RSMI:TOXIC DEBENTURES REGISTRATION.
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 357,781,615 shares of common stock by the selling security holders. We will not receive proceeds from these sales except to the extent certain options or warrants are exercised for cash, and have prepared this prospectus principally in order to meet our contractual obligations to some of the selling security holders. The sale of this block of stock, or even the possibility of its sale, may adversely affect the trading market for our common stock and reduce the price available in that market.
Our shareholders will experience significant dilution upon the conversion of our 2006 Debentures and 2005 Debentures because these debentures convert at a discount to the market price of our common stock at the time of conversion.
At any time and from time to time, all or any portion of the principal amount of the two-year 7% Senior Secured Convertible Debentures we issued in March 2006 (the “2006 Debentures”) then outstanding may, at the option of the holders of the debentures, be converted into shares of common stock at the conversion price then in effect. Similarly, currently and from time to time all or any portion of the principal amount of the three-year 7% Senior Secured Convertible Debentures we issued in May 2005 (the “2005 Debentures”) then outstanding may, at the option of the holders of the debentures, be converted into shares of common stock at the conversion price then in effect. Additionally, all accrued but unpaid interest on 2006 Debentures and 2005 Debentures is payable upon conversion, at our option, in shares of common stock at the conversion price for those debentures then in effect.
The number of shares issuable upon any conversion will be equal to the outstanding principal amount of convertible debenture to be converted, divided by the applicable conversion price on the conversion date, plus (if we have elected to pay such amount in shares of common stock) the amount of any accrued but unpaid interest on the convertible debenture through the conversion date, divided by the conversion price on the conversion date. The conversion price of the 2006 Debentures is equal to the lower of (i) 70% of the volume weighted average closing price per share of our common stock for the 20 trading days immediately preceding the conversion date and (ii) the lowest purchase price or conversion price of any shares of common stock or securities convertible into shares of common stock that we subsequently offer or issue on or prior to the date on which the aggregate outstanding principal amount of the 2006 Debentures is first equal to or less than $1.5 million. The conversion price of the 2005 Debentures is equal to 70% of the volume weighted average closing price per share of our common stock for the five trading days immediately preceding the conversion date. Due to the conversion mechanics of these convertible debentures, decreases in the conversion price result in an increase in the total number of shares issuable upon conversion.
The number of shares to be acquired by each of the holders of the 2006 Debentures or 2005 Debentures upon conversion cannot exceed the number of shares that, when combined with all other shares of common stock and securities then owned by each holder and its affiliates, would result in any one of them owning more than 4.99% of our then outstanding common stock.
There is an inverse relationship between our stock price and the number of shares issuable upon conversion of the 2006 Debentures and 2005 Debentures. That is, the higher the market price of our common stock at the time a debenture is converted, the fewer shares we would be required to issue, and the lower the market price of our common stock at the time a debenture is converted, the more shares we would be required to issue. This inverse relationship is demonstrated by the table set forth below, which shows the number of
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shares into which $6 million of the 2006 Debentures would be convertible at various prices of our common stock.
Estimated 20-Day
Debenture
Number of Shares Issuable on
VWAP of
Conversion
Conversion of $6 Million Principal
Common Stock Price Amount of Debentures
$0.25 $ 0.175 34,285,714
$0.20 $ 0.140 42,857,143
$0.15 $ 0.105 57,142,857
$0.10 $ 0.070 85,714,286
$0.05 $ 0.035 171,428,571
$0.03 $ 0.021 285,714,286
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 340,734,039 shares are issued and outstanding. In addition, our outstanding warrants and options, if exercised at August 9, 2006, would require us to issue an additional 151,627,272 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 August 9, 2006, we had 340,734,039 shares of our common stock issued and outstanding. As of August 9, 2006, an additional 151,627,272 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 $4.00 per share. In addition, we have outstanding $5.6 million principal amount of 2006 Debentures and $5,577 principal amount of 2005 Debentures, all of which are convertible into an undeterminable number of shares of our common stock. The exercise price of such debentures is variable, and is based upon an initial conversion price equal to 70% of the volume-weighted closing price per share of our common stock over a period preceding the applicable conversion date. We also have outstanding $75,000 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.
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If we default under the Securities Purchase Agreement for the 2006 Debentures, we could lose substantially all of our assets.
To secure our obligations under the 2006 Debentures, we granted a security interest in substantially all of our assets, including our intellectual property, in favor of the investors under the terms and conditions of a Security Interest Agreement dated as of March 6, 2006. The security interest terminates upon the earlier of (i) the date on which less than $1.5 million in principal amount of the 2006 Debentures are outstanding, or (ii) payment or satisfaction of all of our obligations under the Securities Purchase Agreement. If we are unable to perform our obligations under the Securities Purchase Agreement, the investors could seek to foreclose and obtain possession or force the sale of substantially all of our assets, including our products under development. If this were to occur, we could not continue in our current line of business and any investment you may have in the Company would lose value.
Our board of directors’ right to authorize the issuance of shares of preferred stock could adversely impact the rights of holders of our common stock.
Our Articles of Incorporation authorize our board of directors to issue up to 15,000,000 shares of preferred stock in one or more series, and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any such series, without further vote or action by shareholders. The terms of any series of preferred stock, which may include priority claims to assets and dividends and special voting rights, could adversely affect the rights of the holders of our common stock and thereby reduce the value of our common stock. The issuance of preferred stock could discourage certain types of transactions involving an actual or potential change in control of our company, including transactions in which the holders of common stock might otherwise receive a premium for their shares over then current prices, otherwise dilute the rights of holders of common stock, and may limit the ability of such shareholders to cause or approve transactions which they may deem to be in their best interests, all of which could have a material adverse effect on the market price of our common stock.
Our stock price may be volatile.
The market price of our common stock will likely fluctuate significantly in response to the following factors, some of which are beyond our control:
• Variations in our quarterly operating results due to a number of factors, including but not limited to those identified in this “Risk Factors” section;
• Changes in financial estimates of our revenues and operating results by securities analysts or investors;
• Changes in market valuations of telecommunications equipment companies;
• Announcements by us of commencement to, changes to, or cancellation of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
• Additions or departures of key personnel;
• Future sales of our common stock;
• Stock market price and volume fluctuations attributable to inconsistent trading volume levels of our stock;
• Commencement of or involvement in litigation; and
• Announcements by us or our competitors of technological innovations or new products.
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.
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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. During the past several years, the Company issued securities to accredited investors pursuant to Section 4(2) of the Act, which were not subject to the safe harbors of Regulation D. While the Company believes these offers and sales were not integrated, if these offers and sales were deemed to be integrated, the Section 4(2) exemption might be unavailable for one or more of these sales. Furthermore, in 2004, $350,000 of our 2003 Debentures were purchased by investors after the filing of a registration statement covering the same type of securities. While the Company and the investors were parties to a purchase agreement executed prior to the filing of the registration statement, the wording of certain conditions to closing created uncertainty as to whether the investors were irrevocably bound to purchase the debentures prior to the filing of the registration statement. As a result, there may not have been an exemption from registration covering these sales. If one or more of these investors were to successfully seek such rescission or institute any such suit, we could face severe financial demands that could materially and adversely affect our financial position.
We do not anticipate paying any dividends on our common stock.
We have not paid any dividends on our common stock since our inception and do not anticipate paying any dividends on our common stock in the foreseeable future. Instead, we intend to retain any future earnings for use in the operation and expansion of our business.
Additional burdens imposed upon broker-dealers by the application of the “penny stock” rules to our common stock may limit the market for our common stock.
The SEC has adopted regulations concerning low-priced (or “penny”) stocks. The regulations generally define “penny stock” to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our shares continue to be offered at a market price less than $5.00 per share, and do not qualify for any exemption from the penny stock regulations, our shares will continue to be subject to these additional regulations relating to low-priced stocks.
The penny stock regulations require that broker-dealers who recommend penny stocks to persons other than institutional accredited investors, make a special suitability determination for the purchaser, receive the purchaser’s 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.
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