sbv2
As filed with the Securities and Exchange Commission on
April 24, 2006
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
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
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount
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Offering
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Aggregate
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Registration
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Securities to be
Registered
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to be Registered(1)
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Price Per Unit(2)
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Offering Price(2)
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Fee
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Common Stock
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359,248,679
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0.127
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45,624,582
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$
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4,882
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(1) |
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Includes shares of common stock held by the selling
shareholders, shares of common stock issuable upon conversion of
debentures held by the selling shareholders, shares of common
stock issuable upon the exercise of warrants held by the selling
shareholders, and the registrants good faith estimate of
certain additional shares of common stock that the registrant
may be required to issue to the selling shareholders pursuant to
that certain Registration Rights Agreement, dated as of
March 6, 2006, among the Company and certain of the selling
shareholders. Pursuant to Rule 416 under the Securities Act
of 1933, as amended (the Securities Act), the number
of shares of common stock registered hereby also includes an
indeterminate number of shares of common stock that may be
issued as a result of stock splits, stock dividends,
recapitalizations or similar events. |
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(2) |
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Estimated solely for purposes of computing the registration fee
in accordance with Rule 457(c) under the Securities Act,
based on the average of the high and low prices for the common
stock as reported on the OTC Bulletin Board on
April 21, 2006. |
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 April 19, 2006, the
last reported sales price per share of our common stock was
$0.14.
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 April , 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 made
available to prospective customers for evaluation and testing in
the first quarter of fiscal 2006. We are presently working on
Release 1.4 of the E30 and Release 1.1 of the
Embarqtm E20
analog front end. We market this novel technology to leading
equipment makers in the telecommunications industry. 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 not yet recorded any revenues from the
sale of products based on our technology.
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 $40,176 for the year ended
October 31, 2005 and the three months ended
January 31, 2006, respectively, representing guaranteed and
license payments and foreign distribution fees from the film. We
incurred net losses of $6,923,386 and $1,273,738 for the year
ended October 31, 2005 and the three months ended
January 31, 2006, respectively.
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.
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 April 20, 2006, the
conversion price would have been $0.08764, resulting in our
issuance of approximately 68.5 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
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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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323,042,763 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 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 $6,923,386 and $5,506,287 for the years
ended October 31, 2005 and 2004, respectively and
$1,273,738 for the three months ended January 31, 2006. As
of January 31, 2006, we had an accumulated deficit of
$63,388,298. 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 April 21, 2006, we had cash balances of $4,086,078.
Although management believes funds on hand will enable us to
meet our liquidity needs at least through January 31, 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. While we made our initial chipset available to
customers for evaluation and testing in December 2005, we have
not begun commercial shipments, 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
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equipment manufacturers. We must also successfully develop
products containing our semiconductor 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.
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A customer can choose at any time to discontinue using our
products in that customers designs or product 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
7
able to devote greater resources to the promotion and sale of
their products. These competitors may also have 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 after the earlier of
May 14, 2006 or the effective date of the registration
statement of which this prospectus forms a part, 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 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 323,042,763 shares are
issued and outstanding. In addition, our outstanding warrants
and options, if exercised at April 19, 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 April 19, 2006, we had 323,042,763 shares of our
common stock issued and outstanding. As of April 19, 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
$40,577 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
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.
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.
12
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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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
13
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 not be exercised on a
cashless basis until May 26, 2006. Even after these dates,
the 2006 Warrants and 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 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
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 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 on or after the earlier of (i) May 14, 2006
or (ii) the effective date of the registration statement of
which this prospectus is a part. 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
14
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 become first exercisable on the earlier of
(i) May 14, 2006 or (ii) the effective date of
the registration statement of which this prospectus is a part.
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 the date of the 2006 Debentures. 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 $1.5 million in aggregate principal 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.
15
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 will be obligated
to pay liquidated damages to the holders of the 2006 Debentures
if the registration statement is not declared effective by the
SEC within the earlier of five days after notice by the SEC that
the registration statement may be declared effective or
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 within 30 days after the specified
target effective date.
Each of our directors and Walter Chen (and their family members,
companies or trusts owning any Company stock) and Munck
Butrus, P.C. 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
will receive a placement agent fee equal to (i) 10% of the
aggregate purchase price ($600,000), (ii) 10% of the
proceeds realized in the future from exercise of 2006 Warrants
issued to the investors, and (iii) warrants (the
Placement Agents Warrants). The Placement
Agents Warrants consist of (x) 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
(y) 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
April 19, 2006, approximately $40,577 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.
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 (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 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%
16
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 April 19, 2006,
18,470,945 of the Class A Warrants and 9,751,189 of the
Class B Warrants were outstanding. 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 debentures
and 2005 Warrants is suspended beyond certain agreed upon
periods. The amount of liquidated damages that may become
payable may be substantial.
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.
17
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) shall be restricted common stock, but shall 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 shall be unchanged and remain in full force and
effect.
In addition, the warrant holders 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 are 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) and signed 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 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 April 19, 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.
18
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.
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
placement agent 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 December 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). 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
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 April 19, 2006 was $0.14 per share.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
November
2005 through January 31, 2006
|
|
|
|
|
|
|
|
|
First 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 April 19, 2006, there were 1,064 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 17 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 made
available to prospective customers for evaluation and testing in
the first quarter of fiscal 2006. We are presently working on
Release 1.4 of the E30 and Release 1.1 of the
EmbarqTM
E20 analog front end. We market this novel technology to leading
equipment makers in the telecommunications industry. 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.
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.
23
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 Investors warrants and to the embedded
conversion option in accordance with EITF issue
No. 00-19
Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Companys Own Stock and
EITF issue
No. 05-04,
view C The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument.
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 three months ended January 31,
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 under
SFAS 123(R) related to employee stock options was $69,037
for the three months ended January 31, 2006. 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 $247,057 for the
three months ended January 31, 2006. Stock-based
compensation expense recognized for non-employees under other
accounting standards was $22,908 for the three months ended
January 31, 2006.
There was no stock-based compensation expense related to
employee stock options under other accounting standards for the
three months ended January 31, 2005. Stock
based-compensation expense recognized for non-employees under
other accounting standards was $279,548 for the three months
ended January 31, 2005.
Stock-based compensation expense recognized in our condensed
consolidated statement of operations for the three months ended
January 31, 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.
As stock-based compensation expense recognized in the condensed
consolidated statement of operations for the three months ended
January 31, 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.
24
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.
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 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.
25
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Capitalized
Software Development Costs
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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 the three months ended January 31, 2006 and
recorded amortization expense of $102,696 during that period.
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.
Results
of Operations
Comparison of the three
months ended January 31, 2006 and the three months ended
January 31, 2005
Revenues. Revenues for the three months ended
January 31, 2006 were $40,176. Of this amount, $6,234 was
in the form of guarantee
and/or
license payments related to the U.S. distribution of the
Film and $33,942 was related to foreign distribution of the
Film. Revenues for the three months ended January 31, 2005
were $8,801 from our Entertainment Business. No revenues were
recorded in connection with our semiconductor business during
the three months ended January 31, 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.
26
Total operating expenses increased 63% or $384,188 to $994,811
for the three months ended January 31, 2006 from $610,823
for the three months ended January 31, 2005. Cost of sales
for the three months ended January 31, 2005 represents the
amortization of film cost for the Film. The decrease for the
three months ended January 31, 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 increased by 100% or $102,696 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.
Research and development expenses increased $77,991 for the
three months ended January 31, 2006, principally as the
result of additional payments made to HelloSoft, Inc.
(HelloSoft) in accordance with the terms of our
services agreement, as amended. Selling, general and
administrative expenses increased 35% or $210,126 to $807,071
primarily as a result of an increase in professional fees and
stock based compensation related to options granted to key
employees and an advisory board member.
Other (Income) Expenses. Other expenses
included interest expense and amortization of deferred financing
costs. Interest expense increased $966,173 primarily as a result
of issuing $3,500,000 of convertible debentures in May 2005 (the
2005 debentures) as well as the increase in
amortization of debt discount. Amortization of deferred
financing costs increased to $243,967 from $24,619 as a result
of the additional deferred financing costs primarily related to
the issuance of the 2005 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.
Other income in the three months ended January 31, 2006
included a gain on the forgiveness of principal and interest on
a promissory note to Zaiq Technologies, Inc. of $1,169,820.
Net Loss. For the three months ended
January 31, 2006 our net loss increased 41% or $368,514 to
$1,273,738 from $905,224 as the result of higher interest costs,
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.
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.
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
27
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 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
$1,006,030 related to 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.
Net Loss. During the 2005 period our net loss
increased $1,417,099 or 26% from $5,506,287 to $6,923,386 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 $1,006,030 as discussed under Other (Income) Expenses
above.
Liquidity
and Capital Resources
Cash balances totaled $4,086,078 at April 21, 2006,
$355,853 at January 31, 2006 and $373,481 at
October 31, 2005.
Net cash used in operating activities was $467,047 for the three
months ended January 31, 2006, compared to $462,489 for the
three months ended January 31, 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 $1,273,738, compared with
$905,224 for the three months ended January 31,
2005; and
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an increase for the three months ended January 31, 2006 of
accounts payable and accrued liabilities of $92,877, compared to
a decrease of accounts payable and accrued liabilities for the
three months ended January 31, 2005 of $101,440, resulting
in a net decrease in cash used of $194,317;
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28
impacted by the following non-cash items:
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increased amortization of deferred financing costs, which were
$243,967 for the three months ended January 31, 2006,
compared to $24,619 for the three months ended January 31,
2005, principally due to increased conversions of the May 2005
Debentures;
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increased amortization of debt discount on notes, which was
$1,193,195 for the three months ended January 31, 2006,
compared to $225,503 for the three months ended January 31,
2005, principally due to increased conversions of the May 2005
debentures;
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increased amortization of technology license and capitalized
software development fee, which was $102,696 for the three
months ended January 31, 2006, compared to $0 for the three
months ended January 31, 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 three
months ended January 31, 2006; and
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increased stock-based compensation expense, which was $339,002
for the three months ended January 31, 2006 compared to
$279,548 for the three months ended January 31, 2005.
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We did not use cash for investing activities during either the
three months ended January 31, 2006 or January 31,
2005.
Net cash provided by financing activities was $449,419 in the
three months ended January 31, 2006 compared to $472,871
for the three months ended January 31, 2005. Net cash
provided by financing activities in the three months ended
January 31, 2006 was the result of proceeds from notes
payable of $750,000 offset by capitalized financing costs of
$82,500, total payments of $129,789 in connection with the
cancellation of the promissory note to Zaiq Technologies, Inc.
and the repurchase of common stock previously issued to Zaiq
Technologies, Inc., and repayments of convertible notes payable
of $88,292.
Net cash provided by financing activities for the three months
ended January 31, 2005 was the result of proceeds from the
issuance of common stock in the amount of $212,900 and proceeds
from notes payable of $300,000, offset by capitalized financing
costs of $33,029, and repayments of convertible notes payable of
$7,000.
Our liquidity improved significantly as a result of a series of
transactions completed subsequent to January 31, 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.
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
29
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.
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 January 31, 2006, $3,101,121 of principal amount and
interest of the 2005 Debentures had been converted into
147,468,595 shares of our common stock and there was
$504,987 of principal amount of the 2005 Debentures outstanding.
As of April 19, 2006, as a result of additional
conversions, $40,577 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
April 19, 2006 and matures in December 2006.
As of April 21, 2006, we had cash balances of $4,086,078.
Although management believes funds on hand will enable us to
meet our liquidity needs through at least January 31, 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.
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, 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 application 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
30
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 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. In May 2005, we entered into a private
placement agreement for convertible debentures, a registration
rights agreement and warrants in connection with the private
placement. Based on the interpretive guidance in EITF Issue
No. 05-4,
view C, due to certain factors, including an uncapped
liquidated damages provision in the registration rights
agreement, we determined that the embedded conversion option
related to these convertible debentures and the registration
rights are derivative liabilities. Accordingly, the fair value
of the embedded conversion option of $1,500,000 was recorded as
a liability as of the closing of the sale of these convertible
debentures. Due to various factors, including substantial
conversions of these convertible debentures and the registration
statement becoming effective on August 1, 2005, the value
of the registration rights was deemed to be de minimus. We
believe the accounting treatment for the 2006 Debentures will be
similar.
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 will adopt EITF
No. 05-7
as of the beginning of our interim reporting period that begins
on February 1, 2006. We are currently in the process of
evaluating the effect that the adoption of this pronouncement
will have on our 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. 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
beginning on February 1, 2006 for all new convertible debt
instruments with a beneficial conversion feature. The
application 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.
31
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 made
available to prospective customers for evaluation and testing in
the first quarter of fiscal 2006. We are presently working on
Release 1.4 of the E30 and Release 1.1 of the
Embarqtm
E20 analog front end. We market this novel technology to
leading equipment makers in the telecommunications industry. 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
Telecommunications Business
The
Broadband Bottleneck
In recent years, demand has increased significantly for
high-speed access to multimedia information and entertainment
content. Telephone companies, office building managers, and
enterprise network operators (together, service
providers) satisfy this demand by offering a mix of voice,
video and data services to homes, businesses and governmental
locations (together, service subscribers). These
subscribers are increasingly seeking high-speed broadband access
in order to take advantage of the dramatic growth of the
Internet and increased use of the World Wide Web for
communicating and accessing information,
e-commerce,
and bandwidth-intensive applications such as video-conferencing,
gaming, data-mining, image processing, distance learning,
streaming audio/video, multimedia broadcasting, telecommuting
and networking between branch offices. Rapid growth in the
number of Internet users and the amount of bandwidth that each
user requires has created bottlenecks on existing communications
networks, especially over the last mile of the
legacy communications infrastructure. The last mile
generally refers to the connection between the edge of the
high-capacity service provider network and the device or
premises of the service subscriber. Generally speaking, the
last mile challenge refers to the bottleneck that
occurs where the high-speed capability of the fiber optic
network meets the low-speed capacity of the local copper-based
network.
As the volume of data has increased, service subscribers have
become increasingly dissatisfied with the performance of
telephone
dial-up
connections that are typically limited to data rates of 28.8
kilobits per second (kbps) to 56 kbps. At the same
time, service providers and content developers are offering more
and more data-intensive applications, thus stimulating demand
for bandwidth. Businesses also are seeking faster access to
broadband content as the convergence of voice, video and data,
and increasing volumes of electronic traffic, have placed new
demands on existing technologies and infrastructures.
In response to the challenge to provide high-speed access for
both consumers and businesses, service providers have been
upgrading their networks so as to significantly increase data
transmission speeds beyond the 56 kbps capacity. Nonetheless,
given the nature of the copper based networks, the increased
data
32
transmission speeds do not approach those needed to address the
burgeoning demand. Our products are designed to increase data
transmission speeds on the existing copper-based network to
satisfy this demand.
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 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.
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. 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
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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.
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 to all applications in the field of the
copper telephone wire telecommunications network. Adaptive is
engaged in the research, development and sales of silicon
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) 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. 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.
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 payment, 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.
Status
of our Solution
Our initial chipset in a planned family of transport processors,
the
EmbarqTM
E30 (Release 1.3) digital signal processor, was made available
to prospective customers for evaluation and testing in the first
calendar quarter of 2006. We are presently working on Release
1.4 of the E30 and Release 1.1 of the
EmbarqTM
E20 analog front end. We estimate that we will complete them in
the second calendar 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 of the E30 and Release 1.2 of the E20. We
estimate that we will also complete them in the second calendar
quarter of 2006.
The primary improvement that we intend to deliver with Release
2.0 is moving both products from a field programmable gate array
version to an application specific standard part, thus lowering
our cost to produce these goods.
34
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.
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.
35
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, 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.
36
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.
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.
37
MANAGEMENT
The names, ages and positions of our directors, executive
officers and key employees are as follows:
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Name
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Age
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Position
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Brad Ketch
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President, Chief Executive
Officer, Secretary, Principal Financial Officer and Director
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Ray Willenberg, Jr.
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Chairman of the Board and
Executive Vice President
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Jack L. Peckham
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Director(1)
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Thomas J. Cooper
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Director(2)
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Audit Committee and Compensation Committee Member |
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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
38
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.
39
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 $0.027 per share and vest
between February and July 2006. |
40
Aggregate
Options Exercised in 2005 and Year-End Option Values
The named executive officers did not exercise any stock options
during the year ended October 31, 2005. The following table
sets forth information as of October 31, 2005 concerning
options held by the named executive officers. None of these
options were
in-the-money
as of October 31, 2005, and all such options were canceled
by agreement effective January 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Value of Unexercised
|
|
|
|
Shares
|
|
|
|
|
|
Underlying Unexercised
|
|
|
In-The-Money
|
|
|
|
Acquired on
|
|
|
Value
|
|
|
Options at Fiscal Year
End
|
|
|
Options at Fiscal Year
End
|
|
|
|
Exercise (#)
|
|
|
Realized ($)
|
|
|
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
41
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 April 19, 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 April 19, 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 323,042,763 shares of common
stock outstanding at April 19, 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
|
|
|
10,533,333
|
(2)
|
|
|
3.17
|
%
|
Ray Willenberg, Jr.
|
|
|
12,581,613
|
(3)
|
|
|
3.79
|
%
|
Jack L. Peckham
|
|
|
1,300,000
|
(4)
|
|
|
*
|
|
Thomas J. Cooper
|
|
|
1,832,258
|
(5)
|
|
|
*
|
|
All executive officers and
directors as a group (4 persons)
|
|
|
26,247,204
|
(6)
|
|
|
7.64
|
%
|
|
|
|
(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 9,100,000 shares of common
stock. |
|
(3) |
|
Includes options to purchase 8,900,000 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 20,500,000 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 April 19, 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
42
own 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 April 19, 2006. However, each of the selling
shareholders that is the holder of 2006 Debentures, 2005
Debentures, 2006 Warrants or 2005 Warrants 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 April 19, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
Owned
|
|
|
Number of Shares
|
|
|
After Offering
|
|
Selling Shareholder
|
|
Before Offering
|
|
|
Offered
|
|
|
Shares
|
|
|
Percent
|
|
|
Lewi 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
Fund
|
|
|
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
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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
|
|
|
969,618
|
|
|
|
969,618
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
* |
|
Less than 1%. |
|
(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 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 warrants and 946,036
Adjustment Shares. Wilhelm Ungar has voting control and
investment discretion over the shares held by the selling
shareholder. Mr. Ungar disclaims beneficial ownership of
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 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. |
|
(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 warrants and
1,100,572 Adjustment Shares. |
|
(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 warrants and
1,613,658 Adjustment Shares. Bristol Capital Advisors, LLC
(BCA) is the |
44
|
|
|
|
|
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 warrants 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 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 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. |
|
(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 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 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 warrants,
849,142 Adjustment Shares and 107,800 shares of common
stock. |
|
(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 warrants and
513,218 Adjustment Shares. |
|
(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 warrants and
1,135,243 Adjustment Shares. |
|
(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 warrants and
1,042,998 Adjustment Shares. |
|
(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 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. |
45
|
|
|
(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 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. |
|
(17) |
|
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 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. |
|
(18) |
|
Includes 2,795,706 shares of common stock issuable upon the
exercise of warrants and 295,008 shares of common stock. |
|
(19) |
|
Include 2,424,047 shares of common stock issuable upon the
exercise of warrants. Also includes 5,404 shares issuable
upon conversion of $442 principal amount plus interest thereon
until maturity of our 2005 Debentures. |
|
(20) |
|
Includes 3,204,034 shares of common stock issuable upon the
exercise of warrants and 120,014 shares of common stock. |
|
(21) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(22) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(23) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(24) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(25) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(26) |
|
Includes 969,618 shares of common stock issuable upon the
exercise of 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. |
|
(27) |
|
Includes 55,000 shares of common stock issuable upon the
exercise of warrants and 672,214 shares of common stock. |
|
(28) |
|
Includes 568,171 shares of common stock issuable upon the
exercise of warrants and 249,972 shares of common stock. |
|
(29) |
|
Includes 484,809 shares of common stock issuable upon the
exercise of warrants and 61,120 shares of common stock
issuable upon conversion of $5,000 principal amount of our 2005
Debentures. |
|
(30) |
|
Includes 484,809 shares of common stock issuable upon the
exercise of warrants and 61,120 shares of common stock
issuable upon conversion of $5,000 principal amount of our 2005
Debentures. |
|
(31) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(32) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(33) |
|
Shifra Weinhaus has voting control and investment discretion
over the shares held by the selling shareholder and disclaims
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. |
|
(34) |
|
See Beneficial
Ownership of Certain Shareholders, Directors and Executive
Officers and
Directors and
Executive Officers of the Registrant.
|
|
(35) |
|
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. |
|
(36) |
|
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. |
46
|
|
|
(37) |
|
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. |
|
(38) |
|
Represents shares underlying stock options granted to
Mr. Peckham. |
|
(39) |
|
Represents shares underlying stock options granted to the
selling shareholder. Mr. Chen serves as a member of the
Companys Advisory Board. |
|
(40) |
|
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. |
|
(41) |
|
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.
Mr. Birnbaum disclaims beneficial ownership of the shares
held by the selling shareholder. |
|
(42) |
|
Includes 666,667 shares of common stock issuable upon the
exercise of warrants and 403,334 shares of common stock
issuable upon conversion of $50,000 principal plus interest
thereon until maturity of our 2003 Debentures. |
|
(43) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(44) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(45) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(46) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(47) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(48) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(49) |
|
Represents shares of common stock issuable upon the exercise of
warrants. |
|
(50) |
|
Represents shares of common stock issuable upon the exercise of
warrants. 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. |
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:
|
|
|
|
|
directly as principals;
|
|
|
|
ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
|
|
|
|
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;
|
|
|
|
purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
|
|
|
|
an exchange distribution in accordance with the rules of the
applicable exchange;
|
|
|
|
privately negotiated transactions;
|
47
|
|
|
|
|
to cover short sales made in compliance with applicable laws and
regulations;
|
|
|
|
broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
|
|
|
|
a combination of any such methods of sale; and
|
|
|
|
any other method permitted pursuant to applicable law.
|
The selling shareholders may also sell shares under
Rule 144 under the Act if available, rather than under this
prospectus.
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:
|
|
|
|
|
The name of each such selling shareholder and of the
participating broker-dealer(s);
|
|
|
|
The number of shares involved;
|
|
|
|
The price at which such shares were sold;
|
|
|
|
The commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
|
|
|
|
That such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus; and
|
|
|
|
Other facts material to the transaction.
|
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.
48
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 April 19, 2006, there were
323,042,763 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.
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
49
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 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
50
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 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.
51
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.
52
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 $6,923,386 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 $3,145,391. 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.
/s/ MARCUM &
KLIEGMAN LLP
New York, New York
January 28, 2006
F-2
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
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
|
|
Accounts payable and accrued
expenses
|
|
|
981,833
|
|
|
|
2,007,871
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,552,903
|
|
|
|
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
|
|
Conversion option liability
|
|
|
778,167
|
|
|
|
|
|
Long-term portion of notes payable
|
|
|
108,134
|
|
|
|
|
|
Redeemable Series B Preferred
Stock
|
|
|
|
|
|
|
3,192,000
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
4,778,329
|
|
|
|
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
|
|
|
63,679,065
|
|
|
|
55,031,976
|
|
Unearned compensation
|
|
|
(22,771
|
)
|
|
|
(164,500
|
)
|
Accumulated deficit
|
|
|
(62,114,560
|
)
|
|
|
(55,191,174
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
(Deficiency)
|
|
|
1,726,636
|
|
|
|
(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
|
|
|
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
|
|
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
|
|
|
2,623,299
|
|
|
|
1,047,180
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(6,923,386
|
)
|
|
$
|
(5,506,287
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss Per
Common Share
|
|
$
|
(0.06
|
)
|
|
$
|
(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
|
)
|
Warrants issued with convertible
debentures
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
Reclassification of conversion
option liability
|
|
|
|
|
|
|
|
|
|
|
721,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721,833
|
|
Warrants issued to placement agent
|
|
|
|
|
|
|
|
|
|
|
319,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319,066
|
|
Warrants issued for professional
services
|
|
|
|
|
|
|
|
|
|
|
11,776
|
|
|
|
|
|
|
|
(11,776
|
)
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,428,541
|
|
|
|
|
|
|
|
1,428,541
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,923,386
|
)
|
|
|
(6,923,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31,
2005
|
|
|
184,901,320
|
|
|
$
|
184,902
|
|
|
$
|
63,679,065
|
|
|
$
|
|
|
|
$
|
(22,771
|
)
|
|
$
|
(62,114,560
|
)
|
|
$
|
1,726,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(6,923,386
|
)
|
|
$
|
(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
|
|
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
|
|
|
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 8 (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) (including its 50% owned subsidiary Top
Secret Productions, LLC), and NV Technology, Inc. (NV
Technology collectively, the Company). 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
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
$6.9 million and $5.5 million, respectively, and as of
October 31, 2005 had a working capital deficiency of
approximately $3.1 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 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. 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 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
F-10
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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 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.
F-11
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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 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 7 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 13) and 38,509,190, for the
years ended October 31, 2005 and 2004, respectively.
F-12
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
Stock-Based
Compensation
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.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
October 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss, as reported
|
|
$
|
(6,923,386
|
)
|
|
$
|
(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
|
|
$
|
(7,952,511
|
)
|
|
$
|
(5,839,787
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss per
Common Share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
$
|
(0.07
|
)
|
|
$
|
(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.
F-13
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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 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 13.
The Company estimates that options granted to the Companys
Chief Executive Officer and Executive Vice President in January
2006, as further discussed in Note 17, 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
F-14
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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 application 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 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. In May 2005, the Company entered into a private
placement agreement for convertible debentures, a registration
rights agreement and warrants in connection with the private
placement (see Note 9). Based on the interpretive guidance
in EITF Issue
No. 05-4,
view C, due to certain factors, including an uncapped liquidated
damages provision in the registration rights agreement, the
Company determined that the embedded conversion option related
to these convertible debentures and the registration rights are
derivative liabilities. Accordingly, the fair value of the
embedded conversion option of $1,500,000 was recorded as a
liability as of the closing of the sale of these convertible
debentures. Due to various factors, including substantial
conversions of these convertible debentures and the registration
statement becoming effective on August 1, 2005, the value
of the registration rights was deemed to be de minimus.
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
F-15
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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
application 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.
3. 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.
4. 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
F-16
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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 15 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.
5. 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 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.
6. 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
|
|
|
|
|
|
|
F-17
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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.
7. 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 10) 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.
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 10.
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 17 for further details.
8. 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. Except for these two notes, the notes are due when
the Company reaches certain milestones from the distribution of
its motion picture. The notes (with the exception of the March
2005 convertible promissory note) may be converted at any time,
in whole or in part, into that number of fully paid and
non-assessable shares of common stock at conversion prices
ranging from $.33 to $1.00. The March 2005 convertible
promissory note may be converted into shares of common stock at
a conversion price per share
F-18
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
equal to the closing price of the common stock on the
Over-the-Counter
Bulletin Board on the date of conversion.
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) |
|
Due when receipts received by the Company from the joint venture
exceed $375,000. |
|
(2) |
|
Due when receipts received by the Company from the joint venture
exceed $2,250,000. |
|
(3) |
|
Due when receipts received by the Company from the joint venture
exceed $750,000. |
|
(4) |
|
Notes 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
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 9, and accrued
interest of $1,800 was paid on the 21st of each month
through May 2005. |
|
(5) |
|
On September 21, 2004, the Company entered into eight
identical loan agreements totaling $100,000. The loan is
evidenced by a promissory note dated September 21, 2004
issued by the Company to the lender. The principal amount of the
loan 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 the proceeds of the private placement of the
2005 Debentures further discussed in Note 9. |
|
(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. |
F-19
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
9. Convertible
Debentures
2005
Debentures
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 6). 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 10).
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.
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, 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.
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 option in
accordance with EITF issue
No. 00-19
Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Companys Own Stock and
EITF issue
No. 05-04,
view C The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument. Due to certain factors,
including an uncapped liquidated damages provision in the
registration rights agreement, the Company determined that the
embedded conversion option related to the 2005 Debentures and
the registration rights are derivative liabilities. Accordingly,
the fair value of the embedded conversion option of $1,500,000
was recorded as a liability as of the closing of the sale of the
2005 Debentures. 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 derivative 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.
The Company followed the guidelines in EITF issue
No. 05-04,
view C and classified the fair value of the Investor Warrants as
equity and separately valued the derivative liability related to
the registration rights.
F-20
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
No gain or loss was deemed necessary during the period ended
October 31, 2005, as the fair value of the derivative
liabilities did not fluctuate in value.
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. 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.
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 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
F-21
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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.
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 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 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 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) the 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.
F-22
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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
|
|
The remaining 7% Debentures outstanding at October 31,
2005 were originally issued in December 2003 and are due and
payable in December 2006.
10. 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 9. |
|
(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 9. |
F-23
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
|
|
|
(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 7) 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
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 17 for further details.
11. 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
|
|
|
|
|
|
|
|
|
|
|
12. 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.
F-24
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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 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 4. These shares were
subsequently canceled in connection with the Exchange Agreement
as discussed in Note 7. 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
F-25
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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.
13. 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.
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 7).
|
|
|
|
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 7).
|
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;
|
F-26
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
|
|
|
|
|
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
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 17).
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-27
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to 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-28
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
The options outstanding and currently exercisable by exercise
price at October 31, 2005 are as follows:
Under the
Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Currently
|
|
Options Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
Exercisable
|
|
|
Price
|
|
|
$
|
0.31
|
|
|
|
40,000
|
|
|
$
|
0.31
|
|
|
|
6.67
|
|
|
|
26,667
|
|
|
$
|
0.31
|
|
$
|
0.42
|
|
|
|
795,000
|
|
|
$
|
0.42
|
|
|
|
6.32
|
|
|
|
795,000
|
|
|
$
|
0.42
|
|
$
|
3.92
|
|
|
|
158,750
|
|
|
$
|
3.92
|
|
|
|
5.34
|
|
|
|
158,750
|
|
|
$
|
3.92
|
|
Outside
the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Currently
|
|
Options Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
Exercisable
|
|
|
Price
|
|
|
$0.15-$0.17
|
|
|
15,000,000
|
|
|
$
|
0.17
|
|
|
|
9.00
|
|
|
|
3,000,000
|
|
|
$
|
0.16
|
|
$0.39
|
|
|
500,000
|
|
|
$
|
0.39
|
|
|
|
6.32
|
|
|
|
500,000
|
|
|
$
|
0.39
|
|
$1.02-$1.07
|
|
|
75,000
|
|
|
$
|
1.05
|
|
|
|
5.97
|
|
|
|
75,000
|
|
|
$
|
1.05
|
|
$2.30
|
|
|
50,000
|
|
|
$
|
2.30
|
|
|
|
5.60
|
|
|
|
50,000
|
|
|
$
|
2.30
|
|
$3.92
|
|
|
50,000
|
|
|
$
|
3.92
|
|
|
|
5.76
|
|
|
|
50,000
|
|
|
$
|
3.92
|
|
$4.00
|
|
|
225,000
|
|
|
$
|
4.00
|
|
|
|
5.06
|
|
|
|
225,000
|
|
|
$
|
4.00
|
|
Warrants
Granted
On November 1, 2003, the Company granted warrants to
purchase 100,000 shares of its common stock at an exercise
price of $.15 in connection with legal services performed for
the Company. The fair value of the stock warrants estimated on
the date of grant using the Black-Scholes option pricing model
is $.15 per share or $21,147.
On December 31, 2003 the Company issued warrants to
purchase 6,666,667 shares of its common stock at an
exercise price of $.25 in connection with the placement of
$1,000,000 of 7% Debentures (see Note 9). The fair
value of the stock warrants estimated on the date of grant using
the Black-Scholes option pricing model is approximately
$.08 per share or $577,259.
On December 31, 2003 the Company issued a warrant to
purchase 666,667 shares of its common stock at an exercise
price of $.15 to the placement agent in connection with the
placement of $1,000,000 of 7% Debentures. The fair value of
the stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is $.14 per share or
$93,333 (see Note 9)
The Company granted to four convertible note holders warrants to
purchase 120,003 shares of its common stock at an exercise
price of $.25 in connection with the extension of the
convertible notes due date. The fair value of the stock
warrants estimated on the date of grant using the Black-Scholes
option pricing model is $.13 per share or $15,992.
F-29
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
On April 20, 2004 the Company issued warrants to purchase
666,666 shares of its common stock at an exercise price of
$.25 in connection with the placement of $100,000 of
7% Debentures (see Note 9). The fair value of the
stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is approximately
$.08 per share or $52,659.
On April 20, 2004, the Company granted a warrant to
purchase 66,666 shares of its common stock at an exercise
price of $.15 to the placement agent in connection with the
placement of $100,000 of 7% Debentures (see Note 9).
The fair value of the stock warrants estimated on the date of
grant using the Black-Scholes option pricing model is
$.15 per share or $9,990.
On May 7, 2004 the Company issued warrants to purchase
1,666,666 shares of its common stock at an exercise price
of $.25 in connection with the placement of $250,000 of
7% Debentures (see Note 9). The fair value of the
stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is approximately
$.09 per share or $142,186.
On May 7, 2004, the Company granted a warrant to purchase
166,667 shares of its common stock at an exercise price of
$.15 to the placement agent in connection with the placement of
$250,000 of 7% Debentures (see Note 9). The fair value
of the stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is $.15 per share or
$17,695.
On October 1, 2004, the Company granted warrants to
purchase 120,000 shares of its common stock at an exercise
price of $.25 in connection with the extension of four
convertible promissory notes that were originally due 11/21/03
and extended once to January 7, 2004 and extended once
again with the due date left open. The fair value of the stock
warrants estimated on the date of grant using the Black-Scholes
option pricing model is $.25 per share or $4,114.
On May 26, 2005, the Company issued warrants to purchase
22,624,430 shares of its common stock at an exercise price
of $.3094 in connection with the placement of the 2005
Debentures (see Note 9). The fair value of the stock
warrants estimated on the date of grant using the Black-Scholes
option pricing model is approximately $.06 per share or
$1,362,324.
On May 26, 2005, the Company issued warrants to purchase
11,312,220 shares of its common stock at an exercise price
of $.1547 in connection with the placement of the 2005
Debentures (see Note 9). The fair value of the stock
warrants estimated on the date of grant using the Black-Scholes
option pricing model is approximately $.06 per share or
$637,676.
On May 26, 2005, the Company granted warrants to purchase
2,262,443 shares of its common stock at an exercise price
of $.3094 to the placement agent in connection with the
placement of the 2005 Debentures (see Note 9). The
fair value of the stock warrants estimated on the date of grant
using the Black-Scholes option pricing model is $.06 per
share or $130,710.
On May 26, 2005, the Company granted warrants to purchase
2,262,443 shares of its common stock at an exercise price
of $.1547 to the placement agent in connection with the
placement of the 2005 Debentures (see Note 9). The
fair value of the stock warrants estimated on the date of grant
using the Black-Scholes option pricing model is $.06 per
share or $130,710.
On May 26, 2005, the Company granted warrants to purchase
1,131,222 shares of its common stock at an exercise price
of $.1547 to the placement agent in connection with the
placement of the 2005 Debentures (see Note 9). The
fair value of the stock warrants estimated on the date of grant
using the Black-Scholes option pricing model is $.05 per
share or $57,646.
On June 23, 2005, the Company granted warrants to purchase
200,000 shares of its common stock at an exercise price of
$.12 in connection with consulting services performed for the
Company. The fair value of the
F-30
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is $.06 per share or
$11,776.
Warrants
Expired
During the year ended October 31, 2005, warrants to
purchase 800,000 shares of common stock expired.
During the year ended October 31, 2004, warrants to
purchase 154,943 shares of common stock expired.
At October 31, 2005, the Company had outstanding warrants
to purchase shares of common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
|
Grant Date
|
|
Shares
|
|
|
Price
|
|
|
Expiration Date
|
|
|
June 14, 2001
|
|
|
50,000
|
|
|
$
|
2.50
|
|
|
|
June 14, 2006
|
|
June 14, 2001
|
|
|
25,000
|
|
|
|
5.00
|
|
|
|
June 14, 2006
|
|
June 14, 2001
|
|
|
25,000
|
|
|
|
10.00
|
|
|
|
June 14, 2006
|
|
November 5, 2001
|
|
|
200,000
|
|
|
|
0.51
|
|
|
|
November 5, 2005
|
|
October 31, 2003
|
|
|
600,000
|
|
|
|
0.15
|
|
|
|
September 30, 2006
|
(1)
|
December 31, 2003
|
|
|
7,333,333
|
|
|
|
0.25
|
|
|
|
December 31, 2008
|
|
April 20, 2004
|
|
|
666,666
|
|
|
|
0.25
|
|
|
|
April 30, 2009
|
(1)
|
April 20, 2004
|
|
|
66,667
|
|
|
|
0.15
|
|
|
|
April 30, 2009
|
(1)
|
May 7, 2004
|
|
|
1,666,666
|
|
|
|
0.25
|
|
|
|
May 31, 2009
|
(1)
|
May 7, 2004
|
|
|
166,667
|
|
|
|
0.15
|
|
|
|
May 31, 2009
|
(1)
|
October 1, 2004
|
|
|
120,000
|
|
|
|
0.25
|
|
|
|
October 1, 2007
|
|
January 11, 2004
|
|
|
100,000
|
|
|
|
0.15
|
|
|
|
January 11, 2005
|
|
May 26, 2005
|
|
|
2,262,443
|
|
|
|
0.1547
|
|
|
|
May 31, 2008
|
|
May 26, 2005
|
|
|
24,886,873
|
|
|
|
0.3094
|
|
|
|
August 31, 2008
|
|
May 26, 2005
|
|
|
12,443,442
|
|
|
|
0.1547
|
|
|
|
August 31, 2006
|
|
June 23, 2005
|
|
|
200,000
|
|
|
|
0.12
|
|
|
|
June 23, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 5, 2005 to
|
|
Exercisable at October 31,
2005
|
|
|
50,812,757
|
|
|
$
|
0.12 to $10.00
|
|
|
|
May 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under certain conditions the Company may accelerate the
expiration date. |
Net
Loss Per Share
Securities that could potentially dilute basic earnings per
share (EPS), in the future, that were not included in the
computation of diluted EPS because to do so would have been
anti-dilutive for the periods presented, consist of the
following:
|
|
|
|
|
2005 Debentures and accrued
interest(1)
|
|
|
95,782,779
|
|
Warrants to purchase common
stock(2)
|
|
|
50,812,757
|
|
Options to purchase common stock(3)
|
|
|
16,893,750
|
|
Convertible notes payable and
accrued interest
|
|
|
8,320,051
|
|
7% Debentures and accrued
interest
|
|
|
946,277
|
|
|
|
|
|
|
Total as of October 31, 2005
|
|
|
172,755,614
|
|
|
|
|
|
|
F-31
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
|
|
|
(1) |
|
(based on a five day volume weighted average common stock price
discounted by 30% at October 31, 2005 of $0.01953) |
|
(2) |
|
(includes warrants to purchase 200,000 shares of common
stock that expired in November 2005) |
|
(3) |
|
(includes options to purchase 14,000,000 shares of common
stock that were canceled in January 2006) |
Substantial issuances after October 31, 2005 through
January 25, 2006
|
|
|
|
|
Options granted to purchase shares
of common stock
|
|
|
22,400,000
|
|
|
|
|
|
|
Warrants issued to purchase shares
of common stock
|
|
|
7,500,000
|
|
|
|
|
|
|
Common stock issued upon
conversion of 2005 Debentures and accrued interest
|
|
|
81,262,190
|
|
|
|
|
|
|
14.
Income Taxes
At October 31, 2005, the Company had approximately
$46,042,000 of net operating loss carry forwards for income tax
purposes, which expire as follows:
|
|
|
|
|
|
|
Net Operating
|
|
Year
|
|
Loss
|
|
|
2011
|
|
$
|
1,583,000
|
|
2012
|
|
|
4,714,000
|
|
2018
|
|
|
4,472,000
|
|
2019
|
|
|
1,698,000
|
|
2020
|
|
|
4,759,000
|
|
2021
|
|
|
9,503,000
|
|
2022
|
|
|
10,230,000
|
|
2023
|
|
|
4,143,000
|
|
2024
|
|
|
2,245,000
|
|
2025
|
|
|
2,695,000
|
|
|
|
|
|
|
|
|
$
|
46,042,000
|
|
|
|
|
|
|
At October 31, 2005 and 2004, the Company has a deferred
tax asset of approximately $19,877,000 and $22,104,000,
respectively, representing the benefits of its net operating
loss and certain expenses not currently deductible for tax
purposes, principally related to the granting of stock options
and warrants and the difference in tax basis of certain
intangible assets. The Companys deferred tax asset has
been fully reserved by a valuation allowance since realization
of its benefit is uncertain. The difference between the Federal
statutory tax rate of 34% and the Companys effective
Federal tax rate of 0% is due to the increase (decrease) in the
valuation allowance of $(2,227,000)(2005) and $1,770,000 (2004).
The Companys ability to utilize its carry forwards may be
subject to any annual limitation in future periods, pursuant to
Section 382 of the Internal Revenue Code of 1986, as
amended.
15. Commitments,
Contingencies and Other Matters
Line
of Credit
On July 21, 2004, the Company entered into a one-year
$100,000 revolving line of credit with a bank. The line of
credit has a floating interest rate of the prime rate set by the
bank plus a margin of .500%. The initial interest rate is
approximately 1.04%. Ray Willenberg, Jr., Chairman of the
Company, has guaranteed the
F-32
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
repayment of the line of credit. As of October 31, 2004, no
amount was outstanding under the line of credit. The above line
expired on August 10, 2005.
Research
and Development Agreement
The Company and HelloSoft entered into an amendment, effective
as of October 11, 2004 (the Amendment), to
their Services Agreement dated as of March 31, 2004 (the
Original Agreement) pursuant to which HelloSoft will
provide development services relating to the Companys
Semiconductor Technologies. The Original Agreement provides
that, upon the Companys request from time to time,
HelloSoft is to provide services to be specified pursuant to
mutually agreed upon terms. The Amendment represents the first
project that HelloSoft is undertaking pursuant to the Original
Agreement.
In consideration for the services being rendered under the
Amendment, the Company agreed to pay to HelloSoft $185,000, half
of which was paid in the form of restricted common stock issued
at a discount of 25% to the closing price of the Companys
Common Stock on the day of the commencement of services. The
other half will be remitted in cash, periodically, upon
completion by HelloSoft and acceptance by the Company of
specified milestones. HelloSoft has assigned to the Company the
rights to any improvements, developments, discoveries or other
inventions that may be generated by HelloSoft in its performance
of the services to be provided under the Amendment.
On July 26, 2005, the Company signed an amendment to the
Original Agreement that defines and prices the next two phases
of the technology development. The Company will expend $445,000
on Phase II and $350,000 on Phase III. Half of
Phase II, or $222,500, was paid to HelloSoft on
July 26, 2005, in the form of restricted common stock
issued at a discount of 25% to the closing price of the
Companys common stock on that date, and the other $222,500
will be paid to them in cash when they complete Phase II.
The restricted common stock issued to HelloSoft was valued at
$296,667 and recorded as research and development expense. When
HelloSoft commences Phase III, the Company will issue to
them $175,000 worth of restricted common stock, and the other
$175,000 will be paid to them in cash when they complete
Phase III. Phase III will be deemed complete when
HelloSoft releases the E30 Rel. 1.4 to the Company. The Company
projects that this will occur in the second quarter of 2006.
Leases
The Companys future minimum lease payments required under
operating leases with a term greater than one year are as
follows:
|
|
|
|
|
Years Ending
October 31:
|
|
|
|
|
2006
|
|
$
|
21,064
|
|
2007
|
|
|
21,696
|
|
2008
|
|
|
9,151
|
|
|
|
|
|
|
Total
|
|
$
|
51,911
|
|
|
|
|
|
|
Rent expense for the years ended October 31, 2005 and 2004
was $39,747 and $122,506, respectively.
Concentration
of Credit Risk
The Company maintains cash balances in two financial
institutions. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000 per institution. From
time to time, the Companys balances may exceed these
limits. At October 31, 2005 and 2004, uninsured cash
balances were approximately $303,682 and $63,744, respectively.
The Company believes it is not exposed to any significant credit
risk for cash.
F-33
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
Legal
Disputes
During the quarter ended July 31, 2004, the Company was
served with the following three summonses and complaints, each
filed on July 30, 2004 in the Superior Court of California
(San Diego County):
Each complaint relates to a convertible promissory note issued
by the Company in December 2001 and payable, according to its
terms, out of film distributions that the Company receives. Each
complaint alleges, among other things: that the Company has
failed to pay the amount due and owing under the convertible
promissory note issued to the plaintiff despite demands for
payment; that the Companys management has acted to
forestall payments to its creditors, including the plaintiff;
and that the Company fraudulently induced the plaintiff to enter
into the convertible promissory note.
The Company was served with the following additional summons and
complaint, filed on July 30, 2004 in the Superior Court of
California (San Diego County): Gerald Handler, Trustee of
the Gerald and Judith Handler Trust and Trustee of the Handler
Children Trust, and Wayne Lill Jr., Trustee of the Wayne Lill
Trust dated 12-22-99 v. New Visual Corporation, New Visual
Entertainment, Inc., Top Secret Productions, LLC and Does 1
through 20. The plaintiffs sought money damages in the aggregate
amount of $375,000, plus interest; an order avoiding alleged
fraudulent transfers; an injunction against disposition of
allegedly fraudulently transferred monies; the appointment of a
receiver; a writ of attachment and imposition of a constructive
trust.
According to their terms, each of the convertible promissory
notes underlying these claims becomes due and payable upon the
Companys receipt of a specified amount of distributions
from its Film and is payable out of those distributions that the
Company has actually received. The convertible promissory notes
underlying these claims were converted by the plaintiffs into
shares of the Companys common stock in March 2002.
The Company filed an answer to the complaints denying all
allegations.
In July 2005 the legal proceedings were dismissed with prejudice
upon the issuance in favor of the plaintiffs of an irrevocable
letter of credit in the maximum amount of $300,000 by a
non-related third party. The Company has no reimbursement
obligation with respect to the letter of credit.
F-34
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
16. Segment
Information
Summarized financial information concerning the Companys
reportable segments is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
|
Entertainment
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Business
|
|
|
Unallocable
|
|
|
Totals
|
|
|
For the Year Ended
October 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Domestic
|
|
$
|
|
|
|
$
|
29,066
|
|
|
$
|
|
|
|
$
|
29,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Foreign
|
|
$
|
|
|
|
$
|
10,800
|
|
|
$
|
|
|
|
$
|
10,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
$
|
(7,032
|
)
|
|
$
|
(1,014,451
|
)
|
|
$
|
(3,278,604
|
)
|
|
$
|
(4,300,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
7,032
|
|
|
$
|
18,080
|
|
|
$
|
|
|
|
$
|
25,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Identifiable Assets
|
|
$
|
6,087,229
|
|
|
$
|
|
|
|
$
|
417,736
|
|
|
$
|
6,504,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
October 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Domestic
|
|
$
|
|
|
|
$
|
94,788
|
|
|
$
|
|
|
|
$
|
94,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Foreign
|
|
$
|
|
|
|
$
|
191,750
|
|
|
$
|
|
|
|
$
|
191,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
$
|
(1,744,822
|
)
|
|
$
|
(1,320,490
|
)
|
|
$
|
(1,393,735
|
)
|
|
$
|
(4,459,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
3,665
|
|
|
$
|
13,763
|
|
|
$
|
|
|
|
$
|
17,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Identifiable Assets
|
|
$
|
5,940,945
|
|
|
$
|
1,043,063
|
|
|
$
|
143,229
|
|
|
$
|
7,127,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Subsequent
Events
Equity
Transactions
In November 2005:
|
|
|
|
|
32,013,269 shares of common stock were issued for converted
2005 Debentures with a principal amount of $489,885 and accrued
interest of $17,345; and
|
|
|
|
warrants to purchase 200,000 shares of common stock expired.
|
In December 2005:
|
|
|
|
|
31,194,234 shares of common stock were issued for converted
2005 Debentures with a principal amount of $520,839 and accrued
interest valued of $19,960; and
|
|
|
|
499,854 shares of common stock previously held of record by
Zaiq were repurchased. See Zaiq Transaction below.
|
In January 2006:
|
|
|
|
|
18,054,687 shares of common stock were issued for converted
2005 Debentures with a principal amount of $300,000 and accrued
interest of $32,472;
|
|
|
|
performance based options to purchase 14,000,000 shares of
restricted common stock that were previously issued in April
2005 to the Companys Chief Executive Officer and Executive
Vice President were canceled; and
|
F-35
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
|
|
|
|
|
options to purchase 22,400,000 shares of common stock were
granted to the Companys Chief Executive Officer, the
Executive Vice President, and an advisory board member. These
options were valued at approximately $600,000 and have a
10 year term, an exercise price of $0.027 per share,
and vest at various times between February 2006 and July 2006.
|
Zaiq
Transaction
On December 19, 2005, the Company entered into a letter
agreement with Zaiq, pursuant to which the Company agreed to
repurchase from Zaiq for total consideration of $200,000 the
following Zaiq assets: (i) 5,180,474 shares (the
Zaiq Shares) of the Companys common stock held
of record by Zaiq, and (ii) a promissory note (the
Zaiq Note) issued by the Company and held by Zaiq
with a principal balance due of $1,201,887.
The Company had the right under the letter agreement to assign
any or all of its purchase commitment, and assigned its right to
purchase 4,680,620 of the Zaiq Shares to Double U Master Fund,
LP (Double U), an unaffiliated third party that has
been a prior investor in the Company. Double U purchased
$225,000 of the debentures issued by the Company in May 2005.
On December 20, 2005, the Company paid Zaiq an aggregate of
$129,789, out of an advance on the bridge loan that was
subsequently signed in January 2006, as further discussed below,
to purchase the Zaiq Note and 499,854 Zaiq Shares. The Zaiq
Shares purchased by the Company have been canceled and the Zaiq
Note has been delivered to the Company marked Paid in
Full. Following the closing of this transaction, the
Companys previous debt to Zaiq under the Zaiq Note
($1,292,111 in remaining principal, and accrued interest amount)
has been canceled, resulting in a gain of approximately
$1,170,000.
Bridge
Loan
In January 2006, the Company entered into a loan agreement with
a third party pursuant to which the Company borrowed $750,000
from the lender. An amount equal to 108% of the principal amount
of the loan is due and payable on the earlier of May 25,
2006 or the date the Company effects a financing transaction or
series of transactions resulting in gross proceeds to the
Company of at least $2,000,000. The Company may prepay the loan
in whole or in part at any time without penalty. The Company
issued to the lender warrants to purchase 7,500,000 shares
of its Common Stock at an exercise price of $0.10 per
share. The fair value of the warrants estimated on the date of
grant is approximately $125,000. In connection with the loan,
the Company granted a security interest in all of its assets.
The Company received net proceeds of $672,470 from this loan
following the payment of due diligence fees and transaction fees
and transaction related fees and expenses.
Amendment
to HelloSoft Services Agreement
On November 3, 2005, the Company and HelloSoft, Inc.
entered into a further amendment to the Services Agreement dated
as of March 31, 2004 described in Note 15 above.
Pursuant to the amendment, the Company paid HelloSoft $60,000 in
cash, and the parties agreed upon certain additions to the
development services to be performed by HelloSoft pursuant to
the Services Agreement, as amended.
F-36
(Unaudited)
|
|
|
|
|
|
|
January 31,
|
|
|
|
2006
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
Cash
|
|
$
|
355,853
|
|
Other current assets
|
|
|
32,458
|
|
|
|
|
|
|
Total Current Assets
|
|
|
388,311
|
|
Property and equipment (net of
accumulated depreciation of $6,434)
|
|
|
9,303
|
|
Technology license and capitalized
software development fee (net of accumulated amortization of
$102,696)
|
|
|
5,648,304
|
|
Deferred financing costs (net of
accumulated amortization of $924,576)
|
|
|
164,840
|
|
Other assets
|
|
|
7,642
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,218,400
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
Convertible notes payable (net of
debt discount of $15,583)
|
|
$
|
653,997
|
|
Convertible debentures (net of
debt discount of $34,287)
|
|
|
90,713
|
|
Notes payable (net of debt
discount of $169,587)
|
|
|
1,352,750
|
|
Account payable and accrued
expenses
|
|
|
942,692
|
|
Conversion option liability
|
|
|
216,434
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,256,586
|
|
Long-term portion of convertible
debentures (net of debt discount of $389,809)
|
|
|
115,178
|
|
Total Liabilities
|
|
|
3,371,764
|
|
|
|
|
|
|
Commitments, Contingencies and
Other Matters
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
Preferred
stock $0.01 par value;
15,000,000 shares authorized; -0- shares issued and
outstanding
|
|
|
|
|
Common
stock $0.001 par value;
500,000,000 shares authorized; 266,163,519 shares
issued and 265,663,665 shares outstanding
|
|
|
266,164
|
|
Treasury
stock 499,854 shares at cost
|
|
|
(7,498
|
)
|
Additional paid-in capital
|
|
|
65,981,175
|
|
Unearned compensation
|
|
|
(4,907
|
)
|
Accumulated deficit
|
|
|
(63,388,298
|
)
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
2,846,636
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
6,218,400
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-37
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
January 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
$
|
40,176
|
|
|
$
|
8,801
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
6,625
|
|
Amortization of technology license
and capitalized software development fee
|
|
|
102,696
|
|
|
|
|
|
Research and development expenses
(including stock based compensation of $5,044 and $0,
respectively)
|
|
|
85,044
|
|
|
|
7,053
|
|
Selling, general and
administrative expenses (including stock based compensation of
$333,958 and $279,548, respectively)
|
|
|
807,071
|
|
|
|
596,945
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
994,811
|
|
|
|
610,623
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(954,635
|
)
|
|
|
(601,822
|
)
|
|
|
|
|
|
|
|
|
|
Other (Income) Expenses:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,244,956
|
|
|
|
278,783
|
|
Amortization of deferred financing
costs
|
|
|
243,967
|
|
|
|
24,619
|
|
Gain on forgiveness of principal
and interest on Zaiq Note
|
|
|
(1,169,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other (Income) Expenses
|
|
|
319,103
|
|
|
|
303,402
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,273,738
|
)
|
|
$
|
(905,224
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss Per
Common Share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of
Common Shares Outstanding
|
|
|
229,136,730
|
|
|
|
87,568,203
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-38
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Unearned
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance at October 31, 2005
|
|
|
184,901,320
|
|
|
$
|
184,902
|
|
|
|
|
|
|
|
|
|
|
$
|
63,679,065
|
|
|
$
|
(22,771
|
)
|
|
$
|
(62,114,560
|
)
|
|
$
|
1,726,636
|
|
Repurchase of common stock for cash
|
|
|
|
|
|
|
|
|
|
|
(499,854
|
)
|
|
|
(7,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,498
|
)
|
Issuance of common stock for
conversion of convertible debentures and accrued interest
|
|
|
81,262,199
|
|
|
|
81,262
|
|
|
|
|
|
|
|
|
|
|
|
1,299,239
|
|
|
|
|
|
|
|
|
|
|
|
1,380,501
|
|
Stock options issued to key
employees and advisory board members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321,138
|
|
|
|
(321,138
|
)
|
|
|
|
|
|
|
|
|
Warrants issued with notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
Reclassification of conversion
option liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561,733
|
|
|
|
|
|
|
|
|
|
|
|
561,733
|
|
Amortization of unearned
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,002
|
|
|
|
|
|
|
|
339,002
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,273,738
|
)
|
|
|
(1,273,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2006
|
|
|
266,163,519
|
|
|
$
|
266,164
|
|
|
|
(499,854
|
)
|
|
$
|
(7,498
|
)
|
|
$
|
65,981,175
|
|
|
$
|
(4,907
|
)
|
|
$
|
(63,388,298
|
)
|
|
$
|
2,846,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-39
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
January 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash Flows From Operating
Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,273,738
|
)
|
|
$
|
(905,224
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Consulting fees and other
compensatory elements of stock issuances
|
|
|
339,002
|
|
|
|
279,548
|
|
Gain on forgiveness of principal
and interest on Zaiq Note
|
|
|
(1,169,820
|
)
|
|
|
|
|
Amortization of deferred financing
costs
|
|
|
243,967
|
|
|
|
24,619
|
|
Amortization of film in production
costs
|
|
|
|
|
|
|
6,625
|
|
Amortization of debt discount on
notes
|
|
|
1,193,195
|
|
|
|
225,503
|
|
Amortization of technology license
and capitalized software development fee
|
|
|
102,696
|
|
|
|
|
|
Depreciation
|
|
|
619
|
|
|
|
4,168
|
|
Change in Assets (Increase)
Decrease:
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
1,573
|
|
|
|
3,712
|
|
Other assets
|
|
|
2,582
|
|
|
|
|
|
Change in Liabilities Increase
(Decrease):
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
92,877
|
|
|
|
(101,440
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating
Activities
|
|
|
(467,047
|
)
|
|
|
(462,489
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
|
|
|
|
212,900
|
|
Purchase of treasury stock
|
|
|
(7,498
|
)
|
|
|
|
|
Proceeds from notes payable
|
|
|
750,000
|
|
|
|
300,000
|
|
Capitalized financing costs
|
|
|
(82,500
|
)
|
|
|
(33,029
|
)
|
Repayments of notes payable
|
|
|
(122,291
|
)
|
|
|
|
|
Repayments of convertible notes
payable
|
|
|
(88,292
|
)
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing
Activities
|
|
|
449,419
|
|
|
|
472,871
|
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase in
Cash
|
|
|
(17,628
|
)
|
|
|
10,382
|
|
Cash Beginning
of Period
|
|
|
373,481
|
|
|
|
127,811
|
|
|
|
|
|
|
|
|
|
|
Cash Ending of
Period
|
|
$
|
355,853
|
|
|
$
|
138,193
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash
Flow
Information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
|
|
|
$
|
5,400
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
Common stock issued for conversion
of convertible debentures, notes payable and accrued interest
|
|
$
|
1,380,501
|
|
|
$
|
211,714
|
|
|
|
|
|
|
|
|
|
|
Value assigned to warrants issued
in connection with notes payable
|
|
$
|
120,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for accrued
liquidated damages
|
|
$
|
|
|
|
$
|
88,000
|
|
|
|
|
|
|
|
|
|
|
Stock offering costs
|
|
$
|
|
|
|
$
|
9,355
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses converted to note
payable
|
|
$
|
|
|
|
$
|
55,251
|
|
|
|
|
|
|
|
|
|
|
Reclassification of conversion
option liability to equity
|
|
$
|
561,733
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-40
|
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1.
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Principles
of Consolidation, Business and Continued Operations
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The condensed consolidated financial statements include the
accounts of Rim Semiconductor Company (formerly New Visual
Corporation) and its wholly owned operating subsidiary, NV
Entertainment, Inc. (NV Entertainment) including its
50% owned subsidiary Top Secret Productions, LLC), collectively,
the Company). 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.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
(US GAAP). In the opinion of management, the
accompanying unaudited financial statements contain all
adjustments, consisting only of those of a normal recurring
nature, necessary for a fair presentation of the Companys
financial position, results of operations and cash flows at the
dates and for the periods indicated. These financial statements
should be read in conjunction with the financial statements and
notes related thereto included in the Annual Report on
Form 10-KSB
for the fiscal year ended December 31, 2005.
These results for the three months ended January 31, 2006
are not necessarily indicative of the results to be expected for
the full fiscal year. The preparation of the consolidated
financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Rim Semiconductor Company was incorporated under the laws of the
State of Utah on December 5, 1985. The Company operates in
two business segments, the production of motion pictures, films
and videos (Entertainment Segment) and the
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, and has generated no revenues to date. The
Companys first chipset was first made available to
prospective customers for evaluation and testing during the
three months ended January 31, 2006.
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.
Historically, the Company has experienced significant recurring
net operating losses as well as negative cash flows from
operations. The Companys main source of liquidity has been
equity and debt financing, which was used to fund historical
losses from operating activities. Based on the Companys
current cash position and its subsequent debt financing (see
note 12), the Company believes it has sufficient cash to
meet its funding needs through at least January 31, 2007.
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2.
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Summary
of Significant Accounting Policies
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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,
F-41
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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 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, the Company wrote down the
carrying value attributed to the Film to $0.
Revenue
Recognition
The Company recognizes revenue from the sale of its
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 the Company has not
recognized any revenues related to the sale of its semiconductor
products.
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:
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persuasive evidence of a sale or licensing arrangement with a
customer exists;
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the film is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate
and unconditional delivery;
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the license period of the arrangement has begun and the customer
can begin its exploitation, exhibition or sale;
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the arrangement fee is fixed or determinable; and
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collection of the arrangement fee is reasonably assured.
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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.
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 earnings at the consummation of the acquisition.
F-42
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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 estimated useful life of the Companys
existing product is seven years.
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 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 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 Company had amortization expense of $102,696 and $0 for the
three months ended January 31, 2006 and 2005, respectively,
related to its capitalized software development costs.
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. For the three months ended
January 31, 2006 and 2005, respectively, no effect has been
given to outstanding options, warrants or convertible debentures
in the diluted computation, as their effect would be
anti-dilutive.
Stock-Based
Compensation
On November 1, 2005, the Company 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 the Companys 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). The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123(R).
The Company early adopted SFAS 123(R) using the modified
prospective transition method, as of November 1, 2005, the
first day of the Companys fiscal year 2006. The
Companys condensed consolidated financial statements as of
and for the three months ended January 31, 2006 reflect the
impact of SFAS 123(R).
F-43
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
In accordance with the modified prospective transition method,
the Companys condensed consolidated financial statements
for prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R).
SFAS 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods in the Companys condensed
consolidated statement of operations. Prior to the adoption of
SFAS 123(R), the Company accounted for stock-based awards
to employees and directors using the intrinsic value method in
accordance with APB 25 as allowed under Statement of
Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123).
Under the intrinsic value method, no stock-based compensation
expense for employee stock options had been recognized in the
Companys condensed consolidated statement of operations
because the exercise price of the Companys stock options
granted to employees and directors equaled the fair market value
of the underlying stock at the date of grant.
Stock-based compensation expense recognized in the
Companys condensed consolidated statement of operations
for the three months ended January 31, 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).
The Company has 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 $69,037
for the three months ended January 31, 2006. 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 $247,057 for the
three months ended January 31, 2006. Stock
based-compensation expense recognized for non-employees under
other accounting standards was $22,908 for the three months
ended January 31, 2006.
There was no stock-based compensation expense related to
employee stock options under other accounting standards for the
three months ended January 31, 2005. Stock
based-compensation expense recognized for non-employees under
other accounting standards was $279,548 for the three months
ended January 31, 2005.
As stock-based compensation expense recognized in the condensed
consolidated statement of operations for the three months ended
January 31, 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 the
Companys pro forma information required under
SFAS 123 for the periods prior to fiscal 2006, the Company
accounted for forfeitures as they occurred.
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, and the correction of errors. The
requirements in SFAS 154 are effective for accounting
changes made in fiscal
F-44
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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 application 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 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. In May 2005, the Company entered into a private
placement agreement for convertible debentures, a registration
rights agreement and warrants in connection with the private
placement (see Note 7). Based on the interpretive guidance
in EITF Issue
No. 05-4,
view C, due to certain factors, including an uncapped liquidated
damages provision in the registration rights agreement, the
Company determined that the embedded conversion option related
to these convertible debentures and the registration rights are
derivative liabilities. Accordingly, the fair value of the
embedded conversion option of $1,500,000 was recorded as a
liability as of the closing of the sale of these convertible
debentures. Due to various factors, including substantial
conversions of these convertible debentures and the registration
statement becoming effective on August 1, 2005, the value
of the registration rights was deemed to be de minimus. The
Company believes the accounting treatment for the 2006
Debentures will be similar.
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
F-45
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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
application 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.
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 the
Companys consolidated financial position, results of
operations, or cash flows.
The Company recognized revenues of $40,176 and $8,801 for the
three months ended January 31, 2006 and 2005, respectively.
The Company had amortization costs of $0 and $6,625 for the
three months ended January 31, 2006 and 2005, respectively.
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4.
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Deferred
Financing Cost
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As of January 31, 2006, deferred financing cost consisted
of costs incurred and warrants issued in connection with the
sale of $3,500,000 of 2005 Debentures, $1,350,000 of
7% convertible debentures, and promissory notes:
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Deferred financing cost
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$
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1,089,416
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Less: accumulated amortization
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(924,576
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Deferred financing cost, net
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$
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164,840
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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 three months ended January 31, 2006 and 2005,
amortization of deferred financing cost was $243,967 and
$24,619, respectively.
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 (the
Zaiq Note) (see
F-46
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
Note 8) 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.
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 Zaiq Note. See Note 8.
On December 19, 2005, the Company entered into a letter
agreement with Zaiq, pursuant to which the Company agreed to
repurchase from Zaiq for total consideration of $200,000 the
following Zaiq assets: (i) 5,180,474 shares (the
Zaiq Shares) of the Companys common stock held
of record by Zaiq, and (ii) the remaining principal balance
of the Zaiq Note.
The Company had the right under the letter agreement to assign
any or all of its purchase commitment, and assigned its right to
purchase 4,680,620 of the Zaiq Shares to an unaffiliated third
party that has been a prior investor in the Company.
On December 20, 2005, the Company paid Zaiq an aggregate of
$129,789, out of an advance on the note payable that was
subsequently signed in January 2006, as further discussed in
Note 8, to purchase the Zaiq Note and 499,854 Zaiq Shares.
The Zaiq Shares repurchased by the Company 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 has been
canceled resulting in a gain of $1,169,820.
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6.
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Convertible
Notes Payable
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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 foot note
(4) below. Except for these two notes, the notes are due
when the Company reaches certain milestones from the
distribution of its motion picture. The Company has recorded
$239,000 of accrued interest payable in accrued expenses at
January 31, 2006. The notes (with the exception of the
March 2005 convertible promissory note) may be converted at any
time, in whole or in part, into that number of fully paid and
non-assessable shares of common stock at conversion prices
ranging from $.33 to $1.00. The March 2005 convertible
promissory note may be converted into shares of common stock at
a conversion price per share
F-47
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
equal to the closing price of the common stock on the
Over-the-Counter
Bulletin Board on the date of conversion.
The outstanding convertible notes are summarized below:
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At January 31,
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2006
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Note payable(1)
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$
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72,000
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Notes payable (ten notes)(2)
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478,000
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Note payable, 9% interest(3)
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10,000
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Note
payable related party(4)
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109,580
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TOTAL
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$
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669,580
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Less: unamortized debt discount
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(15,583
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)
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$
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653,997
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(1) |
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Due when receipts received by the Company from the joint venture
exceed $375,000. The Company made payments of $25,000 during the
three months ended January 31, 2006. |
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(2) |
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Due when receipts received by the Company from the joint venture
exceed $2,250,000. |
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(3) |
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Due when receipts received by the Company from the joint venture
exceed $750,000. |
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(4) |
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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 three months ended January 31, 2006
amortization of debt discount on this note was $5,292. 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 $63,292 during the three months
ended January 31, 2006. In March 2006, the remaining
principal amount of this note and additional deferred
compensation payable to the noteholder were converted into a
convertible promissory note with an aggregate principal amount
of $301,197. See Note 12 for further details. |
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7.
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Convertible
Debentures
|
2005
Debentures
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 (see Note 4).
F-48
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
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.
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, 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.
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 option in
accordance with EITF issue
No. 00-19
Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Companys Own Stock and
EITF issue
No. 05-04,
view C The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument. 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 determined that the embedded conversion option related
to the 2005 Debentures and the registration rights are
derivative liabilities. Accordingly, the fair value of the
embedded conversion option of $1,500,000 was recorded as a
liability as of the closing of the sale of the 2005 Debentures.
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 January 31, 2006, the derivative liability of
$1,500,000 had been reduced to $216,434 as a result of
conversions of the 2005 Debentures. An aggregate of $1,283,566
has been reflected as a reclassification to stockholders
equity since the issuance of the 2005 Debentures.
The Company followed the guidelines in EITF issue
No. 05-04,
view C and classified the fair value of the Investor Warrants as
equity and separately valued the derivative liability related to
the registration rights.
No gain or loss was deemed necessary during the three months
ended January 31, 2006, as the fair value of the derivative
liabilities did not fluctuate in value.
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. 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.
F-49
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
Certain terms of the Investor and Compensation Warrants were
modified in February 2006 (see Note 12).
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 satisfaction of all of the Companys
obligations under the loan agreement. During the three months
ended January 31, 2006, 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.
During the three months ended January 31, 2006, $1,310,724
of principal amount of 2005 Debentures plus accrued interest of
$69,777 were converted into 81,262,199 shares of common
stock.
Included in interest expense for the three months ended
January 31, 2006 is $1,164,160 related to the amortization
of the debt discount related to these debentures.
The 2005 Debentures are summarized below as of January 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Unamortized
|
|
Net
|
|
|
Principal
|
|
Debt
|
|
Carrying
|
|
|
Amount
|
|
Discount
|
|
Value
|
|
Long-term portion
|
|
$
|
504,987
|
|
|
$
|
389,809
|
|
|
$
|
115,178
|
|
7% Debentures
In December 2003, April 2004 and May 2004, the Company completed
a private placement to certain private and institutional
investors of $1,350,000 in principal amount of its three-year
7% Convertible Debentures (the 7% Debentures).
All principal is due and payable three years from the issuance
date.
During the three months ended January 31, 2006, no
principal or accrued interest was converted into shares of
common stock. During the three months ended January 31,
2005, $199,450 of principal amount plus accrued interest of
$12,264 were converted into 1,411,428 shares of common
stock.
The 7% Debentures are summarized below as of
January 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Unamortized
|
|
Net
|
|
|
Principal
|
|
Debt
|
|
Carrying
|
|
|
Amount
|
|
Discount
|
|
Value
|
|
Current portion
|
|
$
|
125,000
|
|
|
$
|
34,287
|
|
|
$
|
90,713
|
|
The remaining 7% Debentures outstanding at January 31,
2006 were originally issued in December 2003 and are due and
payable in December 2006.
F-50
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
The outstanding notes payable are summarized below:
|
|
|
|
|
|
|
January 31,
|
|
|
|
2006
|
|
|
Note payable (five individual
notes with identical terms), unsecured, 6% interest, due on
demand with three days notice(1)
|
|
$
|
256,886
|
|
Note payable, 10% interest,
unsecured, due on demand with three days notice(2)
|
|
|
443,451
|
|
Note payable(3)
|
|
|
12,000
|
|
Note payable(4)
|
|
|
|
|
Note payable(5)
|
|
|
810,000
|
|
|
|
|
|
|
Total
|
|
$
|
1,522,337
|
|
Less: unamortized debt discount
|
|
|
(169,587
|
)
|
|
|
|
|
|
|
|
$
|
1,352,750
|
|
|
|
|
|
|
|
|
|
(1) |
|
In February 2006, the Company issued shares of restricted common
stock in exchange for the return and cancellation of all
outstanding principal and interest on these notes. |
|
(2) |
|
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 7. In
February 2006, the Company issued shares of restricted common
stock in exchange for the return and cancellation of all
outstanding principal and interest on this note. |
|
(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. |
|
(4) |
|
In April 2005, the Company issued a promissory note in
connection with the cancellation of the Redeemable Series B
Preferred Stock which bears interest at the rate of 7% per
annum. In December 2005, the Company entered into an agreement
to repay a portion of the outstanding principal and accrued
interest on the promissory note with the remaining principal
balance and accrued interest being forgiven. See Note 5 for
further details. |
|
(5) |
|
In December 2005 and January 2006, the Company entered into loan
agreements with a third party pursuant to which the Company
borrowed $750,000 from the lender. An amount equal to 108% of
the principal amount ($810,000) of the loans is due and payable
on the earlier of May 25, 2006 or the date the Company
effects a financing transaction or series of transactions
resulting in gross proceeds to the Company of at least
$2,000,000. The difference between the gross proceeds and amount
due at maturity is shown as a discount that is amortized as
interest expense over the life of the loans. The Company issued
to the lender warrants to purchase 7,500,000 shares of its
Common Stock at an exercise price of $0.10 per share. The
fair value of the warrants is $120,000 and is shown as a
discount that is amortized as interest expense over the life of
the loans. In connection with the loans, the Company granted a
security interest in all of its assets. The Company received net
proceeds of $672,470 following the payment of due diligence fees
and transaction fees and transaction related fees and expenses.
These transaction related fees were recorded as deferred
financing costs (see Note 4). For the three months ended
January 31, 2006 amortization of debt discount on this loan
was $10,413. In March 2006, the outstanding principal and
interest were repaid from the proceeds of the private placement
of the 2006 Debentures (see Note 12). |
F-51
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
Common
Stock
During the three months ended January 31, 2006, the Company
issued 81,262,199 shares of common stock for conversion of
convertible debentures and accrued interest valued at
$1,380,501; and repurchased 499,854 shares of common stock
for $7,498 from Zaiq.
Stock
Option Plans
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 2001, the Board of Directors of the Company
approved the 2001 Stock Incentive Plan (the 2001
Plan), which provides for the granting of incentive and
non-statutory options, restricted stock, dividend equivalent
rights and stock appreciation rights for up to
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 (the 2003 Plan and
together with the 2000 Plan and the 2001 Plan, the
Plans), 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 January 31, 2006, no
options have been awarded under the 2003 Plan.
Option awards under the Plans are generally granted with an
exercise price equal to the market price of the Companys
common stock at the date of grant, a 10 year contractual
term, and vest based on the schedule included in the related
option agreement (typically a period that does not exceed five
years).
On November 1, 2005, the Company early adopted
SFAS 123(R), which requires the measurement and recognition
of compensation expense for all share-based payment awards made
to the Companys employees and directors including employee
stock options based on estimated fair values.
Upon adoption of SFAS 123(R), the Company continued to
estimate the value of stock options on the date of grant using
the Black-Scholes model and the assumptions noted in the table
below. Prior to the adoption of SFAS 123(R), the value of
each stock option was also estimated on the date of grant using
the Black-Scholes model for the purpose of the pro forma
financial information in accordance with SFAS 123.
The Company used its historical stock price volatility in
accordance with SFAS 123(R) and SAB 107. The selection
of the historical volatility approach was based upon the lack of
availability of actively traded options on the Companys
stock and the Companys assessment that historical
volatility is representative of future stock price trends.
The risk-free interest rate assumption is based upon observed
interest rates appropriate for the term of the Companys
stock options. The dividend yield assumption is based on the
Companys history and expectation of dividend payouts. The
expected life of stock options represents the Companys
historical experience with regards to the exercise behavior of
its option holders and the contractual term of the options.
As stock-based compensation expense recognized in the condensed
consolidated statement of operations for the three months ended
January 31, 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
F-52
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the Companys
pro forma information required under SFAS 123 for the
periods prior to fiscal 2006, the Company accounted for
forfeitures as they occurred.
The weighted-average estimated fair value of stock options
granted during the three months ended January 31, 2006 was
$0.026 per share using the Black-Scholes model with the
following assumptions:
|
|
|
Expected volatility
|
|
145%
|
Risk-free interest rate
|
|
4.3%
|
Expected dividends
|
|
0.0%
|
Expected life
|
|
10 years
|
There were no options granted during the three months ended
January 31, 2005 and there was no difference between the
reported net income and pro forma net income under
SFAS 123. Accordingly, pro forma disclosures for the three
months ended January 31, 2005 have not been provided.
A summary of option activity as of January 31, 2006 and
changes during the period then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Outside
|
|
|
Exercise
|
|
|
|
the Plans
|
|
|
Price
|
|
|
the Plans
|
|
|
Price
|
|
|
Outstanding at October 31,
2005
|
|
|
993,750
|
|
|
$
|
0.97
|
|
|
|
15,900,000
|
|
|
$
|
0.25
|
|
Options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside the Plans
|
|
|
|
|
|
|
|
|
|
|
22,400,000
|
|
|
$
|
0.027
|
|
Options expired/cancelled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside the Plans
|
|
|
|
|
|
|
|
|
|
|
(14,000,000
|
)
|
|
$
|
0.17
|
|
Options exercised:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside the Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31,
2006
|
|
|
993,750
|
|
|
$
|
0.97
|
|
|
|
24,300,000
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 31,
2006
|
|
|
980,417
|
|
|
$
|
0.98
|
|
|
|
1,900,000
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding as of
January 31, 2006 was $22,400. There was no intrinsic value
for options that were exercisable as of January 31, 2006.
The weighted-average remaining contractual term of stock options
outstanding under the Plans as of January 31, 2006 was
5.93 years. The weighted-average remaining contractual term
of stock options outstanding outside the Plans as of
January 31, 2006 was 9.49 years.
The weighted-average remaining contractual term of stock options
currently exercisable under the Plans as of January 31,
2006 was 5.92 years. The weighted-average remaining
contractual term of stock options currently exercisable outside
the Plans as of January 31, 2006 was 4.15 years.
As of January 31, 2006, total compensation cost related to
nonvested stock options not yet recognized was $517,783 which is
expected to be recognized through July 2006 over a
weighted-average period of 4.9 months.
F-53
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
The total fair value of options vested during the three months
ended January 31, 2006 was $247,057.
Options
Granted
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
2,000,000 shares of restricted common stock vested upon the
Companys consummation of the sale of the 2005 Debentures
in May 2005 and options to purchase 12,000,000 shares of
restricted common stock vested in December 2005 upon the
Companys release of a beta version of its semiconductor
technologies. In January 2006, all of the these options were
canceled. During the three months ended January 31, 2006,
the Company recognized $247,057 of stock-based compensation
expense related to these vested options.
In January 2006, options to purchase 22,400,000 shares of
common stock were granted to the Companys Chief Executive
Officer, the Executive Vice President, and an advisory board
member. These options were valued at $591,863 and have a
10 year term, an exercise price of $0.027 per share,
and vest at various times between February 2006 and July 2006.
During the three months ended January 31, 2006, the Company
recognized $74,081 of stock-based compensation expense related
to these options.
Options
Expired, Canceled and Forfeited
During the three months ended January 31, 2006, options to
purchase 14,000,000 shares of common stock were canceled.
Warrants
Granted
In January 2006, the Company granted warrants to purchase
7,500,000 shares of its common stock at an exercise price
of $0.10 per share to the lender in connection with the
loan agreement (see Note 8(5)). The fair value of the stock
warrants estimated on the date of grant using the Black-Scholes
option pricing model is $0.016 per share or $120,000.
Warrants
Expired
During the three months ended January 31, 2006, warrants to
purchase 200,000 shares of common stock expired.
Net
Loss Per Share
Securities that could potentially dilute basic earnings per
share (EPS), in the future, that were not included in the
computation of diluted EPS because to do so would have been
anti-dilutive for the periods presented, consist of the
following:
|
|
|
|
|
2005 Debentures and accrued
interest(1)
|
|
|
26,585,798
|
|
Warrants to purchase common stock
|
|
|
58,112,757
|
|
Options to purchase common stock
|
|
|
25,293,750
|
|
Convertible notes payable and
accrued interest
|
|
|
5,768,837
|
|
7% Debentures and accrued
interest
|
|
|
960,980
|
|
|
|
|
|
|
Total as of January 31, 2006
|
|
|
116,722,122
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on a five day volume weighted average common stock price
discounted by 30% at January 31, 2006 of $0.01918. |
F-54
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
Substantial issuances after January 31, 2006 through
April 19, 2006
|
|
|
|
|
Options granted to purchase shares
of common stock
|
|
|
4,100,000
|
|
|
|
|
|
|
Restricted common stock issued to
consultants
|
|
|
11,000,000
|
|
|
|
|
|
|
Common stock issued in exchange
for return and cancellation of notes payable
|
|
|
12,064,494
|
|
|
|
|
|
|
Warrants issued in connection with
the 2006 Debentures (See Note 12)
|
|
|
85,146,660
|
|
|
|
|
|
|
Common stock issuable upon
conversion of 2006 Debentures (See Note 12)(2)
|
|
|
68,461,890
|
|
|
|
|
|
|
|
|
|
(2) |
|
Based on a 20 day volume weighted average common stock
price discounted by 30% at April 19, 2006 of $0.08764. |
|
|
10.
|
Commitments,
Contingencies and Other Matters
|
Research
and Development Agreement
The Company and HelloSoft entered into an amendment, effective
as of October 11, 2004 (the Amendment), to
their Services Agreement dated as of March 31, 2004 (the
Original Agreement) pursuant to which HelloSoft will
provide development services relating to the Companys
semiconductor technologies. The Original Agreement provides
that, upon the Companys request from time to time,
HelloSoft is to provide services to be specified pursuant to
mutually agreed upon terms. The Amendment represents the first
project that HelloSoft is undertaking pursuant to the Original
Agreement.
In consideration for the services being rendered under the
Amendment, the Company agreed to pay to HelloSoft $185,000, half
of which was paid in the form of restricted common stock issued
at a discount of 25% to the closing price of the Companys
Common Stock on the day of the commencement of services. The
other half will be remitted in cash, periodically, upon
completion by HelloSoft and acceptance by the Company of
specified milestones. HelloSoft has assigned to the Company the
rights to any improvements, developments, discoveries or other
inventions that may be generated by HelloSoft in its performance
of the services to be provided under the Amendment.
On July 26, 2005, the Company signed an amendment to the
Original Agreement that defines and prices the next two phases
of the technology development. The Company will expend $445,000
on Phase II and $350,000 on Phase III. Half of
Phase II, or $222,500, was paid to HelloSoft on
July 26, 2005, in the form of restricted common stock
issued at a discount of 25% to the closing price of the
Companys common stock on that date, and the other $222,500
will be paid to them in cash when they complete Phase II,
which the Company anticipates will occur in the second calendar
quarter of 2006. The restricted common stock issued to HelloSoft
was valued at $296,667 and recorded as research and development
expense. When HelloSoft commences Phase III, the Company
will issue to them $175,000 worth of restricted common stock,
and the other $175,000 will be paid to them in cash when they
complete Phase III. Phase III will be deemed complete
when HelloSoft releases the E30 Rel. 1.5 to the Company. The
Company projects that this also will occur in the second
calendar quarter of 2006.
On November 3, 2003 and January 24, 2006, the Company
and HelloSoft, Inc. entered into further amendments to the
Original Agreement. Pursuant to the amendments, the Company
agreed to pay HelloSoft an aggregate of $80,000 in cash, and the
parties agreed upon certain additions to the development
services to be performed by HelloSoft pursuant to the Original
Agreement, as amended. $60,000 was paid to HelloSoft during the
three months ended January 31, 2006 and $20,000 was accrued
and is payable to HelloSoft as of January 31, 2006.
F-55
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
Summarized financial information concerning the Companys
reportable segments is shown in the following table:
For the Three Months Ended January 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
|
Entertainment
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Business
|
|
|
Unallocable
|
|
|
Totals
|
|
|
Net Sales domestic
|
|
$
|
|
|
|
$
|
6,234
|
|
|
$
|
|
|
|
$
|
6,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales foreign
|
|
$
|
|
|
|
$
|
33,942
|
|
|
$
|
|
|
|
$
|
33,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(103,315
|
)
|
|
$
|
36,291
|
|
|
$
|
(887,611
|
)
|
|
$
|
(954,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
103,315
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
103,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Identifiable Assets at
January 31, 2006
|
|
$
|
5,822,447
|
|
|
$
|
|
|
|
$
|
395,953
|
|
|
$
|
6,218,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended January 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
|
Entertainment
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Business
|
|
|
Unallocable
|
|
|
Totals
|
|
|
Net Sales domestic
|
|
$
|
|
|
|
$
|
2,501
|
|
|
$
|
|
|
|
$
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales foreign
|
|
$
|
|
|
|
$
|
6,300
|
|
|
$
|
|
|
|
$
|
6,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(1,159
|
)
|
|
$
|
(3,716
|
)
|
|
$
|
(596,946
|
)
|
|
$
|
(601,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,159
|
|
|
$
|
3,009
|
|
|
$
|
|
|
|
$
|
4,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Identifiable Assets at
January 31, 2005
|
|
$
|
5,966,529
|
|
|
$
|
1,015,097
|
|
|
$
|
149,899
|
|
|
$
|
7,131,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Transactions
In February 2006:
(i) 22,311,367 shares of common stock were issued upon
conversion of May 2005 Debentures with a principal amount of
$453,350 and interest of $1,833;
(ii) options to purchase 2,000,000 shares of common
stock were granted to directors. These options were valued at
approximately $85,000 and have a 10 year term, an exercise
price of $0.0319 per share, and vest in May 2006;
(iii) options to purchase 2,000,000 shares of common
stock were granted in connection with legal services performed
for the Company. These options were valued at approximately
$85,000 and have a 10 year term, an exercise price of
$0.0319 per share, and vested on March 1, 2006;
(iv) options to purchase 100,000 shares of common
stock were granted to an employee. These options were valued at
approximately $17,000 and have a 10 year term, an exercise
price of $0.08 per share, and vest on a straight-line basis
over three years;
(v) 12,064,494 shares of common stock were issued in
exchange for the return and cancellation of notes payable with a
principal amount of $700,337 and interest of $144,178;
F-56
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
(vi) 5,656,108 shares of common stock were issued upon
exercise of warrants resulting in gross proceeds of $282,805;
In March 2006:
(i) 5,714,516 shares of common stock were issued upon
exercise of warrants resulting in gross proceeds of $285,726;
(ii) 596,899 shares of common stock were issued upon
conversion of May 2005 Debentures with a principal amount of
$11,073; and
(iii) 11,000,000 shares of restricted common stock
were issued to consultants for services valued at $1,870,000.
In April 2006, 35,714 shares of common stock were issued
upon conversion of convertible promissory notes, resulting in
the cancellation of principal and accrued interest then
outstanding and due of $15,000 under these notes.
Convertible
Promissory Note
On March 7, 2006, the Company issued a convertible
promissory note in the principal amount of $301,197 to the
Companys executive vice president. The note replaced a
promissory note in the principal amount of $383,911, dated
March 25, 2005, which had a remaining balance due of
$88,747, and also included $212,450 owed for deferred
compensation.
The note accrued interest at the rate of 8% per annum and
was due on the earlier of March 3, 2008 or the date on
which the holders employment is terminated by the Company.
The note was convertible, at the holders option, into
shares of the Companys 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. The holder had
certain registration rights set forth in the note. The note was
paid in full in April 2006.
Technology
License Agreement
On February 6, 2006, the Company entered into a technology
license agreement with HelloSoft. Under the agreement, the
Company has obtained a license to include HelloSofts
integrated VoIP software suite in the Companys E30
semiconductor. In exchange for this license, the Company has
agreed to pay HelloSoft a license fee and certain royalties
based on its sales of products including the licensed technology.
Amendments
to Investor and Compensation Warrants
On February 21, 2006, the Company and certain holders of
Investor and Compensation Warrants entered into an amendment
(the Warrant Amendment) to the terms of their
warrants.
The Investor and Compensation Warrants were issued by the
Company to the buyers of the Companys 2005 Debentures and
to a finder in connection with the same transaction. Warrants
for 12,443,442 shares were exercisable at a per share
exercise price of $0.1547, and warrants for
27,149,316 shares were exercisable at a per share exercise
price of $0.3094.
Pursuant to the Warrant Amendment, the Company and certain
holders of the Investor and Compensation Warrants agreed to
temporarily reduce the exercise price of the Investor and
Compensation 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
F-57
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
Amendment may, but are not required to, exercise all or any
portion of their Investor and Compensation Warrants at a per
share price of $0.05 at any time during the New Price Exercise
Period, but cannot do so by means of a cashless exercise. This
reduction in the exercise price of the Investor and Compensation
Warrants expired on March 10, 2006. During the New Price
Exercise Period, holders of the Investor and Compensation
Warrants exercised warrants to purchase 11,370,624 shares
of common stock at the reduced exercise price of $0.05 per
share, resulting in gross proceeds to the Company of $568,531.
Any shares of common stock issued with any exercise of an
Investor or Compensation Warrant to a holder of the Investor or
Compensation Warrant 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 Investor and Compensation
Warrants) shall be restricted common stock, but shall have the
registration rights provided in the Warrant Amendment. Except as
expressly provided in the Warrant Amendment, the terms and
conditions of the Investor and Compensation Warrants and any
related registration rights agreement shall be unchanged and
remain in full force and effect. In addition, the warrant
holders 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 Investor and Compensation Warrants,
prior to the New Required Effective Date (as defined below).
The Company agreed to include the shares of common stock
purchased by an Investor or Compensation Warrant holder through
the exercise of each Investor or Compensation Warrant (whether
or not pursuant to the terms of the Warrant Amendment) in a
registration statement to be filed by the Company with the
Securities and Exchange Commission (the SEC) no
later than the earlier of the date the Company files its next
registration statement with the SEC (other than on
Form S-8
or S-4) for
the sale of shares by the Company or other selling stockholders,
or May 1, 2006. The term New Required Effective
Date means the date which is the later of 120 days
from the expiration of the New Price Exercise Period, or sixty
days after the filing of such registration statement; provided,
however, that in no event shall such date be later than the
required effective date contemplated by the terms of any new
transaction consummated by the Company after February 21,
2006, where the shares of common stock issued or issuable to the
investors in such transaction are included in a registration
statement that is required to be made effective by a stated date.
2006
Debentures
On March 10, 2006, the Company raised gross proceeds of
$6.0 million from the private placement to 17 institutional
and individual investors (the Investors) of its
two-year 7% Senior Secured Convertible Debentures (the
2006 Debentures). Of this amount, $3.0 million
was delivered by the Company to a security agent, acting on
behalf of the Investors (the Security Deposit), to
secure certain obligations of the Company to the Investors if
the Company failed to file an amendment, with the approval of
the Companys shareholders, to its charter documents to
reflect the increase in the Companys authorized common
stock from 500 million to 900 million shares (the
Authorized Share Increase). The Companys
shareholders approved the Authorized Share Increase on
April 18, 2006 and the $3.0 million Security Deposit
was released to the Company.
In connection with the issuance of the 2006 Debentures, the
Company issued to the Investors warrants to purchase
70,955,548 shares of the Companys common stock at an
exercise price of $0.15 per share (subject to adjustments
for stock splits, stock dividends, recapitalizations, mergers,
spin-offs, and certain other transactions). The warrants are
exercisable until the end of the month in which the third
anniversary of the registration statement (as defined below)
occurs.
The Company 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.
F-58
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
(formerly New Visual Corporation and Subsidiaries)
Notes to Financial
Statements (Continued)
The 2006 Debentures are convertible into shares of common stock
at the holders option at any time on or after the earlier
of (i) the 65th day following issuance or
(ii) the effective date of the registration statement, with
the conversion price for any such conversion equal to the lower
of (x) 70% of the volume weighted average price
(VWAP) of the common stock for the 20 days
ending on the trading day immediately preceding the conversion
date or (y) if the Company enters into certain financing
transactions, the lowest purchase price or conversion price
applicable to that transaction. The conversion price is subject
to adjustment.
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 the option of the Company,
either (i) in cash, or (2) in shares of common stock
at the then applicable conversion price.
To secure the Companys obligations under the 2006
Debentures, the Company has granted a security interest in
substantially all of its assets, including without limitation,
its intellectual property, in favor of the Investors. The
security interest terminates upon the earlier of (i) the
date on which less than one-fourth of the original principal
amount of the March 2006 Debentures issued on the Closing Date
are outstanding or (ii) payment or satisfaction of all of
the Companys obligations under the Securities Purchase
Agreement.
The Company has undertaken to file, within 45 days after
the Closing Date or two days after the next shareholders
meeting, whichever is later, but in no event later than
April 28, 2006, a registration statement covering the
common stock underlying the 2006 Debentures and the warrants.
In connection with the placement of the March 2006 Debentures, a
placement agent received a placement agent fee equal to
(i) 10% of the aggregate purchase price (i.e., $600,000),
(ii) 10% of the proceeds realized in the future from
exercise of warrants issued to the Investors,
(iii) 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 (iv) warrants to
purchase an aggregate of 7,095,556 shares of common stock
having an initial exercise price equal to $0.15 per share.
The exercise price of the placement agent warrants is subject to
adjustments for stock splits, stock dividends,
recapitalizations, mergers, spin-offs, and certain other
transactions.
The gross proceeds of the 2006 Debentures are recorded as a
liability net of a debt discount consisting of the fair values
attributed to the Investors warrants and to the embedded
conversion option in accordance with EITF issue
No. 00-19
Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Companys Own Stock and
EITF issue
No. 05-04,
view C The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument.
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 option related to the 2006 Debentures,
the registration rights and the Investor Warrants as derivative
liabilities.
The fair value of the placement agents warrants is
recorded as a deferred financing cost and is being charged to
interest expense over the term of the 2006 Debentures.
Amendments
to Articles of Incorporation
On April 18, 2006, the Company held its 2006 annual meeting
of shareholders. At this meeting, among other things, the
Companys shareholders approved certain amendments to the
Companys articles of incorporation. As the result of one
such amendment, the number of authorized shares of the
Companys common stock was increased from 500 million
to 900 million shares. A second amendment canceled the
designations for all seven of the Companys previously
designated series of preferred stock, none of which was
outstanding.
F-59
Part II
Information
Not Required in Prospectus
|
|
Item 24.
|
Indemnification
of Directors and Officers
|
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 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
II-1
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 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.
|
|
Item 25.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the costs and expenses, other
than broker commissions, payable by the registrant in connection
with the issuance and distribution of the shares being
registered. All amounts shown are estimates, except for the SEC
filing fee.
|
|
|
|
|
SEC Filing Fee
|
|
$
|
4,882
|
|
Legal Fees and Expenses
|
|
|
70,000
|
|
Accounting Fees and Expenses
|
|
|
30,000
|
|
Printing Expenses
|
|
|
20,000
|
|
Miscellaneous Fees and Expenses
|
|
|
5,118
|
|
|
|
|
|
|
Total
|
|
$
|
130,000
|
|
|
|
|
|
|
II-2
|
|
Item 26.
|
Recent
Sales of Unregistered Securities
|
The following paragraphs set forth certain information with
respect to all securities sold by us within the past three years
without registration under the Securities Act.
1. In April 2003, we issued to
(i) 9 investors a total of 806,473 shares of common
stock for aggregate consideration of $121,971; and
(ii) a non-US Person (as such term is defined
in Regulation S of the Securities Act)
1,349,664 shares of common stock for aggregate
consideration of $194,673.
2. In May 2003, we issued to
(i) 9 investors a total of 756,166 shares of common
stock for aggregate consideration of $113,425;
(ii) a non-US Person (as such term is defined
in Regulation S of the Securities Act) 473,023 shares
of common stock for aggregate consideration of $69,588;
(iii) four investors an aggregate of $396,000 in principal
amount of our convertible notes, which notes are convertible
into shares of our common stock at a per share conversion price
of $1.00 and which were issued in exchange for four promissory
notes issued in May 2002 with aggregate principal and accrued
interest due and outstanding at the time of the exchange of
$360,000; and
(iv) an investor 31,250 shares of common stock upon
the conversion of convertible promissory notes, resulting in the
cancellation of principal and accrued interest of $10,000 then
outstanding and due under these notes.
3. In June 2003, we issued to
(i) 13 investors a total of 1,559,896 shares of common
stock for aggregate consideration of $229,985;
(ii) an investor $16,500 in principal amount of our
convertible notes, which notes are convertible into shares of
our common stock at a per share conversion price of $0.39 and
which were issued in exchange for one promissory note issued in
September 2002 with aggregate principal and accrued interest due
and outstanding at the time of the exchange of $15,000; and
(iii) an investor 15,625 shares of common stock upon
the conversion of convertible promissory notes, resulting in the
cancellation of principal and accrued interest then outstanding
and due of $5,000 under these notes.
4. In July 2003, we issued to
(i) 15 investors a total of 1,447,400 shares of common
stock for aggregate consideration of $217,110;
(ii) an investor 55,000 shares of common stock upon
the conversion of a convertible promissory note, resulting in
the cancellation of principal and interest then outstanding and
due of $16,500; and
(iii) two investors an aggregate of $98,000 in principal
amount of our convertible notes, which notes are convertible
into shares of our common stock at a per share conversion prices
between $0.33 to $0.60.
5. In August 2003, we issued to
(i) an investor 300,000 shares of common stock upon
the exercise of outstanding warrants at a per share exercise
price of $0.06; and
(ii) to seven investors a total of 450,100 shares of
common stock for aggregate consideration of $67,515.
II-3
6. In September 2003, we issued to
(i) an investor 700,000 shares of common stock upon
the exercise of outstanding warrants at a per share exercise
price of $0.06; and
(ii) 13 investors a total of 593,667 shares of common
stock for aggregate consideration of $89,050.
7. In October 2003, we issued to
(i) seven investors a total of 450,000 shares of
common stock upon conversion of convertible promissory notes,
resulting in the cancellation of principal and accrued interest
then outstanding and due of $90,000; and
(ii) nine investors a total of 410,000 shares of
common stock for aggregate consideration of $62,015.
8. In November 2003, we issued to
(i) six investors a total of 232,834 shares of common
stock for aggregate consideration of $40,300;
(ii) a provider of legal services three year warrants to
purchase up to 100,000 shares of our common stock. The
warrants provide that if the price of the common stock closes at
or above $1.00 for a consecutive 20 day period, then the
exercise period may, at our option, be reduced to 60 days
following the end of such period; and
(iii) a non-US Person (as such term is defined in
Regulation S under the Securities Act) $300,000 in
principal amount of our 7% Convertible Debentures due
March 31, 2004 and five-year warrants to purchase up to
800,000 shares of our common stock, at a per share exercise
price of $0.15, provided, that, under certain conditions
(including where the price of our common stock closes at or
above $1.00 for a consecutive 20 day period) then, at our
option, we may reduce the exercise period of the warrant to
60 days following the end of such period; and
(iv) In connection with the private placements referred to
in the immediately preceding paragraph, we issued to an entity,
as a placement fee, warrants to purchase up to an aggregate of
600,000 shares of common stock, at an exercise price per
share $0.15, provided, that, under certain conditions (including
where the price of our common stock closes at or above $1.00 for
a consecutive 20 day period) then, at our option, we may
reduce the exercise period of the warrant to 60 days
following the end of such period.
9. In December 2003, we issued to
(i) two consultants a total of 2.8 million shares of
common stock valued at $700,000 in consideration of consulting
services;
(ii) six investors a total of 931,667 shares of common
stock for aggregate consideration of $177,500;
(iii) four note holders a total of 106,668 shares of
common stock in connection with the extension of past due
convertible notes; and
(iv) a service provider 15,000 shares of common stock
in consideration of services rendered.
10. As of December 2003, we entered into agreements with 16
investors pursuant to which we issued to them, and they
purchased, $1 million in principal amount of our three-year
7% Convertible Debentures and undertook to purchase within
five days following the effectiveness of a Registration
Statement registering such shares, an additional $1 million
in principal amount of our three-year 7% Convertible Debentures.
We also undertook to issue or have issued, in connection with
these debentures, five-year warrants to purchase up to
13,333,333 shares of our common stock, at a per share
exercise price of $0.25, subject to cashless exercise rights,
provided, that under certain conditions (including where the
price of our publicly traded common stock closes at or above
$1.00 for a consecutive 20 trading day period) then, at our
option, we may reduce the exercise period to 60 days
following the end of such period.
II-4
In connection with the private placements referred to in the
immediately preceding paragraph, we have issued, as a placement
fee, five year warrants to purchase up to an aggregate of
1,333,333 shares of common stock, at exercise price per
share of $0.15, subject to cashless exercise rights. These
warrants have other terms similar to those included in the
warrants issued to the investors in the private placement
transaction described in the preceding paragraph.
11. In January 2004, we issued to
(i) a consultant 1 million shares of our common stock
valued at $230,000 in consideration of consulting services;
(ii) a director (who is also an executive officer)
400,000 shares of common stock in lieu of amounts owed of
approximately $100,000;
(iii) a director (who is also an executive officer)
40,000 shares of common stock in lieu of amounts owed of
approximately $10,000;
(iv) a former executive officer 50,000 shares of
common stock pursuant to his employment agreement;
(v) an investor 100,000 shares of common stock for
aggregate proceeds of $17,500;
(vi) four note-holders a total of 173,335 shares of
common stock in connection with the extension of past due
convertible notes;
(vii) a resigning executive officer 333,333 shares of
common stock as part of his severance package; and
(viii) two officers a total of 666,666 shares of
common stock.
12. In February 2004, we issued to
(i) an executive officer 83,892 shares of common stock
valued at $19,460 of which 63,818 shares were issued as
salary valued at $14,040, per his employment agreement, and
20,074 shares were issued as a performance bonus;
(ii) a non-management employee 4,000 shares of common
stock valued at $1,080 issued as a performance bonus;
(iii) a service provider 29,455 shares of common stock
in consideration of services rendered; and
(iv) four investors a total of 250,000 shares of
common stock for aggregate consideration of $37,500.
13. In April 2004, two of the investors referred to in
paragraph 10 above waived the registration statement
effectiveness condition, and we issued to, and they purchased,
$100,000 in principal amount of our three-year
7% Convertible Debentures.
14. In May 2004, four of the investors referred to in
paragraph 10 above waived the registration statement
effectiveness condition, and we issued to, and they purchased,
$250,000 in principal amount of our three-year
7% Convertible Debentures.
15. In July 2004, we issued a total of 690,258 shares
of common stock to two purchasers of our 7% Convertible
Debentures upon the conversion of such debentures with respect
to $100,000 in principal amount of debentures and accrued
interest.
16. In August 2004, we issued
(i) to an investor 375,000 shares of common stock for
cash proceeds of $30,000; and
(ii) 38,880 shares of common stock for compensation to
our former CFO and Tatum CFO Partners valued at $7,776.
II-5
17. In September 2004, we issued to an investor
575,000 shares of common stock for cash proceeds of $46,000;
18. In October 2004, we issued
(i) to our investors 30,000 shares of common stock
valued at $4,500 in connection with the extension of the due
date of certain convertible promissory notes;
(ii) to eleven investors 1,600,000 shares of common
stock for cash proceeds of $128,000;
(iii) to a company 660,714 shares of common stock for
research and development services valued at $69,375;
(iv) to an individual 53,047 shares of common stock to
a vendor for services valued at $7,957; and
(v) to an investor 131,250 shares of common stock for
cash proceeds of $10,500.
19. In November 2004, we issued
(i) to the company described 220,238 shares of common
stock in paragraph 18(iii) above for additional research
and development services valued at $23,125; and
(ii) to two investors an aggregate 130,000 shares of
common stock for total proceeds of $10,400.
20. In December 2004, we issued
(i) to three companies, an aggregate 2,928,571 shares
of common stock in exchange for past consulting services valued
at $354,000; and
(ii) to three investors, an aggregate 350,000 shares
of common stock for total proceeds of $28,000.
21. In January 2005, we issued
(i) to seven investors, an aggregate 2,181,250 shares
of common stock for total proceeds of $174,500; and
(ii) to one investor 121,306 shares of common stock
issuable as the result of the conversion of convertible
debentures.
22. In February 2005, we issued
(i) to three investors 830,000 shares of common stock
for cash proceeds of $66,400; and
(ii) to legal counsel 413,341 shares of common stock
for legal services valued at $70,268.
23. In March 2005, we issued
(i) to one investor 17,857 shares of common stock for
a converted promissory note and interest valued at $7,500;
(ii) to one employee 50,000 shares of common stock for
compensation valued at $7,500; and
(iii) to three directors 700,000 shares of common stock for
serving on our board of directors valued at $105,000.
24. In April 2005, we issued
(i) to Zaiq Technologies 4,651,163 shares of common
stock with a value of $744,186 in exchange for surrender of
3,192 shares of Series B Convertible Preferred Stock
having an aggregate liquidation preference of $800,000; and
(ii) to each of our 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
common stock at an exercise price of $0.17.
(iii) to one individual 9,442 shares of common stock for
services valued at $1,643.
II-6
25. In May 2005, we issued
(i) to 26 individual and institutional investors,
$3.5 million in aggregate principal amount of our
three-year 7% Senior Secured Convertible Debentures Series
05-01 and warrants to purchase 11,312,220 shares of common
stock at a per share exercise price of $0.1547 and
22,624,430 shares of common stock at a per share exercise
price of $0.3094;
(ii) to one entity, as a finders fee in connection
with the private placement referred to in paragraph 25(i)
above, warrants to purchase 4,524,886 shares of common
stock at an exercise price of $0.3094 per share and
1,131,222 shares of common stock at an exercise price of
$0.1547 per share; and
(iii) 437,500 shares of common stock to four investors
for cash proceeds of $35,000;
26. In June 2005, we issued to a shareholder
29,547 shares of common stock pursuant to the terms of the
anti-dilution provisions contained in our agreement with such
shareholder.
27. In July 2005, we issued to one investor
4,944,444 shares of common stock in consideration for
research and development services valued at $222,500.
28. In November 2005, we issued 499,854 shares of
common stock to a shareholder as required under certain
anti-dilution provisions of our agreement with such shareholder.
We repurchased these shares from the shareholder in December
2005.
29. In January 2006, we issued
(i) to a lender warrants to purchase 7,500,000 shares
of common stock at an exercise price of $0.10 per share in
connection with our execution of a loan agreement; and
(ii) options to purchase 22,400,000 shares of common
stock at an exercise price of $0.27 per share to our Chief
Executive Officer, the Executive Vice President and an advisory
board member.
30. In February 2006, we issued
(i) to members of our Board of Directors, an advisory
member and several employees options to purchase
2,100,000 shares of common stock; and
(ii) to two note holders 12,064,494 shares of common
stock in exchange for the cancellation of notes payable by the
Company with a principal amount of $700,337 and interest of
$144,178.
During the period between February 21, 2006 and
March 10, 2006, we issued to ten investors
11,370,624 shares of common stock upon exercise of warrants
resulting in gross proceeds of $568,531.
31. In March 2006, we issued
(i) to nine investors, 5,714,516 shares of common
stock upon exercise of warrants resulting in gross proceeds of
$285,726;
(ii) to three consultants, 11,000,000 shares of
restricted common stock to consultants for services valued at
$1,870,000;
(iii) to our Executive Vice President a promissory note in
the principal amount of $301,197, which was convertible into
shares of our common stock and has since such date been paid in
full and cancelled;
(iv) to 17 institutional and individual investors our 2006
Debentures for gross proceeds of $6.0 million;
(v) to the 17 holders of the 2006 Debentures described
above warrants to purchase 70,955,548 shares of our common
stock;
(vi) to the placement agent of the 2006 Debentures
described above warrants to purchase an aggregate of
14,191,112 shares of common stock. See
Agreements with the
Selling Shareholders, and
II-7
(vii) to one investor, 596,899 shares of our common
stock upon conversion of $11,073 principal amount of our
2005 Debentures.
32. In April 2006, we issued to one note holder
35,714 shares of our common stock in exchange for the
cancellation of a note payable with a principal amount of
$10,000 and interest of $5,000.
All of the securities issued in the transactions described above
were issued without registration under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the
Securities Act,
and/or
Regulation D or Regulation S under such Securities
Act. Except with respect to securities sold under
Regulation S, the recipients of securities in each such
transaction acquired the securities for investment only and not
with a view to or for sale in connection with any distribution
thereof. Appropriate legends were affixed to the share
certificates issued in all of the above transactions. The
Company believes the recipients were all accredited
investors within the meaning of Rule 501(a) of
Regulation D under the Securities Act, or had such
knowledge and experience in financial and business matters as to
be able to evaluate the merits and risks of an investment in its
common stock. All recipients had adequate access to information
about the Company. None of the transactions described above
involved general solicitation or advertising.
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3
|
.1
|
|
Restated Articles of
Incorporation.*
|
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3
|
.2
|
|
Bylaws, as amended (incorporated
by reference to Exhibit 3.1 of the Companys Report on Form
10-Q for the period ended July 31, 2001).
|
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4
|
.1
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Specimen Stock Certificate
(incorporated by reference to Exhibit 4.1 of the
Companys Annual Report on
Form 10-KSB
for the period ended October 31, 2005 (the 2005
10-KSB)).
|
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4
|
.2
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|
Warrant, dated as of
October 31, 2003 issued in favor of Melton Management Ltd.
(incorporated by reference to Exhibit 4.3 of the
Companys Registration Statement on
Form SB-2
(No. 333-112643)
filed with the Commission on February 11, 2004).
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4
|
.3
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Form of Three Year Warrant issued
to purchasers of the Companys 7% Convertible Debentures
(incorporated by reference to Exhibit 4.5 of the
Companys Registration Statement on
Form SB-2
(No. 333-112643)
filed with the Commission on February 11, 2004).
|
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4
|
.4
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Form of 7% Three Year Convertible
Senior Convertible Debenture (incorporated by reference to
Exhibit 4.1 of the Companys Report on
Form 8-K
filed with the Commission on June 1, 2005 (the
June 1, 2005
8-K)).
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4
|
.5
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Form of Common Stock Purchase
Warrant issued to certain investors (incorporated by reference
to Exhibit 4.2 of the June 1, 2005
8-K).
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4
|
.6
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|
Form of 7% Senior Secured
Convertible Debenture,
Series 06-01C,
of the Company (incorporated by reference to Exhibit 4.1 of
the Companys Report on
Form 8-K
filed with the Commission on March 13, 2006 (the
March 13, 2006
8-K).
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4
|
.7
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Amendment to
Class 2005-A,
-B, and -C Common Stock Purchase Warrants, dated as of
February 21, 2006, among the Company and the Warrant
holders that are parties thereto (incorporated by reference to
Exhibit 4.1 of the Companys Report on
Form 8-K
filed with the Commission on March 8, 2006).
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5
|
.1
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Opinion of Munck Butrus, P.C.*
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10
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.1
|
|
2000 Omnibus Securities Plan
(incorporated by reference to Appendix A of the
Companys Definitive Proxy Statement filed with the
Commission on May 2, 2000). (1)
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10
|
.2
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Form of Credit Agreement dated
June 29, 2000 by the Company and each of the following
trusts: Epics Events Trust, Ltd.; Exodus Systems Trust, Ltd.;
Prospect Development Trust, Ltd.; Pearl Street Investments
Trust, Ltd.; and Riviera Bay Holdings Trust, Ltd. (incorporated
by reference to Exhibit 10.3 of the Companys Report
on
Form 10-Q
for the period ended July 31, 2000).
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10
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.3
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Form of Amendment to Credit
Agreement dated November 13, 2000 by the Company and each
of the following trusts: Epics Events Trust, Ltd.; Exodus
Systems Trust, Ltd.; Prospect Development Trust, Ltd.; Pearl
Street Investments Trust, Ltd.; and Riviera Bay Holdings Trust,
Ltd. (incorporated by reference to Exhibit 10.9 of the
Companys Report on
Form 10-K
for the period ended October 31, 2000).
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II-8
|
|
|
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|
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10
|
.4
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2001 Stock Incentive Plan
(incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement on
Form S-8
(No. 333-68716),
filed with the Commission on August 30, 2001). (1)
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10
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.5
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Convertible Promissory Note dated
October 10, 2001 by the Company in favor of Nellie Streeter
Crane, Ltd. (incorporated by reference to Exhibit 10.18 of
the Companys Report on
Form 10-K
for the fiscal year ended October 31, 2001 (the 2001
10-K).
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10
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.6
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Convertible Promissory Note dated
October 23, 2001 by the Company in favor of Charles R. Cono
(incorporated by reference to Exhibit 10.20 of the 2001
10-K).
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10
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.7
|
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Stock Option Agreement dated
February 26, 2002, between the Company and Thomas J. Cooper
(incorporated by reference to Exhibit 10.14 of the January
2002 10-Q).
(1)
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10
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.8
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Convertible Promissory Note dated
March 8, 2002, by the Company in favor of Tony Finn
(incorporated by reference to Exhibit 10.1 of the
Companys Report on
Form 10-Q
for the period ended July 31, 2002 (the July 2002
10-Q)).
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10
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.9
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Convertible Promissory Note dated
May 31, 2002, by the Company in favor of Robert E.
Casey, Jr. (incorporated by reference to Exhibit 10.9
of the July 2002
10-Q).
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10
|
.10
|
|
Convertible Promissory Note dated
June 12, 2002, by the Company in favor of Bonnie Davis
(incorporated by reference to Exhibit 10.10 of the July
2002 10-Q).
|
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10
|
.11
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Promissory Note dated
October 29, 2002, by the Company in favor of Robert E.
Casey, Jr. (incorporated by reference to Exhibit 10.57
of the Companys Report on
Form 10-K
for the year ended October 31, 2002 (the 2002
10-K)).
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10
|
.12
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Promissory Note dated
October 31, 2002, by the Company in favor of Charles R.
Cono Trust, Charles R. Cono, TTEE (incorporated by reference to
Exhibit 10.1 of the Companys. Report on
Form 8-K
filed with the Commission on November 18, 2002).
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10
|
.13
|
|
Employment Agreement dated
December 2, 2002, between the Company and Brad Ketch
(incorporated by reference to Exhibit 10.59 of the 2002
10-K). (1)
|
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10
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.14
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2003 Consultant Stock Plan
(incorporated by reference to Exhibit 10.4 of the
Companys Report on
Form 10-Q
for the period ended January 31, 2003).
|
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10
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.15
|
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Convertible Promissory Note dated
February 10, 2003 by the Company in favor of James Warren
(incorporated by reference to Exhibit 10.1 of the April
2003 10-Q).
|
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10
|
.16
|
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Convertible Promissory Note dated
July 23, 2003 by the Company in favor of Johnnie R. Keith
(incorporated by reference to Exhibit 10.5 of the July 2003
10-Q).
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10
|
.17
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Agreement dated December 31,
2003 between the Company and Market Pulse (incorporated by
reference to Exhibit 10.3 to the Companys Report on
Form 10-QSB
for the period ended January 31, 2004).
|
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10
|
.18
|
|
Services Agreement dated as of
March 31, 2004 between the Company and HelloSoft, Inc.
(incorporated by reference to Exhibit 10.18 of the
Companys 2005
10-KSB).
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10
|
.19
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Promissory Note dated as of
September 24, 2004, by the Company in favor of Melton
Management Ltd. (incorporated by reference to Exhibit 2.03
of the Companys Report on
Form 8-K
filed with the Commission on September 24, 2004).
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10
|
.20
|
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First Amendment to the Services
Agreement dated as of March 31, 2004 between the Company
and HelloSoft, Inc. (incorporated by reference to
Exhibit 10.20 of the Companys 2005
10-KSB).
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10
|
.21
|
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Amendment 1.0 to the Services
Agreement dated as of October 11, 2004 between the Company
and HelloSoft, Inc. (Confidential treatment has been granted
with respect to certain portions of this exhibit. Omitted
portions have been filed separately with the Commission)
(incorporated by reference to Exhibit 10.21 of the
Companys 2005
10-KSB).
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10
|
.22
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Consulting Agreement between the
Company and LF Technology Group, LLC, dated November 1,
2004 (incorporated by reference to Exhibit 10.22 of the
Companys 2005
10-KSB).
|
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10
|
.23
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Consulting Agreement between the
Company and Starburst Innovations, LLC, dated November 1,
2004 (incorporated by reference to Exhibit 10.23 of the
Companys 2005
10-KSB).
|
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10
|
.24
|
|
Letter Agreement dated
November 11, 2004 between Lilly Beter Capital Group, Ltd.
and the Company (incorporated by reference to Exhibit 10.24
of the Companys 2005
10-KSB).
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II-9
|
|
|
|
|
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10
|
.25
|
|
Amended and Restated Development
and License Agreement dated as of November 29, 2004 between
Adaptive Networks, Inc. and the Company. (Confidential treatment
has been requested with respect to certain portions of this
exhibit. Omitted portions have been filed separately with the
Commission) (incorporated by reference to Exhibit 10.25 of
the Companys 2005
10-KSB).
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10
|
.26
|
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Amended and Restated Right of
First Refusal, Credit of Payments and Revenue Sharing Agreement
dated as of November 29, 2004, among the Company, Adaptive
Networks, Inc. and Certain Shareholders of Adaptive Networks,
Inc. (incorporated by reference to Exhibit 10.26 of the
Companys 2005
10-KSB).
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10
|
.27
|
|
Promissory Note dated as of
December 10, 2004, by the Company in favor of Ivan
Berkowitz (incorporated by reference to Exhibit 10.27 of
the Companys 2005
10-KSB).
|
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10
|
.28
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Promissory Note dated as of
December 24, 2004 by the Company in favor of Double U
Master Fund LP (incorporated by reference to
Exhibit 2.03 of the Companys Report on
Form 8-K
filed with the Commission on December 24, 2004).
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10
|
.29
|
|
Lease Agreement dated as of
March 2, 2005 between the Company and American Property
Management (incorporated by reference to Exhibit 10.2 of
the Companys Report on
Form 10-QSB
for the period ended January 31, 2005 (the January
2005
10-QSB).
|
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10
|
.30
|
|
Letter Agreement dated
March 14, 2005 between Starburst Innovations, LLC and the
Company (incorporated by reference to Exhibit 10.30 of the
Companys 2005
10-KSB).
|
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10
|
.31
|
|
Employment Agreement between the
Company and Ray Willenberg, Jr. dated as of March 23,
2005 (incorporated by reference to Exhibit 10.1 of the
January 2005
10-QSB). (1)
|
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10
|
.32
|
|
Convertible Promissory Note dated
March 23, 2005, by the Company in favor of Ray
Willenberg, Jr. (incorporated by reference to
Exhibit 10.32 of the Companys 2005
10-KSB).
|
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10
|
.33
|
|
Exchange Agreement between the
Company and Zaiq Technologies, Inc. dated as of April 6,
2005 (incorporated by reference to Exhibit 10.2 of the
January 2005
10-QSB).
|
|
10
|
.34
|
|
Promissory Note dated
April 6, 2005, by the Company in favor of Zaiq
Technologies, Inc. (incorporated by reference to
Exhibit 4.1 of the January 2005
10-QSB).
|
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10
|
.35
|
|
Form of Securities Purchase
Agreement dated as of May 26, 2005, among the Company and
certain investors (incorporated by reference to
Exhibit 10.1 of the Companys Report on
Form 8-K
filed with the Commission on June 1, 2005 (the June
2005
8-K)).
|
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10
|
.36
|
|
Form of Registration Rights
Agreement dated as of May 26, 2005, among the Company and
certain investors (incorporated by reference to
Exhibit 10.2 of the June 2005
8-K).
|
|
10
|
.37
|
|
Security Interest Agreement dated
as of May 26, 2005 among the Company, certain specified
investors, as secured parties, and Krieger and Prager, as agent
for the secured parties (incorporated by reference to
Exhibit 10.3 of the June 2005
8-K).
|
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10
|
.38
|
|
Consulting Agreement between the
Company and Richard Hurn dated July 19, 2005 (incorporated
by reference to Exhibit 10.38 of the Companys 2005
10-KSB).
|
|
10
|
.39
|
|
Amendment 2.0 to the Services
Agreement dated as of July 26, 2005 between the Company and
HelloSoft, Inc. (Confidential treatment has been requested with
respect to certain portions of this exhibit. Omitted portions
have been filed separately with the Commission) (incorporated by
reference to Exhibit 10.39 of the Companys 2005
10-KSB).
|
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10
|
.40
|
|
Amendment 3.0 to the Services
Agreement dated as of November 3, 2005 between the Company
and HelloSoft, Inc. (Confidential treatment has been requested
with respect to certain portions of this exhibit. Omitted
portions have been filed separately with the Commission)
(incorporated by reference to Exhibit 10.40 of the
Companys 2005
10-KSB).
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|
10
|
.41
|
|
Letter Agreement dated as of
December 16, 2005 between the Company and Zaiq
Technologies, Inc. (incorporated by reference to
Exhibit 10.41 of the Companys 2005
10-KSB).
|
|
10
|
.42
|
|
Amendment 3.0 to the Services
Agreement dated as of November 3, 2005 between the Company
and HelloSoft, Inc. (Confidential treatment has been requested
with respect to certain portions of this exhibit. Omitted
portions have been filed separately with the
Commission)(incorporated by reference to Exhibit 10.40 of
the Companys Annual Report on
Form 10-KSB
for the fiscal year ended October 31, 2005 (the 2005
10-KSB)).
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II-10
|
|
|
|
|
|
10
|
.43
|
|
Letter Agreement dated as of
December 16, 2005 between the Company and Zaiq
Technologies, Inc. (incorporated by reference to
Exhibit 10.41 of the Companys 2005
10-KSB).
|
|
10
|
.44
|
|
Bridge Loan Agreement between the
Company and Double U Master Fund, L.P. dated January 24,
2006 (incorporated by reference to Exhibit 10.1 of the
Companys Report on
Form 8-K
filed with the Commission on January 30, 2006 (the
January 30, 2006
8-K)).
|
|
10
|
.45
|
|
Form of Note issued in connection
with the Bridge Loan Agreement (incorporated by reference to
Exhibit 10.2 of the Companys January 30, 2006
8-K).
|
|
10
|
.46
|
|
Form of Warrant issued in
connection with the Bridge Loan Agreement (incorporated by
reference to Exhibit 10.3 of the Companys
January 30, 2006
8-K).
|
|
10
|
.47
|
|
Security Interest Agreement, dated
as of January 24, 2006 among the Company, Double U Master
Fund, L.P. (the Secured Party) and
Krieger & Prager, LLP, as agent for the Secured Party
(incorporated by reference to Exhibit 10.4 of the
Companys January 30, 2006
8-K).
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|
10
|
.48
|
|
Stock Option Agreement dated
January 26, 2006 between the Company and Brad Ketch
(incorporated by reference to Exhibit 10.42 of the
Companys 2005
10-KSB). (1)
|
|
10
|
.49
|
|
Stock Option Agreement dated
January 26, 2006 between the Company and Ray
Willenberg, Jr. (incorporated by reference to
Exhibit 10.43 of the Companys 2005
10-KSB). (1)
|
|
10
|
.50
|
|
Stock Option Agreement dated
January 26, 2006 between the Company and Walter Chen
(incorporated by reference to Exhibit 10.43 of the
Companys 2005
10-KSB).
|
|
10
|
.51
|
|
License Agreement dated as of
February 6, 2006 between the Company and HelloSoft, Inc.
(incorporated by reference to Exhibit 10.10 of the
Companys Quarterly Report on
Form 10-QSB
for the period ended January 31, 2006 (the January
2006
10-QSB)(Confidential
treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with
the Commission).
|
|
10
|
.52
|
|
Stock Option Agreement dated
February 16, 2006 between the Company and Davis Munck
Butrus, P.C. (incorporated by reference to
Exhibit 10.11 of the Companys January 2006
10-QSB).
|
|
10
|
.53
|
|
Stock Option Agreement dated
February 16, 2006 between the Company and Jack Peckham
(incorporated by reference to Exhibit 10.12 of the
Companys January 2006
10-QSB). (1)
|
|
10
|
.54
|
|
Stock Option Agreement dated
February 16, 2006 between the Company and Thomas Cooper
(incorporated by reference to Exhibit 10.13 of the
Companys January 2006
10-QSB). (1)
|
|
10
|
.55
|
|
Form of Securities Purchase
Agreement, dated as of March 6, 2006, between the Company
and the investors named therein (incorporated by reference to
Exhibit 10.1 of the Companys March 13, 2006
8-K).
|
|
10
|
.56
|
|
Form of Warrant issued in
connection with the Securities Purchase Agreement (incorporated
by reference to Exhibit 10.2 of the Companys
March 13, 2006
8-K).
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
(incorporated by reference to Exhibit 21.1 of the
Companys 2005
10-KSB).
|
|
23
|
.1
|
|
Consent of Munck Butrus, P.C.
(included in Exhibit 5.1).
|
|
23
|
.2
|
|
Consent of Marcum &
Kliegman LLP.*
|
|
24
|
.1
|
|
Powers of Attorney (contained on
page S-1).
|
|
|
|
* |
|
Filed herewith |
|
(1) |
|
Signifies a management agreement or compensatory plan or
arrangement. |
Item 28. Undertakings
Rim Semiconductor Company hereby undertakes the following:
(a) (1) To file, during any period in which it offers
or sells securities, a post-effective amendment to this
registration statement to:
(i) Include any prospectus required by
Section 10(a)(3) of the Securities Act;
II-11
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, to
treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide
offering.
(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end
of the offering.
(b) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to
the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
II-12
Signatures
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on
Form SB-2
and authorized this registration statement to be signed on its
behalf by the undersigned in Portland, Oregon, on April 24,
2006.
Rim Semiconductor
Company
Brad Ketch, President and Chief Executive Officer
Power
of Attorney
Each person whose signature to this Registration Statement
appears below hereby appoints Brad Ketch as his
attorney-in-fact,
to sign on his behalf, individually and in the capacities stated
below, and to file (i) any and all amendments and
post-effective amendments to this Registration Statement and
(ii) any registration statement relating to the same
offering pursuant to Rule 462(b) under the Securities Act
of 1933, which amendment or amendments or registration statement
may make such changes and additions as such
attorney-in-fact
may deem necessary or appropriate.
In accordance with the requirements of the Securities Act of
1933, this registration statement has been signed by the
following persons in the capacities and on the dates indicated.
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|
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Signature
|
|
Title(s)
|
|
Date
|
|
/s/ Brad
Ketch
Brad
Ketch
|
|
President, Chief Executive Officer
and Director (principal executive,
financial and accounting officer)
|
|
April 24, 2006
|
|
|
|
|
|
/s/ Ray
Willenberg, Jr.
Ray
Willenberg, Jr.
|
|
Chairman of the Board and
Executive Vice President
|
|
April 24, 2006
|
|
|
|
|
|
/s/ Thomas
J. Cooper
Thomas
J. Cooper
|
|
Director
|
|
April 24, 2006
|
|
|
|
|
|
/s/ Jack
L. Peckham
Jack
L. Peckham
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|
Director
|
|
April 24, 2006
|
II-13