Replies to post #2755 on Rim Semiconductor Company (fka RSMI)

[porscha]

WTM - so far the company has funded 2.25 million dollars for the movie. they say that figure is 100% of their obligation and that was enough to complete the film. the rough draft cut was done a week or so ago and the film is set to premiere in malibu sometime in june.

the gross dollar figures you are seeing talked about have not been plucked from the sky by NVEI, but rather those are the figures the distributors they have been talking to have given them. it's my understanding any distribution deal that is signed will be a percentage based one. john said they have several options. they could sign with a major distributor and have the film played in more theaters, but this would probably cost them a greater percentage. or they could sign with a smaller distribution company, have the film shown in fewer theaters but get a bigger percentage of the gross. bruce brown has been in the motion picture industry for 30+ years so there's no doubt in my mind he knows the in's and out's of that industry.

but regardless, NVEI will receive the first 2.25 million of the gross to re-pay their initial investment, plus a percentage of every dollar the movie grosses. let's also keep in mind that NVEI has one person on the road full time signing sponsership deals. john recently said they have signed at least one and they expect more to come. all of those monies come directly into NVEI to re-pay their initial investment.

as far as the convertable notes are concerned, all warrants and options from a public company are turned into 144 restricted shares after they are exercised. if these notes are structured the same way i do not know, but it wouldn't surprise me to find out they were.

you also need to keep in mind that bruce brown and ray have worked together in the past. even though the movie was announced after the tech was aquired i'm positive it was in the planning stages way before we aquired the tech.

one additional comment on the movie and then hopefully we can get back to talking about the tech. i have read several articles about the up-coming movie in various surfing publications. it seems the surfing world is very excited about this film. there's a link in the links page for one of those articles.

[spokeshave]

WTMHouston: You are leaving out some very important details. Intentional or not, these omissions are conspicuous.

As for the movie financing deal and the timing, I think that it is pretty clear that NVEI was a film production company prior to early 2000 and that this particular movie deal was well in the works before NVEI acquired its broadband technology even though the deal was not finalized until April. You are splitting hairs.

There are some errors in the convertible note assessment that you did. You said:

The conversion privilege allows the holder to convert not only the principal, but also the 50% "interest" into stock at $0.40 a share. As I recall, and I would have to look it up again to be certain, there is about $1.9 million in convertible financing so far. The additional 50% raises this to $2.85 million, at $0.40 a share = 7.125 million shares.


According to the 10K, there was only $865,000 financed through convertible notes, not the $1.9 million that you claim. If you look closely at Exhibits 10.18 through 10.24, you will find all of the conditions for these notes. The language appears to be identical in each Exhibit except for the amounts and the threshold at which the notes become payable. Although the reading is a bit difficult, the meaning becomes clear. Here is what I gleaned:

1) The notes are not convertible until they are payable. See Section 1 of each exhibit. As such, the holders cannot exercise the conversion now. They must wait until the notes are payable. The conditions that make the notes payable vary, but in general, NVEI must have recovered an amount equal to or greater than 150% of the note amount before it becomes payable. In other words, the notes do not become payable until the movie has grossed enough to pay them. Pretty simple really. Note that for Exhibits 10.19 and 10.20 the notes do not become payable until NVEI has $2.25 million in revenue.

2) The shares are not restricted. So, once the note becomes payable, the payee can, at any time, convert the notes to common stock at a strike price of 0.40 and sell them if he sees fit. The total dilution would be (865,000 x 1.5)/0.40 = approximately 3.24 million shares, not the 7.125 million you calculated. Additionally, please remember that the notes are not payable (and hence not convertible) until the revenue goals have been met.

You also said:

Thus, before stockholders of NVEI get even, NVEI must get 150% of whatever NVEI ultimately invested by way of the convertibles. If they get the full $2.25 million for such notes, they will need $3.375 million in revenue to NVEI before the owners of NVEI are even.

I believe this is incorrect. The $2.25 million includes the 50% override as an interest cost. I an quite certain that I saw that in the 10K. I will try to go back and find it. Therefore, the total "nut" is $2.25 million - not $3.375 million.

You also said:

Thus, before stockholders of NVEI get even, NVEI must get 150% of whatever NVEI ultimately invested by way of the convertibles. If they get the full $2.25 million for such notes, they will need $3.375 million in revenue to NVEI before the owners of NVEI are even. Of course, to get to this $3.375 million, and assuming that the JV never has any expenses above the $2.25 million, which is unlikely, the JV (not the movie) must gross at least $4.50 million. The movie's gross will have to be MUCH greater than $4.5 million for this to happen.

OK, we have already established that the cost of production is $2.25 million, not $3.375 million. I have no idea where you got the $4.5 million figure for movie gross to recoup the investment. According to the 10K:

Under the terms of our joint venture, we agreed to finance the production of the film for up to $2,250,000. Upon its release, we will receive all revenues generated by the film until we recover 100% of our initial investment. After we recoup our investment in the venture, 50% of the net profits generated by the film will be paid to us.

It is very clear that *all* revenues generated by the film will be received until the investment is recovered. Additionally, the 10K clearly stated that the movie will be completed within the budget.

So, the first $2.25 million of movie revenue all goes to paying off the production costs. I will not get into a heated discussion about potential gross revenues at this point. Neither of us can really speculate with any authority. However, based on the huge success of Endless Summer, and the modest success of Endless Summer II I would expect gross revenues to be well over $10 million. Since EndlessSummer II did over $10 million in its first year, and considering box-office inflation since 1994, $20 million is easily achievable. It if becomes a cult success like the first Endless Summer did, then it could do much, much more. But that is just my opinion.

[rbsacts]

Rule of thumb on movie investment return is 3 time original cost before a movie starts showing a 'accounting profit'.I think the number is high but 'creative accounting' is used to put more money in the producers pockets before it shares profits to those that have ownership or 'points' in the film.
Randy