<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1998
REGISTRATION NO. 333-59133
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
V3 SEMICONDUCTOR, INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 87-0429263 3674
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) CLASSIFICATION CODE NUMBER)
</TABLE>
------------------------
<TABLE>
<S> <C>
250 CONSUMERS ROAD CARL O. MITCHELL, SECRETARY
SUITE 901 250 CONSUMERS ROAD
NORTH YORK, ONTARIO SUITE 901
CANADA M2J 4V6 NORTH YORK, ONTARIO
(416) 497-8884 CANADA M2J 4V6
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES) TELEPHONE NO.: (416) 497-8884
FACSIMILE NO.: (416) 497-1160
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
</TABLE>
------------------------
Copies of all communications to:
GREGORY SICHENZIA, ESQ.
RICHARD A. FRIEDMAN, ESQ.
SICHENZIA ROSS & FRIEDMAN, LLP
135 WEST 50TH STREET
NEW YORK, NEW YORK 10022
TELEPHONE NO.: (212) 664-1200
FACSIMILE NO.: (212) 664-7329
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
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 of
1933, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
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 number of the earlier effective registration statement for the same
offering. / /
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 number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
DOLLAR PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE
OF SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SECURITY(1) OFFERING PRICE(1)
<S> <C> <C> <C>
Common Stock, $.001 par value(2)....................................... 58,750 $ 1.75 $ 102,812.50
Common Stock, $.001 par value(2)....................................... 55,000 $ 1.93 106,150
Common Stock, $.001 par value(2)....................................... 27,000 $ 2.02 54,540
Common Stock, $.001 par value(2)....................................... 40,000 $ 2.22 88,800
Common Stock, $.001 par value(2)....................................... 4,000 $ 2.50 10,000
Common Stock, $.001 par value(2)....................................... 10,000 $ 2.75 27,500
Common Stock, $.001 par value(2)....................................... 10,000 $ 3.05 30,500
Common Stock, $.001 par value(2)....................................... 30,000 $ 3.11 93,300
Common Stock, $.001 par value(2)....................................... 12,500 $ 3.25 40,625
Common Stock, $.001 par value(2)....................................... 160,000 $ 3.75 600,000
Common Stock, $.001 par value(2)....................................... 3,000 $ 3.86 11,580
Common Stock, $.001 par value(2)....................................... 16,000 $ 4.00 64,000
Common Stock, $.001 par value(2)....................................... 3,000 $ 4.13 12,390
Common Stock, $.001 par value(2)....................................... 5,000 $ 4.25 21,250
Common Stock, $.001 par value(2)....................................... 15,833 $ 4.50 71,248.50
Common Stock, $.001 par value(2)....................................... 4,000 $ 4.63 18,520
Common Stock, $.001 par value(2)....................................... 1,000 $ 4.75 4,750
Common Stock, $.001 par value(2)....................................... 5,000 $ 4.86 24,300
Common Stock, $.001 par value(2)....................................... 2,000 $ 5.13 10,260
Common Stock, $.001 par value(2)....................................... 9,000 $ 5.50 49,500
Common Stock, $.001 par value(2)....................................... 7,000 $ 5.86 41,020
Common Stock, $.001 par value(2)....................................... 40,000 $ 6.25 250,000
-------------
Totals................................................................. $1,733,046.00
<CAPTION>
TITLE OF EACH CLASS AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, $.001 par value(2)....................................... $ 30.33
Common Stock, $.001 par value(2)....................................... 31.31
Common Stock, $.001 par value(2)....................................... 16.09
Common Stock, $.001 par value(2)....................................... 26.20
Common Stock, $.001 par value(2)....................................... 2.95
Common Stock, $.001 par value(2)....................................... 8.11
Common Stock, $.001 par value(2)....................................... 9.00
Common Stock, $.001 par value(2)....................................... 27.52
Common Stock, $.001 par value(2)....................................... 11.98
Common Stock, $.001 par value(2)....................................... 177.00
Common Stock, $.001 par value(2)....................................... 3.42
Common Stock, $.001 par value(2)....................................... 18.88
Common Stock, $.001 par value(2)....................................... 3.66
Common Stock, $.001 par value(2)....................................... 6.27
Common Stock, $.001 par value(2)....................................... 21.02
Common Stock, $.001 par value(2)....................................... 5.46
Common Stock, $.001 par value(2)....................................... 1.40
Common Stock, $.001 par value(2)....................................... 7.17
Common Stock, $.001 par value(2)....................................... 3.03
Common Stock, $.001 par value(2)....................................... 14.60
Common Stock, $.001 par value(2)....................................... 12.10
Common Stock, $.001 par value(2)....................................... 73.75
--------
Totals................................................................. $ 511.25
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
(2) Issuable upon exercise of options, together with such indeterminate number
of securities as may be issuable by reason of anti-dilution provisions
contained therein.
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
V3 SEMICONDUCTOR, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION CAPTIONS IN PROSPECTUS
------------------------------------------------------ ------------------------------------------------------
<S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................. Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Cover Page, Inside Cover Page, Outside Back Page
3. Summary Information and Risk Factors.................. Prospectus Summary, Risk Factors
4. Use of Proceeds....................................... Use of Proceeds
5. Determination of Offering Price....................... Cover Page, Risk Factors
6. Dilution.............................................. Dilution
7. Selling Securityholders............................... Selling Shareholders, Plan of Distribution
8. Plan of Distribution.................................. Prospectus Summary, Selling Securityholders
9. Legal Proceedings..................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management, Principal Stockholders
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Principal Stockholders
12. Description of Securities............................. Description of Securities
13. Interest of Named Experts and Counsel................. Legal Matters
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Management
15. Organization Within Last Five Years................... *
16. Description of Business............................... Prospectus Summary, Business
17. Management's Discussion and Analysis or Plan of
Operation........................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property............................... Business
19. Certain Relationships and Related Transactions........ Certain Transactions
20. Market for Common Equity and Related Shareholder
Matters............................................. Front Cover Page, Description of Securities
21. Executive Compensation................................ Management
22. Financial Statements.................................. Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. *
</TABLE>
- ------------------
* Not Applicable
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 22, 1998
PROSPECTUS
V3 SEMICONDUCTOR, INC.
518,083 SHARES OF COMMON STOCK, CONSISTING OF
SHARES OF COMMON STOCK UNDERLYING VARIOUS OPTIONS AND WARRANTS
------------------------
This Prospectus relates to the sale of 518,083 shares of common stock,
$.001 par value per share (the "Common Stock"), of V3 Semiconductor, Inc., a
Nevada corporation (the "Company"), by certain shareholders (the "Selling
Stockholders") of the Company, which shares of Common Stock are issuable upon
exercise of 518,083 Options and or Warrants (the "Options") which are currently
outstanding. Each Option entitles the holder to purchase one share of Common
Stock at exercise prices ranging from $1.75 to $6.25 per share (subject to
adjustment). Options expire between July 7, 1999 and February 22, 2006. See
"Description of Securities."
The Common Stock is quoted on the Over the Counter ("OTC") Bulletin Board
under the symbol VVVI. On June 29, 1998, the last reported sale price of the
Common Stock was $3.94.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON
PAGE 6 AND "DILUTION" ON PAGE 12.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
To the extent that Options are exercised, the Company will receive the
proceeds from the exercise of such Options. The Company cannot predict the
extent to which Options will be exercised. Regardless of whether any Options are
exercised, the Company will incur expenses of approximately $75,000.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act of
1933, as amended (the "Act"), with respect to the Securities offered hereby.
This Prospectus omits certain information contained in the Registration
Statement as permitted by the rules and regulations of the Commission and the
exhibits thereto, and reference is made to the Registration Statement and the
exhibits thereto for further information with respect to the Company and the
Securities offered hereby. Each such statement is qualified in its entirety by
such reference. The Registration Statement, including exhibits and schedules
filed therewith, may be inspected without charge at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and its public reference facilities in
New York, New York and Chicago, Illinois upon payment of the prescribed fees.
Electronic registration statements filed through the Electronic Data Gathering,
Analysis, and Retrieval System are publicly available through the Commission's
Website (http://www.sec.gov). At the date hereof, the Company was not a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
2
<PAGE>
PROSPECTUS SUMMARY
The following discussion summarizes certain information contained in this
Prospectus. It does not purport to be complete and is qualified in its entirety
by reference to more detailed information and financial statements, including
the notes thereto, appearing elsewhere in this Prospectus.
Prospective investors are cautioned that the statements in this Prospectus
that are not descriptions of historical facts may be forward looking statements
that are subject to risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified under "Risk Factors" and elsewhere in this Prospectus
or in documents incorporated by reference in this Prospectus.
THE COMPANY
V3 Semiconductor Inc. ("V3" or the "Company"') originates, designs,
develops and markets a family of high-performance, highly integrated chips and
chipsets for microprocessors which are found in computer peripheral devices,
network servers and telecommunications devices. Such microprocessors are
referred to in the industry as embedded processors ("Embedded Processors") and
are the central controllers for dedicated or non-general purpose systems
("Embedded Systems"). The Company specializes in designing and developing
semiconductor products that provide direct-connect interfaces to popular
embedded processors, such as the Intel i960, the IBM PowerPC and the AMD 29K
Series. The Company's products are designed to facilitate implementation of
common functions, such as input/output ("I/O"), dynamic random access memory
("DRAM") and peripheral component interconnect ("PCI") Bridge Controllers. The
Company currently markets approximately 17 products. V3 has designed its devices
to interface seamlessly with a wide variety of processors, which eliminates the
need for customers to expend time and effort converting a "generic interface" to
support their particular system architecture. The Company's products are
utilized in numerous applications, including networking, communications,
storage, printing and imaging, and multi-media.
The Embedded Systems market, which is the Company's primary market, is
expanding rapidly in response to the increasing need for speed and functionality
in servers, mass storage devices, computer networks and telecommunications. The
Company's major customers and/or technology partners in the Embedded Systems
market include; Intel, Motorola, IBM, Hitachi, QED, Hewlett Packard, NorTel,
Data General, Cabletron, Sony, Hughes, Adaptec and Ascend/Cascade
Communications.
The Company is at the leading edge of Embedded Systems architecture and has
developed products for new emerging standards, such as Intelligent I/O ("I2O")
which provide solutions to data transfer problems that slow processor
performance. In an embedded system, the transfer of data between chips is a
crucial design issue that can negatively impact system performance. The
increasing need to move data faster and more efficiently will require solutions
supported by the Company's current and future products.
V3 was incorporated in Nevada in 1985. The Company's principal offices are
located at 250 Consumers Road, Suite 901, North York, Ontario, Canada M2J 4V6
and its telephone number is (416) 497-8884; its world-wide website is located at
www.vcvbed.com. Information contained in the Company's website shall not be
deemed part of this Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the Selling
Shareholders............................ 518,083 shares of Common Stock issuable upon exercise of outstanding
Options held by the Selling Stockholders. See "Selling Stockholders
and Plan of Distribution" for a complete description of the Options
outstanding and the holders of such Options.
Use of Proceeds........................... Any money received by the Company upon the exercise of Options will
be used for working capital and other corporate purposes. The Company
will not receive any proceeds from the sale of shares of Common Stock
by the Selling Stockholders. See "Use of Proceeds."
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Risk Factors.............................. An investment in the securities offered involves substantial risks,
and should be considered only by investors who can afford to sustain
a loss of their entire investment. See "Risk Factors."
Common Stock Outstanding Before the
Offering................................ 5,471,528(1)
Common Stock Outstanding After the
Offering................................ 5,989,611(2)
Special Voting Shares Outstanding......... 46,368(3)
OTC Bulletin Board Symbol................. VVVI(4)
</TABLE>
- ------------------
(1) Includes 10,000 shares of Common Stock issued subsequent to June 30, 1998.
(2) Assuming all outstanding options are exercised.
(3) Special voting shares convert to Common Stock on a one for one basis and
have the same voting power as Common Stock.
(4) The Company's shares began trading on the OTC Bulletin Board in 1994.
SUMMARY FINANCIAL INFORMATION
The following summary of financial information should be read in
conjunction with the Financial Statements and notes thereto appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30 YEAR ENDED SEPTEMBER 30
------------------------ ------------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.................................................... $2,639,968 $1,399,056 $1,951,453 $ 882,042
Gross profit............................................. 1,795,765 882,651 1,202,370 468,080
Net income (loss)........................................ 279,253 76,323 (124,596) (551,467)
Earnings (loss) per share(1) ............................ 0.07 0.02 (0.03) (0.13)
Shares of Common Stock outstanding....................... 5,461,528 3,437,928 3,437,928 3,425,428
Voting Special Shares outstanding........................ 46,368 697,310 697,310 709,810
Total Common Stock and Voting Special Shares(1) ......... 5,507,896 4,135,238 4,135,238 4,135,238
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------
JUNE 30, 1998 1997 1996
------------- ---------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital ....................................................... $ 5,128,980 $ 485,292 $ 590,648
Total Assets........................................................... 5,909,785 1,289,901 1,325,042
Total Liabilities...................................................... 381,339 431,900 345,648
Stockholders' Equity................................................... 5,528,446 858,001 979,394
</TABLE>
- ------------------
(1) Earnings (loss) per share are based upon the weighted average of the total
number of shares of Common Stock outstanding plus total number of Voting
Special Shares. Such computation represents basic and full dilution.
4
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
ASIC......................................... Application Specific Integrated Circuit
CISC......................................... Complex Instruction Set Computer
CPU.......................................... Central Processing Unit
DMA.......................................... Direct Memory Access
DRAM......................................... Dynamic Random Access Memory
Embedded..................................... Dedicated or Non-General purpose, i.e. Embedded processor usually
a RISC CPU.
FPGA......................................... Field Programmable Gate Array
I/O.......................................... Input/Output
I,O.......................................... Intelligent Input/Output
ISA.......................................... Industry Standard Architecture
MFP.......................................... Multi Function Peripheral Devices
NRE.......................................... Non-Recurring Engineering (charges)
OEM.......................................... Original Equipment Manufacturer
PCI.......................................... Peripheral Component Interconnect
PLD.......................................... Programmable Logic Device
RAID......................................... Redundant Array of Inexpensive Disks
RISC......................................... Reduced Instruction Set Computer
SIG.......................................... Special Interest Group
SRAM......................................... Static Random Access Memory
VHDL......................................... VHSIC (Very High Speed Integrated Circuit) Hardware Description
Language
VHISS........................................ Very Highly Integrated Silicon Solutions
</TABLE>
5
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other information contained in this Prospectus, in connection
with investments in the securities offered hereby. This prospectus contains
certain forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this prospectus. An investment in the securities
offered hereby involves a high degree of risk.
Competition. Competition in the semiconductor industry is intense. As the
Embedded Systems market gains popularity due to its rapid growth, the number of
competitors will increase dramatically. In addition, new architectures and new
concepts may be responsible for new products that can perform similar functions
as the Company's products. Competition is based on design and quality of the
products, product performance, price and service, with the relative importance
of such factors varying among products and markets. In addition, the gross
profit margins realizable in the Company's markets can differ across regions,
depending on the economic strength of end-product markets in those regions. Even
in strong markets, price pressures may emerge as competitors attempt to increase
market share by lowering prices on those products. Competition in the various
markets served by the Company comes from companies of various sizes, many of
which are larger and have greater financial and other resources than the Company
and, thus, can better withstand adverse economic or market conditions than can
the Company. There can be no assurance that the Company will be able to compete
successfully in the future against existing or new competitors or that the
Company's operating results will not be adversely affected by increased price
competition.
Risk of Technological Change. The semiconductor industry is characterized
by rapid technological change and frequent introduction of new technology
leading to more complex and powerful products. The result is a cyclical economic
environment generally characterized by short product life cycles, rapid selling
price erosion and high sensitivity to the overall business cycle. In addition,
substantial capital, engineering resources and R&D investment is required for
development and manufacture of products and processes. Overall, the Company may
experience periodic fluctuations in its operating results because of industry
wide conditions.
Possible Defects in Products; Lack of Product Liability
Insurance. Products as complex as those offered by the Company may contain
errors, "bugs" and defects that may impact device specification and related
performance, when first introduced or when new versions are released. These
errors, "bugs" or defects may impact the Company's ability to ship its products
and may necessitate a redesign, which will have an adverse effect on production
of new customer designs and product shipments. Although every effort is made to
alleviate these problems, there are no assurances that, when the parts are
tested either at the Company or at the Samsung or Hyundai fabrication
facilities, these problems will be detected. The same part may have to go
through several modifications to correct these problems. Such defects could have
a material adverse effect on the Company's ability to ship and sustain existing
customers.
The Company faces an inherent risk of exposure to product liability claims
in the event that the products designed and sold by the Company contain errors,
"bugs" and/or defects. There can be no assurance that the Company will avoid
significant product liability exposure. The Company does not currently have any
product liability insurance, and there can be no assurance that insurance
coverage will be available in the future on commercially reasonable terms, or at
all. Further, there can be no assurance that such insurance, if obtained, will
be adequate to cover potential product liability claims, or that a loss of
insurance coverage or the assertion of a product liability claim or claims would
not materially adversely affect the Company's business, financial condition and
results of operations.
Fluctuations in Financial Results. The Company's operating results may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside of the Company's control. Factors that may affect the
Company's operating results include the rate at which customers grow, the state
of the computer industry and general economic conditions. Further, the demand
for the Company's products will be directly affected by the life cycle of
products with which the Company's products are designed to operate (business
cycles). Additional factors that may affect the Company's operating results
include the amount and timing of capital expenditures and other costs relating
to the expansion of the Company's business, price competition or pricing changes
in the computer industry. In addition, shifts in product mix toward, or away
from, higher margin
6
<PAGE>
products can also have a significant impact on the Company's operating results.
As a result of these and other factors, the Company's financial results can
fluctuate significantly from period to period.
Potential Failure to Develop New Products; Potential for Technological
Obsolescence. The semiconductor industry as a whole is characterized by rapidly
changing technology and industry standards, along with frequent new product
introductions. The Company's success in these markets will depend on its ability
to design, develop, manufacture, assemble, test, market and support new products
and enhancements on a timely and cost-effective basis. There can be no assurance
that the Company will successfully identify new product opportunities and
develop and bring new products to market in a timely and cost-effective manner,
or that products or technologies developed by others will not render the
Company's products or technologies obsolete or noncompetitive. A fundamental
shift in technology in the Company's product markets could have a material
adverse effect on the Company.
Dependence on Key Customers. The Company has several key customers which
individually account for more than five percent of the Company's total revenues.
For the year ended September 30, 1997, Appletec Ltd. accounted for 30%; Future
Electronics accounted for 33%; Hewlett Packard accounted for eight percent; Data
General accounted for seven percent and Netspeed accounted for seven percent of
the Company's total revenues. For the nine month period ended June 30, 1998,
Future Electronics accounted for 33%; Appletec Ltd. accounted for 15%; Netspeed
accounted for 14%; Hewlett Packard accounted for seven percent and Nbase
Communications accounted for five percent of the Company's total revenues. Many
of the Company's key customers operate in cyclical industries and as a result
their order levels have varied significantly from period to period in the past
and may vary significantly in the future. Such customer orders are dependent
upon their markets and customers and may be subject to delays or cancellations.
The loss of one or more of such customers, or a declining market in which such
customers reduce orders or request reduced prices, could have a material adverse
effect on the Company.
Dependence on Third Party Manufacturers, Manufacturing Risks. The Company
does not manufacture any of its products, what is referred to in the
semiconductor industry as a "fabless" producer of semiconductors. Therefore the
Company is highly dependent upon third party manufacturers that can produce
semiconductors that meet the Company's specifications. The Company currently has
third party manufacturers that can produce semiconductors which meet the
Company's needs, although the Company has not entered into any supply contracts
with such manufacturers. Accordingly, no assurance can be given that the
manufacturers will be available to the Company, on commercially reasonable terms
or otherwise.
As the industry continues to progress to smaller manufacturing and design
geometries, the complexities of producing semiconductors will increase.
Decreasing sizes may introduce new problems and delays that may effect product
deployment and deliveries. Due to the nature of the industry and the Company
being a "fabless" semiconductor company, there could be, from time to time,
fabrication related problems that may influence product availability.
Introducing new products or transferring existing products to a new fab or
process may result in unforeseen device specification and operating problems
that may effect product shipments which may be costly to correct. Silicon fab
capacity may also change or the costs per (silicon) wafer may increase as
worldwide semiconductor demand increases.
Dependence on Key Personnel. The Company's success depends to a
significant extent upon certain senior management, technical personnel and
electronic engineers. In February 1996, the Company entered into a five year
employment agreement with John Zambakkides, its president and chief executive
officer. The Company has not, however, obtained any key-man life insurance on
the lives of any of its officers or key personnel, and there can be no assurance
that it will do so. The Company believes that its future success will depend in
large part on its ability to hire and retain highly skilled technical,
managerial and marketing personnel, as well as its ability to attract and retain
replacements for or additions to such personnel in the future. As the demand for
new, specially trained and experienced electronic engineers increases worldwide,
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. The loss of certain key employees or the Company's
inability to attract and retain other qualified employees could have a material
adverse effect on the Company's business. See "Management."
Need for Additional Financing. The Company believes that the funds raised
from its recent private placement of Common Shares, together with revenues from
operations, will be sufficient to finance the
7
<PAGE>
Company's working capital requirements for a period of at least 12 months. The
Company may not have sufficient capital resources to develop and implement its
business plan beyond such 12 month period. Therefore, the ultimate success of
the Company may depend upon its ability to raise additional capital. The Company
has not investigated the current availability, sources or terms of acquiring
additional capital, and the Board of Directors will not in all likelihood do so
until it has determined a need for such additional capital. If additional
capital is needed, there is no assurance that such capital will be available
from any source or, if available, made or proposed on terms which are acceptable
to the Company. If such capital is not available, it will be necessary for the
Company to limit its operations to those that can be financed with existing
financial resources.
Risks Associated with Intellectual Property. The Company's future success
and competitive position depends in part upon its ability to obtain and maintain
certain proprietary technology used in its principal products, and the Company
relies in part on patent, trade secret, trademark and copyright law to protect
that technology. Some of the technology is not covered by any patent or patent
application, and there can be no assurance that any of the 4 patent applications
filed by the Company will not be invalidated, circumvented, challenged or
licensed to others, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology, duplicate
the Company's technology or design around the patents owned or licensed by the
Company. In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in certain foreign
countries. There can be no assurance that steps taken by the Company to protect
its technology will prevent misappropriation of such technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There is no
intellectual property litigation currently pending against the Company; however,
the Company may from time to time be notified of claims that it may be
infringing patents or other intellectual property rights owned by other third
parties. If it is necessary or desirable, the Company may seek licenses under
such patents or intellectual property rights. However, there can be no assurance
that licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture or shipment of products or the use by
the Company of processes requiring the technology. Litigation could result in
significant expense to the Company, adversely affecting sales of the challenged
product or technology and diverting the efforts of the Company's technical and
management personnel, whether or not such litigation is determined in favor of
the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture,
use, sale or importation of infringing products, expend significant resources to
develop or acquire non-infringing technology, discontinue the use of certain
processes or obtain licenses to the infringing technology. There can be no
assurance that the Company would be successful in such development or
acquisition or that such licenses would be available under reasonable terms and
any such development, acquisition or license could require expenditures by the
Company of substantial time and other resources.
No Dividends and None Anticipated. To date, the Company has paid no
dividends on its Common Stock. The payment of any future dividends will be at
the sole discretion of the Company's Board of Directors. The Company intends to
retain earnings to finance the expansion of its business and does not anticipate
paying dividends on the Common Shares in the foreseeable future. See "Dividend
Policy."
Control by Existing Shareholders; Anti-Takeover Effects. The Company's
executive officers, directors and other principal shareholders, in the
aggregate, beneficially own approximately 26% of the Company's outstanding
Common Shares. The voting power of these shareholders, under certain
circumstances, could have the effect of delaying or preventing a change in
control of the Company. See "Principal Shareholders." Further, the holders of
the Company's Common Shares do not have cumulative voting rights. Accordingly,
the holders of a majority of the Common Shares present at a meeting of
shareholders will be able to elect all of the directors of the Company and the
minority shareholders will not be able to elect a representative to the
Company's Board of Directors. See "Description of Capital Stock; Common Shares."
8
<PAGE>
Issuance of Additional Securities. The Board of Directors of the Company
will have authority to issue further Common Shares or other securities without
the consent or vote of the shareholders of the Company. The issuance of
additional Common Shares by the Company's management, whether in respect of a
transaction involving a business opportunity or otherwise, may have the effect
of further diluting the proportionate equity interest and voting power of
holders of Common Shares, including investors under this offering. See
"Description of Securities; Common Shares". Although the Company's Board of
Directors has no present intention to do so, it has authority, without action by
the Company's shareholders, to issue the authorized and unissued Preferred
Shares in one or more series and to determine the voting rights, preferences as
to dividends and liquidation, conversion right and other rights of such
securities, which rights may be superior to those of the Common Shares offered
hereby.
Restrictions on Resale; No Assurance of Market Making Activity. The Common
Shares are quoted on the OTC Bulletin Board, a regulated quotation service that
captures and displays real-time quotes and/or indications of interest in
securities not listed on The NASDAQ Stock Market or any U.S. exchange. Although
the Company has applied to have its Common Stock listed on the NASDAQ SmallCap
Market, there can be no assurance that such listing will be obtained. No
assurance can be given that an active market will always be available for the
Common Shares or as to the liquidity of the trading market for the Common
Shares. If a trading market is not maintained, holders of the Common Shares may
experience difficulty in reselling such Common Shares or may be unable to resell
them at all. Any such market may be discontinued at any time. In addition, there
is no assurance that the price of the Common Shares in the market will be equal
to or greater than the offering price hereof. See "Description of Capital
Stock"; "Trading Information."
Potential Change to OTC Bulletin Board Listing Qualifications. NASD
Regulation, Inc. has introduced a proposed rule to limit quotations on the OTC
Bulletin Board to the securities of issuers that make current filings pursuant
to the Securities Exchange Act of 1934 (the "Exchange Act"). Furthermore, NASD
Regulation, Inc. has proposed rules which would require members to review
current issuer financial statements prior to recommending a transaction to a
customer in an OTC Bulletin Board security and to deliver a disclosure statement
to a customer prior to an initial purchase of an OTC equity security. In the
event that such proposed rule changes are enacted, and the Company fails to make
current filings or the NASD members do not maintain the appropriate
documentation with respect to the Company, the Company's Common Stock could be
de-listed from the OTC Bulletin Board and/or the trading activity of its
securities may be severely limited.
Immediate and Substantial Dilution. The present owners of shares of the
Company's issued and outstanding Common Stock have acquired a controlling
interest in the Company at a cost substantially less than that which the
investors pursuant to this Offering may purchase their Shares. Therefore, the
investors pursuant to this Offering will bear a substantial portion of the risk
of loss, while control of the Company will remain in the hands of the current
management of the Company. Investors in this Offering will suffer immediate and
substantial dilution. See "Dilution."
Necessity of Continuing Post-Effective Amendments to the Company's
Registration Statement and State Blue Sky Registration; Exercise of Warrants;
Obligation to Optionholders. Although the Options have not knowingly been sold
to purchasers in jurisdictions in which the Options are not registered or
otherwise qualified for sale, purchasers may move to jurisdictions in which the
Options and the Common Stock underlying the Options are not so registered or
qualified. In this event, the Company would be unable to issue Common Stock to
those persons desiring to exercise their Options unless and until the Options
and the underlying Common Stock are qualified for sale in jurisdictions in which
such purchasers reside, or an exemption from such qualification exists in such
jurisdictions. There can be no assurance that the Company will be able to effect
any required qualification.
The Options will not be exercisable unless the Company maintains a current
Registration Statement on file with the Commission through post-effective
amendments to the Registration Statement containing this Prospectus. Although
the Company intends to file appropriate post-effective amendments to the
Registration Statement containing this Prospectus, and to maintain a current
Registration Statement on file with the Commission relating to the Common Stock
underlying the Options that is offered hereby, there can be no assurance that
such will be accomplished or that the Options will continue to be so registered.
See "Description of Securities."
9
<PAGE>
The obligation to maintain a current registration statement may impose a
financial burden on the Company and create a contractual liability of the
Company to the Optionholders.
Shares Eligible for Future Sale. No assurance can be given as to the
effect, if any, that future sales of Common Stock, will have here on the market
price of Common Stock. Of the Company's shares of Common Stock currently
outstanding at June 29,1998, 3,934,816 are "restricted securities" as that term
is defined in Rule 144 under the Securities Act of 1933, as amended ("Act"), and
under certain circumstances may be sold without registration pursuant to that
rule. Subject to compliance with the notice and manner of sale requirements of
Rule 144 and provided that the Company is current in its reporting obligations
under the Securities Exchange Act of 1934, as amended, a person who beneficially
owns restricted shares for a period of at least two years is entitled to sell,
within any three month period, shares equal to the greater of 1% of the then
outstanding shares of Common Stock, or if the Common Stock is quoted on the
NASDAQ System, the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of the required notice of sale with the
Securities and Exchange Commission. See "Shares Eligible For Future Sale." As of
June 29, 1998, 2,566,488 shares of Common Stock, held by 23 beneficial owners,
are eligible for sale pursuant to Rule 144. The Company is unable to predict the
effect that sales made under Rule 144 or otherwise may have on the market price
of the Common Stock prevailing at the time of any sales. Nevertheless, sales of
substantial amounts of the restricted shares of Common Stock in the public
market could adversely affect the then prevailing market for the Common Stock
and could impair the Company's ability to raise capital through the sale of its
equity securities. See "Description of Securities--Shares Eligible for Future
Sale."
Possible Delisting and Risk of Low-Priced Securities; Possible Adverse
Effect of Penny Stock Regulations on the Liquidity of the Company's
Securities. The Common Stock currently trades on the NASD's OTC Electronic
Bulletin Board. At June 15, 1998, the bid and asked prices were $3.94 and $4.13,
respectively. The NASD has more stringent criteria for listing of securities on
NASDAQ. To qualify for NASDAQ Small-Cap listing, NASDAQ requires satisfaction of
certain financial tests, including the attainment of specified minimum levels of
assets, income, net worth, and certain minimum requirements relating to the
market value of the securities to be listed (exclusive of shares owned by
insiders), as well as the number of shares and stockholders. Specifically, the
Company must have at least $4,000,000 in net tangible assets and a minimum bid
price of at least $4.00. However, there can be no assurance that the Company
will be able to satisfy certain other specified financial tests and market
related criteria required for quotation on NASDAQ. If the Company is unable to
satisfy the NASDAQ listing criteria in the future, its Common Stock will not be
eligible for trading on NASDAQ. Trading, if any, would continue to be conducted
in the over-the-counter market in the so-called "pink sheets" or the "Electronic
Bulletin Board" of the National Association of Securities Dealers, Inc.
("NASD"), and consequently an investor could find it more difficult to dispose
of, or to obtain accurate quotations as to the price of the Company's
securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Commission regulations generally
define a penny stock to include an equity security that has a market price of
less than $5.00 per share, subject to certain exceptions. Such exceptions
include any equity security listed on NASDAQ and any equity security issued by
an issuer that has (i) net tangible assets of at least $2,000,000, if such
issuer has been in continuous operation for three years, (ii) net tangible
assets of at least $5,000,000, if such issuer has been in continuous operation
for less than three years, or (iii) average annual revenue of at least
$6,000,000, if such issuer has been in continuous operation for less than three
years. Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks association therewith. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer, and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and broker-dealer and salesperson compensation information
must be given to the customer orally or in writing prior to effecting the
transaction and must be given in writing before or with the customer's
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from such rules the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the
10
<PAGE>
secondary market for a stock that becomes subject to the penny stock rules. If
the Company's securities become subject to the penny stock rules, investors in
this offering may find it more difficult to sell such securities.
In addition, if the Company's securities are not quoted on NASDAQ, or the
Company does not have $2,000,000 in net tangible assets, trading in the Common
Stock would be covered by Rule 15g-9 promulgated under the Exchange Act for
non-NASDAQ and non-exchange listed securities. Under such rule, broker/dealers
who recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities also are exempt from this rule if the market price is
at least $5.00 per share.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Company's securities could be
severely affected. In such an event, the regulations on penny stocks could limit
the ability of broker/dealers to sell the Company's securities and thus the
ability of purchasers of the Company's securities to sell their securities in
the secondary market.
Environmental Regulations. The Company believes that compliance with
federal, state and local laws or regulations which have been enacted or adopted
to regulate the environment has not had, nor will have, a material effect upon
the Company's capital expenditures, earnings, competitive or financial position.
Broad Discretion in Application of Proceeds by Management; Change in Use of
Proceeds. Approximately $1,658,046 (100%) of the estimated net proceeds of this
Offering have been allocated to working capital. Additionally, in the event that
the Underwriter's over-allotment option is exercised or to the extent that the
Warrants are exercised, the Company will realize additional net proceeds, which
will be added to working capital. Accordingly, the Company's management will
have broad discretion as to the application of such proceeds. Notwithstanding
its plan to develop its business as described in this Prospectus, future events,
including the problems, expenses, difficulties, complications and delays
frequently encountered by businesses, as well as changes in the economic climate
or changes in government regulations, may make the reallocation of funds
necessary or desirable. Any such reallocation will be at the discretion of the
Board of Directors. See "Use of Proceeds."
Forward Looking Statements and Associated Risks. This Prospectus contains
certain forward-looking statements, including among others (i) anticipated
trends in the Company's financial condition and results of operations, and (ii)
the Company's business strategy for managing and expanding its operations. These
forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to other risks described elsewhere in this "Risk Factors" discussion,
important factors to consider in evaluating such forward-looking statements
include (i) changes in external competitive market factors or in the Company's
internal budgeting process which might impact trends in the Company's results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in the Company's business strategy or an inability to execute its
strategy due to unanticipated changes in the industries in which it operates;
and (iv) various competitive factors that may prevent the Company from competing
successfully in the marketplace. In light of these risks and uncertainties, many
of which are described in greater detail elsewhere in this "Risk Factors"
discussion, there can be no assurance that the events predicted in
forward-looking statements contained in this Prospectus will, in fact,
transpire.
Year 2000. Many computer systems used today may be unable to interpret
data correctly after December 31, 1999, because they allow only two digits to
indicate the year in a date. The Company has been engaged in assessing this
Year 2000 issue as it relates to its business. Because the Company is highly
dependent on third party vendors, this review covers both the Company's own
operating systems and the systems of the Company's third party vendors and
manufacturers. Failures and interruptions, if any, resulting from the inability
of certain computing systems of third party vendors, including the Company's
clearing broker, to recognize the Year 2000 could have a material adverse effect
on the Company's results of operations. There can be no assurance that the Year
2000 issue can be resolved by any of such third parties prior to the upcoming
change in the century. Although the Company may incur substantial costs,
particularly costs resulting from charges by its third party service providers,
in correcting Year 2000 issues, such costs are not sufficiently certain to
estimate at this time.
11
<PAGE>
USE OF PROCEEDS
Any money received by the Company upon the exercise of the Options will be
used for working capital and general corporate purposes. The maximum amount of
proceeds that the Company will receive upon the exercise of the Options is
$1,733,046 (assuming the current exercise prices), less approximately $75,000 in
costs associated with this Offering. However, there can be no assurance that any
or all of the Options will be exercised and that the Company will receive any
proceeds therefrom.
DIVIDENDS
To date, the Company has paid no dividends on any shares of its Common
Stock and the Company's Board of Directors has no present intention of paying
any dividends on its Common Stock in the foreseeable future. See "Description of
Securities." The payment by the Company of dividends on the Common Stock in the
future, if any, rests solely within the discretion of the Board of Directors and
will depend upon, among other things, the Company's earnings, capital
requirements and financial condition, as well as other factors deemed relevant
by the Company's Board of Directors. Although dividends are not limited
currently by any agreements, it is anticipated that future agreements, if any,
with institutional lenders or others may also limit the Company's ability to pay
dividends on the Common Stock.
DILUTION
The net tangible assets of the Company at June 30, 1998 was $5,528,446. The
net tangible book value of the Company's Common Stock at June 30, 1998 was
approximately $1.00 per share. Net tangible book value represents the amount of
the Company's tangible assets reduced by the amount of its liabilities. The
present owners of shares of the Company's issued and outstanding Common Stock
have acquired a controlling interest in the Company at a cost substantially less
than that which the investors in this Offering may purchase shares. Accordingly,
to the extent that the shares issued in this Offering upon the exercise of
outstanding options and warrants are issued at prices which are higher than the
prices paid by the present owners, the present owners shall experience an
increase in the net tangible book value per share of their shares of Common
Stock while the investors in this Offering will suffer immediate and substantial
dilution.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1998. This table should be reviewed in conjunction with the Company's
Financial Statements attached as an exhibit hereto.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C>
Shareholders equity
Special shares(1)................................................................................ 124
Common Shares(1)................................................................................. 5,462
Additional paid in capital(1).................................................................... 6,022,308
Cumulative Translation Adjustment(1)............................................................. 6,829
Deficit.......................................................................................... (506,277)
---------
Total Shareholders' equity......................................................................... 5,528,446
---------
---------
Total Capitalization............................................................................... 5,528,446
---------
---------
</TABLE>
- ------------------
(1) See Notes to the financial statements.
13
<PAGE>
MARKET FOR SECURITIES
The high and low bid (price which a market maker is willing to pay for the
Share) and offered (price at which a market maker will sell the Shares)
quotations for the Company's Shares, as reported to the Company's management by
the OTC Bulletin Board are listed in the following chart. These quotations are
between dealers, do not include retail mark-ups, markdowns or other fees and
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
DATE LOW BID HIGH BID LOW ASK HIGH ASK
- ----------------------------------------------------------------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
Fiscal 1996
December 31, 1995.................................................... $ 4.50 $7.50 $5.50 $8.25
March 31, 1996....................................................... $ 3.50 $5.875 $4.25 $6.875
June 30, 1996........................................................ $ 1.50 $6.00 $2.00 $8.00
September 30, 1996................................................... $ 1.50 $4.125 $2.25 $8.00
Fiscal 1997
December 31, 1996.................................................... $ 0.625 $3.25 $1.75 $4.25
March 31, 1997....................................................... $ 1.00 $3.00 $2.50 $4.50
June 30, 1997........................................................ $ 1.25 $4.125 $2.25 $5.00
September 30, 1997................................................... $ 3.50 $4.375 $4.25 $5.25
Fiscal 1998
December 31, 1997.................................................... $ 2.375 $4.25 $3.25 $5.00
March 31, 1998....................................................... $ 3.75 $7.00 $4.00 $7.75
June 30, 1998........................................................ $ 3.875 $6.125 $4.00 $6.75
</TABLE>
At September 14, 1998, there were 828 shareholders of the Company's Common
Stock.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The statements contained in this Prospectus that are not historical are
forward looking statements, including statements regarding the Company's
expectations, intentions, beliefs or strategies regarding the future. Forward-
looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward looking statements included in this Prospectus are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the factors detailed in the risks discussed in the "Risk
Factors" section.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996.
Sales
Sales increased 121% to $1,951,453 in fiscal 1997 from $882,042 for the
1996 fiscal year. This increase in sales was a result of (i) an increase in the
number of customers purchasing the Company's products, (ii) an increase in the
number of products available for sale, (iii) an increase in shipments, and
(iv) additional sales personnel marketing the Company's products.
Gross Profit
Gross profit increased 157% to $1,202,370 in fiscal 1997 from $468,080 in
fiscal 1996. The increase in gross profit was a result of increased sales
combined with higher profit margins. The Company was able to increase its gross
profit percentage by (i) reducing the prices the Company pays to its ASIC
manufacturing subcontractors by 20% to 60% through negotiating better pricing
terms, and (ii) streamlining the product delivery structure. Most of the
Company's products are now shipped directly from its manufacturing subcontractor
to V3's third party inventory logistics partner. The logistics partner, at the
direction of V3, is responsible for shipping product to the customer. As a
result, all costs related to inventory storage, product handling, quality
inspections and product delivery are incurred by the logistics partner.
Other Income
Other income decreased by 67% to $259,712 in fiscal 1997 from $779,998 in
fiscal 1996. This decrease was a direct result of a reduction in royalty payment
from National Semiconductor Corporation ("NSC"). NSC has the rights to
manufacture and market an earlier version of the Company's Burst Memory
Controller ("BMC") product family. NSC paid the Company a royalty equal to 50%
of the selling price on the first 100,000 units shipped to their customers;
thereafter the royalty is reduced to 7.5% per unit. In January 1997, NSC shipped
their 100,000th unit and as a result the royalty payable on all additional units
sold was reduced to 7.5% per unit. The reduction in "Other Income" is a direct
reflection of the reduction in the royalty percentage. The Company believes that
the decrease in royalty payments from NSC will be offset by increased sales of
its newer BMC products. The Company is currently contacting customers that have
purchased the Company's older BMC products and converting them to its new line
of BMC products.
Research & Development ("R&D") Expenditures
R&D expenditures decreased by 31% to $332,927 in fiscal 1997 from $483,651
in fiscal 1996. The Company reduced the costs of its R&D by reducing the number
of modifications made to its products. Products are often modified after they
have been designed and produced due to shifting standards in the semiconductor
industry and because of bugs that may be discovered in early versions of
products. The Company has been able to reduce the number of modifications or
"re-spins" that it has to make to its products. For example, in 1996 the
15
<PAGE>
Company re-spun its PCI Bridge Controllers ("PBC") three times and in 1997 the
Company did not have to re-spin its PBC device at all. The Company further
reduced its R&D expenses in 1997 by reducing the number of evaluation boards
designed and built in favor of an increased number of application notes. In the
past, the Company would demonstrate how its products worked in applications by
producing actual evaluation boards containing the Company's products. Customers
could then use these boards to evaluate the Company's products. During 1997, the
Company shifted to using application notes to demonstrate its products rather
than producing evaluation boards. The application notes are essentially paper
designs which demonstrate on paper how customers can build systems with the
Company's parts, without incurring the costs of actually building the board
level systems.
Loss for the year
Losses for the fiscal year 1997 were reduced by 77% to $124,596 as compared
to the loss of $551,467 for fiscal year 1996. The Company's reduction in losses
was a result of increased sales, increased profit margins, reduced R&D costs and
improvements in operating efficiencies.
NINE MONTHS ENDED JUNE 30, 1997 AND 1998
Sales
Sales increased 89% to $2,639,968 for the first nine months of fiscal 1998
from $1,399,056 for the first nine months of the 1997 fiscal year. This increase
in sales was a result of (i) an increase in the number of design wins that are
now shipping in production volumes, (ii) the introduction of an updated SSC
device and the release of the first members of the EPC product family, (iii) an
increase in the number of manufacturers representatives promoting the V3
products and (iv) an increase in the number of design wins.
Gross Profit
Gross profit increased 103% to $1,795,765 in the first nine months of
fiscal 1998 from $882,651 in the first nine months of fiscal 1997. The increase
in gross profit was a result of increased sales and the continuing effort to
reduce the cost of goods sold. The Company was able to negotiate reduced costing
for all its products which resulted in a gross margin of 68% during the first
nine months of fiscal 1998 versus a gross profit margin of 63% for the same
period in fiscal 1997. Most notable of these cost reductions was the 51%
reduction in the cost of the SSC device as a result of re-spinning that product.
There was a significant increase in commissions paid to the manufacturers
representatives however that increase can be attributed to the increased number
of manufacturers representatives promoting the V3 products as well as the
increase in sales.
Other Income
Other income decreased by 55% to $126,907 in the first nine months of
fiscal 1998 from $279,823 in the first nine months of fiscal 1997. Other income
is comprised, almost entirely of royalty income paid to V3 by National
Semiconductor Corporation ("NSC") for the rights to manufacture and market a BMC
design. The trend of decreasing royalty revenue is expected to continue as NSC
is simply maintaining their current customer base and is not trying to expand
it. Royalty payments are also expected to be reduced as more customers upgrade
to the newer versions of the BMC device that are only available from V3.
R&D Expenditures
R&D expenditures increased by 52% to $325,981 in the first nine months of
fiscal 1998 from $213,925 in the first nine months of fiscal 1997. The increase
in R&D expenditures is due entirely to an increase in R&D salaries and
personnel. In order to release new products to the marketplace within the ever
shortening time windows the Company expects to more than double the number of
engineering personnel that it currently employs.
16
<PAGE>
Net Income
Net income for the first nine months of fiscal year 1998 was increased by
266% to $279,253 as compared to $76,323 for first nine months of fiscal year
1997. The Company's return to profitability was a result of increased sales,
increased profit margins and improvements in operating efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of fiscal 1998, cash used in operations was
$1,091. Cash flow used in investing activities was $109,444 as a result of
purchases of fixed assets.
On March 16, 1998, the Company through its Placement Agent, The Mason Cabot
("Mason Cabot") Division of W.J. Nolan & Co., undertook the private placement of
Common Stock of the Company at a price of $3.50 per share. The offering
contemplated a minimum gross amount of $1,000,000 and a maximum of $5,500,000.
On May 6, 1998, the initial closing was conducted in which the Company sold
687,926 shares for aggregate gross proceeds of $2,407,741. On June 15, 1998, the
second and final closing was conducted in which the Company sold 684,732 shares
for aggregate gross proceeds of $2,396,562. In the two closings the Company sold
a total of 1,372,658 shares of Common Stock for $4,804,303. Mason Cabot received
a 7% selling commission and a 1.5% non-accountable expense allowance for its
services as placement agents. The Company received net proceeds of this sale of
approximately $4,375,000. Management believes that the net proceeds of the
private placement together with accumulated cash deposits from operations will
be sufficient to meet the Company's capital need for the next 12 months.
In September 1997, the Company entered into a line of credit with the
Canadian Imperial Bank of Commerce ("CIBC") for a maximum of $140,000. No funds
have ever been drawn on this facility. This facility bears interest at the prime
rate, as established by the Royal Bank of Canada, plus two percent.
In April 1998, the Company entered into an agreement with the Export
Development Corporation ("EDC"), a company developed by the Government of
Ontario, Canada, whereby the Company purchases EDC insurance, which covers up to
90% of the Company's receivables. The premium for such insurance, on average,
equals one half of one percent of the Company's receivables in a given month.
The Company believes that the funds raised from its recent private
placement of Common Shares, together with revenues from operations, will be
sufficient to finance the Company's working capital requirements for a period of
at least 12 months.
YEAR 2000
Many computer systems used today may be unable to interpret data correctly
after December 31, 1999, because they allow only two digits to indicate the year
in a date. The Company has been engaged in assessing this Year 2000 issue as it
relates to its business. This review covers both the Company's own operating
systems and the systems of the Company's third party vendors and manufacturers.
This project, along with developing and implementing solutions to the Year 2000
issue is continuing. Management currently anticipates that the project will be
substantially completed before the end of calendar year 1998. While the Company
is currently unable to quantify the costs associated with implementing solutions
to the Year 2000 issue, it does not believe that such costs will not have a
material impact on the Company's financial results or position.
FORWARD-LOOKING STATEMENTS
Certain statements in Management's Discussion and Analysis of financial
condition and Results of Operations and certain sections in this Prospectus are
forward looking. These may be identified by the use of forward-looking words or
phrases such as "believe", "expects", "anticipate", "should", "estimated" and
"potential", among others. These forward-looking statements are based on the
Company's reasonable current expectations. The Company notes that a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in such
forward-looking statements.
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BUSINESS
HISTORY
The Company was incorporated under the laws of the State of Nevada on
December 23, 1985 under the name Ariel, Inc. The Company was dormant and did not
engage in any business activities until April 1994 when the Company merged with
V3 Corporation and changed its name from Ariel, Inc. to V3 Incorporated.
V3 Corporation, was incorporated under the Ontario Business Corporations on
October 22, 1985. During the period from October 22, 1985 to April 1994,
V3 Corporation engaged in the business of designing, engineering and marketing
semiconductors and integrated circuits. On April 18, 1994, the Company and
V3 Corporation entered into a plan of reorganization agreement through which the
two companies merged into V3 Incorporated and in 1996, V3 Incorporated changed
its name to V3 Semiconductor, Inc.
OVERVIEW
The overall mission of the Company is to originate, design and market high
performance peripheral and core silicon products for the Embedded Systems
market. The Company believes that the Embedded Systems market has the potential
for significant growth as Embedded System applications evolve in functionality
from relatively simple industrial controllers to use in highly complex
networking and telecommunications applications.
The Company's products are designed to function in tandem with specific
microprocessors manufactured by third parties such as Intel Corporation
("Intel"), Motorola Corporation ("Motorola"), International Business Machines
("IBM"), Hitachi Semiconductor of America ("Hitachi"), Quantum Effect Design
("QED"), Texas Instruments ("T.I."), Integrated Device Technology ("IDT") and
Advanced Micro Devices ("AMD"). Microprocessors, which include microcontrollers
or central processing units ("CPUs"), are the central controllers of virtually
all computer systems. In addition, they are also used in a relatively invisible
but very large segment of the computer industry as "Embedded Controllers" in a
variety of products and applications. The Company's products work with these
CPUs by directing and controlling the flow of data between the CPUs and the
various peripherals that the CPUs control. Applications include servers,
communication routers, data switches, mass storage controllers, modems,
facsimiles (fax) and imaging equipment, telecommunication switching equipment,
networking controllers, instrumentation, industrial tools and consumer
appliances.
The Company's products are co-peripherals to all major RISC processors
including, but not limited to, Intel's i960 family of processors, IBM's PowerPC
series and AMD's 29K, as well as embedded x86 processors which are used for
lower cost applications. In addition, with a minimum of programming, the
Company's controllers (System, Memory and PCI) can be used with any and all
embedded processors, such as: Motorola (PowerPC TM, 68K TM, Coldfire TM,
PowerQUICC TM families), Hitachi (Super-H TM, SCA-II TM Series), MIPS TM
Processors (QED, MIPS TM, IDT, NEC, Toshiba). The Company's products are
designed to be compatible with existing and new standards and technologies such
as PCI with I2O and are used in such new technologies as ATM, xDSL, Ethernet
(10BaseT), Fast Ethernet (100BaseT), Gigabit Ethernet etc.
The Company has identified target markets for its business, designed and
developed products that satisfy the requirements of key customers in those
markets, and established a number of important strategic alliances with Intel,
IBM, Motorola, Hitachi and QED. The Company is presently listed on Intel's and
Motorola's websites and believes it will be on Hitachi's, T.I.'s and QED's
websites in the near future. The Company's sales and marketing channels are
designed in order to provide total market coverage. The Company has now reached
the stage in the development of its business plan and has the right management
team in place, to aggressively pursue marketing and sales strategies to maximize
market share in its target markets and reinforce its competitive advantages in
the Embedded Systems market.
PRODUCT LINES
The Company produces processor specific semiconductors, integrated
circuits, for the Embedded Systems market. These products are used by system
designers who are utilizing high-speed RISC and 'Super Scalar' microprocessors
within their embedded systems design. These processors demand efficient coupling
to memory and peripheral input/output (I/O) devices in order to attain any
degree of efficiency. The system designer faces three alternative choices in
achieving this coupling: (1) use PLDs or FPGAs (Field Programmable Gate Array)
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which must be customized to the application, (2) designing an ASIC to implement
the application, or (3) using a V3 Semiconductor standard product which requires
no design work and whose functionality has been fully tested.
The Company's principal product lines fall into three categories: Burst
(DRAM) Memory Controllers (BMC Family), Small System Controllers (SSC Family)
and PCI Bridge Controllers (PBC, EPC & PSC Families). Today's market demands
also require support for these silicon devices in the form of evaluation and
reference design boards, application notes, documentation and software that will
enable engineers ease of interfacing to other devices in their design.
BURST (DRAM) MEMORY CONTROLLERS
Semiconductor memory is typically available in two major types, Static
Random Access Memory ("SRAM") and Dynamic Random Access Memory ("DRAM"). SRAM
devices are somewhat faster than DRAMs, however, they are considerably more
expensive, particularly in systems where a significant amount of random access
memory is required. DRAM Controllers are integrated circuits that are physically
installed between the microprocessor and an array of DRAM devices and execute
the appropriate control strategy to make DRAM devices behave like SRAM devices.
The Company's Burst Memory Controllers ("BMCs") are DRAM Controllers
interfaces the host processor to the low cost commodity DRAMs manufactured by
merchant semiconductor manufacturers. Systems employing these controllers can
replicate the performance of an SRAM based system at a fraction of the cost, at
lower power levels, at higher speeds and with no design or production overhead
to either the DRAM manufacturer or the system designer. In order to increase
flexibility to system designers and to expand their marketability, most BMCs
have features that are software programmable, enabling these features to be
easily modified for performance or convenience.
The Company has a Canadian patent on a DRAM Controller design which
minimizes the power required and heat generated during the access stage with a
proprietary design feature that may only be functionally replicated by other
technologies at materially higher prices.
SMALL SYSTEM CONTROLLERS ("SSC")
System Controllers are integrated circuits that expand the functional use
of DRAM controllers by adding control features that would normally be provided
by external devices. The Company's system controllers (SSC family of integrated
circuits) are designed to operate with specific microprocessors such as Intel's
i960 Sx/Jx, and IBM's PPC401 PowerPC processors and are typically used in
high-performance network equipment and RAID (Storage) Controllers. The Company's
SSC product family, allows system designers to replace many lower integration
support components with a single integrated component.
The Company's SSC System Controller family includes a high performance DRAM
controller, DMA controllers, interrupt management, serial ports, I/O control
logic, timers and I/O ports. The SSC can be combined with Intel i960 or IBM
PowerPC processors to build powerful, low-component could add-in cards, robotics
controllers and networking systems.
PCI BRIDGE CONTROLLERS (PBC)
Peripheral Component Interconnect (PCI) is a new system "bus" standard
developed by more than 100 industry leading companies, including Intel, IBM,
AMD, H.P. and Apple to define a single standard method of connecting CPUs to
peripheral devices such as disk controllers, graphics controllers and
communication devices. Most computers today use the PCI bus interface which has
replaced the Industry Standard Architecture (ISA) bus interface.
The Company was the first company to go to production with devices that
supported the intelligent input/output (I2O) standard. This new standard
provides a software solution (along with PCI, a standard bus interface) which
optimizes CPU and system performance by handling the overhead of I/O interrupts.
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The Company has now launched its Second Generation of I2O PCI Controllers,
the EPC (Enhanced PCI Controller). The EPC has additional functionality such as
DMA Chaining, which supports Multi-Processor capabilities. These features are in
demand by mainly networking companies such as: Cisco, Bay Networks, 3 Comm,
Ascend/Cascade Communications, Hewlett Packard, Cabletron, Nortel, Newbridge and
others.
A more recent and more widely applicable family of PCI Controllers is the
PCI Slave Controller ("PSC"). This family is targeted for the cost sensitive ISA
devices, which are now migrating to PCI adapter cards. These are lower cost,
high volume products targeted for a lower-end adapter mass market which in turn
addresses the conversion from older limited and obsolete data buses (ISA) to
wider and more efficient ones (PCI).
EMBEDDED SYSTEMS INDUSTRY OVERVIEW
According to Frost and Sullivan, a market research company, the total
embedded market (4, 8, 16 and especially 32 and 64 bit RISC Processors) is
expected to grow to approximately $34 billion by the year 2002. The embedded
market is driven by the increasing performance demands for speed and
functionality, of the server, mass storage, networking and communications
technologies. Global players, such as Intel, Motorola, IBM, Hitachi and Hewlett
Packard, who also are the Company's technology partners and/or customers, attest
to this unprecedented growth by investing heavily into product development in
RISC processors, new standards such as I2O and new 32 and 64 bit peripherals.
Their heavy investments are driven either by the need to develop, design and
market end-user equipment or semiconductor products in support of the embedded
market.
According to Frost and Sullivan, the high-end 32 and 64 bit processor
segment of the embedded market is expected to exceed $9 billion by the year
2002. The embedded PCI market, a major subsection of the embedded market that
the Company serves, is expected to grow to $1.7 billion during the same time
period. The Company is targeting a subset of this market, the peripherals
sector, which is expected to grow to over $1 billion by the year 2002. The
Company's goal is to attain significant market share of this surging market by
2001. Emerging standards, such as I2O (Intelligent I/O)--which address and
resolve the serious and costly systems problem of data bottlenecks--create new
opportunities in this market, by providing solutions to data transfer and CPU
overhead problems. In an embedded system, these are crucial design issues that
seriously impact system performance. The increasing need to move data faster and
more efficiently will require solutions supported by the Company's current and
future products.
Initially the Company's products were developed to support RISC processors
in embedded applications. As Embedded Systems requirements have evolved, driven
mainly by networking and office equipment applications, the Company has moved to
designing more advanced products in support of the I/O (input/output) needs that
are driven by such industry leaders as Intel, IBM, H.P., US Robotics, Compaq,
Cisco, Bay Networks etc. New products may include a RISC processor core or
"coring" with a partner as part of a highly integrated silicon based system, as
well as other highly integrated peripherals targeted for certain segments
(telecom and data equipment, imaging, set-top and high-end server) of the
market.
SEMICONDUCTOR INDUSTRY MARKET STRUCTURE
There are three major segments in the semiconductor industry: the standard
integrated circuit ("IC") segment, the application specific integrated circuit
("ASIC") segment and the "chipset" segment which is a hybrid of the other two
segments. Each of these market segments can be further subdivided into
"merchant" and "captive" markets. The merchant market consists of producers
involved in sales to unrelated third parties, while the captive market involves
sales to affiliated parties. For example, while IBM is reportedly the largest
producer of semiconductors in the world, its production is principally consumed
internally by its "captive" vertically integrated business groups. AMD , T.I.,
Motorola, SGS-Thompson and NSC, on the other hand, are examples of merchant
semiconductor suppliers.
IC BUSINESS SEGMENT
The IC business segment generally sells two types of products: relatively
generic high volume, low margin devices (such as DRAM memory devices), and
proprietary technologies (such as microprocessors, peripheral controllers,
graphics ICs and signal processing ICs). In the "high volume" product lines, key
factors for success
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are cost controls, manufacturing efficiency and quality. In the "proprietary"
product areas, while cost and quality issues remain relevant, intellectual
property and innovative design take precedence.
For most large semiconductor producers in the merchant market, volume
output and economies of scale are critical to success. However, costs of
production being relatively uniform (or at least potentially so) for larger
manufacturers, the value of a semiconductor manufacturer's products is
determined by market demand for the features embodied in those products.
Consumers of merchant market ICs select semiconductors for incorporation into
their products based principally on their functionality (roughly determined by
the surface area consumed per product unit) and the degree to which competing
designs can be excluded from the marketplace.
The volume requirements of major merchant market suppliers, their cost of
production constraints, and the effect that this has on product selection for
inclusion in the semiconductors they design and produce has created
opportunities for smaller and innovative semiconductor companies, such as Cyrix,
Atmel, Actel and Xilinx. This is the niche market in which the Company operates.
These kinds of producers are known in the industry as "fabless" semiconductor
manufacturers. These companies, under subcontracting arrangements with larger
semiconductor manufacturers, focus on developing niche designs and products
which can be incorporated into, or added on to, the semiconductors manufactured
by principal merchant market semiconductor suppliers. Because fabless
manufacturers do not have the high fixed costs associated with semiconductor
manufacturing, profitable sales can be made at lower volume targets and their
niche products can be brought to market both independently and through
arrangements with the principal merchant market semiconductor manufacturers.
The Company, for example, has partnered with a traditional semiconductor
maker, National Semiconductor Corporation, to not only "make" products for
incorporation into NSC designs but also to develop, market and sell ICs jointly
with NSC.
ASIC BUSINESS SEGMENT
ASICs are essentially customized ICs designed for specific customer
applications. The desire among manufacturers who use embedded control systems to
pursue differentiation in developing their own product designs, and their needs
to increase performance and reduce costs in a number of specific areas, has
fueled the demand for ASICs. While this should be, in theory, a highly
profitable value added undertaking for larger semiconductor manufacturers,
several factors have impeded market growth and profitability in this area. The
major problems of ASICs is that they are expensive to design, do not achieve
full functionality without substantial upgrading and have limited market scope
in the semiconductor merchant market as specific-purpose products. ASICs also
are not easily accommodated within the established architecture of most systems.
As a result, a number of semiconductor manufacturers specializing in ASIC
products have encountered serious financial difficulties and have either
discontinued operations or have been acquired by other firms in recent years.
For this reason, the Company has focused upon the chipset segment of the
semiconductor industry.
CHIPSET BUSINESS SEGMENT
Traditionally, "chipsets" were not a part of the embedded market. The
Company's entry into the semiconductor business was founded on the premise that
32-Bit RISC processors would change the embedded design marketplace. The 32-Bit
RISC processors are inexpensive and powerful, and allow functions traditionally
implemented in hardware through the use of "chipsets" to be moved into software
without sacrifice in performance or cost. Through the use of 32-Bit processors,
the Company has defined "chipsets" for the embedded marketplace. These "chipset"
devices are part of a new segment of the IC business segment known as
Application Specific Standard Products ("ASSPs").
ASSPs are designed, manufactured, marketed and sold as merchant market
commodity devices or standard products and they are targeted at interfacing key
functions like memory control and other peripheral functions to specific
processors. The Company's interface devices cost less than equivalent ASICs or
discrete solutions that would otherwise be required, and there are no
development costs to the end-user.
The 32-Bit Embedded RISC market has exploded over the past 6 years from
100,000 units shipped in 1989 to 7 million units shipped in 1994. In 1996,
volumes are expected to exceed 15 million units for a total value of
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over $1 billion and by 2002 to exceed $7 billion. The Company has had an early
start in this marketplace and given its current and planned product mix,
anticipates being one of only a few suppliers of this technology.
MARKETING AND SALES STRATEGY & STRATEGIC PARTNERSHIPS
The Company has identified target markets for its business, designed and
developed products that satisfy the requirements of key customers in those
markets, and established a number of important strategic alliances with Intel,
IBM, Motorola, Hitachi and QED. The Company is presently listed on Intel's and
Motorola's websites and believes it will be on Hitachi's, T.I.'s and QED's
websites in the near future. The Company markets it products through direct
sales to its major, global corporate customers; sales through the Company's
network of manufacturers' representatives which include major original equipment
manufacturers worldwide and sales through distributors. The Company believes
that it has reached the stage in the development of its business to aggressively
pursue marketing and sales strategies to maximize market share in its target
markets and reinforce its competitive advantages in the Embedded Systems market.
The Company markets its products worldwide through a network of
manufacturers' representatives and distributors. The Company utilizes the
technical support, customer service and materials management of its
representatives and distributors. The Company's customers include Adaptec,
Ascend/Cascade, Cabletron, Data General, Hewlett Packard, Hitachi, Hughes
Communications, IBM, Kodak, NEC, Netspeed, Nortel, Samsung, Scitex and Sony.
The Company has developed a number of relationships with strategic partners
who combine the Company's products with their own in recommended system
solutions for customers. These include the i960 division of Intel, the High End
Microprocessor group of Motorola, the Embedded Processor Division of AMD, the
RISC product group of IDT, the Embedded Processor group of IBM, the Embedded
Super-H group of Hitachi and the MIPs Intellectual Property House QED.
To date the Company's marketing strategy has focused on building end-user
and strategic partner confidence in its IC products. Information has been
disseminated to strategic partners and consultations have been held with a view
to presenting the Company's products as part of the strategic partners' overall
design solution to their customer's specific requirements. The Company has been
able to access the resources of its strategic partners to identify target
markets, determine market sizes, develop design proposals and solutions, and
establish pricing policies.
This third party marketing approach has enabled the Company to develop a
substantial base of customers. These alliances have been particularly important
in developing relationships and product distribution channels to smaller
customers who are more risk averse and less prepared to embrace technology
solutions offered by smaller suppliers such as the Company. Due to its strategic
relationships with established merchant market manufacturers, the Company has
been able to develop a level of confidence in smaller suppliers that makes it
easier to establish ongoing relationships with them. Smaller customers are
important to the Company's overall market development strategy since they
purchase smaller quantities of its products at higher average selling prices.
They also provide a more diverse and stable revenue base than that which would
apply if the Company held a small number of large accounts.
MANUFACTURING
The Company does not own or operate silicon fabrication facilities and
therefore is referred to as a "fabless" semiconductor company. The Company has
chosen to be fabless as a result of (i) the significant front end costs of
constructing and owning silicon fabrication facilities (estimated at $500
million to $1 billion) and (ii) the overabundance of low cost fabrication
capacity available in the market. The Company has established strategic foundry
alliances with three semiconductor fabricators ("fabs") that meet the Company's
high-yield, low-cost requirements. The Company's semiconductor manufacturers
include: (i) Samsung, a high-volume production facility, especially for new
products, located in Korea, (ii) Hyundai, another high-volume production
facility in Korea, and (iii) Chip Express, a low volume, quick-turnaround
producer located in California. The Company is also in discussions with IBM,
Hitachi, TSMC, SGS-Thompson, KLSI, S-MOS/Seiko Epson and UMC regarding
fabrication.
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To assure its products meet high-quality standards, the Company has
established a Manufacturing/Process Engineering group and a Quality Assurance
department. The continuous audits by these groups assure that the Company's
manufacturing partners and its employees have the discipline to meet the quality
requirements to establish ISO 9001 certification. The ISO 9001 certification is
a quality management and quality assurance certification standard developed by
the International Organization for Standardization ("ISO"). The ISO 9001
certification is the highest standard in the ISO 9000 series. The ISO 9000
series was developed to provide an internationally accepted system of rating
quality and for providing product standardization V3 is the only company among
its competitors that is ISO 9001 compliant, a definite asset in getting approved
with large customers such as NorTel and H.P. etc.
RESEARCH AND DEVELOPMENT/PRODUCT DEVELOPMENT
The Company has assembled a strong engineering team, comprised of senior
architects and designers from companies such as ATI and LSI Logic. The Company's
engineering group has designed and developed the Company's product families,
including the Burst Mode Controller and the System Controller series, both of
which remain in production today. The Company plans to expand its product line
and enter the 64-Bit PCI Controller market, based on customer demands and
embedded market and RISC processor evolution. The Company maintains a continuous
dialogue with customers and technology partners to ensure that the Company's
products incorporate features that are essential for the rapidly evolving
(embedded) systems design requirements. As a result, the Company's new products
will incorporate inputs from current customers (Hewlett Packard, IBM, Bay
Networks, Cisco, Nortel, Scitex, US Robotics, Kodak, Ascend etc.) and leverage
the expertise gained from joint product development with Intel, IBM, Motorola,
Hitachi, QED, IDT and Hewlett Packard. For example, the Company utilized such
expertise to become the first semiconductor company to introduce and demonstrate
a family of products compatible with the newly emerging I2O standard.
BETA-SITE AND KEY CUSTOMER SUPPORT PROGRAMS
As part of its product and market development strategy, the Company
supplies unpublished designs that it has developed to a small number of
end-users on a trial basis, and works with those end-users to further refine and
develop new products or modifications to existing products, that will meet the
requirements of a particular market segment.
The Company retains ownership and control over any proprietary information
disclosed under a Beta-site agreement and retains clear title to any
developments that may result from such joint efforts.
When the design specifications are finalized and product functionality has
been demonstrated, the Company is well positioned to provide the ongoing supply
requirements of those end-users or other end users in the same market segment.
This process of complementary development work with end-users enhances the
Company's design reputation, instills customer confidence and expands potential
markets for the Company's products.
V3 CUBED CORPORATION ("V CUBED")
V Cubed was incorporated under the laws of the State of Nevada on
September 30, 1994, and is qualified to do business in the State of California.
V Cubed is a wholly owned subsidiary of the Company that was formed for the sole
purpose of providing sales and marketing support for the products of the
Company. V Cubed's principal office is located at 2348 Walsh Avenue, Santa
Clara, California 95051.
In order to maximize the exposure of the Company's products to the
marketplace, it is important that strict attention be paid to product marketing,
customer support and sales support. While the design, manufacturing and
strategic positioning of the Company products are managed from the corporate
head office in Toronto, it was felt that the public face of the Company should
be located in a geographical region (historically and) presently associated with
the business of the Company and one with geographical proximity to the Company's
largest customer base in the world.
The net effect of establishing a presence in the heart of "Silicon Valley"
has been to spread the ability to support customers across several time zones
and to develop an image of the Company consistent with that which customers
expect. V Cubed is chartered with the responsibility of managing customer
contact on both a regional
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and worldwide basis even though resources from the Toronto office are sometimes
required to assist in this regard. The Company's Vice President of Sales and
Marketing resides at V Cubed and it is the Company's goal to expand this
location's resources significantly to take advantage of this huge market.
V3 SEMICONDUCTOR CORP.
V3 Semiconductor Corp. is a corporation organized under the laws of the
Province of Ontario, Canada and is a wholly owned subsidiary of the Company. The
Company's research and development (R&D) activities are conducted through
V3 Semiconductor Corp.
PROPERTIES
The Company leases its headquarters, a 7500 square foot facility (soon to
be expanded to 14,000 square feet) located in North York, Ontario. The lease is
for a term of 5 years and 6 months, expiring January 31, 2002, with an annual
base rent of Cdn.$7,491 for the first year, Cdn.$9,363.75 the second year,
Cdn.$11,236.50 the third year, Cdn.$14,982 the fourth year, and Cdn.$18,727.50
for the remaining term of the lease. The headquarters houses the Company's
President & CEO, Vice President of Engineering, General Manager and Financial
Officer and Corporate Secretary and the Director of Manufacturing and Quality.
The Company leases office space located in Santa Clara, California, which
is the principal office of its subsidiary, V3 Cubed. The lease is for a term of
one year, renewable annually, with an annual base rent of $1,785.
EMPLOYEES
As of June 1, 1998, the Company currently employs approximately
28 individuals, including 4 senior executives, 11 engineers, 9 individuals in
sales and marketing, 4 individuals in operations and support staff. The plan is
to expand in 1998 engineering to 21, sales and marketing to 9, operations to 6,
finance to 1 and corporate to 3 for a total of 40, essentially doubling the
Company's personnel.
LEGAL PROCEEDINGS
Mr. Patrick Prentiss, a former employee and original founder of the
Company, filed a claim against V3 Corporation, a wholly owned subsidiary of the
Company, in August 1995. The suit, which has been brought in the Ontario Court
(General Division) (Commercial List), court file number B224/95, seeking damages
of an undetermined number of Class "A" preferred shares of V3 Corporation. In
addition, Mr. Larry Krauss, an individual who was going to act as a finder to
find investors for the Company, filed a claim against the Company in November
1995 alleging breach of contract. The suit has been brought in the Ontario Court
(General Division) court file number 95-CU-94054 and seeks damages of
$6,000,000. The Company believes that it has meritorious defenses to both of
these actions and intends to vigorously contest the actions. As a result, the
Company does not believe that these actions will have a material adverse effect
upon the financial conditions or results of operations of the Company. The
Company is not aware of any other material legal proceedings now pending or
threatened against the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
John Zambakkides................................ 48 President, Chief Executive Officer and Director
Carl Mitchell................................... 37 General Manager, Secretary and Treasurer
Michael Alford.................................. 37 Vice President of Engineering
Gregg Smith..................................... 50 Vice President Sales and Marketing
Bernard N. Slade................................ 74 Director
Jim Wilkinson................................... 50 Director
John A. Fazackerley............................. 62 Director
Robert Skinner.................................. 47 Director
</TABLE>
Set forth below is a brief background of the executive officers and
directors of the Company, based on information supplied by them.
John Zambakkides. Mr. John Zambakkides joined the Board of Directors of
the Company in May, 1995 and on April 13, 1996, he was appointed as President
and Chief Executive Officer of the Company. Mr. Zambakkides has an Electronics
Diploma from Niagara College and an Electronics Bachelor of Engineering from
Ryerson Polytechnical Institute. From 1992 to 1996, Mr. Zambakkides worked with
InTELaTECH, Inc. From 1972 to 1992, Mr. Zambakkides served as Regional Manager
for Fairchild Semiconductor during which time he helped to establish Fairchild
in the Canadian market. After National Semiconductor Corp. ("NSC") acquired
Fairchild, Mr. Zambakkides was made General Manager for NSC. Mr. Zambakkides
served on the Board of Directors of the Canadian subsidiaries of both Fairchild
and NSC for a total of 13 years where he contributed his expertise in the areas
of sales, engineering and corporate development. In addition, his expertise was
supplemented by numerous courses in management, finance as well as Total Quality
Management ("TQM"), whereby he was also an accredited instructor for the
Canadian organization.
Carl Mitchell. Mr. Mitchell has served as the Company's General Manager &
Corporate Secretary since June 1994 and is responsible for the General
Administration and Management of the business operations of the Company.
Mr. Mitchell joined V3 Semiconductor Corp. in 1987 and was responsible for
writing and documenting the user interface for the Pc/La Personal Logic
Analyzer, as well as setting up and maintaining the distribution channels for
that product family. In 1989 Mr. Mitchell was appointed Company Controller and
was responsible for the accounting functions as well as the preparation of the
financial statements. Mr. Mitchell is currently responsible for the operations,
administration and financial & corporate reporting of the V3 group of companies.
Mr. Mitchell graduated from the University of Toronto in 1984 with a Specialist
Degree in Computer Science. Prior to joining the Company, Mr. Mitchell was
Software Group Manager at Syntronics Inc.
Michael Alford. Michael Alford, B.E.Sc. (Electrical) graduated from the
University of Western Ontario in 1983 with a degree in Electrical Engineering.
Since that time Mr. Alford has developed a wide range of experience in all
phases of electronic design, with a particular emphasis on the design of
semiconductors. Mr. Alford was one of the first design engineers employed by V3
and has recently returned as hardware design manager. Prior to his return, he
was the design group leader for multi-media products at ATI. While at ATI
Technologies, he led a team that designed part of an Intel i750 derivative for
acceleration of digital video. He was also a project manager for ATI's first
video re-sizing and reformatting chip. He has experience in ASIC and custom VLSI
chip designs (CMOS technology), and he holds several patents in the area of
multi-media architectures. Mr. Alford graduated from the University of Western
Ontario in 1983 with a degree in Electrical Engineering.
Gregg Smith. Mr. Smith has been the Vice President Sales and Marketing
since he joined the Company in 1997. Prior thereto, from 1986 to 1997, he was
the Western Area Vice President with Future Electronics, Corp. responsible for
the largest territory in the world where he supervised the management of eleven
sales offices,
25
<PAGE>
employing more than 250 people. From 1975 to 1986 Mr. Smith worked for National
Semiconductor Corp., first as Canadian Regional Manager, then starting in 1979
as an Area Sales Manager based in Arizona, then in 1982 as Area Sales Manager
based in Southern California. From 1972 to 1975 he was General Manager for one
of Hamilton Avnet's largest branches in North America. Mr. Smith is senior sales
executive with over 20 years experience in sales and sales management with
national and regional organizations in the manufacturer and distribution areas
of the Semiconductor Industry. Mr. Smith graduated from the University of New
Brunswick with a Bachelor of Science and Business Degree.
Bernard N. Slade. Mr. Slade was elected to the Company's board of
directors in April, 1996. Mr. Slade also serves on the board of directors of
YieldUp International, a firm he founded in 1993. From 1993 to 1984, Mr. Slade
acted as a consultant for Arthur D. Little, Inc. and Gemini Consulting. Prior to
becoming a consultant, Mr. Slade spent 28 years working for IBM, from 1956 to
1984, where he held a number of senior positions including management of product
development and manufacturing for the components division and Corporate Director
of Manufacturing Technology. From 1948 to 1956 Mr. Slade worked in research and
development for RCA. Mr. Slade is the author of "Compressing Product Development
Cycle" and "Winning the Productivity Race."
James Wilkinson. Mr. Wilkinson was elected to the Company's board of
directors in April, 1996 and is also currently working as a consultant in the
industry. From 1994 to 1997, Mr. Wilkinson served as the Vice-President, Chief
Operating Officer and Secretary to Tee-Comm Electronics, Inc. and has 30 years
of experience in corporate finance. From 1987 to 1994, Mr. Wilkinson served as
Vice President and Treasurer of Northern Telecom Ltd., and from 1984 to 1987
Mr. Wilkinson was the Assistant Treasurer of Corporate Finance for Northern
Telecom Ltd. Prior thereto, he held senior financial positions with Shell Canada
Ltd. and Canadian National Railway Co.
John A. Fazackerley. Mr. Fazackerley was elected to the board of directors
in September, 1997. Mr. John Fazackerley, founded Digital Processing Systems in
1987 and is currently serving as its Chairman of the Board. From 1975 to 1987,
Mr. Fazackerley was employed by Scientific Atlanta. When he joined Scientific
Atlanta, he served as head of Broadband sales for their newly established
Canadian facility. In 1977 he was promoted to General Manager and in 1987 he
purchased Scientific Atlanta's studio (equipment) products, under its Digital
Video Systems division, and formed Digital Processing Systems. Mr. Fazackerley
has served as a director on the Board of the Canadian Cable Television
Association for seven years and he presently serves as an international
representative on the Management Committee of the International broadcasting
Convention in London, England. He was born in Cheshire, England were he received
his Radio and Television Engineering diploma from Salford University.
Robert Skinner. Mr. Skinner was elected to the board of directors in March
1998. From 1992 to 1998 Mr. Skinner has managed his own investments,
specializing in emerging companies in the technology market. From 1980 to 1992,
Mr. Skinner was an executive director of Bain Capital Markets Ltd., Bain
Securities Ltd., and Bain and Co. Ltd., the group holding company. He first
joined Bain and Co. in 1980 working in its Fixed Income Division, and soon
thereafter became a partner in the firm in December 1981. During his career with
Bain and Co. he was also involved in risk management, mortgage securitization,
and commodities markets with emphasis on both coal and industrial metals.
Mr. Skinner's experience in the securities industry commenced in 1977, when he
joined Capel Court Corporation Ltd., a merchant bank, where he engaged in
securities trading and structuring transactions.
Directors serve until the next annual meeting of stockholders or until
their successors are elected and qualified. Officers serve at the discretion of
the Board of Directors. Directors do not currently receive fees for their
services as directors, but are reimbursed for travel expenses.
COMMITTEES OF THE BOARD
The Company's Board of Directors has an Audit Committee responsible for
overseeing the preparation and approval of the Company's audited financial
statements and a Compensation Committee responsible for overseeing the
compensation of executive officers. In addition, the Company's Board of
Directors has appointed a committee, the Stock Option Plan Committee, comprised
of outside directors, which administers the Stock Option Plan, and a committee
to administer the Company's Employee Stock Purchase Plan.
26
<PAGE>
COMPENSATION OF DIRECTORS
The Company's directors are compensated for their reasonable out-of-pocket
expenses for each meeting of the Board of Directors and for each Board of
Directors Committee meeting they attend. In addition, directors will be awarded
10,000 options pursuant to the 1996 Stock Option Plan upon their reelection and
the next Annual Meeting.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information with respect to
the compensation paid to the Company's Chief Executive Officer for services
rendered in all capacities to the Company for the year ended December 31, 1997.
Other than as listed below, the Company had no executive officers whose total
annual salary and bonus exceeded $100,000 for that fiscal year:
<TABLE>
<CAPTION>
LONG TERM
OTHER ANNUAL ALL OTHER COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION BONUS COMPENSATION AWARDS/OPTION(1)
- --------------------------- ---- ------- ------------ ------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
John Zambakkides........... 1995 -- -- -- -- 160,000
President and Chief 1996 $72,282 -- -- --
Executive Officer 1997 $99,397 $8,172 -- --
</TABLE>
- ------------------
(1) Options were granted on February 23, 1996 at an exercise price or $3.75 per
share
The following table shows the value at December 31, 1997, of unexercised
options held by the named executive officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON REALIZED FISCAL YEAR-END (#) FISCAL YEAR-END ($)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------ ------------ -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
John Zambakkides.............. 0 0 95,000/65,000 $ 118,750/$81,250
</TABLE>
EMPLOYMENT ARRANGEMENTS
John Zambakkides has a five year employment agreement with the Company,
commencing January 1998 and thereafter renewable annually. The agreement
provides for a base salary of Cdn. $160,000, however Mr. Zambakkides has elected
to receive a salary of Cdn. $140,000. The employment agreement provides for a
car allowance of Cdn. $1,000 per month. In addition, Mr. Zambakkides is entitled
to receive a bonus and options based upon achieving certain goals and objectives
as determined by the Board of Directors.
EMPLOYEE STOCK OPTION PLAN
In February 1996, the Company adopted, by action of the board of directors
and stockholders, the 1996 Employee Stock Option Plan (the "Plan"). The Plan
which was amended in February 1997, provides for the issuance of incentive stock
options to qualified employees. The Plan does not have an expiration date. Set
forth below is a summary of the Plan, but this summary is qualified in its
entirety by reference to the full text of the Plan, a copy of which is filed as
an exhibit to the Registration Statement, of which this Prospectus is a part.
The Plan is authorized to grant options or other equity-based incentives
for 400,000 shares of the Common Stock. If shares subject to an option under the
Plan cease to be subject to such option, or if shares awarded under the Plan are
forfeited, or otherwise terminated without a payment being made to the
participant in the form of stock, such shares will again be available for future
distribution under the Plan.
Awards under the Plan may be made to key employees, including officers of
and consultants to the Company, its subsidiaries and affiliates, including any
director. The Plan Imposes no limit on the number of
27
<PAGE>
officers and other key employees to whom awards may be made; however, no person
shall be entitled to receive awards which would entitle such person to acquire
more than 10% of the number of shares of Common Stock available under the Plan.
The Plan is to be administered by a committee of no less than two
disinterested directors to be appointed by the board (the "Committee"). No
member or alternate member of the Committee shall be eligible to receive options
or stock under the Plan (except as to the automatic grant of options to
directors) or under any plan of the Company or any of its affiliates. The
Committee has broad discretion in determining the persons to whom stock options
or other awards are to be granted, the terms and conditions of the award,
including the type of award, the exercise price and term and the restrictions
and forfeiture conditions. If no Committee is appointed, the functions of the
Committee shall be performed by the board of directors.
The Committee will have the authority to grant the following types of
awards under the Plan: incentive or non-qualified stock options. The Plan is
designed to provide the Committee with broad discretion to grant incentive
stock-based rights.
As of the date of this Prospectus, the Board granted stock options to
purchase an aggregate of 358,083 shares of Common Stock at exercise prices
between $1.25 and $6.25. Such exercise prices were determined by the Board to be
the fair market value per share on the date of grant. Under the Plan the options
become exercisable as to 20% upon grant and 20% on each of the next four
anniversaries of the grant, however the Committee at its discretion can
establish other vesting schedules. The options which have been granted expire
between July 7, 1999 and February 22, 2006.
EMPLOYEE STOCK PURCHASE PLAN
On February 12, 1996, the Board of Directors approved an employee stock
purchase plan. The plan reserves 20,000 shares of Common Stock, out of the
shares of Common Stock reserved under the Stock Option Plan, for eligible
employees and permits employees to purchase Common Stock through payroll
deductions at a purchase price of 90% of the fair market value of the Common
Stock on the purchase date.
LIMITATION ON LIABILITY OF DIRECTORS
The Nevada General Corporation Law permits a corporation, through its
Certificate of Incorporation, to exonerate its directors from personal liability
to the corporation, or to its stockholders, for monetary damages for breach of
fiduciary duty of care as a director, with certain exceptions. The exceptions
include a breach of the director's duty of loyalty, acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of law,
improper declarations of dividends, and transactions from which the directors
derived an improper personal benefit. The Company's Certificate of Incorporation
exonerates its directors from monetary liability to the extent permitted by this
statutory provision. The Company has been advised that it is the position of the
Securities and Exchange Commission that insofar as the foregoing provision may
be invoked to disclaim liability for damages arising under the Act, that
provision is against public policy as expressed in the Act and is therefore
unenforceable.
28
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 1998, and as adjusted to
give effect to the sale of 518,083 shares of Common Stock issuable upon exercise
of the Option, certain information concerning beneficial ownership of shares of
Common Stock with respect to (i) each person known to the Company to own 5% or
more of the outstanding shares of Common Stock, (ii) each director of the
Company, (iii) the executive officers of the Company, and (iv) all directors and
officers of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES APPROXIMATE
BENEFICIALLY PERCENTAGE OF AS
NAME OWNED COMMON STOCK* ADJUSTED**
- ---------------------------------------------------------- ---------------- ------------- ----------
<S> <C> <C> <C>
John Zambakkides(1)....................................... 160,000 3% 3%
Carl Mitchell(2).......................................... 752,339 13% 13%
Michael Alford(3)......................................... 483,248 8% 8%
Alan Simmons(4)........................................... 745,409 12% 12%
Bernard N. Slade(5)....................................... 85,000 2% 1%
Jim Wilkinson(6).......................................... 25,000 0.5% 0.4%
John A. Fazackerley(7).................................... 15,833 0.3% 0.3%
Robert Skinner(8)......................................... 210,002 4% 4%
Patrick Prentiss.......................................... 543,654 10% 9%
Bellingham Industries Inc. ............................... 599,857 11% 10%
All Officers and Directors as a Group (4 persons)......... 1,415,589 26% 24%
</TABLE>
- ------------------
Except as noted above, the address for the above identified officers and
directors of the Company is c/o V3 Semiconductor, Inc., 250 Consumers Road,
Suite 901, North York, Ontario, Canada M2J 4V6.
* Percentages are based upon the assumption that the shareholder has exercised
all of the currently exercisable options he or she owns which are currently
exercisable or exercisable within 60 days and that no other shareholder has
exercised any options he or she owns.
** Percentages have been adjusted to reflect the number of shares of Common
Stock to be registered herein (518,083 shares).
(1) Includes 160,000 shares of Common Stock issuable upon exercise of the stock
options granted John Zambakkides as part of a special grant, which are
immediately exercisable.
(2) Includes 50,000 shares of Common Stock owned by Mr. Mitchell's wife and
40,000 shares of Common Stock issuable upon exercise of stock options
granted under the Company's ESOP.
(3) Includes 140,000 shares of Common Stock owned by Mr. Alford's wife and
40,000 shares of Common Stock issuable upon exercise of stock options
granted under the Company's ESOP.
(4) Includes 159,000 shares of Common Stock owned by Mr. Simmons' wife and
21,205 shares of Common Stock owned by Mr. Simmons' parents, 174,650 shares
of Common Stock owned by Mr. Simmons' mother-in-law and 15,000 shares of
Common Stock issuable upon exercise of stock options granted under the
Company's ESOP.
(5) Includes 25,000 shares of Common Stock issuable upon exercise of stock
options granted under the Company's ESOP plan. Includes 20,000 shares owned
by Mr. Slade's wife and 6,000 shares owned by Mr. Slade's son.
(6) Includes 25,000 shares of Common Stock issuable upon exercise of stock
options granted under the Company's ESOP plan.
(Footnotes continued on next page)
29
<PAGE>
(Footnotes continued from previous page)
(7) Includes 15,833 shares of Common Stock issuable upon exercise of stock
options granted under the Company's ESOP plan.
(8) Includes 200,002 shares of Common Stock owned by Cedar Capital Limited.
Robert Skinner is the sole shareholder of Cedar Capital Limited. Includes
10,000 shares of Common Stock issuable upon exercise of stock options
granted under the Company's ESOP plan.
CERTAIN TRANSACTIONS
A shareholder, Alan Simmons, provided consulting and management services to
the Company for fees in the amount of $67,757 for 1997 and $65,814 in 1996.
These amounts are included in the Company's Research and Development expense.
The consulting and management services provided by Mr. Simmons were on terms no
less favorable than those that could have been obtained from an unaffiliated
party.
DESCRIPTION OF SECURITIES
The Company's authorized capital consists of 50,000,000 Common Shares, par
value $0.001 per share, 10,000,000 Preferred Shares, par value $0.001 per share
("Common Stock" or "Common Shares") and 3,400,000 shares of special voting stock
("Voting Special Shares"), par value $.0005 per share. As of the date hereof,
5,471,528 shares of Common Stock and 46,368 Voting Special Shares are currently
issued and outstanding.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on
each matter submitted to vote at any meeting of shareholders. Common Stock does
not carry cumulative voting rights and, therefore, holders of a majority of the
outstanding shares of Common Stock will be able to elect the entire Board of
Directors, and, if they do so, minority shareholders would not be able to elect
any members to the Board of Directors. The Company's Board of Directors has
authority, without the action by the Company's shareholders, to issue all or any
portion of the authorized but unissued Common Stock, which would reduce the
percentage ownership of the Company of its shareholders and which may dilute the
book value of the Common Stock.
The Company's by-laws provide that one third of the shares issued and
outstanding and entitled to vote on a matter shall constitute a quorum for
shareholders' meetings, except with respect to matters for which a greater
quorum is required by law.
Shareholders of the Company have no pre-emptive rights to acquire
additional Common Stock. The Common Stock are not subject to redemption and
carry no subscription or conversion rights. In the event of liquidation of the
Company, the Common Stock are entitled to share equally in corporate assets
after satisfaction of all liabilities. All of the Common Stock currently issued
and outstanding are fully paid and non-assessable.
Holders of Common Stock are entitled to receive such dividends as the Board
of Directors may from time to time declare out of funds legally available for
the payment of dividends. The Company has not paid dividends on its Common Stock
and there can be no assurance that it will pay dividends in the foreseeable
future. See "Dividend Policy" and "Risk Factors".
Holders of 1,372,658 shares of Common Stock which were purchased from the
Company in a private placement of securities in May and June of 1998 have
certain registration rights and are entitled to include in certain registration
statements filed by the Company during the five year period following the
completion of such Private Placement such information as may be required to
permit a public offering of any of the Common Stock purchased in the Private
Placement (the "Registerable Securities") limited in the case of a Regulation A
offering to the amount of the available exemption, except for any registration
statement filed by the Company on Forms S-4 or S-8 (including any Form S-3
related to such Form S-8) or any other comparable form or any registration
statement relating to Common Stock underlying employee stock options. The
Company shall bear all costs relating to the registration except for the
holders' pro rata portion of the legal costs and except commissions or
30
<PAGE>
discounts and fees of the under holder's own professionals, if any. Provided,
however, that this provision shall not apply to any shares of Common Stock if
such Shares of Common Stock may then be sold within a six-month period under
Rule 144 of the Act, assuming the holder's compliance with the provisions of
such Rule, and the Company delivers an opinion of counsel to that effect to the
transfer agent; and provided, further, that if the offering with respect to
which a registration statement is filed is managed by an independent
underwriter, then (i) if in the reasonable judgment of the managing underwriter,
which shall be evidenced by a writing delivered to the undersigned, the sale of
the shares of Common Stock in connection with the proposed offering would have a
material adverse effect on the offering, the undersigned shall not sell its
shares of Common Stock under such registration statement until 90 days after the
effective date of such registration statement, and (ii) if securities are to be
registered for the benefit of any other selling security holder ("Selling
Holder"), the holder shall be entitled to sell immediately under such
registration statement a percentage of the total number of shares of a
particular class of securities owned by the undersigned equal to the highest
percentage of that class to be sold under such registration statement (vis-a-vis
the total number of securities of that class owned) by any such Selling Holder,
with the holder being entitled to sell the balance of its shares of Common Stock
under such registration statement commencing 90 days after the effective date of
the registration statement.
The Company has agreed to provide holders of the 1,372,658 shares of Common
Stock thirty days prior written notice of the intended filing date of any
registration statement, other than a registration statement held on Form S-4 or
Form S-8 (including any Form S-3 related to such Form S-8) or any other
comparable form or any registration statement relating to Common Stock
underlying employee stock options.
VOTING SPECIAL SHARES
Holders of Voting Special Shares are entitled to one vote per share but are
not otherwise entitled to receive any dividends from the Company or any proceeds
in the event of the liquidation, dissolution or winding up of the Company. The
Voting Special Shares are convertible at any time into shares of Common Stock on
a one for one basis.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time in one or more
series as may from time to time be determined by the Company's Board of
Directors. The Company's Board of Directors has authority, without action by the
shareholders, to determine the voting rights, preferences as to dividends and
liquidation, conversion rights and any other rights of such series. Any
Preferred Shares, if and when issued, may carry rights superior to those of the
Common Shares. The Company currently has no plans to issue any Preferred Shares.
OPTIONS AND WARRANTS
Of the 614,588 Options and Warrants outstanding, Options and Warrants
representing 486,765 shares have vested and are currently exercisable. 358,083
Options have been issued pursuant to the Company's ESOP. Options granted under
the ESOP are granted at an exercise price which equals 100% of the fair market
value of the Common Stock on the date of the grant. John Zambakkides, the
President and Chief Executive Officer of the Company has received 160,000
Options outside of the ESOP (120,000 of which have vested). Mr. Zambakkides'
Options are exercisable at $3.75 per share. 120,000 of these Options expire on
February 22, 2006 and 40,000 of these Options expire on February 22, 2001. The
Mason Cabot division of W.J. Nolan & Co., received 96,505 Warrants as part of
its compensation for acting as placement agent in the Company's 1998 private
placement. These Warrants expire three years from the date of grant and are
exercisable at $3.50 per share.
TRADING INFORMATION
The Common Shares are quoted on the OTC Bulletin Board, a regulated
quotation service that captures and displays real-time quotes and/or indications
of interest in securities not listed on The NASDAQ Stock Market or any U.S.
exchange. As of June 29, 1998, the closing price for the Common Stock was $3.94
and the 52 week high and low prices were $7.75 and $2.75, respectively.
Information as to trading volumes, and bid and asked prices, for the Common
Shares may be obtained directly from the OTC Electronic Bulletin Board. See
"Market for Securities".
31
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by its United States securities counsel, Sichenzia, Ross &
Friedman LLP 135 West 50th Street, 20th Floor, New York, New York, 10020.
Certain members of Sichenzia, Ross & Friedman LLP are the beneficial owners of
an aggregate 10,000 shares of Common Stock of the Company.
EXPERTS
The financial statements for each of the two fiscal years ended
September 30, 1997 and 1996, appearing in this Prospectus and Registration
Statement have been audited by KPMG, Toronto, Chartered Accountants, as set
forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the Company has outstanding 5,471,528
shares of Common Stock, without taking into account shares of Common Stock
issuable upon exercise of the Options.
Of the Company's shares of Common Stock currently outstanding, 3,939,146
are "restricted securities" as that term is defined in Rule 144 under the
Securities Act of 1933, as amended ("Act"), and under certain circumstances may
be sold without registration pursuant to that rule. As of the date of this
Prospectus, 2,566,488 shares of Common Stock, held by 23 beneficial owners, are
eligible for sale pursuant to Rule 144.
In general, under Rule 144 as currently in effect, subject to satisfaction
of certain other conditions, a person (or persons whose shares are required to
be aggregated), including any affiliate of the Company, who beneficially owns
"restricted shares" for a period of at least two years is entitled to sell
within any three-month period, a number of shares that does not exceed the
greater of 1% (54,675 as of the date of this prospectus) of the then outstanding
shares of Common Stock, or if the Common Stock is quoted on the NASDAQ System,
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding the filing of the required notice of sale with the Securities
and Exchange Commission. The seller also must comply with the notice and manner
of sale requirements of Rule 144, and there must be current public information
available about the Company. In addition, any person (or persons whose shares
are aggregated) who is not, at the time of the sale, nor during the preceding
three months, an affiliate of the Company, and who has beneficially owned
restricted shares for at least three years, can sell such shares under Rule 144
without regard to any of the limitations described above.
No predictions can be made of the effect, if any, that future sales of
restricted shares or the availability of restricted shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the restricted shares of Common Stock in the public
market could adversely affect the then prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
32
<PAGE>
SELLING STOCKHOLDERS
The Selling Stockholders and number of securities owned are as follows:
<TABLE>
<CAPTION>
OPTIONS
- -----------------------------------------------------------------------------------------
<S> <C>
John Zambakkides......................................................................... 160,000(1)
Carl Mitchell............................................................................ 40,000(2)
Michael Alford........................................................................... 40,000(3)
Gregg Smith.............................................................................. 30,000(4)
Steven Eng............................................................................... 10,000(5)
Alan Simmons............................................................................. 15,000(6)
Bernard Slade............................................................................ 25,000(7)
Jim Wilkinson............................................................................ 25,000(8)
John A. Fazackerley...................................................................... 15,833(9)
Phillip J. Sikora........................................................................ 5,000(10)
Vikram Gandhi............................................................................ 10,000(11)
Michael Tressider........................................................................ 15,000(12)
Mansur Abdulhusein....................................................................... 5,000(13)
Mack Baba................................................................................ 6,000(14)
Kam--Pui Tang............................................................................ 4,000(15)
Alan Tsun................................................................................ 21,000(16)
Ann McMichael............................................................................ 4,750(17)
Debra Fraser............................................................................. 2,500(18)
Emily Hodgkinson......................................................................... 8,000(19)
Farborz Pourbigharaz..................................................................... 12,000(20)
Felix Ho................................................................................. 1,000(21)
Gregory Agostinelli...................................................................... 19,000(22)
Mitchell Kahn............................................................................ 10,000(23)
Watany Benjamel.......................................................................... 3,000(24)
Robert Skinner........................................................................... 10,000(25)
Jayesh Patel............................................................................. 2,000(26)
Jaclyn Beder............................................................................. 2,000(27)
Mark Sprague............................................................................. 5,000(28)
David Fox................................................................................ 2,000(29)
Myil Rumkumar............................................................................ 2,000(30)
Ali Djamalian............................................................................ 2,000(31)
Hassan M. Anklis......................................................................... 3,000(32)
Michael Feldman.......................................................................... 3,000(33)
</TABLE>
- ------------------
(1) John Zambakkides, the Company's President and Chief Executive Officer, was
issued an aggregate 160,000 Options to purchase Common Stock of the
Company. These options were not issued under the Company's ESOP. Of such
options: (i) 120,000 options are exercisable at $3.75 per share, expire on
February 22, 2006, and were granted in February 1996 in connection with
Mr. Zambakkides original employment with the Company; and (ii) 40,000
options are exercisable at $3.75 per share, expire on February 22, 2001,
and were granted in February 1996 in connection with Mr. Zambakkides.
employment as a Director of the Company.
(2) Carl Mitchell, the General Manager, Secretary and Treasurer of the Company,
received an aggregate of 40,000 Options to purchase Common Stock of the
Company in connection with the Company's ESOP. Of
(Footnotes continued on next page)
33
<PAGE>
(Footnotes continued from previous page)
such options: (i) 25,000 options were granted on May 3, 1996, and are
exercisable at $1.93, expire on May 2, 2001; and (ii) 15,000 options were
granted on March 26, 1997, are exercisable at $ $2.22 per share and expire
on March 25, 2002.
(3) Michael Alford, Vice President of Engineering of the Company, received an
aggregate of 40,000 Options to purchase Common Stock of the Company
pursuant to the Company's ESOP. Of such Options: (i) 25,000 Options were
granted on May 3, 1996, and are exercisable at $1.93, expire on May 2,
2001; and (ii) 15,000 Options were granted on March 26, 1997, are
exercisable at $2.22 per share and expire on March 25, 2002.
(4) On November 3, 1997, Gregg Smith, the Company's Vice President of Sales and
Marketing, received an aggregate of 30,000 Options to purchase Common Stock
of the Company in connection with the Company's ESOP. Such Options are
exercisable at $3.125 per share and expire on November 2, 2002.
(5) On November 11, 1997, Steven Eng, the Company's Director of Manufacturing
and International Marketing, received an aggregate of 10,000 options to
purchase Common Stock of the Company in connection with the Company's ESOP.
Such options are exercisable at $3.25 share and expire on August 10, 2002.
(6) Alan Simmons, received an aggregate of 15,000 options to purchase Common
Stock of the Company in connection with the Company's ESOP. Of such
options: (i) 5,000 options were granted on May 3, 1996, and are exercisable
at $1.93, expire on May 2, 2001; and (ii)10,000 options were granted on
March 26, 1997, are exercisable at $2.22 per share and expire on March 25,
2002.
(7) Bernard N. Slade, a member of the Board of Directors of the Company,
received an aggregate of 25,000 options to purchase Common Stock of the
Company in connection with the Company's ESOP. Of such options: (i) 5,000
options were granted on May 3, 1996, and are exercisable at $1.93, expire
on May 2, 2001; (ii)10,000 options were granted on March 26, 1997, are
exercisable at $2.22 per share and expire on March 25, 2002 and
(iii) 10,000 options were granted on March 26, 1998 at $6.25 per share
which expire March 25, 2003.
(8) Jim Wilkinson, a member of the Board of Directors of the Company, received
an aggregate of 25,000 options to purchase Common Stock of the Company in
connection with the Company's ESOP. Of such options: (i) 5,000 Options were
granted on May 3, 1996, and are exercisable at $1.93, expire on May 2, 200;
(ii) 10,000 Options were granted on March 26, 1997, are exercisable at
$2.02 per share and expire on March 25, 2002 and (iii) 10,000 options were
granted on March 26, 1998 at $6.25 per share which expire March 25, 2003.
(9) On August 26, 1997, John A. Fazackerley, a member of the Board of Directors
of the Company, received an aggregate of 15,833 Options to purchase Common
Stock of the Company in connection with the Company's ESOP. 5,833 Options
are exercisable at $4.50 per share and expire on August 25, 2002 and 10,000
Options were granted on March 26, 1998 at $6.25 per share which expire
March 25, 2003.
(10) On October 6, 1997, Phillip J. Sikora, an employee of the Company, received
an aggregate of 5,000 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $4.86
per share and expire on October 5, 2002.
(11) On September 2, 1997, Vikram Gandhi, an employee of the Company, received
an aggregate of 10,000 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $4.50
per share and expire on September 1, 2002.
(12) On June 16, 1997, Michael Tressider, an employee of the Company, received
an aggregate of 10,000 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $3.05
per share and expire on June 15, 2002. On March 1, 1998 he received 5,000
options exercisable at $5.50 which expire February 28th, 2003.
(13) On May 3, 1996, Mansur Abdulhusein, an employee of the Company, received an
aggregate of 5,000 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $1.75
per share and expire on May 3, 2001.
(14) On May 3, 1996, Mark Baba, an employee of the Company, received an
aggregate of 5,000 options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are
(Footnotes continued on next page)
34
<PAGE>
(Footnotes continued from previous page)
exercisable at $1.75 per share and expire on May 3, 2001. On March 26, 1997
he received 1,000 Options under the ESOP exercisable at $2.02 which expire
March 25, 2002.
(15) On March 26, 1997, Kam-pui Tang, an employee of the Company, received an
aggregate of 4,000 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $2.02
per share and expire on March 25, 2002. Mr. Tang exercised 100 Options at
$2.02 on February 20, 1998.
(16) On May 3, 1996, Alan Tsun, an employee of the Company, received an
aggregate of 17,000 options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $1.75
per share and expire on May 2, 2002. On March 1, 1998 he received 4,000
Options at $5.50 exercisable per share which expire February 28, 2003.
(17) On May 3, 1996, Ann McMichael, an employee of the Company, received an
aggregate of 3,750 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $1.75
per share and expire on May 2, 2002. She received 1,000 Options under the
ESOP on September 21st, 1997 at $4.75 per share which expire September 20,
2002.
(18) On February 26, 1997, Debra Fraser, an employee of the Company, received an
aggregate of 2,500 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options will be exercisable at
$3.25 per share and expire on February 25, 2002.
(19) On May 3, 1996, Emily Hodgkinson, an employee of the Company, received an
aggregate of 6,000 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $1.75
per share and expire on May 2, 2001. On March 26, 1997 she received 2,000
Options at an exercise price or $2.02 which expire March 25, 2002.
(20) On May 3, 1996, Fariborz Pourbigharaz, an employee of the Company, received
an aggregate of 12,000 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $1.75
per share and expire on May 2, 2001.
(21) On December 19, 1997 Felix Ho, an employee of the Company, received an
aggregate of 1,000 Options to purchase Common Stock of the Company in
connection with the Company's ESOP. Such Options are exercisable at $4.00
per share and expire on December 18, 2002.
(22) On May 16, 1997, Gregory Agostinelli, an employee of the Company, received
4,000 Options to purchase Common Stock of the Company in connection with
the Company's ESOP. Such Options are exercisable at $2.50 per share and
expire on May 15, 2002. On December 19, 1997, he received 15,000 options
exercisable at $4.00 which expire December 18, 2002.
(23) On July 8, 1996, Mitchell Kahn, the former President of the Company,
received an aggregate of 10,000 Options to purchase Common Stock of the
Company in connection with his employment termination settlement. Such
Options are exercisable at $2.75 per share and expire on July 7, 1999.
(24) Watany Benjamel received Options on December 22, 1997 to purchase 3.000
shares of Common Stock under the ESOP. The Options are exercisable at $3.86
per share and expire on December 21, 2002.
(25) Robert Skinner a director of the Company received Options on March 26, 1998
to purchase 10,000 of Common Stock at an exercise price of $6.25 per share.
The Options expire on March 25, 2003.
(26) Jayesh Patel received Options on April 28, 1998 to purchase 2,000 shares of
Common Stock under the ESOP. The Options are exercisable at $5.13 per share
and expire on April 27, 2003.
(27) Jaclyn Beder received Options on April 21, 1998 to purchase 2,000 shares of
Common Stock under the ESOP. The Options are exercisable at $5.86 per share
and expire on April 20, 2003.
(28) Mark Sprague received Option on ESOP April 6, 1997 to purchase 5,000 shares
of Common Stock at $5.86 per share. The Options expire on April 5, 2003.
(29) David Fox received 2,000 Options under the ESOP on May 25, 1998. The
Options are exercisable at $4.63 per share and expire on May 24, 2003.
(30) Myil Rumkumar received 2,000 Options under the ESOP on May 25, 1998. The
Options are exercisable at $4.63 per share and expire on May 24, 2003.
(31) Ali Djamalian received 2,000 Options under the ESOP on June 1, 1998. The
Options are exercisable at $4.25 per share and expire on May 31, 2003.
(Footnotes continued on next page)
35
<PAGE>
(Footnotes continued from previous page)
(32) Hassan M. Anklis received 3,000 Options under the ESOP on June 1, 1998. The
Options are exercisable at $4.25 per share and expire on May 31, 2003.
(33) Michael Feldman received 3,000 Options under the ESOP on June 15, 1998. The
Options are exercisable at $4.13 per share and expire on June 14, 2003.
PLAN OF DISTRIBUTION
Each Selling Stockholder is free to offer and sell his or her shares of
Common Stock at such times, in such manner and at such prices as he or she shall
determine. Such Common Shares may be offered by Selling Stockholders in one or
more types of transactions, which may or may not involve brokers, dealers or
cash transactions. The Selling Stockholders may also use Rule 144 under the
Securities Act, to sell such securities, if they meet the criteria and conform
to the requirements of such Rule. There is no underwriter or coordinating broker
acting in connection with the proposed sale of Common Shares by the Selling
Stockholders.
The Selling Stockholders have advised the Company that sales of Common
Shares may be effected from time to time in transactions (which may include
block transactions) in the over-the-counter market, in negotiated transactions,
through the writing of options on the Common Shares, or a combination of such
methods of sale, at fixed price which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices, the Selling
Stockholders may effect such transactions by selling Common Shares directly to
purchasers or to or through broker/dealers which may act as agents or
principals. Such broker/dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Stockholders and/or the
purchasers of Common Shares from whom such broker/dealers may act as agents or
to whom they sell as principal, or both (which compensation as to a particular
broker/dealer may act as agents might be in excess of customary commissions).
The Selling Stockholders and any broker/dealers that act in connection with the
sale of the Common Shares might be deemed to be "underwriters" within them
meaning of Section 2(11) of the Securities Act, and any commissions received by
them and any profit on the resale of the Units as principal might be deemed to
be underwriting discounts and commissions under the Securities Act. The Selling
Stockholders may agree to indemnify any agent, dealer or broker/dealer that
participates in transactions involving sales of the shares against certain
liabilities, including liabilities arising under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities, they will be subject to prospectus
delivery requirements under the Securities Act. Furthermore, in the event of a
"distribution" of his or her Common Shares, any Selling Stockholder, any selling
broker/dealer and any "affiliated purchasers" may be subject to Rule 10b-7 under
the Exchange Act which prohibits any "stabilizing bid" or "stabilizing purchase"
for the purpose of pegging, fixing or stabilizing the price of the Common Shares
in connection with the Offering.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by its counsel, Sichenzia, Ross & Friedman LLP, 135 West 50th
Street, 20th Floor, New York, New York, 10020.
EXPERTS
The financial statements of the Company at September 30, 1997, and for each
of the two fiscal years in the period ended September 30, 1997 and 1996,
appearing in this Prospectus and Registration Statement have been audited by
KPMG, Chartered Accountants, as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
36
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Act with respect to the Securities offered hereby. This Prospectus omits
certain information contained in the Registration Statement and the exhibits
thereto, and reference is made to the Registration Statement and the exhibits
thereto for further information with respect to the Company and the Securities
offered hereby. Each such statement is qualified in its entirety by such
reference. The Registration Statement, including exhibits and schedules filed
therewith, may be inspected without charge at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and its public reference facilities in New
York, New York and Chicago, Illinois upon payment of the prescribed fees.
Electronic registration statements filed through the Electronic Data Gathering,
Analysis, and Retrieval System are publicly available through the Commission's
Website (http://www.sec.gov). Following the Effective Date hereof, the Company
intends to be a reporting company under the Securities Exchange Act of 1934, as
amended.
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
V3 Semiconductor Inc.:
Report of Independent Auditors.................................................................... F-2
Balance Sheet..................................................................................... F-3
Statement of Operations........................................................................... F-4
Statement of Stockholders Equity.................................................................. F-5
Statement of Cash Flows........................................................................... F-6
Notes to Financial Statements..................................................................... F-7 - F-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
V3 Semiconductor Inc.
We have audited the accompanying consolidated balance sheets of V3 Semiconductor
Inc. as at September 30, 1997 and 1996 and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall 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 the Company as at
September 30, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in accordance with generally accepted accounting
principles in the United States.
/s/ KPMG____________
KPMG
Chartered Accountants
North York, Canada
November 27, 1997,
except for note 6(b),
which is dated September 4, 1998
F-2
<PAGE>
V3 SEMICONDUCTOR INC.
CONSOLIDATED BALANCE SHEETS
(STATED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30
JUNE 30 ------------------------
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 4,785,108 $ 558,676 $ 313,250
Accounts receivable, net of allowance for doubtful accounts of $2,264
at June 30, 1998; $1,104 at September 30, 1997 and $Nil at
September 30, 1996................................................. 559,996 231,892 390,211
Inventories (note 2).................................................. 142,506 95,452 148,549
Prepaid expenses...................................................... 22,709 31,172 19,726
----------- ---------- ----------
5,510,319 917,192 871,736
Capital assets (note 3)................................................. 399,466 372,709 453,306
----------- ---------- ----------
$ 5,909,785 $1,289,901 $1,325,042
----------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 350,183 $ 331,844 $ 195,563
Accrued liabilities................................................... 21,718 27,160 16,642
Income taxes payable.................................................. -- 2,534 367
Deferred revenue...................................................... -- 6,699 --
Current portion of bank term loan (note 4(a))......................... 9,438 55,313 61,191
Current portion of obligation under capital leases (note 5)........... -- 8,350 7,325
----------- ---------- ----------
381,339 431,900 281,088
Bank term loan (note 4(a)).............................................. -- -- 56,092
Obligation under capital leases (note 5)................................ -- -- 8,468
Shareholders' equity:
Capital stock:
Preferred shares:
Authorized 10,000,000; no shares issued and outstanding
(note 6)...................................................... -- -- --
Special shares:
Authorized 3,400,000; 46,368 shares issued and outstanding at
June 30, 1998; 697,310 and 709,810 shares issued and
outstanding at September 30,1997 and 1996 (note 6)............ 124 449 455
Common shares:
Authorized 50,000,000; 5,461,528 shares issued and outstanding at
June 30, 1998; 3,437,928 and 3,425,428 shares issued and
outstanding at September 30, 1997 and 1996 (note 6)........... 5,462 3,438 3,425
Additional paid-in capital......................................... 6,022,308 1,649,175 1,649,182
----------- ---------- ----------
6,027,894 1,653,062 1,653,062
Cumulative translation adjustment..................................... 6,829 (9,531) (12,733)
Deficit............................................................... (506,277) (785,530) (660,935)
----------- ---------- ----------
5,528,446 858,001 979,394
Commitments (note 11)...................................................
Contingent liabilities (note 12)........................................
----------- ---------- ----------
$ 5,909,785 $1,289,901 $1,325,042
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
V3 SEMICONDUCTOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(STATED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
JUNE 30 SEPTEMBER 30
------------------------- ------------------------
1998 1997 1997 1996
---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales.................................................... $2,639,968 $ 1,399,056 $1,951,453 $ 882,042
Cost of goods sold....................................... 844,203 516,405 749,083 413,962
---------- ----------- ---------- ----------
1,795,765 882,651 1,202,370 468,080
Other income (note 7).................................... 126,907 279,823 259,712 779,998
Expenses:
Selling, general and administrative.................... 1,159,742 629,247 987,616 1,070,050
Research and development (note 8)...................... 325,981 213,925 332,927 483,651
Depreciation and amortization.......................... 82,687 102,078 143,151 128,497
Rent and utilities..................................... 69,393 58,668 77,252 56,786
Bank charges and interest.............................. 5,616 9,033 10,700 21,429
---------- ----------- ---------- ----------
1,643,419 1,075,951 1,551,646 1,760,413
---------- ----------- ---------- ----------
Income (loss) before income taxes........................ 279,253 86,523 (89,564) (512,335)
Income taxes:
Current................................................ 124,500 15,600 54,877 39,132
Tax benefit of utilization of loss carryforward........ (124,500) (5,400) (19,845) --
---------- ----------- ---------- ----------
-- 10,200 35,032 39,132
---------- ----------- ---------- ----------
Net income (loss)........................................ $ 279,253 $ 76,323 $ (124,596) $ (551,467)
---------- ----------- ---------- ----------
Net income (loss) per share (note 13)
Basic.................................................. $ 0.07 $ 0.02 $ (0.03) $ (0.13)
---------- ----------- ---------- ----------
Diluted................................................ $ 0.06 $ 0.02 $ (0.03) $ (0.13)
---------- ----------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
V3 SEMICONDUCTOR INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(STATED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN TOTAL
CAPITAL SHARE
SPECIAL CAPITAL
SPECIAL SHARES COMMON SHARES SHARES AND RETAINED
----------------- ------------------ AND ADDITIONAL EARNINGS CUMULATIVE
PAR PAR COMMON PAID-IN (ACCUMULATED TRANSLATION
SHARES VALUE SHARES VALUE SHARES CAPITAL DEFICIT) ADJUSTMENT
--------- ----- --------- ------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1995............. 1,623,194 $ 812 2,712,044 $2,712 $1,649,538 $1,653,062 $ (109,468) $ (9,784)
Changes during the year:
Conversion of special shares to
common shares.................... (713,384) (357) 713,384 713 (356) -- -- --
Cancellation of special shares
(note 6(a))...................... (200,000) -- -- -- -- -- -- --
Loss for the year.................. -- -- -- -- -- -- (551,467) --
Translation adjustment............. -- -- -- -- -- -- -- (2,949)
--------- ----- --------- ------ ---------- ---------- ---------- --------
Balance, September 30,
1996............................... 709,810 455 3,425,428 3,425 1,649,182 1,653,062 (660,935) (12,733)
Changes during the period:
Conversion of special shares to
common shares.................... (12,500) (6) 12,500 13 (7) -- -- --
Net income......................... -- -- -- -- -- -- 76,323 --
Translation adjustment............. -- -- -- -- -- -- -- 3,248
--------- ----- --------- ------ ---------- ---------- ---------- --------
Balance, June 30, 1997 (unaudited)... 697,310 449 3,437,928 3,438 1,649,175 1,653,062 (584,612) (9,485)
Changes during the period:
Loss for the period................ -- -- -- -- -- -- (200,918) --
Translation adjustment............. -- -- -- -- -- -- (46)
--------- ----- --------- ------ ---------- ---------- ---------- --------
Balance, September 30,
1997............................... 697,310 449 3,437,928 3,438 1,649,175 1,653,062 (785,530) (9,531)
Changes during the period:
Conversion of special shares to
common shares (unaudited)........ (650,942) (325) 650,942 651 (326) -- -- --
Issuance of Common Shares
(unaudited)...................... -- -- 1,372,658 1,373 4,373,459 4,374,832 -- --
Net income (unaudited)............. -- -- -- -- -- -- 279,253 --
Translation adjustment
(unaudited)...................... -- -- -- -- -- -- -- 16,360
--------- ----- --------- ------ ---------- ---------- ---------- --------
Balance, June 30, 1998 (unaudited)... 46,368 $ 124 5,461,528 $5,462 $6,022,308 $6,027,894 $ (506,277) $ 6,829
--------- ----- --------- ------ ---------- ---------- ---------- --------
--------- ----- --------- ------ ---------- ---------- ---------- --------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance, October 1, 1995............. $ 1,533,810
Changes during the year:
Conversion of special shares to
common shares.................... --
Cancellation of special shares
(note 6(a))...................... --
Loss for the year.................. (551,467)
Translation adjustment............. (2,949)
-----------
Balance, September 30,
1996............................... 979,394
Changes during the period:
Conversion of special shares to
common shares.................... --
Net income......................... 76,323
Translation adjustment............. 3,248
-----------
Balance, June 30, 1997 (unaudited)... 1,058,965
Changes during the period:
Loss for the period................ (200,918)
Translation adjustment............. (46)
-----------
Balance, September 30,
1997............................... 858,001
Changes during the period:
Conversion of special shares to
common shares (unaudited)........ --
Issuance of Common Shares
(unaudited)...................... 4,374,832
Net income (unaudited)............. 279,253
Translation adjustment
(unaudited)...................... 16,360
-----------
Balance, June 30, 1998 (unaudited)... $ 5,528,446
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
V3 SEMICONDUCTOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
JUNE 30 SEPTEMBER 30
---------------------- ------------------------
1998 1997 1997 1998
---------- -------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activites:
Net income (loss)........................................... $ 279,253 $ 76,323 $(124,596) $ (551,467)
Add items not involving cash:
Depreciation and amortization............................. 82,687 102,078 143,151 128,497
Deferred revenue.......................................... (6,699) -- 6,699 --
Changes in working capital balances:
Accounts receivable....................................... (328,104) (130,465) 158,319 (240,345)
Income taxes.............................................. (2,534) (5) 2,167 13,704
Inventories............................................... (47,054) 36,237 53,097 (17,018)
Prepaid expenses.......................................... 8,463 10,293 (11,446) (5,948)
Accounts payable.......................................... 18,339 44,090 136,281 (71,552)
Accrued liabilities....................................... (5,442) (16,642) 10,518 16,642
---------- -------- --------- -----------
Total cash provided by (used by) operating
activities................................................ (1,091) 121,909 374,190 (727,487)
Investing activities:
Additions to capital assets............................... (109,444) (35,162) (62,553) (254,929)
---------- -------- --------- -----------
Total cash used by investing activities..................... (109,444) (35,162) (62,553) (254,929)
Financing activities:
Repayment of bank term loan............................... (45,875) (46,858) (61,970) (69,042)
Repayment of loan payable................................. -- -- -- (99,733)
Repayment of obligation under capital lease............... (8,350) (5,549) (7,443) --
Increase in obligation under capital lease................ -- -- -- 15,793
Issuance of common shares................................. 4,374,832 -- -- --
---------- -------- --------- -----------
Total cash provided by (used by) financing activities....... 4,320,607 (52,407) (69,413) (152,982)
---------- -------- --------- -----------
Increase (decrease) in cash and cash equivalents............ 4,210,072 34,340 242,224 (1,135,398)
Effect of currency translation adjustments on cash.......... 16,360 3,248 3,202 (2,949)
Cash and cash equivalents, beginning of period.............. 558,676 313,250 313,250 1,451,597
---------- -------- --------- -----------
Cash and cash equivalents, end of period.................... $4,785,108 $350,838 $ 558,676 $ 313,250
---------- -------- --------- -----------
Cash paid for:
Interest.................................................. $ 3,374 $ 7,034 $ 8,337 $ 18,305
---------- -------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
V3 Semiconductor Inc. (the "Company"), is incorporated under the laws
of the State of Nevada. The consolidated financial statements of the
Company include the accounts of its wholly-owned subsidiaries, V3
Semiconductor Corp., a Canadian company incorporated under the Ontario
Business Corporations Act and V Cubed Corporation, a California-based
company, registered in the State of Nevada. All intercompany balances and
transactions have been eliminated. The Company's principal business
activities are the design and development of integrated circuits for the
embedded computer market.
(b) Inventories:
Raw materials, which are used in the production of computer boards,
are valued at the lower of cost or replacement value. Finished goods, which
consists of embedded chips are valued at the lower of cost (cost has been
determined on the average cost basis) or net realizable value.
(c) Capital assets:
The Company records capital assets at cost, net of accumulated
depreciation and amortization. These assets are depreciated over their
estimated useful lives as follows:
<TABLE>
<CAPTION>
ASSET BASIS RATE
- --------------------------- -------------------- --------
<S> <C> <C>
Furniture and equipment Declining balance 20%
Computer equipment Declining balance 30%
Computer software Declining balance 30%
Patent Straight line 17 years
</TABLE>
(d) Share issue costs:
Share issue costs are charged against share capital.
(e) Revenue recognition:
Revenues from the sale of chipsets and chips are recognized at the
time of shipment.
(f) Research and development costs:
Research and development costs are charged to operations as incurred
less investment tax credits related to these costs.
(g) Foreign currency translation:
The Company's Canadian subsidiary measures and reports its results in
Canadian dollars. The amounts relating to assets and liabilities have been
translated into United States dollars at the current balance sheet rate and
amounts relating to the profit and loss accounts have been translated using
the year's average exchange rate. Differences arising from currency
translation are presented as a component of shareholders' equity.
F-7
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(h) Income taxes:
The Company records income taxes using the asset and liability method
as required by the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts that are more likely than not to be realized. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rates changes are enacted.
(i) Use of estimates:
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles 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 consolidated financial statements, and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
(j) Cash and cash equivalents:
The Company considers all highly liquid investments purchased with a
maturity of 90 days or less to be cash equivalents. Cash and cash
equivalent balances consist of cash balances and 60 day term deposits.
2. INVENTORIES:
Inventories are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
JUNE 30 -------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Raw materials.............................................. $ 14,671 $14,501 $ 18,243
Finished goods............................................. 127,835 80,951 130,306
-------- ------- --------
$142,506 $95,452 $148,549
-------- ------- --------
-------- ------- --------
</TABLE>
F-8
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
3. CAPITAL ASSETS:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
JUNE 30, 1998 COST AMORTIZATION VALUE
- ------------------------------------------------------- -------- ------------ --------
<S> <C> <C> <C>
Furniture and equipment................................ $121,963 $ 51,123 $ 70,840
Computer equipment..................................... 284,786 141,956 142,830
Computer software...................................... 406,511 237,881 168,630
Patent................................................. 8,803 1,486 7,317
Computer equipment under capital lease................. 21,000 11,151 9,849
-------- -------- --------
$843,063 $443,597 $399,466
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
SEPTEMBER 30, 1997 COST AMORTIZATION VALUE
- ------------------------------------------------------- -------- ------------ --------
<S> <C> <C> <C>
Furniture and equipment................................ $111,387 $ 41,158 $ 70,229
Computer equipment..................................... 231,100 115,204 115,896
Computer software...................................... 384,657 219,208 165,449
Patent................................................. 9,381 1,312 8,069
Computer equipment under capital lease................. 21,962 8,896 13,066
-------- -------- --------
$758,487 $385,778 $372,709
-------- -------- --------
-------- -------- --------
<CAPTION>
ACCUMULATED NET BOOK
SEPTEMBER 30, 1996 COST AMORTIZATION VALUE
- ------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Furniture and equipment................................ $ 97,110 $ 24,646 $ 72,464
Computer equipment..................................... 196,079 72,505 123,574
Computer software...................................... 381,114 151,326 229,788
Patent................................................. 9,513 963 8,550
Computer equipment under capital lease................. 22,271 3,341 18,930
-------- -------- --------
$706,087 $252,781 $453,306
-------- -------- --------
-------- -------- --------
</TABLE>
4. BANKING FACILITIES:
(a) The bank term loan bears interest at the bank prime rate plus 2%,
is repayable in monthly payments of $5,028 plus interest, is secured by a
specific charge on certain capital assets, a general assignment of accounts
receivable and a general security agreement. The loan matures on
August 31, 1998.
(b) The Company has a $143,980 line of credit payable on demand, which
bears interest at the Canadian bank prime rate plus 2% of which none was
drawn at June 30, 1998. Advances under the facility are secured by a
general security agreement covering substantially all the assets of the
Company.
5. OBLIGATION UNDER CAPITAL LEASES:
The obligation under capital leases represents the total present value
of future minimum lease payments discounted at the implicit interest rate
of 12.9% in the lease.
F-9
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
5. OBLIGATION UNDER CAPITAL LEASES (CONTINUED):
The following is a schedule, by year, of future minimum lease payments
under capital lease:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------
1997 1996
------- -------
<S> <C> <C>
1997..................................................................... $ -- $ 8,868
1998..................................................................... 8,746 8,130
------- -------
Total minimum lease payments............................................. 8,746 16,998
Less amount representing interest........................................ (396) (1,205)
------- -------
8,350 15,793
Current portion of obligation under capital leases....................... (8,350) (7,325)
------- -------
$ -- $ 8,468
------- -------
------- -------
</TABLE>
6. CAPITAL STOCK:
The authorized capital stock of the Company consists of: 50,000,000
common shares with a par value of $.001 each, 10,000,000 preferred shares,
which may be issued in different series and whose rights and privileges are
to be determined at the time of issue, and 3,400,000 special shares with a
par value of $0.0005 each. The special shares are voting, are not entitled
to any dividends and can not be transferred without the consent of the
Board of Directors.
The holders of the special shares are able to exchange one special
share together with one preferred share of V3 Semiconductor Corp. for one
common share of the Company. Except for this conversion right, it is the
intention of the directors to refuse to permit any sales, transfers or
other dispositions of the special shares of the Company or the preferred
shares of V3 Semiconductor Corp.
(a) Pursuant to the terms of an escrow agreement, the Company's stock
transfer agent held 400,000 special shares of the Company and 400,000
preferred shares of V3 Semiconductor Corp., which would be issued if
certain profit performance targets were met by June 30, 1995 and March 31,
1996, otherwise they are subject to cancellation. In 1996 and 1995, 200,000
shares were cancelled each year, since the targets had not been met.
(b) The Company undertook a private placement offering (the
"Offering") of a minimum of $1,000,000 and a maximum of $5,500,000 of
common shares at $3.50 per common share. In connection with the Offering
between the Company and The Mason Cabot Division of W. J. Nolan & Co., (the
"Placement Agent"), the Placement Agent offered the minimum offering on a
"best efforts, all or none" basis and any additional shares up to the
maximum offering on a "best efforts" basis. The Company agreed to pay the
Placement Agent a fee of 7% of each common share sold, plus an expense
allowance of 1.5% of the aggregate purchase price of the common shares
sold. The Company also granted to the Placement Agent, warrants to purchase
96,505 common shares. Each warrant has a 3 year exercise period commencing
on the date of the Final Closing (June 22, 1998) at $3.50 per common share.
The Company received net proceeds in the amount of $2,188,000 representing
the issuance of 687,926 common shares in May 1998 and $2,186,000
representing the issuance of 684,732 common shares in June 1998. Share
issue costs relating to the May 1998 and June 1998 private placement
offerings were $219,316 and $210,155, respectively.
Subsequent to June 30, 1998, the Company issued 10,000 common shares
in the amount of $28,000 in consideration for legal services.
F-10
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
6. CAPITAL STOCK (CONTINUED):
(c) During fiscal 1996, the board of directors approved an employee
share purchase plan. The plan reserves 20,000 common shares for purchase by
eligible employees and permits employees to purchase common stock through
payroll deductions at a purchase price of 90% of the fair market value of
the common shares on the purchase date. No shares have yet been issued
under this plan.
(d) Stock option plan:
During fiscal 1996, the board of directors approved an employee stock
option plan. Pursuant to the plan, 250,000 common shares are reserved for
issue to eligible employees. During fiscal 1997, the board of directors
approved an amendment to the employee stock option plan to increase the
shares reserved for issue from 250,000 common shares to 400,000. In
addition, the board of directors approved the issuance of 10,000 options to
each director as compensation.
A total of 517,983 share options were granted and approved by the
board of directors which expire between July 1999 and February 2006. Of
this total, 90,833 options were granted to the members of the board of
directors and 160,000 options were granted to an officer and director of
the Company. The options granted to the officer and director of the Company
are in addition to the options reserved for under employee stock option
plan. The options exercise prices range from $1.75 to $6.25 per share.
The Company measures compensation cost for stock option awards issued
to employees using the intrinsic value based method of accounting
prescribed by the United States Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Had compensation cost
for these plans been determined under the provisions of the United States
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" which utilizes
a fair value based method, the Company's net income (loss) and earnings
(loss) per share would have been changed to the following pro forma
amounts:
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------
1998 1997
--------------------- --------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)............................. $279,253 $(205,729) $ 76,323 $(63,035)
Net income (loss) per share
Basic....................................... 0.07 (0.05) 0.02 (0.02)
Diluted..................................... 0.06 (0.05) 0.02 (0.01)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------------------------------
1997 1996
---------------------- ------------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Net income (loss)....................... $(124,596) $(319,321) $(551,467) $(1,156,910)
Net income (loss) per share
Basic................................. (0.03) (0.08) (0.13) (0.27)
Diluted............................... (0.03) (0.07) (0.13) (0.27)
</TABLE>
For purposes of the pro forma disclosures, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option pricing model with following weighted average assumptions used for
F-11
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
6. CAPITAL STOCK (CONTINUED):
options as at June 30, 1998 and 1997, September 30, 1997 and 1996,
respectively: risk-free interest rates of 5.0%, 5.3%, 5.0% and 5.0%;
expected dividend yields of 0%, 0%, 0% and 0%; expected volatility of 90%,
90%, 90% and 90%; and expected lives of 5 years, 5 years, 5 years and
5 years.
Certain additional disclosures with respect to stock-based
compensation are as follows:
Stock option information:
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------
1998 1997
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period...................... 384,083 $ 2.87 283,750 $ 2.95
Options granted................................... 134,000 4.69 83,500 2.30
Options exercised................................. 100 -- 100 --
------- ------ ------- ------
Balance, end of period............................ 517,983 $ 3.34 367,150 $ 2.80
------- ------ ------- ------
Exercisable, at end of period..................... 390,260 309,420
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------------------------
1997 1996
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period...................... 283,750 $ 2.95 -- $ --
Options granted................................... 100,333 2.67 283,750 2.95
------- ------ ------- ------
Balance, end of period............................ 384,083 $ 2.87 283,750 $ 2.95
------- ------ ------- ------
Exercisable, at end of period..................... 322,798 243,750
------- -------
------- -------
</TABLE>
Stock options outstanding and exercisable as at June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
---------------------------
WEIGHTED
OPTIONS OUTSTANDING AVERAGE
- ------------------------ REMAINING
EXERCISE CONTRACTUAL
PRICE NUMBER LIFE NUMBER
- ------------- ------- --------------- -------
<S> <C> <C> <C>
$ 1.75 - 2.00 113,750 1.0 - 3.0 years 113,750
2.02 - 2.75 80,900 3.1 - 4.0 years 67,336
3.00 - 3.86 215,500 4.1 - 5.0 years 142,670
4.00 - 6.25 107,833 5.0 - 8.0 years 66,504
------- -------
517,983 390,260
------- -------
------- -------
</TABLE>
F-12
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
7. OTHER INCOME:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
JUNE 30 SEPTEMBER 30
-------------------- --------------------
1998 1997 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Royalty income............................... $ 76,800 $210,529 $257,472 $605,070
Consulting fees.............................. 49,697 69,096 -- 174,450
Interest..................................... 410 198 2,240 478
-------- -------- -------- --------
$126,907 $279,823 $259,712 $779,998
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The Company's Canadian subsidiary entered in a royalty agreement with
one of its suppliers whereby the supplier was granted the right to sell the
Company's product. The royalty agreement provided for a 50% royalty payment
on the first 100,000 units shipped to customers and a 7.5% royalty payment
on any additional units shipped to customers up to a maximum royalty
payment of approximately $1.7 million. As at June 30, 1998, approximately
$1.5 million of royalty payments have been received. Royalty revenues are
recognized in accordance with the terms of the agreement.
8. RESEARCH AND DEVELOPMENT:
(a) Government assistance:
Research and development is undertaken by the Canadian subsidiary. The
Company received government assistance covering a portion of the salaries
incurred on qualifying research and development projects. Government
assistance has been accrued and netted against the research and development
expense as follows:
<TABLE>
<S> <C>
Year ended September 30, 1997..................................................... $ 124,989
Year ended September 30, 1996..................................................... 73,430
Nine months ended June 30, 1998................................................... 115,747
Nine months ended June 30, 1997................................................... 60,101
</TABLE>
(b) Investment tax credits ("ITCs"):
The Company's Canadian subsidiary incurs current and capital
expenditures which are eligible as scientific research and experimental
development ("SR&ED") expenditures. The Company earns ITCs at a rate of 20%
on SR&ED expenditures each year. These ITCs are available for application
against the Canadian subsidiary's federal income taxes payable. Unclaimed
ITCs can be carried forward for a period of 10 years. The Company has
unclaimed ITCs which expire as follows:
<TABLE>
<S> <C>
2005.............................................................................. $ 132,000
2006.............................................................................. 153,000
2007.............................................................................. 94,000
</TABLE>
(c) Research and development expenditures:
The Company's Canadian subsidiary incurs SR&ED expenditures which can
be deducted against taxable income. The Company has undeducted SR&ED
expenditures of approximately $1,098,000 available to be deducted against
future years' taxable income and can be carried forward indefinitely.
F-13
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
9. INCOME TAXES:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
June 30, 1998, are presented below:
<TABLE>
<CAPTION>
CANADA UNITED STATES TOTAL
---------- ------------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ -- $ 39,900 $ 39,900
Unclaimed research and development
expenditures.................................. 580,200 -- 580,200
Unclaimed investment tax credits................. 444,000 -- 444,000
Fixed assets..................................... 31,800 -- 31,800
---------- --------- ----------
Total gross deferred tax assets.................. 1,056,000 39,900 1,095,900
Less valuation allowance......................... (858,000) (39,900) (897,900)
---------- --------- ----------
Net deferred tax assets.......................... 198,000 -- 198,000
Deferred tax liabilities:
Investment tax credits........................... 198,000 -- 198,000
---------- --------- ----------
Total gross deferred tax liabilities............. 198,000 -- 198,000
---------- --------- ----------
Net deferred tax liability....................... $ -- $ -- $ --
---------- --------- ----------
---------- --------- ----------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1997, are presented below:
<TABLE>
<CAPTION>
CANADA UNITED STATES TOTAL
--------- ------------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 257,788 $ 100,400 $ 358,188
Unclaimed research and development expenditures... 219,878 -- 219,878
Unclaimed investment tax credits.................. 379,000 -- 379,000
Fixed assets...................................... 48,730 -- 48,730
--------- --------- ----------
Total gross deferred tax assets................... 905,396 100,400 1,005,796
Less valuation allowance.......................... (736,362) (100,400) (836,762)
--------- --------- ----------
Net deferred tax assets........................... 169,034 -- 169,034
Deferred tax liabilities:
Investment tax credits............................ 169,034 -- 169,034
--------- --------- ----------
Total gross deferred tax liabilities.............. 169,034 -- 169,034
--------- --------- ----------
Net deferred tax liability........................ $ -- $ -- $ --
--------- --------- ----------
--------- --------- ----------
</TABLE>
F-14
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
9. INCOME TAXES (CONTINUED):
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1996, are presented below:
<TABLE>
<CAPTION>
CANADA UNITED STATES TOTAL
--------- ------------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 273,406 $ 77,200 $ 350,606
Unclaimed research and development expenditures..... 206,944 -- 206,944
Unclaimed investment tax credits.................... 328,000 -- 328,000
Fixed assets........................................ 79,797 -- 79,797
--------- --------- ---------
Total gross deferred tax assets..................... 888,147 77,200 965,347
Less valuation allowance............................ (741,859) (77,200) (819,059)
--------- --------- ---------
Net deferred tax assets............................. 146,288 -- 146,288
Deferred tax liabilities:
Investment tax credits.............................. 146,288 -- 146,288
--------- --------- ---------
Total gross deferred tax liabilities................ 146,288 -- 146,288
--------- --------- ---------
Net deferred tax liability.......................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
At September 30, 1997, the Company and its subsidiaries had operating
loss carryforwards for tax purposes which expire as follows:
<TABLE>
<CAPTION>
UNITED STATES CANADA
------------- --------
<S> <C> <C>
2000............................................................. $ -- $ 47,000
2001............................................................. -- 425,000
2002............................................................. -- 106,000
2003............................................................. -- --
2004............................................................. -- --
2005............................................................. -- --
2006............................................................. -- --
2007............................................................. -- --
2008............................................................. -- --
2009............................................................. 36,000 --
2010............................................................. 81,000 --
2011............................................................. 76,000 --
2012............................................................. 58,000 --
--------- --------
$ 251,000 $578,000
--------- --------
--------- --------
</TABLE>
F-15
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
9. INCOME TAXES (CONTINUED):
The effective tax rate on income is different from the statutory
income tax rate as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
JUNE 30 ----------------
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Statutory tax rate............................................ 44.6% 44.6% 44.6%
Increase (reduction) resulting from:
Tax benefit of loss carryforwards............................. (44.6) (16.6) --
Reduction of provincial taxes due to SR&ED superallowance..... -- -- (15.6)
----- ----- -----
-- 28.0% 29.0%
----- ----- -----
----- ----- -----
</TABLE>
10. RELATED PARTY TRANSACTIONS:
A shareholder provided consulting and management services for fees
which are included in research and development expense as follows:
<TABLE>
<S> <C>
Year ended September 30, 1997...................................................... $ 67,757
Year ended September 30, 1996...................................................... 65,814
Nine months ended June 30, 1998.................................................... 28,670
Nine months ended June 30, 1997.................................................... 68,073
</TABLE>
These transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
11. COMMITMENTS:
(a) The Company leases office premises under operating leases which
expire at various dates through 2002.
The minimum lease payments due under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30:
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 80,851
1999.............................................................................. 60,788
2000.............................................................................. 63,274
2001.............................................................................. 71,491
2002.............................................................................. 23,830
----------
$ 300,234
----------
----------
</TABLE>
(b) The Company has entered into a five year employment agreement with
the Company's President and Chief Executive Officer, commencing February
1996. The employment agreement provides for an annual base salary of
$112,000 (Canadian $160,000).
12. CONTINGENT LIABILITIES:
(a) A lawsuit was instituted against the Company's subsidiary by a
former employee for entitlement of additional preferred shares of the
company in 1995. The company has contested the legal action and management
believes that it has a valid defense in this matter.
F-16
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
12. CONTINGENT LIABILITIES (CONTINUED):
(b) During 1996, a breach of contract lawsuit was instituted against
the Company's subsidiary in the amount of $6,000,000. Management, after
consulting with legal counsel, is of the opinion that the Company has a
strong defense to the claim.
13. NET INCOME (LOSS) PER SHARE:
Net income (loss) per share has been calculated using the weighted
average number of common and special shares outstanding during the periods.
Special shares have been included in the weighted average number of shares
outstanding as the special shares are exchangeable into common shares of
the Company (note 6).
The weighted average number of common and special shares outstanding
which was used to calculate the net income (loss) per share was:
<TABLE>
<S> <C>
September 30, 1996.............................................................. $ 4,284,827
September 30, 1997.............................................................. 4,135,238
June 30, 1997................................................................... 4,135,238
June 30, 1998................................................................... 4,281,297
</TABLE>
Application of the provisions of Statement of Financial Accounting
Standards No. 128 results in disclosure of two income per share measures,
basic and assuming dilution, on the face of the consolidated statement of
income.
The reported net income represents the net income available to common
and special shareholders for purposes of computing both measures. The
following reconciles shares outstanding at the beginning of the year to
average shares outstanding used to compute both income per share measures:
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
---------------------- ----------------------
1998 1997 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Common and special shares outstanding,
beginning of year....................... 4,135,238 4,135,238 4,135,238 4,335,238
Weighted average shares issued............ 146,059 -- -- --
Weighted average shares cancelled......... -- -- -- (50,411)
--------- --------- --------- ---------
Average shares outstanding--basic......... 4,281,297 4,135,238 4,135,238 4,284,827
Effect of dilutive securities:
Dilutive shares contingently issuable upon
the exercise of stock options and
warrants................................ 458,935 309,583 325,719 145,486
Shares assumed to have been purchased for
treasury with assumed proceeds from the
exercise of stock options and
warrants................................ (354,286) (82,527) (90,603) (92,227)
--------- --------- --------- ---------
Average shares outstanding--assuming
dilution................................ 4,385,946 4,362,294 4,370,354 4,338,086
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-17
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
14. SEGMENTED INFORMATION:
Except for the $4.4 million of net proceeds from the private offering,
substantially, all the operations of the Company are conducted by, and
assets held by the Canadian subsidiary. The Company has several customers
whose sales represent a significant portion of the Company's total sales.
Sales to each of the three major customers for the nine months ended June
30, 1998 were $871,000, $396,000 and $370,000 respectively. Sales to each
of the three major customers for the nine months ended June 30, 1997 were
$691,000, $169,000 and $139,000 respectively. Sales to each of the two
major customers for the year ended September 30, 1997 were $644,000 and
$585,000 respectively. Sales to each of the four major customers for the
year ended September 30, 1996 were $272,000, $160,000, $147,000 and $84,000
respectively. Sales to all customers are conducted in United States
dollars.
Export sales by the Company's Canadian subsidiary were as follows:
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
---------------------- ----------------------
1998 1997 1997 1996
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
United States............................ $ 923,989 $377,745 $ 526,892 $423,380
Middle East.............................. 395,995 167,887 585,436 97,025
Other.................................... 343,196 139,906 175,631 8,820
---------- -------- ---------- --------
$1,663,180 $685,538 $1,287,959 $529,225
---------- -------- ---------- --------
---------- -------- ---------- --------
</TABLE>
15. FINANCIAL INSTRUMENTS:
The reported values of financial instruments which consist of cash and
cash equivalents, accounts receivable, accounts payable, accrued
liabilities and bank term loan payable approximate their fair values due to
the short-term nature of these instruments.
16. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of accounts receivable.
The Company's exposure to credit risk is impacted by the economic
conditions of the embedded systems market which could affect the customers'
ability to satisfy their obligations to the Company. In order to reduce
risks, the Company has credit procedures in place whereby trade receivables
are insured and the insuring company performs analysis to control the
granting of credit to high-risk customers.
17. NEW ACCOUNTING STANDARDS NOT YET ADOPTED:
SFAS 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income (which is all changes in the
net equity of a business due to transactions or other events not involving
owners) and its components (revenues, expenses, gains and losses). While it
does not specify a format of presentation, SFAS 130 does require that all
items that are required to be recognized as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominance as other financial statements. SFAS 130, which does not address
issues of recognition or measurement of comprehensive income, is effective
for fiscal years beginning after December 15, 1997.
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes new standards for the reporting of information
about the operating segments of a business. It also establishes standards
for related disclosures about products and services, geographic areas and
major customers. Generally, SFAS 131 requires that the definition of
operating segments reflect the manner in which the enterprise's chief
operating decision maker decides how to allocate resources and assess
performance. SFAS 131 is effective for fiscal years beginning after
December 15, 1997.
F-18
<PAGE>
V3 SEMICONDUCTOR INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION AS AT JUNE 30, 1998 AND THE NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 ARE UNAUDITED
(STATED IN UNITED STATES DOLLARS)
17. NEW ACCOUNTING STANDARDS NOT YET ADOPTED (CONTINUED):
Management does not believe that the adoption of these new accounting
standards will materially affect its historical results of operations or
shareholders' equity.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management has not
determined the effect of SFAS 133 on its financial statements.
F-19
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Glossary.................................................... 5
Risk Factors................................................ 6
Use of Proceeds............................................. 12
Dividends................................................... 12
Dilution.................................................... 12
Capitalization.............................................. 13
Market for Securities....................................... 14
Unaudited Pro Forma Condensed Consolidated Statement of
Income....................................................
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Business.................................................... 18
Management.................................................. 25
Principal Stockholders...................................... 29
Certain Transactions........................................ 30
Description of Securities................................... 30
Shares Eligible for Future Sale............................. 32
Selling Stockholders........................................ 33
Plan of Distribution........................................ 36
Legal Matters............................................... 36
Experts..................................................... 36
Additional Information...................................... 37
Index to Financial Statements............................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
518,083 SHARES
OF COMMON STOCK
V3 SEMICONDUCTOR, INC.
---------------------------
P R O S P E C T U S
---------------------------
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the
registrant, pursuant to the foregoing provisions, or otherwise, the registrant
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. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such a director, officer or controlling person in
connection with the securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities offered hereby.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 511.25
NASD registration fee....................................... 0.00
Printing and engraving...................................... $10,000.00
Accountants' fees and expenses.............................. $30,000.00
Legal fees.................................................. $25,000.00
Transfer agent's fees and expenses.......................... 0.00
Blue Sky fees and expenses.................................. 0.00
Miscellaneous............................................... $ 9,488.75
----------
Total.................................................. $75,000.00
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years the Company has issued securities to a limited
number of persons as described below. Except as indicated, there were no
underwriters involved in the transactions and there were no underwriting
discounts or commissions paid in connection therewith.
In July 1995, the Company sold to 5 investors an aggregate of 220,375
shares of Common Stock for $2.75 per share (an aggregate of $303,531.25). The
sale of securities was exempt form registration pursuant to Rule 506 under
Section 4(2) of the Act.
In September 1995, the Company sold to 20 investors an aggregate of 434,863
shares of Common Stock for $2.75 per share (an aggregate of $1,195,873.25). The
sale of securities was exempt from registration pursuant to Rule 506 under
Section 4(2) of the Act.
On February 23, 1996, the Company granted 160,000 shares to John
Zambakkides, the President and Chief Executive Officer of the Company. The
transaction was exempt from registration under Section 4(2) of the Act.
In May 1998, the Company sold to 22 investors an aggregate of 687,926
shares of Common Stock for $2,407,741. The Mason Cabot Division of W.J. Nolan &
Co., placed the Common Stock and received 7% placement agent fees plus expenses
of 1.5% and warrants to purchase 48,154 shares of common stock at an exercise
price of $3.50 per share. Such warrants expire on May 5, 2001. The sale of
securities was exempt from registration pursuant to Rule 506 under Section 4(2)
of the Act.
In June 1998, the Company sold to 26 investors an aggregate of 684,732
shares of Common Stock for $2,396,562. The Mason Cabot Division of W.J. Nolan
&Co. placed the Common Stock and received 7% placement agent fees plus expenses
of 1.5% and warrants to purchase 48,351 shares of common stock at an
II-1
<PAGE>
exercise price of $3.50 per share. Such warrants expire on June 21, 2001. The
sale of securities was exempt from registration pursuant to Rule 506 under
Section 4(2) of the Act.
In July 1998, the Company issued to Sichenzia, Ross & Friedman LLP ("SRF"),
United States legal counsel to the Company, in consideration of certain legal
services performed by SRF for the benefit of the Company The issuance of
securities was exempt from registration pursuant to Section 4(2) of the Act. The
Company has valued these 10,000 shares of stock at $28,000.
Between February 23, 1996 and June 15, 1998 the Company granted options to
purchase an aggregate 343,083 shares of Common Stock under its 1997 Stock Option
Plan to its officers and directors. The transactions were exempt from
registration under Section 4(2) of the Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
1.3 Certificate of Incorporation, as amended to date.**
3.2 By-Laws.**
4.1 Form of Common Stock Certificate.
4.2 1996 Stock Option Plan.**
5.1 Opinion of Sichenzia, Ross & Friedman, LLP.
10.1 Lease of premises located at 250 Consumers Road, North York, Ontario, Canada
24.1 Consent of KPMG, the Company's Independent Auditors.
24.2 Consent of Sichenzia, Ross & Friedman, LLP (Included in Exhibit 5.1).
25.1 Powers of Attorney (see Page II-5).**
</TABLE>
- ------------------
* To be filed by amendment
** Previously filed
ITEM 28. UNDERTAKINGS
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(1) 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.
(2) To remove from the registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
registrant, pursuant to the foregoing provisions, or otherwise, the registrant
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. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding)
II-2
<PAGE>
is asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(4) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the issuer under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(5) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-3
<PAGE>
(5) SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE IT MEETS ALL THE
REQUIREMENTS OF FILING ON FORM SB-2 AND AUTHORIZED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
NORTH YORK, ONTARIO, ON SEPTEMBER 22, 1998.
V3 SEMICONDUCTOR, INC.
By: _________/s/ CARL MITCHELL________
Carl Mitchell, Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl Mitchell his true and lawful
attorney-in-fact and agent, with full power of substitution and re-
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits and
schedules thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully ratifying and confirming all that
said attorney-in-fact and agent or their substitutes or substitute may lawfully
do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September 22, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ JOHN ZAMBAKKIDES President, Chief Executive Officer September 22, 1998
- ------------------------------------------ (Principal Executive Officer) and Director
John Zambakkides
/s/ CARL MITCHELL General Manager, Secretary and Treasurer September 22, 1998
- ------------------------------------------
Carl Mitchell
/s/ BERNARD N. SLADE Director September 22, 1998
- ------------------------------------------
Bernard N. Slade
/s/ JAMES WILKINSON Director September 22, 1998
- ------------------------------------------
James Wilkinson
/s/ JOHN A. FAZACKERLEY Director September 22, 1998
- ------------------------------------------
John A. Fazackerley
/s/ ROBERT SKINNER Director September 22, 1998
- ------------------------------------------
Robert Skinner
</TABLE>
II-4
<PAGE>
NUMBER [V3 SEMICONDUCTOR INC. LOGO] SHARES
SEMICONDUCTOR INC. CUSIP NO. 918392 10 1
THE EMBEDDED CHIPSET COMPANY
50,000,000 AUTHORIZED SHARES $.001 PAR VALUE NON-ASSESSABLE
This Certifies that
is the record holder of
shares of V3 SEMICONDUCTOR, INC. Common Stock
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This
Certifixate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile seal of the Corporation and the facismille signatures
of its duly authorized officers.
TRANSFER AGENT AND REGISTRAR
COLONIAL STOCK TRANSFER
Salt Lake City, Utah 84111
COUNTERSIGNED AND REGISTERED
By: /s/ Illegible
-------------------------
Authorized Signature
Dated:
/s/ Illegible V3 SEMICONDUCTOR, INC. CORPORATE SEAL NEVADA /s/ Illegible
- ----------------- ---------------
Secretary President
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
------- -------
TEN ENT - as tenants by the (Cust) (Minor)
entireties
JT TEN - as joint tenants with under Uniform Gifts to
right of survivorship and Minors Act
not as tenants in common -------------
(State)
Additional abbreviations may also be used though not
in the above list.
For the value recieved, hereby sell, assign and transfer unto
--------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
---------------------------------------
| |
---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------- Shares
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
--------------
-------------------------------------------------------------------
NOTICE: SIGNATURE MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE
FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST
BE GUARANTEED BY A BANK, BROKER OR ANY OTHER ELIGIBLE
GUARANTOR INSTITUTION THAT IS AUTHORIZED TO DO SO UNDER THE
SECURITIES TRANSFER AGENTS MEDALLION PROGRAM (STAMP) UNDER
RULES PROMULGATED BY THE U.S. SECURITIES AND EXCHANGE
COMMISION.
THE SHARE OF STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED UNLESS A COMPLIANCE WITH THE REGISTRATION
PROVISIONS OF SUCH ACT HAS BEEN MADE OR UNLESS
AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION
PROVISIONS HAS BEEN ESTABLISHED, OR UNLESS SOLD
PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933.
<PAGE>
SICHENZIA, ROSS & FRIEDMAN LLP
Attorneys At Law
135 West 50th Street, 20th Floor
New York, New York 10020
---------------------
Telephone: (212) 664-1200
Facsimile: (212) 664-7329
E-Mail: [email protected]
September 21, 1998
VIA ELECTRONIC TRANSMISSION
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, CC 20549
Re: V3 SEMICONDUCTOR, INC.
SEC File No. 333-59133
-----------------------
Ladies and Gentlemen:
We refer to the above-captioned registration statement on Form SB-2
(the "Registration Statement") under the Securities Act of 1933, as amended
(the "Act"), filed by V3 Semiconductor, Inc., a Nevada corporation (the
"Company"), with the Securities and Exchange Commission.
We have examined the originals, photocopies, certified copies or
other evidence of such records of the Company, certificates of officers of the
Company and public officials, and other documents as we have deemed relevant
and necessary as a basis for the opinion hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as certified copies or
photocopies and the authenticity of the originals of such latter documents.
Based on our examination mentioned above, we are of the opinion that
the securities being registered to be sold pursuant to the Registration
Statement are duly authorized and will be, when sold in the manner described
in the Registration Statement, legally and validly issued, and fully paid and
nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under "Legal Matters"
in the related Prospectus. In giving the foregoing consent, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act, or the rules and regulations of the Securities and
Exchange Commission.
Very truly yours,
/s/ Sichenzia, Ross & Friedman, LLP
-----------------------------------
Sichenzia, Ross & Friedman, LLP
<PAGE>
COMMERCIAL LEASE
THIS INDENTURE
made the 13th day of August
one thousand nine hundred and ninety-six.
IN PURSUANCE OF THE SHORT FORMS OF LEASES ACT
BETWEEN
250 CONSUMERS ROAD LIMITED
A company incorporated under the laws of the Province of
Ontario and having its head office at 214 Merton Street,
Suite 300, Toronto, Ontario, M4S 1A6
hereinafter called the "Lessor"
OF THE FIRST PART
-and-
V.3. SEMICONDUCTOR CORPORATION
hereinafter called the "Lessee"
OF THE SECOND PART
WITNESSETH that in consideration of the rents,
covenants and agreements hereinafter reserved and contained
on the part of the said Lessee, to be paid, observed and
performed, the said Lessor has demised and leased and by
these presents doth demise and lease unto the said Lessee
ALL THOSE CERTAIN PREMISES excluding any part of the
external walls known and described as Suite 901 on the 9th
level of the office building located at and municipally
known as 250 Consumers Road, in the City of North York, in
the municipality of Metropoitan Toronto and comprising an
area of approximately 7,491 square feet (adjusted to
include Lessee's proportionate share of common areas and
facilities on the 9th level of the building) as outlined in
red on the floor plan of the 9th level of the building
hereto attached as Schedule "A".
DEPOSIT A deposit in the amount of FIFTEEN THOUSAND FOUR HUNDRED
AND SEVENTY-SIX DOLLARS AND EIGHTY-SIX CENTS
($15,476.86) is payable by the Lessee at the time
of execution of this lease and shall be applied to Fixed
Annual Minimum Rent, Additional Rent and GST payable thereon
for the first month of the lease term and to the Fixed
Annual Minimum Rent, Additional Rent and GST payable thereon
for the last month of the lease term and shall be subject to
forefeiture as liquidated damages in the event of the
default by the Lessee of any of the terms hereof.
TERM TO HAVE AND TO HOLD the said demised premises for and
during the term of FIVE (5) YEARS AND SIX (6) MONTHS to be
computed from the 1st day of August, 1996 and from thenceforth
ensuing and to be fully completed and ended on the 31st day
of January, 2002.
RENTAL YIELDING AND PAYING THEREFOR during the first period
of the lease term from August 1, 1996 to July 31, 1997, as
Fixed Annual Minimum Rent, the sum of SEVEN THOUSAND FOUR
HUNDRED AND NINETY-ONE DOLLARS ($7,491.00) per annum, payable
in equal consecutive monthly installments of SIX HUNDRED AND
TWENTY-FOUR DOLLARS AND TWENTY-FIVE CENTS ($624.25) each in
advance on the first day of each and every month during the
first period of the lease term.
YIELDING AND PAYING THEREFOR during the second period of
the lease term from August 1, 1997 to July 31, 1998, as
Fixed Annual Minimum Rent, the sum of NINE THOUSAND THREE
HUNDRED AND SIXTY-THREE DOLLARS AND SEVERNTY-FIVE CENTS
($9,363.75) per annum, payable in equal consecutive monthly
installments of SEVEN HUNDRED AND EIGHTY DOLLARS AND
THIRTY-ONE CENTS ($780.31) each in advance on the first day
of each and every month during the second period of the
lease term.
<PAGE>
COMMERCIAL LEASE - Page 2
YIELDING AND PAYING THEREFOR during the third period of
the lease term from August 1, 1998 to July 31, 1999, as
Fixed Annual Minimum Rent, the sum of ELEVEN THOUSAND TWO
HUNDRED AND THIRTY-SIX DOLLARS AND FIFTY CENTS ($11,236.50)
per annum, payable in equal consecutive monthly installments
of NINE HUNDRED AND THIRTY-SIX DOLLARS AND THIRTY-EIGHT
CENTS ($936.38) each in advance on the first day of each and
every month during the third period of the lease term.
YIELDING AND PAYING THEREFOR during the fourth period
of the lease term from August 1, 1999 to July 31, 2000, as
Fixed Annual Minimum Rent, the sum of FOURTEEN THOUSAND NINE
HUNDRED AND EIGHTY-TWO DOLLARS ($14,982.00) per annum,
payable in equal consecutive monthly installments of ONE
THOUSAND TWO HUNDRED AND FORTY-EIGHT DOLLARS AND FIFTY CENTS
($1,248.50) each in advance on the first day of each and
every month during the fourth period of the lease term.
YIELDING AND PAYING THEREFOR during the fifth period of
the lease term from August 1, 2000 to January 31, 2002, as
Fixed Annual Minimum Rent, the sum of EIGHTEEN THOUSAND
SEVEN HUNDRED AND TWENTY-SEVEN DOLLARS AND FIFTY CENTS
($18,727.50) per annum, payable in equal consecutive monthly
installments of ONE THOUSAND FIVE HUNDRED AND SIXTY DOLLARS
AND SIXTY-THREE CENTS ($1,560.63) each in advance on the
first day of each and every month during the fifth period of
the lease term.
THE RENTS PAYABLE, as per above, in addition to
additional rent, are subject to the goods and services tax
(GST) payable monthly in addition to any additional charges
that may arise from time to time. Failure to pay GST
constitutes default under the terms of the Lease.
NOTWITHSTANDING any of the above, the Lessee shall have
the months of August, 1996, and September, 1996, and August,
1997, and August 1998, and August, 1999, and August, 2000
free of all rents (Fixed Annual Minimum Rent and Additional
Rent).
The said Lessee covenants with the said Lessor as follows:
RENT To pay the Fixed Minimum Annual Rent, additional rent
and such other amounts for which the Lessee may be liable
under the provisions of this Lease (all collectively
referred to herein as "Rent");
BUSINESS TAXES To pay all business and other taxes, charges, rates,
duties and assessments levied, rated, charged or assessed
against and in respect of the Lessee's occupancy of the
Leased Premises or in respect of the personal property,
trade fixtures, furniture and facilities of the Lessee or
business of the Lessee on the Leased Premises, if, as and
when the same becomes due, and will indemnify and keep
indemnified the Lessor from and against all payment of all
loss, charges and expenses occasioned by or arising from any
and all such taxes, rates, duties, assessments, license fees
and any and all taxes which may in future be levied in lieu
of such taxes and in addition if the Lessee or any person
occupying the Leased Premises or any part thereof shall
elect to have the Leased Premises or any part thereof
assessed for Separate School taxes, the Lessee shall pay to
the Lessor as soon as the amount of the Separate School
taxes is ascertainable, any amount by which the Separate
School taxes exceed the amount which would have been payable
for school taxes had such election not been made as
aforesaid;
REALTY TAXES The word "Taxes" means all realty taxes, rates,
levies and assesments whatsover, whether municipal,
parliamentary or otherwise charged or levied upon the Leased
Premises or upon the Lessor in respect thereof, or in respect
of the Building or the Lands upon which the Building is
erected including taxes for education and all taxes, rates,
duties, levies and assesments for local improvements and
including any and all taxes which may in future be levied in
lieu thereof but excluding the amount by which Separate
School taxes (if any should be payable) exceed the amount
which would have been payable for school taxes if no
assesment for Separate Schools had been made and excluding
such taxes as income, profits or excess profits taxes
assessed upon the income of the Lessor. The words "Lessee's
Proportionate Share" shall mean the fraction which has as
its numerator the total Gross Rentable Area of the Leased
Premises and which has as its denominator the total Gross
Rentable Area of the building (including the Leased
Premises) but, excluding all basement area except such Net
Rentable Areas of the basement level as are leased for
retail purposes, or as otherwise reasonably determined by
the Lessor;
<PAGE>
COMMERCIAL LEASE - Page 3
The Lessee shall, as additional rent, in each and every
year during the Term and within the time or times
hereinafter provided, pay to the Lessor or to the taxing
authorities as the Lessor may direct, all Taxes for which a
separate assessment and separate bill has been rendered
directly to the Lessee. The Lessee agrees to provide to the
Lessor within ten (10) days after the Lessor's written
demand, a copy of any separate tax bill or separate notice of
assessment for the Leased Premises. The Lessee will upon
written request deliver to the Lessor receipts for payment
of all such Taxes paid to any such taxing authorities as
aforesaid;
If no separate assessment or bill is rendered by a
taxing authority against the Lessee with respect to the
Leased Premises, the Lessee shall, as additional rent, in
each and every year during the Term and within the time or
times hereinafter provided, pay to the Lessor the Lessee's
Proportionate Share of Taxes levied against the Building and
lands upon which the Building has been erected;
OPERATING The Lessee shall, as additional rent, in
EXPENSES each and every year during the Term and within the time or
time hereinafter provided, pay without duplication to the
Lessor its Proportionate Share of the Lessor's cost of
insurance taken out and the Lessor's expense of repairing,
maintaining and operating the Building and the Common Areas
of the Building;
The Lessor's expense of repairing, maintaining and
operating the Building and the Common Areas shall mean all
expenses properly attributable to the repair, maintenance
and operation of the Building, the Common Areas of the
Building and the lands upon which it is located and all
rights-of-way and laneways adjacent to or servicing,
directly or indirectly, the Building and such lands
including without limitation all amounts paid, incurred, or
attributable to:
cleaning, snow and ice removal;
lighting of Common Areas and providing of any speaker,
security, communication, public address or music
broadcasting systems;
managing, supervising, policing, patrolling and security
and fire protection in respect of the Building;
depreciation of all fixtures and equipment which by
their nature require periodic replacement or substantial
replacement according to generally accepted accounting
principles at such rates as are used in generally accepted
accounting principles including cleaning equipment, waste
disposal equipment, heating, ventilating and air
conditioning equipment plus interest on the undepreciated
book value of the same from time to time at the rate of one
percent (1%) in excess of the prime rate of interest charged
by The Toronto Dominion Bank at Toronto;
heating, ventilating and air conditioning and sprinkler
system including maintenance, repairs, replacements and
depreciation at such rates and in accordance with generally
accepted accounting principles of all equipment, fixtures,
machinery and the like used in connection therewith to the
extent that the same are not separately charged to rentable
premises within the Building;
the supply of utilities and similar services to the
Building to the extent that the same are not separately
charged to rentable premises within the Building;
repairs, maintenance and replacement of the Building and
any improvements therein or thereon and on the property of
which the Leased Premises form part or servicing such
property including rights-of-way and the laneway adjacent to
and servicing the Building and improvements thereon;
sanitary control including waste removal;
charges for the rentals of machinery and equipment used
exclusively for the purpose of providing any of such services
and the reasonble wages, salaries and benefits payable to
personnel engaged to provide any of such services;
an Adminstration Fee equal to fifteen percent (15%) of
the Realty Taxes and Operating Expenses;
PAYMENT The additional rent payable by the Lessee as outlined
OF ADDITIONAL above shall be paid as follows:
RENT
The Lessor shall reasonable estimate the amount of such
additional rentals prior to the commencement of the Lessor's
fiscal year which commences on the 1st day of January unless
otherwise notified and the Lessee shall pay to the Lessor
monthly as additional rent, one-twelfth (1/12th) of such
estimated
<PAGE>
COMMERCIAL LEASE - Page 4
additional rent. The additional rent for the calendar year
1996 is estimated to be $10.68 per square foot of gross
rentable area per annum;
If the amount of additional rental payments made by the
Lessee should be less than the actual additional rentals due
for such year taken as a whole, then the Lessee shall pay to
the Lessor upon written demand the amount of such
deficiency. If the aggregate amount of additional rental
payments made by the Lessee should be greater than the
actual additional rentals due for such year taken as a
whole, then the amount of such excess shall be repaid by the
Lessor to the Lessee within thirty (30) days of demand; and
if there be any such excess for the last lease year of the
Term, the amount thereof will be refunded by the Lessor to
the Lessee within ninety (90) days after the expiration of
the Term. If this Lease commences on a date other than the
first day of a calendar year or expires on a date other than
the last day of a calendar year, the estimated additional
rentals for such periods of this Lease less than a full
calendar year shall be adjusted on a pro-rata basis;
REPAIR AND to repair (reasonable wear and tear and damage by
fire, lightning and tempest only excepted);
AND that the said Lessor may enter and view state of
repair;
AND that the said Lessee will repair according to notice
in writing (reasonable wear and tear and damage by fire,
lightning and tempest only excepted);
AND that they will leave the premises in good repair
(reasonable wear and tear and damage by fire, lightning and
tempest only excepted);
ASSIGNMENT AND will not assign or sub-let the whole or any part
of the demised premises without leave; the Lessee hereby
waives and renounces the benefit of any present or future
act of the Legislature of Ontario which would allow the
Lessee to assign or sub-let this lease, without leave of the
Lessor, which leave shall not be unreasonably withheld;
AND the said Lessee covenants with the said Lessor, its
successors and assigns;
BUSINESS (A) THAT the said demised premises will not, during the said
term, be at any time used for any other purpose than that of
a general business office.
FIXTURES (B) AND THAT no fixtures, goods or chattels of any kind
will, except in the ordinary course of business, be removed
from the demised premises during the term hereby demised or
at any time thereafter without the written consent of the
Lessor, its successors or assigns, being first had and
obtained, until all rent in arrears as well as all rent to
become due during the remainder of the term hereby granted
shall have been fully paid, or the payment thereof secured
to the satisfaction of the Lessor or its assigns.
ELECTRIC POWER (C) THAT the Lessee will not, during the said term or at any
time prior or subsequent thereto, purchase, acquire or use
any electric current for lighting or other purposes except
from the company or corporation which shall for the time
supply the Lessor with electric current for such purposes in
the said building; the intention being that without the
written consent of the Lessor, there shall be only one
system of electric lighting in the said building.
(D) THE Lessor hereby covenants to pay all charges for
electric energy (for light and power) and gas used by the
Lessee in the demised premises. The Lessor shall be
responsible for the replacement of ballasts, fuses and
fluorescent lights with the demised premises.
ALTERATIONS. (E) THAT if the Lessee shall during the said term desire to
PARTITIONS, ETC. affix or erect partitions, counters or fixtures in any part of
the walls, floors or ceilings of the demised premises, it
may do so at its own expense at any time and from time to
time provided that the Lessee's rights to make such
alterations to the demised premises shall be subject to the
following conditions:
(1) THAT before undertaking any such alterations,
the Lessee shall submit to the Lessor a plan
showing the proposed alterations and shall
obtain the aproval and consent of the Lessor
to the same, which undertakings shall not be
reasonably withheld.
(2) THAT all such alterations shall conform to
all building by-laws, if any, then in force
affecting the demised premises.
(3) THAT such alterations will not be of such
kind or extent as to in any manner weaken the
structure of the building after the
alterations are completed or reduce the value
of the building.
(F) THAT, except as herien provided the Lesee will not erect
or affix or remove or change the location or style of any
partitions or fixtures, without the written consent of the
Lessor being first had and obtained.
<PAGE>
COMMERCIAL LEASE - Page 5
(G) THAT, at the expiration of the term hereby granted, or
any renewal thereof, all fixtures belonging to the Lessee
shall remain upon the demised premises until taken down by
the Lessor, and the Lessee shall forthwith, upon the same
being taken down, remove the same from the demised premises
first paying to the Lessor the expense of such taking down
and making good all damage occasioned to the demised
premises by the taking down or removal thereof.
BANKRUPTCY OR
INSOLVENCY (H) THAT, if the term hereby granted or the goods and chattels
of the Lessee or any assignee or sub-Lessee shall be at any
time seized or taken in execution or attachment, or it the
Lessee or any such assignee or sub-Lessee shall make an
assignment for the benefit of creditors or shall become
bankrupt or insolvent, or make a proposal to its creditors,
or without the consent of the Lessor being first obtained in
writing shall make a sale, under the Bulk Sales Act, in
respect of goods on the premises, or being a company shall
become subject to any legislative enactment relating to
liquidation or winding up, either voluntary or compulsory,
the said term shall immediately become forfeited and void,
and an amount equivalent to the next ensuing three months'
rent shall be at once due and payable.
RULES AND
REGULATIONS (I) THAT the Lessee and its clerks, servants and agents will
at all times during the occupancy of the demised premises
observe and conform to such reasonable rules and regulations
as shall be made by the Lessor from time to time including
the rules and regulations set forth in Schedule "C" hereto
and of which the Lessee shall be notified, such rules and
regulations being deemed to be incorporated in and form part
of these presents.
REMODELING AND (J) THAT, in the event of the Lessor desiring at any time
SALE during the term, or any renewal thereof, to remodel the said
building, or any part thereof, or to take down the said
building, the Lessee will on receiving six months' notice in
writing, surrender this lease and all the remainder of the
term, if any, then yet to come and unexpired, as from the
day mentioned in such notice, and will, subject nevertheless
to the provisions hereinbefore contained thereupon, vacate
the premises and yield up to the Lessor the peaceable
possession thereof. IT IS UNDERSTOOD that the said six
months' notice need not expire at the end of any year or at
the end of any month, and in the event of the day fixed for
termination of the lease expiring on some other day than the
last day of a month, the rent for such month shall be
apportioned for the broken period.
IT IS AGREED between the Parties hereto that in the
event of a sale of the said premises or if the said premises
be expropriated or condemned by any Department of the
Federal, Provincial or Municipal Governments then the Lessor
shall have the right notwithstanding anything herein
contained to terminate this lease upon giving three months'
notice in writing to the Lessee of his intention so to do or
by paying the said Lessee a bonus of three months' rent, in
which latter event, the Lessee undertakes to vacate the said
premises at the expiration of thirty (30) days from the
delivery of such notice.
PROTECTIVE
INSTALLATIONS THE LESSEE agrees to pay the cost of any installations,
additions, or alterations to the said premises that the
Lessor may be required to make by any Municipal, Provincial
or other governing authority, or requested by any private
protective system used by the Lessees, for the security and
protection of the Lessee and his employees and his or their
effects including but not so as to limit the foregoing
installations, additions and alterations for fire and theft
protection and all such installations, additions, or
alterations shall forthwith become the property of the
Lessor.
DISTRESS AND the Lessee further covenants, promises and agrees
with the Lessor that notwithstanding any present or future
Act of the Legislature of the Province of Ontario, none of
the goods or chattels of the Lessee at any time during the
continuance of the term hereby created on the said demised
premises shall be exempt from levy by distress for rent in
arrears by the Lessee as provided for by the said Section of
said Act, and that upon any claim being made for such
exemption by the Lessee or on distress being made by the
Lessor, this covenant and agreement may be pleaded as an
estoppel against the Lessee in any action brought to test
the right to the levying upon any such goods as are named
exempted in the said Section, the Lessee waiving as he
hereby does all and every benefit that could or might have
accrued to him under and by virtue of the said section of
the said act but for the above covenant.
The Lessor covenants with the Lessee for quiet enjoyment.
The Lessor further covenants with the Lessee as follows:
TAXES AND RATES (A) To pay all taxes and rates, municipal, parliamentary or
otherwise, including water rates for the normal supply of cold
water to the said premises, assessed against the demised
premises of the Lessor or Lessee on account therof saving
and excepting any business taxes and taxes upon personal
<PAGE>
COMMERCIAL LEASE - Page 6,
property or income of the Lessee, license fees, or other
taxes imposed upon the property, business or income of the
Lessee;
PROVIDED THAT;
(i) IN THE EVENT of the Lessee being assessed as a
Separate School Supporter, and by reason thereof
the amount of the taxes payable on the said
premises being over the amount payable on an
assessment as a Public School Supporter, then and
in such event the Lessee covenants and agrees with
the Lessor to pay to the Lessor the amount of such
increase upon demand being made therefor in writing
by the Lessor. It is understood and agreed that such
increase shall be payable by the Lessee
notwithstanding the fact that at the time such
demand is made, the Lessee may have ceased to be a
Lessee of the Lessor. In the event of the Lessee
failing to pay to the Lessor the amount of such
increase upon demand as herein provided, then the
Lessor shall have the same rights and remedies for
collection thereof as for the rent in arrears.
HEATING (B) To heat the said premises between the fifteenth day of
October and the first day of May next ensuing in each year
in such manner as to keep the said premises at a reasonable
temperature for the reasonable use thereof by the Lessee
during reasonable business hours except during the making of
repairs, and in case the boilers, engines, pipes, or other
apparatus or any of them used in effecting the heating of
the said demised premises shall at any time become incapable
of heating said premises as aforesaid, or be damaged or
destroyed, to repair said damage or replace said boilers,
engines, pipes or apparatus or any of them or (at the
option of the Lessor) substitute other heating apparatus
therefor within a reasonable time, provided, however, that
the Lessor shall not be liable for indirect or consequential
damages for personal discomfort or illness arising from any
default of the Lessor;
AIR-CONDITIONING (C) TO COOL the said premises between the fifteenth day of
June and the first day of September next ensuing in each
year in such manner as to keep the said premises at a
reasonable temperature for the reasonable use thereof by the
Lessee during reasonable business hours except during the
making of repairs, and in case the air-conditioning units,
engines, pipes, or other apparatus or any of them used in
effecting the cooling of the said demised premises shall at
any time become incapable of cooling said premises as
aforesaid, or be damaged or destroyed, to repair said damage
or replace said air-conditioning units, engines, pipes or
apparatus or any of them or (at the option of the Lessor)
substitute other cooling apparatus therefor within a
reasonable time, provided, however, that the Lessor shall
not be liable for indirect or consequential damages for
personal discomfort or illness arising from any default of
the Lessor;
ACCESS (C) To give the Lessee, his agents, clerks, servants and all
persons transacting business with the Lessee, in common with
other persons, the right to enter the demised premises by
means of the main entrance on 250 Consumers Road, North York
and free use of the stairway and passages from the street to
the said premises at all reasonable times, subject to rules
and regulations in regard to the said building as may be
passed from time to time.
PROVISO for re-entry by the said Lessor on non-payment
of rent or non performance of covenants.
VOIDANCE OF LEASE IT IS FURTHER DECLARED AND AGREED that in case the
VACANT OR said premises or any part thereof, become and remain vacant
IMPROPER USE and unoccupied for the period of fifteen days, or be used by
any other person or persons, or for any other purpose than
as above provided, without the written consent of the
Lessor, this lease shall, at the option of the Lessor, cease
and be void, and the term hereby created expire and be at an
end, anything hereinbefore to the contrary notwithstanding
and the proportionate part of the current rent shall
thereupon become immediately due and payable, and the Lessor
may re-enter and take possession of the premises as though
the Lessee or other occupant or occupants of said premises
were holding over after the expiration of the term; or
in such case instead of determining this lease as aforesaid
and re-entering upon the demised premises, the Lessor may
take possession of the demised premises, or any part or
parts thereof, and let and manage the same and grant any
lease or leases therof upon such terms as to the Lessor or its
assigns may appear to be reasonable, and demand, collect,
recieve and distrain for all rental which shall become
payable in respect thereof, and apply the said rentals after
deducting all expenses incurred in connection with the
demised premises, upon the rent hereby reserved, and the
Lessor and its assigns and every such agent acting as
aforesaid from time to time, shall in so acting be the
agents of the Lessee, who alone shall be responsible for their
acts, and the Lessor and its assigns shall not be accountable
for any moneys except those actually recieved, notwithstanding
and act, neglect, omission or default or any such as agent
acting as aforesaid.
<PAGE>
COMMERCIAL LEASE - Page 7
WATER AND GAS AND IT IS FURTHER DECLARED AND AGREED THAT the Lessor
DAMAGE shall not be liable for any damage to any property at any time
upon the demised premises arising from gas, steam, water, rain
or snow, which may leak into, Issue or flow from any part of
the said building, or from the gas, water, steam or drainage
pipes or plumbing works of the same or from any other place or
quarter or for any damage caused by or attributable to the
condition or arrangement of any electric or other wires in the
said building. The Lessee shall be liable for any damage done
by reason of water being left running from the taps in the
demised premises or from gas permitted to escape therein.
RISKS OF INJURY AND the Lessor shall not be responsible for any
personal injury which shall be sustained by the Lessee or
any employee, customer, or other person who may be upon the
demised premises or in the said building or the entrances or
appurtenances thereto. All risks of any such injury being
assumed by the Lessee, who shall hold the Lessor harmless
and indemnified therefrom.
NOTICE OF THE Lessee shall give the Lessor prompt written notice
ACCIDENT of any accident or other defect in the sprinkler system, water
pipes, gas pipes or heating apparatus, telephone, electric or
other wires on any part of the premises.
INSURANCE THE Lessee covenants with the said Lessor that his
said business to be so carried on in the said building will
not be of such a nature as to increase the insurance risk on
the said premises or cause the Lessor to pay an increased rate
of insurance premiums on the said premises by reason thereof
and it is distinctly understood that in case said business so
carried on by the Lessee is or becomes of such a nature to
increase the insurance risk or causes the Lessor and/or other
occupants of the said building to pay an increased rate of
insurance premiums, that the Lessee will from time to time pay
to the Lessor the increased amount of insurance premiums which
the said Lessor and other occupants of the said building have
to pay in consequence thereof; provided that the Lessee
covenants that he will not carry on or permit to be carried on
any business in the said building which may make void or
voidable any insurance held by the Lessor or the other
occupants of the said building.
BUSINESS NOT TO BE PROVIDED that the Lessee will not do or permit anything
A NUISANCE to be done on the said premises or permit or keep anything
therein which may be annoying to the Lessor or other occupants
of the said building of which the said Lessor may deem to be a
nuisance and that no machinery shall be used therein which
shall cause any undue vibration in or to the said premises and
that in case of the Lessor or any other occupants of the said
building reasonably complaining that any machinery or
operation or process is a nuisance to it or them or which
causes any undue vibration or noise in the said premises that
upon receiving notice thereof, the said Lessee will
immediately abate such nuisance. The said Lessee covenants not
to obstruct or interfere with the rights of the Lessor or
other occupants of the said building or in any way injure or
annoy them or conflict with any of the rules and regulations
of the Board of Health or with and Statute or municipal
by-law.
SIGN AND IT IS HEREBY FURTHER AGREED by and between the said
Lessor and the said Lessee that no sign, advertisement or
notice shall be inscribed, painted or affixed by the said
Lessee on any part of the outside or inside of the building
whatever, unless of such manner, color, size and style and in
such places upon or in said building as shall be first
designated by the Lessor, and, furthermore, the Lessee, on
ceasing to be Lessee of the demised premises, will, before
removing his goods and fixtures from the said premises, cause
any sign as aforesaid to be removed or obliterated at his own
expense and in a workmanlike manner to the satisfaction of
the Lessor.
ELEVATOR THE Lessor undertakes to maintain elevators in said
building which are to be run during the ordinary business
hours of every business day of the year, but not during public
holidays or Sundays, except at the option of the Lessor. The
Lessee shall, subject to the Lessor's rules and regulations,
have free use of such elevators in common with others lawfully
using the same, but the Lessee and its employees and all other
persons using any such elevator shall do so at its, his, her
or their sole risk and under no circumstances shall the
lessor be held responsible for any damage or injury happening
to any person whilst using such elevator, or occasioned to
any person by such elevator or any appurtenances and whether
such damage or injury shall happen by reason of the act,
omission or negligence or otherwise of the Lessor, or any of
its employees, servants, agents or otherwise howsoever.
<PAGE>
COMMERCIAL LEASE - Page 8
FIRE PROVIDED that if during the term herein or any renewal
thereof the premises shall be destroyed or damaged by fire or
the elements then the following provisions shall apply:
(A) If the demised premises shall be so badly injured as to be
unfit for occupancy, and as to be incapable of being repaired
with reasonable diligence within one hundred and twenty days
of the happening of such injury, then the term hereby granted
shall cease and be at an end to all intents and purposes from
the date of such damage or destruction, and the Lessee shall
immediately surrender the same, and yield up possession of the
demised premises to the Lessor, and the rent from the time of
such surrender shall be apportioned;
(B) If the demised premises shall be capable, with reasonable
diligence, of being repaired and rendered fit for occupancy
within one hundred and twenty days from the happening of such
injury as aforesaid, but if the damage is such as to render
the demised premises wholly unfit for occupancy, then the rent
hereby reserved shall not run or accrue after such injury, or
while the process of repair is going on, and the Lessor shall
repair the same with all reasonable speed, and the rent shall
recommence immediately after such repairs shall be completed.
(C) If the demised premises shall be repaired within one
hundred and twenty days as aforesaid, and if the damage is
such that the said premises are capable of being partially
used, then until such damage shall have been repaired, the
rent shall abate in the proportion that the part of the
demised premises rendered unfit for occupancy bears to the
whole of the demised premises.
NO ABATEMENT OF THERE shall be no abatement from or reduction of the
RENT rent due hereunder, nor shall the Lessee be entitled to
damages, losses, costs or disbursements from the Lessor during
the term hereby created on, caused by or on account of fire,
(except as above), water, sprinkler systems, partial or
temporary failure or stoppage of heat, light, elevator, live
steam or plumbing service in or to the said premises or
building, whether due to acts of God, strikes, accidents, the
making of alterations, repairs, renewals, improvements,
structural changes to the said premises or buildings or the
equipment or systems supplying the said services, or from any
cause whatsoever; provided that the said failure or stoppage
be remedied within a reasonable time.
RIGHT TO SHOW THAT the Lessee will permit the Lessor to exhibit the
PREMISES demised premises during the last three months of the term to
any prospective Lessee and will permit all persons having
written authority therefor to view the said premises at all
reasonable hours.
NOTICES THAT any notice which either of the parties is required
or permitted to give pursuant to any provision of this lease
may, if intended for the Lessee, be given a writing left at
the demised premises or mailed by registered mail addressed to
the Lessee at the demised premises, and if intended for the
Lessor by a writing left at the premises of the Lessor at 214
Merton Street, Suite #300, Toronto, Ontario, M4S 1A6 or mailed
by registered addressed to the Lessor at the Lessor's said
premises, and such notice shall be deemed to have been given
at the time it was delivered or mailed, as the case may be.
OVER HOLDING PROVIDED further and it is hereby agreed that
should the Lessee holdover after the expiration of this lease
and the Lessors thereafter accept the rent for the said
premises, the Lessee shall hold the said premises as a monthly
Lessee only of the Lessors but subject in all other respects
to the terms and conditions of this lease.
LEASEHOLD
IMPROVEMENTS The Lessee agrees to accept the leased premises in
an "AS IS" condition except that the Lessor shall, at its
own cost and expense, do the following:
o demise walls as indicated on the space plan attached hereto
as Schedule "D"
o Expose the plate glass indicated as G1 and G2; and
o install double-doors.
BUILDING SIGNAGE NOTWITHSTANDING any of the above the Lessor permits
signage for the Lessee on the upper facade of the west or
south side of the building, subject, subject to the Lessor's
reasonable approval as to size, design and aesthetic criteria.
RIGHT OF FIRST The Lessee shall have a right of first refusal to lease
REFUSAL ON "Area A" being part of the ninth (9th) floor of the building
ADDITIONAL AREA shown outlined in green on Schedule "D" and comprising
approximately two thosand three hundred and fifty-five (2,355)
squarefeet of rentable area. If, during the Term of the Lease
or any renewal therof, the Lessor receives an acceptable
written offer, from a third party, to lease all or a portion
of "Area A", then the Lessor will notify the Lessee in
writing, of the terms of such acceptable written Offer to
Lease. The Lessee shall have forty-eight (48) hours from
receipt of such notice to exercise its right of first refusal,
in writing, delivered to the Lessor, to lease "Area A" on the
same terms and conditions as are contained in the accepable
<PAGE>
COMMERCIAL LEASE - Page 9
written Offer to Lease. Should the Lessee not exercise its
right of first refusal within the forty-eight (48) hour
period as specified, then this right of first refusal shall
terminate. If, as a result of the Lessee not exercising this
option, all or part of the space is leased by another
tenant, then this right of first refusal shall cease.
RENEWAL The Lessee, when not in default or arrears
hereunder, upon written notification to the Lessor at least
SIX (6) months prior to the expiration of the lease term,
shall have the right to renew the Lease for a further term
of up to FIVE (5) YEARS on the same terms and conditions
except for the further right of renewal and the rental rate
which shall be set at the then current fair market rate for
similar premises in the North York area.
The words importing the singular number only shall
include the plural, and vice versa, and words importing the
masculine gender shall include the feminine gender, and
words importing persons shall include firms and corporations
and vice versa.
Unless the context otherwise required, the word
"Lessor" and the word "Lessee" whenever used herein shall be
construed to include and shall mean the executors,
administrators, successors and/or assigns of the said Lessor
and Lessee, respectively, and when there are two or more
Lessees bound by the same covenants herein contained, their
obligations shall be joint and several Schedules "A", "B"
and "C" attached hereto form an integral part of this lease.
IN WITNESS WHEREOF the parties hereto have executed these presents
SIGNED, SEALED and DELIVERED 250 CONSUMERS ROAD LIMITED
In the presence of
/s/ Per:/s/ illegible
------------------------ ------------------------------
V.3. SEMICONDUCTOR CORPORATION
Per:/s/ illegible
------------------------------
<PAGE>
SCHEDULE "A"
------------
250 CONSUMERS ROAD
-----------------
NORTH YORK, ONTARIO
SUITE 901
[V3 SEMICONDUCTOR FLOOR PLAN]
<PAGE>
SCHEDULE "B"
------------
SPECIAL PROVISIONS
- ------------------
1 LESSEE'S INSURANCE
The Lessee shall take out and keep in force during the said Term:
(1) Comprehensive general public liability (including bodily injury,
death, and property damage) insurance, on an occurrence basis with
respect to the business carried on in or from the Leased Premises and
the Lessee's use and occupancy thereof of not less than ONE MILLION
DOLLARS ($1,000,000.00) which insurance shall include the Lessor as a
named insured and shall protect the lessor in respect of claims by
the Lessee as if the Lessor were separately insured; and
(2) Insurance in respect of fire and such other perils as are from
time to time defined in the usual extended coverage endorsement
covering the Lessee's trade fixtures and the furniture and equipment
of the Lessee and; (except as to Insured Damage), all Leasehold
Improvements of the Lessee and which insurance shall include the
Lessor as a named insured as the Lessor's interest may appear with
respect to insured Leasehold Improvements and provide that any
proceeds recoverable in the event of loss to Leasehold Improvements
shall be payable to the Lessor but the Lessor agrees to make
available such proceeds toward the repair or replacement of the
insured property if this Lease is not terminated pursuant to any
other provision hereof.
All insurance required to be maintained by the Lessee hereunder shall
be on terms and with insurers to which the Lessor has no reasonable
objection and shall provide that such insurer shall provide to the
Lessor thirty (30) days written notice of cancellation or material
alteration of such terms. The Lessee shall furnish to the Lessor
certificates or other evidence acceptable to the Lessor as to the
insurance from time to time required to be effected by the Lessee and
its renewal or continuation in force. If the Lessee shall fail to
take out, renew and keep in force such insurance, the Lessor may do
so as the agent of the Lessee and the Lessee shall repay to the
Lessor any amounts paid by the Lessor as premiums forthwith upon
demand.
2. CARPET
The Lessee shall be responsible for any burns, tears, stains or damages
to the carpet, reasonable wear and tear and pre-existing excepted, and
shall make any restorations and/or replacements as directed by the
Lessor at the Lessee's cost, and shall leave carpeting in a clean,
undamaged, unsoiled and unstained condition upon vacating the premises,
reasonable wear and tear excepted.
3. FEDERAL GOODS AND SERVICES TAX COVENANT
Notwithstanding any other provisions of this Lease to the contrary,
the Lessee shall pay to the Lessor an amount equal to any and all
goods and service taxes, sales taxes, value added taxes, or any other
taxes imposed on the Lessor with respect to net Rent, additional Rent
or any other amounts payable by the Lessee to the Lessor under this
Lease whether characterized as a goods and services tax, sales tax,
value added tax, or otherwise (and shall hereinafter be referred to
as "Sales Taxes"). It is the intention of the parties that the Lessor
shall be fully reimbursed by the Lessee with respect to any and all
Sales Taxes payable by the Lessor. The amount of such Sales Taxes so
payable by the Lessee shall be calculated by the Lessor and shall be
paid to the Lessor at the same time as the amounts to which such
Sales Taxes apply are payable to the Lessor under the terms of this
Lease or upon demand at such other time or times as the Lessor from
time to time determines. Notwithstanding any other provision of this
Lease to the contrary, the amount payable by the Lessee under this
paragraph shall be deemed not to be net Rent or additional Rent, but
the Lessor shall have all of the same remedies for and rights of
recovery of such amount as it has for recovery of rent under this
Lease.
4. NOTICES
Any notice given hereunder shall be personally delivered during normal
business hours to the Lessor at: 214 Merton Street, Suite #300,
Toronto, Ontario, M4S 1A6 and to the Lessee at: 250 Consumers Road,
Suite #901, North York, Ontario), M2J 4V6
PARKING
The Lessee and its visitors shall have the right to a reasonable and
proportionate use of the unreserved outdoor parking associated with
the building free of charge on a first come, first served basis,
together with the other tenants of the building and their visitors.
6. DIRECTORY BOARDS
The Lessee shall have the right to have the name of its firm on the
building directory board in the main building lobby at the Lessee's
expense.
7. ELEVATORS
Any moving of furniture or large items requiring the elevator to be
put on service for an extended period of time, can only be done upon
48 hours prior notification to management in writing and can only be
scheduled for a prearranged specified period of time. The cost of
necessary on-site security, if after office hours and/or on a
weekend, will be charged to the respective Lessees.
Deliveries or moving of small items necessitating putting the elevator
on service for a period of no longer than 15 minutes, can be arranged
between 10:00 a.m. and 3:30 p.m. on weekdays except holidays and
weekends.
8. USE OF COMMON BOARDROOM
The Lessee shall have the use of the common boardrom in the building on
a first-come, first-served basis at rates and terms as exist at the
time of request by the Lessee.
9. AFTER-HOUR ACCESS
a) After hour access to the building is by security access card only,
or such reasonable prior arrangement with management.
b) Additional security access cards (for employees) are available to
the Lessee upon written, authorized request, free of charge,
provided that the Lessee shall be responsible for maintaining
security measures governing such additional access cards, and
provided that the Lessee shall notify management promptly in the
event any access cards issued have been misplaced or considered
stolen.
<PAGE>
SCHEDULE "C"
SCHEDULE OF RULES AND REGULATIONS FORMING PART OF THE WITHIN LEASE
1. The sidewalks, entrances, elevators, stairways and corridors of the building
shall not be obstructed by any Lesssees or used by them for any other purpose
than for ingress and egress to and from their respective offices, and no Lessee
shall place or allow to be placed in the hallways, corridors or stairways any
waste paper, dust, garbage, refuse or any thing whatever that shall tend to make
them appear unclean, untidy or filthy.
2. The floors, skylights and windows that reflect or admit light into
passageways or into any place in the said building shall not be covered or
obstructed by any of the Lessees, and no awnings shall be put over any window;
the water closets and other water apparatus shall be used for any purpose other
than those for which they were constructed, and no sweeping, rubbish, rags,
ashes or other substances be thrown therein, and any damage resulting to them
from misuse shall be borne by the Lessee by whom or by whose employees the
damage was caused.
3. All window signs, interior signs and signs on glass doors must be approved in
writing by the Lessor before the Lessee engages a sign contractor to paint said
signs, and all such signs shall be painted in the form previously so approved by
the Lessor.
4. In the event that the Lessor provided and installs a Public Directory Board
inside the main entrance to the building, the Lessee's or Lessees' name or names
shall be placed on the said Board at the expense of such Lessee or Lessees, same
to be charged to the Lessee or Lessees in the month's bill for rent next
rendered, and shall be recoverable as rent.
5. If any sign, advertisement or notice shall be inscribed, painted or affixed
by the Lessee on or to any part of the building whatever, then the Lessor shall
be at liberty to enter on said premises and pull down and take away any such
sign, advertisement or notice, and the expense thereof shall be payable by the
Lessee.
6. If by any reason of any alterations which the Lessee may make or may permit
to be made, with or without the consent of the Lessor, to any part of the
demised premises or to any fixtures in the demised premises, the addition of any
equipment or the use of any material which the Lessee, its employees or other
persons permitted by the Lessee to be on the premises may use or keep in the
said premises, or any change in the type of occupancy of the demised premises
which the Lessee may make or permit to be made, there is any increase in the
insurance premiums payable by the Lessor on any fire insurance which may be in
effect or which the Lessor may hereafter place upon the building of which the
demised premises form a part the Lessee agrees to pay to the Lessor the amount
of such increase, and the parties agree that a statement by the insurance broker
of the Lessor of the amount of such increase shall be final and binding upon the
parties.
7. No safes, machinery, equipment, heavy merchandise or anything liable to
injure or destroy any part of the building shall be taken into it without the
consent of the Lessor in writing, and the Lessor shall in all cases retain the
power to limit the weight and indicate the place where such safe or the like is
to stand, and the cost of repairing any and all damage done to the building by
taking in or putting out such safe or the like or during the time it is in or on
the premises, shall be paid for on demand by the Lessee who so causes it. No
Lessee shall load any floor beyond its reasonable weight carrying capacity as
set forth in the municipal or other codes applicable to the building.
8. In order that the demised premises may be kept in a good state or
preservation and cleanliness, the Lessee shall during the continuance of its
lease permit the janitor or caretaker of the Lessor to take change of and clean
the demised premises.
9. No Lessee shall employ any person or persons other than the janitor or
caretaker of the Lessor for the purpose of such cleaning or of taking charge of
said premises, it being understood and agreed that the Lessor shall be in no
wise responsible to any Lessee for any loss of property from the demised
premises, however occurring, or any damage done to the furniture or other
effects of any Lessee by the janitor or caretaker or any of its employees.
10. The Lessor shall have the right to enter the demised premises at reasonable
hours in the day to examine the same or to make such repairs and alterations as
it shall deem necessary for the safety and preservation of the building and also
during the three months previous to the expiration of the lease of the demised
premises, to exhibit the said premises to be let and put upon them its usual
notice "For Rent", for which said notice shall not be removed by any Lessee.
11. Nothing shall be thrown by the Lessees, their clerks or servants, out of the
windows or doors or down the passages and sky-lights of the building.
12. No animals shall be kept in or about the premises.
13. If the Lessee desires telegraph or telephone, call bell or other private
signal connections, the Lessor reserves the right to direct the electricians or
other workmen as to where and how the wires are be introduced, and without such
directions no boring or cutting for wires shall take place. No other wires of
any kind shall be introduced without the written consent of the Lessor.
14. No one shall use the leased premises for sleeping apartments or residential
purposes.
15. Lessees and their employees shall not make or commit any improper noise in
the building, or in any way interfere with or annoy other Lessees or those
having business with them.
16. All Lessees must observe strict care not to allow their windows to remain
open so as to admit rain or snow, or so as to interfere with the heating of the
building. The Lessees neglecting this rule will be responsible for any injury
caused to the property of other Lessees or to the property of the Lessor by such
carelessness. The Lessee, when closing offices for business, day or evening,
shall close all windows and lock all doors.
17. The Lessee agrees not to place any additional locks upon any doors of the
demised premises and not to permit any duplicate keys to be made therefor; but
to use only additional keys obtained from the Lessor, at the expense of the
Lessee, and to surrender to the Lessor on the termination of the lease all keys
of the said premises.
18. The Lessee shall give to the Lessor prompt written notice of any accident
any defect in the water pipes, gas pipes, heating apparatus, telephone or
electric light or other wires in any part of said building.
19. No inflammable oils or other inflammable, dangerous or explosive materials
shall be kept or permitted to be kept in the demised premises.
20. The caretaker will have charge of all radiators and will give all
information for the management of the same, and the Lessee shall give to the
Lessor prompt written notice of any accident to or defects in the water pipes or
heating apparatus.
21. No bicycles or other vehicles shall be brought within the building or upon
the Lessor's property; including any lane or courtyard.
22. Nothing shall be placed on the outside of windows or projections of the
demised premises. No air-conditioning equipment shall be placed at the
windows of the demised premises without the consent in writing of the Lessor.
23. Spikes, hooks, nails, screws or knobs shall not be put into the walls or
woodwork.
24. No freight, furniture or packages will be received in the building or
carried up or down in the elevator between the hours of 8 a.m. and 6 p.m.
25. All glass, locks and trimmings in or upon the doors or windows of the
demised premises shall be kept whole and whenever any part thereof shall become
broken, the same shall be immediately replaced or repaired under the direction
and to the satisfaction of the Lessor, and such replacements and repairs shall
be paid for by the Lessee.
26. No heavy equipment of any kind shall be moved within the building without
skids being placed under the same, and without the consent of the Lessor in
writing.
27. Any alterations, additions, renewals or changes made in the partitions or
divisions of the rooms or linoleum floors during the currency of the lease
shall, if made at the request of the Lessee, be done by the Lessor at the
expense of the Lessee, and shall be subject to the approval in writing and
direction of the Lessor.
28. The Lessor shall not be liable for any damage to any property at any time on
the demised premises, nor for the theft of any of the said property, nor shall
it be liable for an escape or leakage of smoke, gas, water, rain or snow;
howsoever caused, nor for any accident to the property of the Lessee.
29. Any person entering upon the roof of the building does so at his own risk.
30. The Lessee shall not enter into any contract with any person or persons or
corporations for the purpose of supplying towels, soap or sanitary supplies,
etc., ice or spring water, unlesss the said person or persons or corporations
agree that the time and place of delivery of such articles and the elevator
service to be used in connection therewith shall be subject to such rules and
regulations as the Lessor may from time to time prescribe.
31. Lessees, their agents and employees shall not take food into the elevator or
into public or rented portions of the building unless such food is carried in
covered receptacles approved by the Lessor in writing.
32. The Lessor reserves the right to restrict the use of the demised premises to
the Lessee and/or its employees after 6 p.m.
33. No Lessee shall made a door-to-door canvass of the building for the purpose
of selling any products or services to the other Lessees without the written
consent of the Lessor.
34. No Lessee shall be permitted to do cooking or to operate cooking apparatus
except in a portion of the building rented for the purpose.
35. The Lessor shall have the right to made such other and further reasonable
rules and regulations and to alter, amend or cancel all rules and regulations as
in its judgement may from time to time be needed for the safety, care and
cleanliness of the building and for the preservation of good order therein and
the same shall be kept and observed by the Lessees, their clerks and servants.
The Lessor may from time to time waive any of such rules and regulations as
applied to particular Lessees and is not liable to the Lessee for breaches
thereof by other Lessees.
<PAGE>
SCHEDULE "D"
------------
LEASEHOLD IMPROVEMENTS
250 CONSUMERS ROAD
------------------
NORTH YORK, ONTARIO
SUITE 901 -6982 S.F.
[FLOOR PLAN FOR V3 SEMICONDUCTOR INC.]
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form SB-2 of our report dated November 27, 1997
except for note 6(b) which is as of September 4, 1998 relating to the
financial statements of V3 Semiconductor, Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
is such Prospectus.
/s/KPMG
- ---------------------
KPMG
Chartered Accountants
Toronto, Canada
September 22, 1998
