investor
Warrants, the Compensation Warrants, and the registration rights
as derivative liabilities. Accordingly, these derivative
liabilities are measured at fair value with changes in fair
value reported in earnings as long as they remain classified as
liabilities. The Company reassesses the classification at each
balance sheet date. If the classification required under EITF
No. 00-19 changes as a result of events during the period,
the contract should be reclassified as of the date of the event
that caused the reclassification. Due to various factors,
including substantial conversions of the 2005 Debentures and the
registration statement becoming effective on August 1,
2005, the value of the registration rights was deemed to be de
minimus.
As of October 31, 2005, the conversion option liability of
$1,500,000 was reduced to $778,167 as a result of conversions of
the 2005 Debentures during the period ended October 31,
2005. Accordingly, $721,833 was reflected as a subsequent
reclassification to stockholders equity during the period
ended October 31, 2005.
A gain on the change in fair value of the derivative liabilities
of $2,233,004 was recognized during the year ended
October 31, 2005.
To secure the Companys obligations under the 2005
Debentures, the Company granted a security interest in
substantially all of its assets, including without limitation,
its intellectual property, in favor of the investors under the
terms and conditions of a Security Interest Agreement dated as
of the date of the 2005 Debentures. The security interest
terminates upon the earlier of (i) the date on which less
than one-third of the original principal amount of the 2005
Debentures issued on the closing date are outstanding or
(ii) payment or
F-21
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
satisfaction of all of the Companys obligations under the
loan agreement. Subsequent to October 31, 2005, condition
(i) was met and therefore the security interest terminated.
A registration statement (the Registration
Statement) covering the Common Stock issuable upon
conversion of the 2005 Debentures, the Investor Warrants and the
Compensation Warrants referred to above was declared effective
on August 1, 2005.
As a result of obtaining the 2005 Debentures, 1,000,000 stock
options granted to each of the Companys chief executive
officer and executive vice president in April 2005 became fully
vested and non-forfeitable, as discussed in Note 13.
During the period ended October 31, 2005, $1,684,289 of
principal amount of 2005 Debentures plus accrued interest of
$36,331 were converted into shares of common stock.
Included in interest expense for the year ended October 31,
2005 is $1,946,031 related to the amortization of the debt
discount related to these debentures.
The 2005 Debentures are summarized below at October 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Unamortized
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Debt Discount
|
|
|
Value
|
|
|
Long-term portion
|
|
$
|
1,815,711
|
|
|
$
|
1,553,969
|
|
|
$
|
261,742
|
|
7% Debentures
In December 2003, the Company completed a private placement to
certain private and institutional investors of $1 million
in principal amount of its three year 7% Convertible
Debentures (the 7% Debentures) and signed
commitments to place an additional $1,000,000 of such Debentures
(the Additional Debentures) upon the effectiveness
of a registration statement covering the common stock underlying
the 7% Debentures. The registration statement was
originally filed on February 11, 2004. In April and May
2004, certain holders of the Debentures waived the registration
statement effectiveness condition and purchased an aggregate of
$350,000 in principal amount of Debentures, satisfying their
post effectiveness commitments. The registration statement was
declared effective by the Securities and Exchange Commission on
August 16, 2004 solely with respect to the common stock
underlying the $1 million in principal amount of
7% Debentures and related securities issued as of December
2003. As the registration statement covering the common stock
underlying the Additional Debentures was not declared effective
by the specified date of June 28, 2004, the Company will
not be issuing Additional Debentures for the remaining $650,000
under this transaction.
In connection with the issuance of the 7% Debentures in
December 2003, the Company issued five-year warrants to purchase
up to 6,666,667 shares of the Companys Common Stock,
at a per share exercise price of $0.25, subject to cashless
exercise provisions. In connection with the issuance of the
additional 7% Debentures in April and May 2004, the Company
issued five-year warrants to purchase up to
2,333,332 shares of the Companys Common Stock, at a
per share exercise price of $0.25, subject to cashless exercise
provisions.
The holders of the 7% Debentures can convert their debt
into shares of the Companys common stock at $.15 per
share subject to certain anti-dilution adjustments (stock
splits, redemptions, mergers, and certain other transactions).
Accrued interest under the 7% Debentures may be paid in
cash or common stock. In the event of an uncured default, as
defined, or a non-permitted sale of securities, the holders of
the 7% Debenture can require the Company to redeem their
debentures. Providing that the certain conditions are met, the
7% Debentures automatically convert into common shares on the
third anniversary of issuance. In addition, under certain
circumstances, the Company can require the conversion of the
7% Debentures before such time.
F-22
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
The gross proceeds of the $1,000,000 in December of 2003 were
allocated 57.73% or $577,259 to the debentures and 42.27% or
$422,741 to the warrants. The conversion price of the debentures
was below the market price of the Companys common stock at
December 31, 2003, which resulted in a beneficial
conversion feature relating to the first $1,000,000 of $577,259.
In accordance with EITF
No. 00-27
the amount allocated to the beneficial conversion feature was
limited to the net proceeds of the offering less the value
allocated to the warrants issued to the purchasers.
The gross proceeds of the $100,000 in April of 2004 were
allocated 52.66% or $52,659 to the debentures and 47.34% or
$47,341 to the warrants. The conversion price of the debentures
was below the market price of the Companys common stock at
April 20, 2004, which resulted in a beneficial conversion
feature of $52,659. In accordance with
EITF No. 00-27
the amount allocated to the beneficial conversion feature was
limited to the net proceeds of the offering less the value
allocated to the warrants issued to the purchasers.
The gross proceeds of the $250,000 in May of 2004 were allocated
56.87% or $142,186 to the debentures and 43.13% or $107,814 to
the warrants. The conversion price of the debentures was below
the market price of the Companys common stock at
May 7, 2004, which resulted in a beneficial conversion
feature of $142,186. In accordance with EITF
No. 00-27
the amount allocated to the beneficial conversion feature was
limited to the net proceeds of the offering less the value
allocated to the warrants issued to the purchasers.
In connection with this private placement, the Company issued to
the placement agent warrants to purchase 900,000 shares of
the Companys common stock valued at $121,018 and incurred
$144,822 of other debt issuance costs. Such amount was recorded
as deferred financing costs and is being charged to interest
expense over the term of the loan. The warrants to purchase
666,667 shares of common stock expire on December 31,
2008 and the warrants to purchase 66,666 shares of common
stock expire on April 20, 2009 and the warrants to purchase
166,667 shares of common stock expire on May 7, 2009.
In each case, the warrants are exercisable at $.15 per
share.
The Company paid in full ($300,000 plus $3,540 of accrued
interest) a 7% convertible debenture issued on October 31,
2003 with a maturity date of April 30, 2004 out of the
proceeds it received from the above December 31, 2003
private placement.
Under the agreements with the purchasers of the December 2003
Debentures, the Company is obligated to pay to the Debenture
holders liquidated damages associated with the late filing of
the Registration Statement and the missed Registration Statement
required effective date of March 30, 2004. Liquidated
damages are equal to (x) 2% of the principal amount of all
the Debentures during the first
30-day
period following late filing or effectiveness and (y) 3% of
the principal amount of all Debentures for each subsequent
30-day
period (or part thereof). These liquidated damages aggregated to
$160,000. Accrued liquidated damages as of October 31, 2005
was $37,550. At their option, the Debenture holders are entitled
to be paid such amount in cash or shares of Common Stock at a
per share rate equal to the effective conversion price of the
Debentures, which is currently $0.15. 803,331 shares of
common stock valued at $98,450 were issued during the year ended
October 31, 2005.
During the year ended October 31, 2005, $907,500 of
principal amount plus accrued interest of $73,336 were converted
into shares of common stock. During the year ended
October 31, 2004, $317,500 of principal amount plus accrued
interest of $13,945 were converted into shares common stock.
The 7% Debentures are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Unamortized
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Debt Discount
|
|
|
Value
|
|
|
Long-term portion
|
|
$
|
125,000
|
|
|
$
|
47,617
|
|
|
$
|
77,383
|
|
F-23
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
The remaining 7% Debentures outstanding at October 31,
2005 were originally issued in December 2003 and are due and
payable in December 2006.
11. Notes Payable
The Company has the following notes payable outstanding at
October 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Note payable (five individual
notes with identical terms), unsecured, 6% interest, due on
demand with three days notice
|
|
$
|
256,886
|
|
|
$
|
256,886
|
|
Note payable, 10% interest,
unsecured, due on demand with three days notice(1)
|
|
|
443,451
|
|
|
|
483,424
|
|
Note payable, unsecured, 15%
interest, due March 24, 2005(2)
|
|
|
|
|
|
|
250,000
|
|
Note payable(3)
|
|
|
12,000
|
|
|
|
12,000
|
|
Note payable(4)
|
|
|
1,229,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
1,942,207
|
|
|
$
|
1,002,310
|
|
Less: current portion of notes
payable
|
|
|
(1,834,073
|
)
|
|
|
(1,002,310
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
108,134
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding principal of $39,973 and interest of $110,027 was
paid in June 2005 from the proceeds of the private placement of
the 2005 Debentures further discussed in Note 10. |
|
|
|
(2) |
|
On September 24, 2004, the Company entered into a loan
agreement with a stockholder pursuant to which the Company
borrowed $250,000. The loan is evidenced by a promissory note
dated as of September 24, 2004. The Company received net
proceeds of $220,000 following the payment of transaction
related fees and expenses. The principal amount of the loan and
any accrued and unpaid interest was due and payable on
March 24, 2005. Interest owing in December 2004 was repaid
from a subsequent loan made to the Company in December 2004.
Outstanding principal of $250,000 and interest of $25,068 was
paid in June 2005 from the proceeds of the private
placement of the 2005 Debentures further discussed in
Note 10. |
|
|
|
(3) |
|
On March 26, 2004, the Company entered into a loan
agreement, pursuant to which the Company borrowed $12,000 from
the lender. The loan is evidenced by an installment note dated
as of March 26, 2004. The principal amount of the loan and
any accrued and unpaid interest at a rate of 5% were due and
payable on July 26, 2004. On July 26, 2004, the lender
agreed to extend payment and unpaid accrued interest until
November 15, 2004. The lender has subsequently agreed to
modify the repayment terms such that the principal and interest
are due on demand with three days notice, however the notice may
not occur before November 15, 2005. |
|
|
|
(4) |
|
In April 2005, the Company issued a promissory note in
connection with the cancellation of the Redeemable Series B
Preferred Stock (see Note 8) which bears interest at
the rate of 7% per annum. The outstanding principal amount
of the promissory note and interest accrued thereon is due and
payable in four equal quarterly installments beginning on the
first anniversary of the date of the promissory note. Unless an
event of default has occurred and is continuing, the principal
amount of the promissory note is forgiven in the amount of
$797,333 on each of the six-month and twelve-month anniversaries
of the date of the promissory note. |
In October 2005, $797,333 of principal was forgiven in
accordance with these terms. The Company is required to pay to
the holder 10% of the proceeds of any new financing consummated
within 90 days of the date of the promissory note and 20%
of the proceeds of any new financing consummated thereafter
through the first anniversary of the promissory note in
prepayment of the amount due under the promissory note. The
F-24
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
Company has the right to prepay the outstanding principal amount
of the promissory note and any accrued interest thereon in whole
or in part without penalty or premium at any time. During the
year ended October 31, 2005, principal of $364,797 and
interest of $27,983 were repaid from the proceeds of new
financings to comply with the mandatory payment provisions of
the promissory note. In December 2005, the Company entered into
an agreement to repay a portion of the principal amount of the
promissory note with the remaining balance being forgiven. See
Note 18 for further details.
12. Accounts
Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following
at October 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Accrued Officers Compensation,
bonuses and payroll
|
|
$
|
215,450
|
|
|
$
|
495,676
|
|
Professional fees
|
|
|
5,718
|
|
|
|
537,796
|
|
Interest payable
|
|
|
611,863
|
|
|
|
590,390
|
|
Accrued liquidated damages
|
|
|
37,550
|
|
|
|
136,000
|
|
Consulting fees
|
|
|
63,414
|
|
|
|
184,851
|
|
Miscellaneous
|
|
|
47,838
|
|
|
|
63,158
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
981,833
|
|
|
$
|
2,007,871
|
|
|
|
|
|
|
|
|
|
|
13. Preferred
Stock
Redeemable
Series B Preferred Stock
On April 10, 2002, the Company amended its Articles of
Incorporation and designated 4,000 shares of its authorized
preferred stock as Series B Preferred Stock, with a
liquidation preference of $1,000 per share.
The Company may redeem any or all of the shares of Series B
Preferred Stock at any time or from time to time at a per share
redemption price equal to the preference amount.
The Series B Preferred Stock are mandatorily redeemable by
the Company at the liquidation preference as follows:
(i) Closing of financing transaction of at least
$15 million.
(ii) Closing of a corporate transaction, (such as a merger,
consolidation, reorganization, sale of significant assets, etc.)
resulting in a change of control.
(iii) In the event the Company completes a financing, which
is at least $3 million but less than $15 million, the
Company must partially redeem the Series B Preferred Stock
based on a fraction, the numerator of which is the net cash
proceeds received by the Company, as a result of the financing
transaction, and the denominator of which is $15 million.
(iv) The Company is obligated to redeem any outstanding
Series B Preferred Stock at its liquidation preference, in
eight equal quarterly payments, commencing on March 31,
2005 and ending on December 31, 2006.
Holders of Series B Preferred Stock are entitled to receive
dividends if, as and when declared by the Companys Board
of Directors in preference to the holders of its common stock
and of any other stock ranking junior to the Series B
Preferred Stock with respect to dividends.
The Company cannot declare or pay any dividend or make any
distribution on its Common Stock unless a dividend or
distribution of at least two times the dividend paid on the
common stock is also paid on the
F-25
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
Series B Preferred Stock. Holders of Series B
Preferred Stock are also entitled to share pro-rata (based on
the aggregate liquidation preference) in any dividend,
redemption or other distribution made to any other series of the
Companys preferred stock. The Series B Preferred
Stock does not have voting rights, except as required by law.
Each share of the Series B Preferred Stock is convertible
into shares of the Companys Common Stock by dividing
$1,000 by the conversion price. The conversion price is the fair
market value of the Companys Common Stock at the time of
conversion, but not to be less than $.34 per share, subject
to adjustment, and not to exceed $4.00 per share, subject
to adjustment. Holders of the Series B Preferred Stock were
granted piggy-back registration rights to register common shares
reserved for such conversion.
In April 2002, the Company issued 3,192 shares of its
Series B Preferred Stock, with redemption and liquidation
preference of $3,192,000, in connection with the development and
license agreement discussed in Note 5. These shares were
subsequently canceled in connection with the Exchange Agreement
as discussed in Note 8. As of October 31, 2005 and
2004, there were 4,000 authorized shares of Series B
Preferred Stock and 0 and 3,192 shares issued and
outstanding, respectively.
Series C,
Series D, Series E, Series F and Series G
Convertible Preferred Stock
On February 24, 2003 the Company amended its Articles of
Incorporation and designated 100,000 shares of its
authorized preferred stock as Series C Preferred Stock. On
May 16, 2003, the Company amended this designation and
fixed the number of shares designated as Series C Preferred
Stock as 57,894,201. On June 13, 2003 and June 27,
2003, the Company amended its Articles of Incorporation and
designated 9,090,909 Shares of its authorized preferred
stock as Series D Preferred Stock and 25,000 shares of
its authorized preferred stock as Series E Preferred Stock.
On August 7, 2003 the Company amended its Articles of
Incorporation and designated 10,297,118 shares of its
authorized preferred stock as Series F Preferred Stock and
10,297,118 shares of its authorized preferred stock as
Series G Preferred Stock.
All of the designated Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock
were issued between May and August 2003, to collateralize
proposed loans to the Company that never materialized. By their
terms, the share certificates representing these series are
returnable to the Company upon demand in the event the proposed
loans are not completed by January 31, 2004. None of the
proposed loans were ever concluded. While certain of the issued
certificates have been returned, certain others remain
outstanding despite the Companys request for their return.
However, none of the series C, D, E, F and G are classified
as outstanding as of October 31, 2005 or 2004 as such
shares are issuable upon the funding of the loans.
14. Stockholders
Equity (Deficiency)
Preferred
Stock and Rights Dividend
The Company adopted a stockholder rights plan, in which one
right was distributed on August 21, 2000 as a dividend on
each outstanding share of common stock to stockholders of record
on that date. Each right will entitle the stockholders to
purchase 1/1000th of a share of a new series of junior
participating preferred stock of the Company at an exercise
price of $200 per right in certain events. The rights
expired on August 21, 2004.
Common
Stock
Effective November 12, 2003, the Company amended its
Articles of Incorporation and increased the authorized number of
shares of common stock from 100,000,000 to 500,000,000.
F-26
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
During the year ended October 31, 2005, the Company issued:
|
|
|
|
|
10,289,026 shares of common stock to various investors for
cash proceeds of $835,100;
|
|
|
|
2,837,500 shares of common stock for consulting services
valued at $342,000;
|
|
|
|
5,073,015 shares of common stock for various services
valued at $314,667;
|
|
|
|
2,750,000 shares of common stock to key employees and
directors valued at $452,500;
|
|
|
|
72,763,232 shares of common stock for converted promissory
notes, debentures and accrued interest valued at $2,708,956;
|
|
|
|
803,331 shares of common stock as penalty for delayed
filing/effectiveness of a registration statement valued at
$98,450;
|
|
|
|
|
|
529,311 shares of common stock in connection with a Below
Market Issuance (See Note 8).
|
|
|
|
|
|
422,783 shares of common stock in payment of accounts
payable and accrued expenses in the amount of $71,911;
|
|
|
|
|
|
4,651,163 shares of common stock with a fair value of
$744,186 in exchange for the surrender of Redeemable
Series B Preferred Stock valued at $800,000. The Company
recognized a gain of $55,814 on the transaction (See
Note 8).
|
During the year ended October 31, 2004, the Company issued
|
|
|
|
|
4,907,085 shares of common stock to various investors for
cash proceeds of $594,000;
|
|
|
|
310,003 shares of common stock valued at $49,381 as
consideration for the extension of the due date of certain
convertible notes payable;
|
|
|
|
40,000 shares of common stock for deferred compensation of
$10,000;
|
|
|
|
1,003,999 shares of common stock for compensation to
officers and employees valued at $231,080;
|
|
|
|
4,002,227 shares of common stock for consulting services
valued at $980,050;
|
|
|
|
468,047 shares of common stock for services valued at
$110,207;
|
|
|
|
2,209,631 shares of common stock for converted promissory
notes and accrued interest valued at $331,445;
|
|
|
|
283,333 shares of common stock for liquidated damages
valued at $24,000;
|
|
|
|
880,952 shares of common stock for research and development
services valued at $92,500.
|
Stock
Option Plans
Stock
Options
During 2000, the Board of Directors and the stockholders of the
Company approved the 2000 Omnibus Securities Plan (the
2000 Plan), which provides for the granting of
incentive and non-statutory options and restricted stock for up
to 2,500,000 shares of common stock to officers, employees,
directors and consultants of the Company.
During August of 2001, the Board of Directors of the Company
approved the 2001 Stock Incentive Plan (the 2001
Plan and together with the 2000 Plan, the
Plans), which provides for the granting of incentive and
non-statutory options, restricted stock, dividend equivalent
rights and stock appreciation rights for up to
F-27
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
2,500,000 shares of common stock to officers, employees,
directors and consultants of the Company. The stockholders of
the Company ratified the 2000 Plan in May 2000, and the 2001
Plan in July 2002.
In January 2003, the Board of Directors of the Company approved
the 2003 Consultant Stock Plan (2003 Plan), which
provides for the issuance of up to 6,000,000 non-qualified stock
options or stock awards to consultants to the Company.
Directors, officers and employees are not eligible to
participate in the 2003 Plan. A total of 3,200,000 shares
of common stock have been issued under the 2003 Plan to four
consultants. As of October 31, 2005 no options have been
awarded under the 2003 Plan.
In April 2005, the Company issued to each of its Chief Executive
Officer and Executive Vice President, 1,000,000 shares of
common stock, and performance based options to purchase
7,000,000 shares of restricted common stock at an exercise
price of $0.17, which was equal to the closing price of the
common stock on the
Over-the-Counter
Bulletin Board on the date of grant. Options to purchase
1,000,000 shares of restricted common stock vested upon the
Companys consummation of the sale of the 2005 Debentures
in May 2005 and options to purchase 6,000,000 shares of
restricted common stock vested subsequent to year-end in
December 2005 upon the Companys release of a beta version
of its semiconductor technologies. 2,325,000 options which were
previously granted to these two individuals were canceled in
connection with the issuance of the 2,000,000 shares of
restricted common stock. In January 2006, all of the 14,000,000
options were canceled and new options were granted (See
Note 18).
As the closing price of common stock at October 31, 2005
was below the exercise price of these performance based options
and therefore the intrinsic value was $0, no compensation
expense has been recorded in connection with these options.
F-28
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
A summary of the Companys stock option activity and
related information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Under
|
|
|
Average
|
|
|
Outside
|
|
|
Average
|
|
|
|
the
|
|
|
Exercise
|
|
|
the
|
|
|
Exercise
|
|
|
|
Plans
|
|
|
Price
|
|
|
Plans
|
|
|
Price
|
|
|
Balance at October 31, 2003
|
|
|
2,188,750
|
|
|
$
|
1.25
|
|
|
|
4,192,500
|
|
|
$
|
2.03
|
|
Options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside the option plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expired/cancelled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the Plans
|
|
|
(10,000
|
)
|
|
$
|
2.36
|
|
|
|
|
|
|
|
|
|
Outside the option plans
|
|
|
|
|
|
|
|
|
|
|
(201,250
|
)
|
|
$
|
1.59
|
|
Options exercised in the plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2004
|
|
|
2,178,750
|
|
|
$
|
1.25
|
|
|
|
3,991,250
|
|
|
$
|
2.11
|
|
Options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside the option plans
|
|
|
|
|
|
|
|
|
|
|
15,000,000
|
|
|
$
|
0.17
|
|
Options expired/cancelled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the Plans
|
|
|
(1,185,000
|
)
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
Outside the option plans
|
|
|
|
|
|
|
|
|
|
|
(3,091,250
|
)
|
|
$
|
1.92
|
|
Options exercised in the plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2005
|
|
|
993,750
|
|
|
$
|
0.97
|
|
|
|
15,900,000
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 31,
2004
|
|
|
2,077,084
|
|
|
$
|
1.27
|
|
|
|
3,366,250
|
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 31,
2005
|
|
|
980,417
|
|
|
$
|
0.98
|
|
|
|
3,900,000
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31, 2005, 1,506,250 options are available under
the 2000 Plan, 0 options are available under the 2001 Plan and
2,800,000 options or stock awards are available under the 2003
Plan.
The weighted average fair value at date of grant for options
granted during 2005 was $0.09 per option. The fair value of
options at date of grant was estimated using the Black-Scholes
option pricing model utilizing the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Risk-free interest rates
|
|
|
3.77
|
%
|
|
|
|
|
Expected option life in years
|
|
|
3
|
|
|
|
|
|
Expected stock price volatility
|
|
|
79
|
%
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
|
|
F-29
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Consolidated
Financial
Statements (Continued)
The options outstanding and currently exercisable by exercise
price at October 31, 2005 are as follows: