AS FILED WITH THE COMMISSION ON APRIL 16, 1998 FILE NO. 333-45875
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Pre-Effective Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
INNOVACOM, INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
NEVADA 367 88-0308568
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
3400 Garrett Drive, Santa Clara, California 95054; (408) 727-2447
(Address and telephone number of principal executive offices)
3400 Garrett Drive, Santa Clara, California 95054; (408) 727-2447
(Address of principal place of business or intended principal place of business)
Mark C. Koz, President & Chief Executive Officer
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, California 95054
(408) 727-2447
(Name, address and telephone number of agent for service)
Copies to:
Scott E. Bartel, Esq.
Eric J. Stiff, Esq.
Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Telephone: (916) 442-0400
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ 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
blocks 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 statement 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. [ ]
<PAGE>ii
CALCULATION OF REGISTRATION FEE
Proposed
Proposed Maximum
Proposed class of Maximum Aggregate Amount of
securities to be Amount to be Offering Offering Registration
registered Registered{(1)} Price{(5)} Price Fee
- ----------------- --------------- ---------- ---------- ------------
Common Stock, par value
$0.001 ("Common Stock")
Underlying 7% Convertible
Debentures 5,111,904{(2)} $ 2.50{(5)} $ 12,779,760 $ 3,872.66
Common Stock to be issued
upon the exercise of
warrants 750,000{(3)} $ 2.50{(5)} $ 1,875,000 $ 568.18
Common Stock underlying
Secured Promissory Note 2,750,000{(4)} $ 2.37{(4)} $ 6,517,500 $ 1,974.80
Total 8,611,904 $ 21,172,260 $ 6,415.64*
*Of this amount, $4,260.60 was paid by wire transfer on February 5, 1998, and
$180.24 was paid by wire transfer on February 6, 1998.
(1) Includes an indeterminate number of shares of Common Stock that may be
issuable to prevent dilution resulting from stock splits, stock dividends and
conversion price or exercise price adjustments, which are included pursuant to
Rule 416 promulgated under the Securities Act of 1933.
(2) Based on the aggregate amount of principal on the 7% Convertible
Debentures (the "Debentures") and accrued interest for one year in the
aggregate amount of $350,000. The Debentures convert at the lower of $3.47 per
share or, (i) prior to April 22, 1998, 85% of the average closing bid price of
a share of Common Stock for the five trading days prior to conversion (the
"Conversion Average Price"), or (ii) from April 22, 1998 through May 21, 1998,
82.5% of the Conversion Average Price, or, (iii) after May 22, 1998 to December
22, 2002, 80% of the Conversion Average Price. The Debentures may be converted
into shares of Common Stock at the option of holder in whole or in part as
follows: (i) 33% of the aggregate principal amount of the Debentures may be
converted prior to the earlier of April 21, 1998, or the effectiveness of this
registration statement, (ii) 66% of the aggregate principal amount of the
Debentures may be converted from April 22, 1998 through May 21, 1998, and (iii)
the balance of the aggregate principal amount of the Debentures may be
converted thereafter. For the sole purpose of calculation of the registration
fee, the average price of a share of Common Stock is based upon the average
high and low price of approximately $2.50 per share as reported on the NASD OTC
Bulletin Board on February 5, 1998. The Company is contractually required to
register 200% of the number of shares of Common Stock the Debentures, and
interest thereon, are convertible into, as of February 6, 1998.
(3) Includes 250,000 shares of Common Stock underlying warrants with an
exercise price of $3.00 per share and 250,000 shares of Common Stock underlying
warrants with an exercise price of $4.00 per share. Also includes 250,000
shares of Common Stock underlying warrants with an exercise price of $2.43 per
share.
(4) Represents the number of shares of Common Stock that may be issued upon
the conversion of a credit facility agreement (`Credit Facility') and secured
promissory note ("Note") dated as of July 1, 1997. The Note may be converted
at the option of the holder, into shares of Common Stock in an amount equal to
80% of the trading price of a share of Common Stock on the date an advance of
funds was made pursuant to the Credit Facility. Assuming the full conversion
<PAGE>iii
of $5 million of principal and $500,00 in interest, the Note would convert into
2,750,000 shares based on a conversion price of $2.00 per share. (Based on 80%
of average market price of $2.50 per share.) However, for the sole purpose of
calculation of the registration fee, the per share price is based upon the
average high and low price of $2.37 per share of Common Stock of InnovaCom on
April 9, 1998, as reported on the NASD OTC Bulletin Board under the symbol
"MPEG."
(5) Calculated in accordance with Rule 457(c) of the Securities Act of
1933, as amended. Estimated for the sole purpose of calculating the
registration fee and based upon the average high and low price of $2.50 per
share of Common Stock of InnovaCom on February 5, 1998, as reported on the NASD
OTC Bulletin Board under the symbol "MPEG."
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>iv
INNOVACOM, INC.
CROSS-REFERENCE SHEET
Pursuant to Item 501 of Regulation S-B
Registration Statement
ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
1. Front of Registration Statement
and Outside Front Cover Page of
Prospectus Front Cover
2. Inside Front and Outside Back
Cover Pages of Prospectus Inside Front and Outside Back
Cover Pages
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders and Plan of
Distribution
8. Plan of Distribution The Offering; Plan of
Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons Management; Principal
Stockholders; Selling
Stockholders and Plan of
Distribution
11. Security Ownership of Certain
Beneficial Owners and Principal Stockholders; Selling
Management Stockholders and Plan of
Distribution
12. Description of Securities Description of Securities
13. Interest of Named Experts and Not Applicable
Counsel
14. Disclosure of Commission
Position on Indemnification for Management: Indemnification
Securities Act Liabilities Matters
15. Organization Within Last Five Certain Transactions
Years
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and
Analysis or Plan of Operation Management's Discussion and
Analysis
18. Description of Property Facilities
19. Certain Relationships and Certain Transactions
Related Transactions
20. Market for Common Equity and
Related Stockholder Matters Prospectus Summary
21. Executive Compensation Management
22. Financial Statements Consolidated Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure Change in Accountants
<PAGE>1
Subject to Completion, dated April 16, 1998
Prospectus
INNOVACOM, INC.
COMMON STOCK
The Selling Stockholders, as defined below, of InnovaCom, Inc., a Nevada
corporation ("InnovaCom" or the "Company"), are hereby offering the following:
(i) the resale of shares of Common Stock issuable upon the conversion of 7%
Convertible Debentures in the aggregate principal amount of $5 million (the
"Debentures"), and interest thereon, (ii) the resale of 250,000 shares of
Common Stock issuable upon the exercise of warrants at an exercise price of
$3.00 per share, (iii) the resale of 250,000 shares of Common Stock issuable
upon the exercise of warrants at an exercise price of $4.00 per share (the
warrants described in (ii) and (iii) above are collectively referred to as the
"Warrants"), (iv) the resale of 250,000 shares of Common Stock issuable upon
the exercise of a warrant exercisable at $2.43 per share (the "Additional
Warrant"), and (v) the resale of shares of Common Stock issuable upon the
conversion of the Promissory Note in the aggregate principal amount of $5
million (the "Note") and interest thereon. The Debentures are convertible into
shares of the Company's Common Stock at a conversion price equal to the lesser
of $3.47 per share or, (i) prior to April 22, 1998, 85% of the average closing
bid price of a share of the Company's Common Stock for the five trading days
prior to conversion (the "Conversion Average Price"), or (ii) from April 22,
1998 through May 21, 1998, 82.5% of the Conversion Average Price, or (iii) from
May 22, 1998 to December 22, 2002, 80% of the Conversion Average Price. The
Debentures have a term of five (5) years, expiring December 22, 2002 (the "Due
Date"), and any remaining amounts of principal and accrued interest not
previously converted or prepaid on the Debentures automatically converts into
shares of the Company's Common Stock on the Due Date. The Debentures may be
converted into shares of Common Stock at the option of the holder in whole or
in part as follows: (i) 33% of the aggregate principal amount of the Debentures
may be converted prior to the earlier of April 21, 1998 or the effectiveness of
this registration statement, (ii) 66% of the aggregate principal amount of the
Debentures may be converted from April 22, 1998 through May 21, 1998, and (iii)
the balance of the aggregate principal amount of the Debentures may be
converted thereafter. The Note may be converted, at the option of the holder,
into shares of Common Stock at a conversion price equal to 80% of the trading
price per share of the Company's Common Stock on the date an advance was made
pursuant to the Credit Facility Agreement ("Credit Facility"). The Credit
Facility and Note expire on June 30, 1998. See "Selling Stockholders," "Plan
of Distribution," and "Description of Securities - Debentures."
JNC Opportunity Fund Ltd. ("JNC") acquired the Debentures and Warrants
pursuant to a private placement. Pursuant to the terms of the private
placement, the Company is contractually required to register the shares of
Common Stock issuable upon conversion of the Debentures, and payment of
interest thereon, and exercise of the Warrants. The Additional Warrants were
acquired by Cardinal Capital Management, Inc. ("Cardinal") in consideration for
their investment advisory services related to the private placement described
above. The Note and Credit Facility, as amended, allows the Company to borrow
up to $5 million and were entered into by the Company and Micro Technology S.A.
("Micro Technology") on July 1, 1997. The number of shares of Common Stock
registered for resale herein and underlying the Note and Credit Facility
includes approximately 500,000 shares intended to meet future advances and
accrued interest which may be converted under the Note.
<PAGE>2
JNC, Cardinal and Micro Technology are collectively referred herein as the
"Selling Stockholders." The Company will not receive any proceeds from the
resale by the Selling Stockholders of the shares of Common Stock and the shares
of Common Stock underlying the Debentures, Warrants, Additional Warrant, and
Note (the "Shares"). See "The Offering," "Selling Stockholders" and "Plan of
Distribution." The Company's Common Stock is traded on the NASD OTC Bulletin
Board ("OTC Bulletin Board") under the symbol "MPEG." On April 9, 1998, the
average high and low price of a share of the Company's Common Stock was $2.37
as reported on the OTC Bulletin Board. The Debentures, Warrants, Additional
Warrant and Note are not traded on the OTC Bulletin Board or any other exchange
or quotation system.
THE COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 5
THESE ARE SPECULATIVE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 16, 1998.
<PAGE>3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
InnovaCom, Inc., a Nevada corporation ("InnovaCom" or the "Company") is
developing digital video compression and processing technology to provide
broadcast quality encoded video utilizing the Motion Picture Experts Group
("MPEG") second generation standard for video and audio compression ("MPEG-2").
The Company's development includes single chips, multiple chips, circuit
boards, software and complete digital video compression and processing
systems.
The Company has been a development stage company since its inception and
is currently developing digital video compression and processing technology
using existing third party three chip compression hardware. The Company
intends to replace this three chip hardware with its own MPEG-2 single chip
video encoder (the "DVImpact Chip") during 1998. After the design of the
DVImpact Chip has been completed, it will be tested over several months along
with the related digital video compression and processing components including
the Company's circuit board and software. Assuming successful completion, the
DVImpact Chip and related products will likely then go into volume production.
No assurance can be given that the Company will be successful in completing its
DVImpact Chip and related products, or if completed, that such products will be
commercially accepted.
The Company was originally incorporated in Florida in March of 1993 and
was essentially dormant until 1996. The Company's founder and Chairman, Mark
C. Koz, was also a founder of FutureTel, Inc., a Florida corporation
("FutureTel"). From 1994 until 1996, Mr. Koz collaborated on FutureTel's
development of a video compression chip and related MPEG-2 technology which was
termed the "Gecko" technology. In March of 1996 FutureTel licensed the Gecko
technology to the Company in exchange for royalties, for a period of seven
years and not to exceed $3 million, based on sales of digital video compression
chips utilizing or derived from the Gecko technology. This non-exclusive
worldwide license grants the Company the right to use, duplicate, modify and
enhance the Gecko technology. The Company has applied certain aspects of the
Gecko technology in its development of the DVImpact Chip.
In July 1996, the Company merged with Jettson Realty Development
Corporation, a Nevada corporation ("Jettson"). The merger took the form of a
share for share exchange, in which all of the shares of the Company were
exchanged for a controlling block of shares of Jettson. Thereafter, the name
of Jettson was changed to "InnovaCom, Inc." The Company's Common Stock
currently trades on the OTC Bulletin Board under the symbol "MPEG." The merger
between the Company and Jettson is currently the subject of litigation. See
"Legal Proceedings."
In May 1997, the Company acquired Sierra Vista Entertainment, Inc., a
Nevada corporation ("Sierra Vista") in a share for share exchange by
issuing 8,514,500 shares of its Common Stock to Sierra Vista shareholders.
Sierra Vista is seeking to become a motion picture production company and
as a result of the acquisition, the Company gained access to approximately
$3 million of working capital and a credit facility of up to $3 million
which was eventually increased to $5 million.
The Company's principal offices are located at 3400 Garrett Drive,
Santa Clara, California 95054 and the phone number is (408) 727-2447.
Unless otherwise indicated, reference to the Company or InnovaCom in this
registration statement also includes its wholly-owned subsidiary Sierra
Vista.
<PAGE>4
SUMMARY OF RISK FACTORS
Investment in the Company's Common Stock involves certain risks which
should be carefully considered and evaluated, including but not limited to,
the Company's operating losses, need for additional capital, dependence on
the development of its single chip product, its ability to develop new
products, the security interest in all of the Company's assets, and
dependence on key personnel. For a discussion of considerations relevant
to an investment in the Common Stock, see "Risk Factors"
THE OFFERING
The Company is registering for resale the shares of Common Stock
issuable upon conversion of the Debentures, and accrued interest thereon,
exercise of the Warrants and Additional Warrants, and conversion of the
Note and interest thereon. The shares of Common Stock issuable upon
conversion of the Debentures, and interest thereon, exercise of the
Warrants and Additional Warrants and conversion of the Note, and interest
thereon, may be sold in a secondary offering by the Selling Stockholders
pursuant to this Prospectus. The Company will not receive any proceeds
from the resale of the Shares. See "The Offering."
SUMMARY CONSOLIDATED FINANCIAL DATA
The unaudited summary consolidated financial data presented below should
be read in conjunction with the more detailed financial statements of the
Company and notes thereto along with the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31
1997 1996
Statement of Operations Data:
Revenues $ 149,000 $ 0
Loss from operations 9,613,446 8,152,116
Loss before Income Taxes 10,819,780 8,192,595
Net Loss 10,822,980 8,193,395
Basic and Diluted Loss per share .60 0.98
Shares used in per share calculation 17,895,305 8,361,597
AS AT DECEMBER 31, 1997
Balance Sheet Data:
Working Capital (deficit) $ (1,454,500)
Total Assets 6,206,556
Long-term debt 3,318,949
Stockholders' equity (deficit) $ (2,900,434)
<PAGE>5
RISK FACTORS
In addition to the other information presented in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing the Common Stock offered hereby.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" and elsewhere in this Prospectus.
LIMITED OPERATING HISTORY. Since its inception, the Company has
generated nominal revenues. Its primary activities to date have
been the research and development of MPEG-2 products for digital
video compression and processing technology. The Company's success
is dependent upon the development and marketing of its proposed
products, as to which there can be no assurance. Unanticipated
problems, expenses and delays are frequently encountered in
developing new products. Other factors that may affect the
development of products and their sales include, but are not limited
to, new or competing products developed by competitors, the need to
develop customer support capabilities and market expertise, delays
in product development, market acceptance, and the success or
failure of sales and marketing activities. The Company has no
experience in bringing products to market in any substantial manner
and the failure of the Company to meet any of the conditions
discussed above could have a materially adverse effect upon the
Company's operations. No assurances can be given that the Company
can or will ever be profitable. See "Business" and "Managements
Discussion and Analysis of Financial Condition and Results of
Operations."
OPERATING LOSSES. Since its inception, the Company has incurred
losses. For the years ended December 31, 1997 and 1996, the Company
incurred net losses of $10,822,980 and $8,193,395 and had an
accumulated deficit of $19,018,775 since inception. The Company
expects to continue to incur losses and to continue to accumulate a
deficit for at least the first two quarters of 1998 and until the
Company completely develops and markets its products and gains
significant market acceptance. No assurances can be given that the
Company will achieve profitability. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
QUALIFIED OPINION. The report of the Company's independent
accountants contains an explanatory paragraph regarding the
Company's ability to continue as a going concern. Among the factors
cited by the accountants as raising substantial doubt as to the
Company's ability to continue as a going concern include the fact
that the Company has no established source of operating income and
that it has recurring losses from operations.
NEED FOR ADDITIONAL CAPITAL AND DILUTION. Development of new
products require substantial capital. The Company's future capital
requirements will depend on many factors, including cash flow from
operations, progress in developing new products, competing
technological and market developments, and the Company's ability to
successfully market its products. Because the Company currently
does not have significant revenues, and will not have revenues until
it begins to market its products, the Company will be required to
raise additional capital through equity or debt financings for its
operations. Any equity financings could result in dilution to the
Company's then-existing stockholders. Sources of debt financing
will result in interest expense. If the Company is unable to raise
additional funds, the Company may be required to reduce its
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LITIGATION INVOLVING THE COMPANY The Company and its officers
and directors are involved in a number of legal proceedings. Such
litigation includes an action by the Company against former
directors and officers of the Company and alleged financial
consultants to the Company for, among other things, breach of
<PAGE>6
fiduciary duty, fraud, breach of contract and RICO. Three of these
defendants have filed cross-complaints against the Company and its
officers and directors. Further, a former employee of the Company
has filed an action for breach of contract, and an alleged creditor
of the Company has filed an action for the repayment of monies. As
a result of litigation, the Company will have to spend a substantial
amount of time and fees in prosecuting and defending itself in
these matters. See "Legal Proceedings."
SECURITY INTEREST IN THE COMPANY'S ASSETS. The Company has
entered into a $5 million Credit Facility and Note which expires on
June 30, 1998. As of March 31, 1998, the amount of principal and
interest outstanding under the Credit Facility and Note was
$4,181,422. The outstanding principal and interest is secured by
all of the assets of the Company. Therefore, in the event the
Company is unable to repay the Credit Facility, the holder will hold
a first-priority security interest in the Company's assets upon
default. The holder of the Note has indicated that it intends to
convert the Note into shares of Common Stock. However, no assurance
can be given that the holder will convert the Note. If the holder
does not convert the Note, the Company will be required to request
the holder to extend the Note or seek some other source to repay the
Note. No assurances can be made that the Company will be able to
repay all amounts due under the Credit Facility and Note when
required or that a default will not occur prior to repayment. See
"Management's Discussion and Analysis and Results of Operations."
COMPETITION. The digital video and audio industry is marked by
numerous small as well as large competitors. Some of the Company's
competitors include C-Cube Microsystems, Inc., IBM and LSI Logic,
Inc. Additionally, the Company competes in an industry segment in
which numerous competitors have substantially greater resources than
the Company. The Company believes other single chip encoder
products may enter the market prior to the Company's proposed single
chip encoder. No assurances can be given that existing or potential
competitors of the Company will not develop products equal to or
better than those developed by the Company or that such products
will not receive greater market acceptance. See "Business."
DEPENDENCE ON INDEPENDENT MANUFACTURERS/SUBCONTRACTORS AND
SUPPLIERS OF COMPONENTS. The Company does not maintain its own
manufacturing or production facilities, and does not intend to do so
in the foreseeable future. The Company anticipates that its
products will be manufactured and its components will be supplied by
independent companies. Many of these independent companies may also
manufacture and supply products for the Company's existing and
potential competitors. The Company does not have any licensing or
other supply agreements with its manufacturers and suppliers.
Therefore, the Company's suppliers could terminate their
relationship with the Company at any time. In the event the Company
were to have difficulties with its manufacturers and suppliers, the
Company could experience delays in supplying products to its
customers.
UNCERTAINTY OF MARKET ACCEPTANCE. To date, the Company has had
minimal sales of its products. The Company's success will depend
upon acceptance of its products by the technology industry,
including independent third party companies and the general public.
Achieving such acceptance will require significant marketing
investment. No assurances can be given that the technology industry
will accept the Company's existing and proposed products or, if
accepted, the level of acceptance. See "Business."
DEPENDENCE ON TECHNOLOGY INDUSTRIES AND TECHNOLOGICAL
OBSOLESCENCE. The digital video and audio industry is characterized
by extensive research and development and rapid technological
changes, resulting in very short product life cycles. Further, the
video and audio industry is characterized by intense competition
among various technologies and their respective proponents.
Development of new or improved products, processes or technologies
may render the Company's products obsolete or less competitive. The
Company will be required to devote substantial efforts and financial
resources to enhance its existing products and to develop new
products. No assurances can be given that competing products or new
<PAGE>7
products or technology will not be developed rendering the Company's
products and technology obsolete.
DEPENDENCE ON MPEG-2 ACCEPTANCE AND CONTINUATION AS STANDARD.
The Company has focused much of its resources on the MPEG-2
technology and the success of that standard will dramatically impact
the Company's success. No assurances can be given that the MPEG-2
standard will remain in favor in the industry. Furthermore, should
the standard be modified or replaced, no assurances can be given
that the Company's research and development work will successfully
transfer to an alternative standard. See "Business" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RELIANCE ON OEM CUSTOMERS AND RETAIL DISTRIBUTORS. The
Company's success will depend to a significant extent upon its
ability to develop a distribution system with original equipment
manufacturers ("OEMs") and retail distributors to distribute and
sell the Company's products in the marketplace. No assurances can
be given that the Company will be successful in obtaining and
retaining the OEM customers and retail distributors it requires to
continue to grow and expand its marketing and sales efforts.
PROTECTION OF INTELLECTUAL PROPERTY. The Company currently does
not hold any patents. The Company has a non-exclusive worldwide
license from FutureTel to manufacture, use, sell and otherwise deal
with the Gecko video compression technology. If the Company
completes its acquisition of Intelligent Instruments Corporation, it
may become the holder of a patent for a proprietary set-top box
design and a pending patent for a proprietary server design. See
"Business - Intelligent Instruments Corporation." The Company
currently holds certain trademarks on the Company's name and the
names of certain products.
No assurances can be given that another company will not
attempt to infringe upon any current or future licenses, patents,
patent applications, trademarks, or copyrights of the Company or its
products and technology or that the Company may not inadvertently
infringe upon any current or future licenses, patents, patent
applications, trademarks, or copyrights of another company or its
products and technology. Such infringement could result in
protracted and costly litigation and sales losses. Further, no
assurances can be given that others will not independently develop
products or technology that are equivalent or superior to those of
the Company or that such products will not utilize the same or
similar technology developed by the Company, whether protected or
unprotected by a license or patent.
NECESSITY TO MAINTAIN CURRENT PROSPECTUS; STATE BLUE SKY
REGISTRATION REQUIRED TO EXERCISE WARRANTS. The shares of Common
Stock issuable on exercise of the Warrants, Additional Warrants and
Note have been registered with the Commission. The Company will be
required from time to time to file post-effective amendments to its
registration statement in order to maintain a current prospectus
covering the issuance of such shares upon exercise of the Warrants
and Additional Warrants and conversion of the Note. The Company has
undertaken to make such filings and use its best efforts to cause
such post-effective amendments to become effective. If for any
reason a required post-effective amendment is not filed, it does not
become effective or its not maintained, the holders of the Warrants,
Additional Warrants and Note may be prevented from exercising their
Warrants or convert their Note. Holders of the Warrants, Additional
Warrants and Note have the right to exercise the Warrants or convert
the Note only if the underlying shares of Common Stock are
qualified, registered or exempt from registration under applicable
securities laws of the state in which the various holders of the
Warrants, Additional Warrants and Note reside. The Company cannot
issue shares of Common Stock to holders in states where such shares
are not qualified, registered or exempt. See "Description of
Securities."
CONCENTRATION OF STOCK OWNERSHIP. Upon completion of the
offering, the present directors, executive officers, and
stockholders owning more than 5% of the outstanding Common Stock and
<PAGE>8
their respective affiliates will beneficially own approximately
28.97% of the outstanding Common Stock of the Company. As a result
of their ownership, the directors, executive officers, and more than
5% stockholders and their respective affiliates collectively will
have substantial control of all matters requiring stockholder
approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership
may also have the effect of delaying or preventing a change in
control of the Company. See "Principal Shareholders" and
"Description of Securities."
POSSIBLE DILUTION FROM DEBENTURES, WARRANTS, AND A NOTE. As of
the date of this prospectus, there will be Debentures, Warrants,
Additional Warrants and a Note outstanding to purchase up to an
aggregate of 8,104,262 shares of Common Stock, including up to
5,111,904 shares underlying the Debentures, 500,000 shares
underlying the Warrants, 250,000 shares underlying Additional
Warrants and 2,242,358 shares underlying the Note. Depending on the
current market price per share of Common Stock, holders of the
Debentures, Warrants, Additional Warrants and Note may be able to
purchase shares of Common Stock at a price less than the trading
price of the Common Stock with a resulting dilution of the interests
to the other stockholders. Because of this potential dilutive
effect, the Debentures, Warrants, Additional Warrants and Note may
have a detrimental impact on the terms under which the Company may
obtain financing through a sale of its Common Stock in the future.
Any evaluation of the favorability of market conditions for a
subsequent stock offering by the Company must take into account any
outstanding Warrants, Additional Warrants and Note.
POSSIBLE VOLATILITY OF SECURITIES PRICES. The trading price of
the Company's Common Stock could be subject to wide fluctuations in
response to quarterly variations in operating results, announcements
of technological innovations or new products by the Company or its
competitors, changes in financial estimates by securities analysts,
the operating and stock price performance of other companies that
investors may deem comparable to the Company, and other events or
factors. Moreover, in some future quarter the Company's operating
results may fall below the expectations of securities analysts and
investors. In such event, the market price of the Company's Common
Stock would likely be materially and adversely affected. In
addition, the stock market in general, and the market prices for
high-tech related companies in particular, have experienced extreme
volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's
Common Stock, regardless of the Company's operating performance.
PENNY STOCK REGULATIONS. The Securities and Exchange Commission
(the "Commission") has adopted regulations which generally define
"penny stock" to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. The Company's
securities may be covered by the penny stock rules, which impose
additional sales practice requirements on broker-dealers who sell to
persons other than established customers and accredited investors
(generally, institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by this rule, the broker-dealers must make a
special suitability determination for the purchase and receive the
purchaser's written agreement of the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to
sell the Company's securities and also affect the ability of
purchasers to sell their shares in the secondary market.
DEPENDENCE ON KEY PERSONNEL. The Company's performance is
substantially dependent on the performance of its executive officers
and key personnel and on its ability to retain and motivate such
personnel. The loss of any of the Company's key personnel,
particularly the Company's founder Mark C. Koz, could have a
material adverse effect on the Company's business, financial
condition and operating results. The Company's success will also
depend upon its ability to hire and retain additional qualified
<PAGE>9
personnel. No assurance can be given that the Company will be able
to hire or retain such qualified personnel.
THE OFFERING
JNC is offering for resale shares of the Company's Common Stock
issuable upon conversion of 7% Convertible Debentures in the
aggregate principal amount of $5 million (the "Debentures") and
interest thereon. The Debentures convert at the lower of $3.47 per
share or, (i) prior to April 22, 1998, 85% of the average closing
bid price of a share of Common Stock for the five trading days prior
to conversion (the "Conversion Average Price"), or (ii) from April
22, 1998 through May 21, 1998, 82.5% of the Conversion Average
Price, or (iii) after May 21, 1998 to December 22, 2002, 80% of the
Conversion Average Price. The Debentures may be converted into
shares of Common Stock at the option of the holder in whole or in
part as follows: (i) 33% of the aggregate principal amount of the
Debentures may be converted prior to the earlier of April 21, 1998,
or the effectiveness of this registration statement, (ii) 66% of the
aggregate principal amount of the Debentures may be converted from
April 22, 1998 through May 21, 1998, and (iii) the balance of the
aggregate principal amount of the Debentures may be converted
thereafter. The Debentures have a term of five (5) years, expiring
December 22, 2002 (the "Due Date"), and any amounts of principal and
accrued interest, not previously converted or prepaid, on the
Debentures automatically converts into shares of Common Stock on the
Due Date.
In addition, JNC is offering for resale shares of Common Stock
issuable upon exercise of the Warrants, as defined below, by the holder
thereof. JNC may acquire 250,000 shares of Common Stock at an exercise
price of $3.00 per share and may acquire an additional 250,000 shares of
Common Stock at an exercise price of $4.00 per share (collectively,
referred to as the "Warrants"). Cardinal is offering for resale 250,000
shares of Common Stock issuable upon exercise of warrants at an exercise
price of $2.43 per share (the "Additional Warrants"). No assurance can be
given that any of the Warrants or Additional Warrants will be exercised.
The Debentures and Warrants were issued to JNC pursuant to a private
placement completed on December 22, 1997, and the Additional Warrants were
issued to Cardinal in consideration for investment advisory services
provided in connection with such private placement.
MicroTechnology is offering for resale shares of the Company's
Common Stock issuable upon conversion of a Promissory Note in the
aggregate principal amount of up to $5 million (the "Note") and
interest thereon. The Note was issued in connection with a credit
facility agreement, in any amounts not to exceed $5 million ("Credit
Facility"). The Note may be converted, at the option of the holder,
into shares of Common Stock in an amount equal to 80% of the trading
price of a share of Common Stock on the date an advance of funds was
made pursuant to the Credit Facility. The Note and Credit Facility
expire on June 30, 1998. As of March 31, 1998, the amount of
principal and accrued interest outstanding under the Note and Credit
Facility was $4,181,422 and may convert into 1,742,358 shares of
Common Stock at an average conversion price of $2.40.
The shares of Common Stock issuable upon conversion of the
Debentures (including accrued interest thereon), upon exercise of
the Warrants and Additional Warrants and the Note (including accrued
interest thereon) (the "Shares") may be sold in a secondary offering
by the holders thereof pursuant to this Prospectus. The Company
will not receive any proceeds from the resale of the Shares by the
Selling Stockholders.
<PAGE>10
Pursuant to the terms of the private placement with JNC and the
Credit Facility with Micro Technology, the Company is contractually
required to register the shares of Common Stock issuable upon the
conversion of the Debentures and payment of interest thereon and
upon the exercise of the Warrants.
USE OF PROCEEDS
The Company will not receive any proceeds from the resale of
the shares of Common Stock underlying the Debenture, Warrant,
Additional Warrant, and Note by the Selling Stockholders.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain future earnings for use
in the operation and expansion of the business. The Company does not
intend to pay any cash dividends in the foreseeable future. The
declaration of dividends in the future will be at the discretion of the
Board of Directors and will depend upon the earnings, capital requirements,
and financial position of the Company.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the OTC Bulletin
Board under the symbol "MPEG" on July 15, 1996. The following
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
The high and low prices of the Company's Common Stock on a quarterly
basis for the past two fiscal years are as follows:
QUARTER HIGH LOW
September 30, 1996 $8.13 $1.25
December 31, 1996 $9.25 $4.25
March 31, 1997 $6.19 $1.63
June 30, 1997 $5.06 $2.44
September 30, 1997 $4.38 $2.38
December 31, 1997 $3.63 $2.38
<PAGE>11
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data
presented below for the years ended December 31, 1996 and 1997, are
derived from and should be read in conjunction with the more
detailed financial statements of the Company and the notes thereto,
which have been audited by Hein + Associates LLP, independent
auditors, whose report is included elsewhere in this Prospectus.
The selected consolidated financial data presented below should be
read along with the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which
follows this section.
YEARS ENDED DECEMBER 31,
1997 1996
Statement of Operations Data:
Revenues: $ 149,000 $ -
Costs and expenses:
Cost of Goods Sold 52,538 -
Research and development 4,388,180 2,711,028
Production expenses 36,235 -
Selling, general and administrative 5,285,493 5,441,088
Total costs and expenses 9,762,446 8,152,116
Operating Loss 9,613,446 8,152,116
Interest expense, net 1,203,775 8,989
Income tax expense 3,200 800
Net loss 10,822,980 8,193,395
Basic and Diluted net loss per share: 0.60 0.98
Shares used in per share calculations 17,895,305 8,361,597
AS AT DECEMBER 31,
1997 1996
Balance Sheet Data:
Working capital (deficit) (1,454,500) (1,243,756)
Total assets 6,206,556 215,996
Long-term debt 3,318,949 -
Stockholders' equity (deficit) (2,900,434) (1,040,467)
<PAGE>12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
The following sections discuss the Company's financial condition
and results of operations based upon the Company's consolidated
financial statements which have been prepared in accordance with
generally accepted accounting principles. The following sections
also contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially
from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus.
GENERAL
The Company is a development stage company with a principal
focus in digital video compression and processing technology
compliant with MPEG-2 standards. The Company is currently developing
chips, boards and systems for targeted potential customers. In 1997,
the Company merged with Sierra Vista, a Nevada corporation in the
development stages of production and distribution of feature length
films.
The Company plans to make the transition from development stage
to full production and sale of products in 1998. The Company's
single-chip MPEG-2 encoder, the DV2100 MPEG-2 encoder board, and
numerous system level products are at advanced stages of development
and are expected to begin significant volume shipment in the near
future. Management anticipates that the Company will become
profitable in 1998, but that continuing operating losses early in
1998 combined with the requirements of increased inventories and
accounts receivable will require additional funding in 1998. No
assurances can be given that the Company will become profitable or
such additional funding will be available or, if available, that it
will be on terms favorable to the Company.
Product development in 1998 is planned to continue in areas
complimentary to the Company's pending product sales. These product
development efforts are expected to include updated versions of
previously released products with enhanced feature sets and
functionality, products that will compliment other existing products,
and products that will broaden product lines to address additional
market niches. Management anticipates significant increases in the
staffing in its research and development efforts and in production,
marketing, sales and administration.
Management of Sierra Vista does not anticipate significant
revenues during the remainder of the fiscal year. No significant
increases in permanent employees and no significant purchases of
equipment are anticipated. Sierra Vista's operations are dependent
on receiving adequate working capital from InnovaCom.
The Company does not believe that inflation will have an impact
on its results of operations and does not believe that its business
is seasonal.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and
the notes thereto and other financial information included elsewhere
in this Prospectus.
<PAGE>PAGE 13
YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
REVENUES
Revenues for the year ended December 31, 1997 were $149,000 as
compared to zero for the year ended December 31, 1996. The revenues
in 1997 were from shipments of developer systems to five customers
who purchased the systems to begin development of their own software
in anticipation of the Company's commercial release of its board
encoding products. The Company's products were at an earlier stage
of development in 1996, and accordingly there was no revenue.
GROSS MARGINS
Gross margins were approximately $96,000, or 64% of revenues,
for the year ended December 31, 1997, as compared to zero for the
year ended December 31, 1996. The gross margin percentage in 1997 is
not necessarily representative of the margins that the Company
expects on its products when commercial shipments to customers begin
sometime in the future.
RESEARCH AND DEVELOPMENT
Research and development expense in the year ended December 31,
1997 totaled approximately $4,388,000. This was an increase of
approximately $1,677,000, or 62%, from the research and development
expense for the year ended December 31, 1996. The change results
principally from an increase in the number of employees in the
research and development group and an increase in the period that
these people were working (activity in the first half of 1996 was low
because the Company did not receive significant funding until July of
1996), which increased payroll by approximately $1,394,000 and
required the Company to recognize approximately $732,000 in
compensation expense in connection with the issuance of stock options
or common stock to employees in accordance with Accounting Principles
Board Opinion 25. This increase was partially offset by a reduction
of approximately $775,000 in the amount of purchased research and
development expenses in 1997 relative to 1996.
PRODUCTION EXPENSES
Production expenses of approximately $36,000 were related to
Sierra Vista. InnovaCom had no similar expenses during 1996.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were approximately
$5,285,000 for the year ended December 31, 1997, which was a decrease
of approximately $156,000, or 3%, from approximately $5,441,000
during the same period in 1996. The total in 1996 included
approximately $3,396,000 in expense recognized in conjunction with
the issuance of Common Stock and stock options at prices below fair
market value to various consultants. This expense was approximately
$647,000 in 1997. Currently, some of the Common Stock options
granted to consultants are subject to litigation. Excluding the
$3,396,000 in 1996 and $647,000 in 1997, selling, general and
administrative expense would have been approximately $2,593,000
higher in 1997 than in 1996, an increase of 127%. This increase is
related to an increase in the number of employees and an increase in
the period of time they were present in 1997 relative to 1996,
$484,000 in expenses related to Sierra Vista which was present in
1997 but not in 1996, and increases in legal and auditing of
approximately $559,000 and travel expenses of approximately $172,000.
<PAGE>14
INTEREST INCOME
Interest income increased from approximately $2,000 in 1996 to
approximately $10,000 in 1997. This increase reflects the return
from the temporary investment of surplus cash.
INTEREST EXPENSE
Interest expense substantially increased from approximately
$11,000 during the year ended December 31, 1996 to approximately
$1,214,000 for the year ended December 31, 1997. This increase
resulted primarily from the credit facility created in 1997 against
which the Company had drawn approximately $3,982,000 of principal as
of December 31, 1997. The outstanding balance of the credit facility
may be converted into Common Stock of the Company at a discount to
the market price of a share of Common Stock. Accordingly, the value
of this discount, approximately $1,021,000 at December 31, 1997, is
recorded as interest expense.
INCOME TAX EXPENSE
Income tax expense for the year ended December 31, 1997 was
approximately $3,000 as compared to approximately $1,000 for the same
period in 1996. This increase was related to the merger with Sierra
Vista which increased the minimum franchise tax payable to the State
of California.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had negative working
capital of $1,454,500. At this time, the Company has no substantial
revenues, and does not anticipate any substantial revenues until the
Company is able to complete and sell its products. Historically, the
Company has raised funds through equity and debt financings to fund
its operations and provide working capital to it and its
subsidiaries. It is anticipated that the Company will continue to
finance its operations and those operations of its subsidiaries
through equity and debt financings.
The Company will require additional working capital to fund its
operations and the operations of its subsidiaries. The Company
intends to fund its requirements through the issuance of debt
obligations and, to a lesser extent. the issuance of Common Stock
The Company is currently in discussions with institutional investors
to finance the Company through the issuance of convertible
debentures. No assurance can be given that these discussions and
negotiations will lead to the financing of the Company. In the event
that the Company is unable to obtain adequate financings, there will
be a material adverse effect on the Company's ability to meet its
business objectives.
Net cash used in operating activities totaled approximately
$7,106,000 during fiscal 1997 and $1,970,000 during fiscal 1996.
Net cash used during fiscal 1997 and 1996 primarily related to the
Company's losses of approximately $10,823,000 and $8,193,000,
respectively. The net loss during 1997 was offset by non-cash items
relating to interest expense from the discount resulting from the
beneficial conversion feature of the credit facility, compensation
expense recognized upon the issuance of Common Stock and stock
options, and the acquisition of technology for Common Stock expensed.
The net loss during fiscal 1996 was offset by compensation expense
related to the issuance of Common Stock and stock options for
compensation and the acquisition of technology for Common Stock
expensed.
Net cash flows provided from financing activities totaled
approximately $9,217,000 during fiscal 1997 as compared to
approximately $2,269,000 during 1996. During fiscal 1997, the
Company received approximately $2,917,000 in connection with the
acquisition of Sierra Vista Entertainment, approximately $665,000
from the sale of Common Stock to an investor, $4,609,000 upon the
issuance of debentures and $3,982,000 drawn down from the credit
facility. This cash received was offset by the acquisition of
<PAGE>15
property and equipment of approximately $768,000. During fiscal
1996, the Company received approximately $2,224,000 from the sale of
its Common Stock, offset by an advance to a related party of
approximately $94,000 and the acquisition of property and equipment
of approximately $205,000.
As of December 31, 1997, the Company's debts consisted of
advances against a $5,000,000 credit facility granted by a
shareholder with a principal balance of approximately $3,982,000 and
accrued interest of approximately $101,000. This note matures on
June 30, 1998, bears interest at 10% per annum and is secured by a
first-priority security interest in essentially all of the Company's
assets. The principal and interest on this credit facility can be
converted at the lender's option into Common Stock of the Company at
a 20% discount to the market price of the stock at the date that
individual advances were made to the Company under this credit
facility.
In addition, as of December 31, 1997, the Company issued $5
million in the aggregate of convertible debentures receiving
approximately $4,609,000 in net proceeds. The convertible debentures
bear interest at 7% and are due December 22, 2002. The debentures
are convertible into Common Stock in increments of one-third; one-
third may be convertible upon the earlier of the effective date of
this registration statement or after the 120th day after the original
issue date; one-third after the 120{th} day of the original issue
date but prior to the 150{th} day from the original issue date; and
one-third after the 150{th} day from the original issue date. In
connection with the private placement, the Company issued warrants to
purchase 250,000 shares of Common Stock at $2.43 per share.
In July 1997, the Company retained the services of an investment
advisor to assist in the raising of up to $15 million in a private
placement. In connection with these services, the Company granted
options to purchase 400,000 shares of Common Stock at $2.50 per
share. 200,000 of the options were exersicable upon grant, the
remaining will be exercisable upon the completion of a $15 million
private placement. In March 1998, the Company terminated the
relationship with the advisor.
IMPACT OF THE YEAR 2000 ISSUE. The Year 2000 Issue is the
result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's, or
its suppliers' and customers' computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The majority of the Company's operations are based on PC
application and the Company believes that its software is year 2000
compliant. The Company has not yet identified any year 2000 problem
but will continue to monitor the issues. No assurances can be given
that the year 2000 problem will not occur with respect to the
Company's computer systems.
Neither the Company nor its subsidiary have initiated formal
communications with significant suppliers and large customers to
determine the extent to which those third parties' failure to remedy
their own Year 2000 Issues would materially effect the Company and
its subsidiaries. The Company has not received any indication from
its suppliers and large customers that the Year 2000 Issue may
materially effect their ability to conduct business and the Company
has no current plans to formally undertake such an assessment.
<PAGE>16
BUSINESS
CORPORATE INFORMATION
The Company was originally incorporated in Florida in March of
1993 as a research and development company and was essentially
dormant until 1996. In March of 1996, the Company began to emphasize
the development of broadcast quality encoded video utilizing the
Motion Picture Experts Group ("MPEG") second generation standard for
video and audio compression ("MPEG-2") and obtained a license from
FutureTel, Inc to utilize portions of its development of a video
compression chip and related MPEG-2 technology, termed the "Gecko"
technology. From 1993 until 1995, Mr. Mark C. Koz, the Company's
founder and Chairman, was also a shareholder in and an officer and
director of FutureTel and assisted in the development of the Gecko
technology. Mr. Koz terminated his relationship as an officer,
director and shareholder of FutureTel and, in connection with his
departure, FutureTel licensed the Gecko technology to the Company in
exchange for royalties, for a period of seven years and not to exceed
$3 million, based on sales of video compression chips utilizing or
derived from the Gecko technology. The Company has applied certain
aspects of the Gecko technology in its development of its single chip
video encoder, the DVImpact Chip.
In July 1996, the Company merged with Jettson Realty Development
Corporation, a Nevada corporation ("Jettson"). The merger took the
form of a share for share exchange, in which all of the shares of the
Company were exchanged for approximately 52% of Jettson. The merger
was accounted for under the reverse take-over method of accounting.
Thereafter, the name of Jettson was changed to "InnovaCom, Inc." The
Company's Common Stock currently trades on the OTC Bulletin Board
under the symbol "MPEG." The merger between the Company and Jettson
is currently the subject of litigation. See "Legal Proceedings."
In May 1997, the Company acquired Sierra Vista Entertainment,
Inc., a Nevada corporation ("Sierra Vista") in a share for share
exchange by issuing 8,514,500 shares of its Common Stock to Sierra
Vista shareholders. Sierra Vista is a motion picture production
company and as a result of the acquisition, the Company gained access
to approximately $3 million of working capital and a credit facility
of up to $5 million.
The Company is developing digital video compression and
processing technology to provide broadcast quality video encoding and
processing products and systems utilizing the MPEG-2 standard. The
Company's development includes single chips, multiple chips, circuit
boards, software, and complete digital video compression and
processing systems. The Company is currently developing digital
video compression and processing technology using existing third
party three chip compression hardware. The Company intends to
replace this three chip hardware with its own single chip video
encoder, the DVImpact Chip, during 1998.
DIGITAL VIDEO INDUSTRY OVERVIEW
In the past, video images were transmitted and stored using
almost exclusively analog formats. Digital video technology,
including the Company's technology, has been developed more recently
and provides several benefits over analog. For example, unlike
analog, digital video can be compressed, providing significant
storage and transmission efficiencies. Further, digital video can
generally be duplicated and transmitted without significant loss of
quality.
The Moving Picture Experts Group ("MPEG") was formed in 1988 to
develop a worldwide industry standard for digital compression of
video. In 1991, the MPEG committee adopted the first technical
<PAGE>17
standard of digital video compression for full video motion for
personal computers, which is known as "MPEG-1."
The MPEG committee determined that a higher quality digital
video standard was needed for broadcast quality video. The MPEG
committee eventually adopted the second generation standard of MPEG
for video and audio compression ("MPEG-2"). The MPEG-2 video
compression standard defines the standard applicable to broadcast
quality video which may permit effective storage and transmission of
digital video.
THE COMPANY'S PRODUCTS AND TECHNOLOGY
Currently, the Company is utilizing existing third party three
chip compression hardware in development of its digital video
compression and processing technology. The Company intends to
replace this three chip hardware with its own single chip video
encoder, which has been termed "DVImpact," along with the Company's
development of a circuit board and software for providing MPEG-2
video encoding.
The DVImpact Chip and related video compression hardware and
software, which is the subject of patent application docket numbers
2056 and 2057, has applied certain aspects of the Gecko technology
which was licensed from Future Tel in 1996.
Under the License Agreement, the Company has the rights to use,
duplicate, distribute, modify and enhance the technology for the
development, manufacture and distribution of its products and to
sublicense the technology to others for the enhancement, development,
manufacture and distribution of its products. The Company also holds
trademarks on the Company's name and the names of certain products
under development.
The Company develops core technologies and methodologies for
digital video compression and processing technology applications.
The Company's adherence to MPEG-2 non-proprietary "open standards" is
anticipated to help facilitate customers' flexibility in developing
solutions based on the Company's products under development. The
Company believes adherence to the open standards may, therefore, help
customers' products meet time-to-market requirements. The following
are products currently under development by the Company.
DVIMPACT SINGLE CHIP MPEG-2 ENCODER is currently under
development and is designed to provide real time encoding of a
digital video input and to generate a compressed data stream that
management believes will be smaller and of better quality than that
of competing solutions. With minor modifications, the same chip is
designed to act as a high quality MPEG-1 encoder for applications
compliant with MPEG-1 standards. The Company anticipates using the
DVImpact in its own board and systems level products as well as
selling the chip on a merchant basis into appropriate applications.
Management believes that the DVImpact will address needs in a variety
of different markets and that customers will perceive advantages in
the DVImpact over competing solutions both included in the Company's
other products and as a stand alone merchant product.
In connection with the development of the DVImpact single chip
MPEG-2 encoder, the Company entered into an agreement with a Company
to manufacture the Company's chip. The agreement calls for payment
of $225,000 for design and manufacture of the chip. As of December
31, 1997, the Company made a $90,000 non-refundable deposit to
TriTech Electronics, Inc. for the start of design work. The
remaining amounts are due upon shipment of prototypes.
<PAGE>18
DV-2110 MPEG-2 ENCODER BOARD, currently under development, is
designed to act as the system interface, i/o manager, and host for
the DVImpact chip, or other MPEG-2 encoder chips. The Company
intends to use the DV-2110 imbedded in the Company's systems
products, and to sell the board as a stand alone component, or
packaged with certain Company-developed software as an OEM product to
customers in markets that the Company does not currently service with
its own system level products. The board is intended to be
compatible with personal computers running Windows 95 and NT
operating systems, and to operate with a variety of video compression
hardware. Its modular design and flexible architecture are designed
to allow it to function in a wide range of digital audio and video
applications in many different hardware and software environments.
TRANSPEG<trademark> AND MAVNET<trademark> SYSTEMS-LEVEL PRODUCTS
are currently in advanced stages of development and are designed for
professional broadcast markets. This includes: A line of
interchangeable digital multi-channel transmissions products that
incorporate compressed video and transmit on multiple digital video
broadcast standards; a digital broadcast player/recorder that
incorporates MPEG-2 video compression; and MPEG-2 instrumentation
cluster for vector scope and waveform monitoring; and MPEG-2 multi-
channel encoding system; and a corporate DVD authoring system
utilizing MPEG-2 video compression. These products are intended to
provide digital video processing technology to customers who are
facing the conversion from analog to digital broadcast technology
while maintaining the look and feel of the interface that the users
have known on their analog tools. One potential application is a
system designed specifically for broadcasters for use in producing,
downloading, editing and delivering digitally compressed broadcast
quality video. However, the Company believes that a complete MPEG-2
digital video compression system could also be utilized by end-users
in producing a variety of other video and audio programs.
SALES AND MARKETING
The Company intends to market its systems and products through
its own sales force and through the use of independent sales
representatives. Currently, the Company is emphasizing the sale of
its system based solutions to the video broadcast industry through
direct sales calls from the Company's sales force and by attendance
at national and international trade shows. Because the Company's
systems and products have been in the development stage, the Company
has not achieved significant revenue from sales and does not
anticipate significant sales revenue until its products become
available in commercial quantities.
MARKET FOR THE COMPANY'S PRODUCTS
The markets for the Company's systems and products using its
digital video compression technology can be divided into three broad
markets: video applications in communications, especially the
broadcast market; video applications in computers and computer
networks; and video applications in consumer electronics. The
Company intends to market its products in all three broad markets,
but will initially emphasize video applications in communications
targeting the analog to digital conversion of television broadcast
technology.
VIDEO APPLICATIONS IN COMMUNICATIONS
Digital video compression is currently used in several new
applications in the communications market, including the conversion
from analog to digital television, increase transponder capacity on
satellite DBS networks, and wired and wireless cable networks.
The Company intends to initially emphasize the marketing of its
systems solutions to the analog television broadcast station which
desires to convert to the transmission of digital television in
accordance with the mandates of the Federal Communications
Commission. Most analog television stations must convert to digital
<PAGE>19
transmission within the next six years. The Company is in the final
stages of development of a full product line targeting the video
compression needs of television broadcast stations converting from
analog to digital transmissions.
The first full-scale digital video transmission systems to
achieve full deployment were a series of DBS networks (Direct
Broadcast Satellite television). Through the use of digital video
compression technology on high-power Ku-band satellites, DBS networks
typically provide 100 or more channels to large geographical areas.
The Company intends to target this market once its DVImpact Chip is
commercially available through the development of video and audio
compression and multiplexing systems which are intended to have the
capability of increasing the number of video channels available to
networks over existing satellite transponders.
The wireless cable or MMDS networks involve a local "line-of-
sight" broadcast network which broadcasts video over much shorter
distances from a stationary ground-based antenna directly to small
receiving antennas placed at each subscriber's home. Wireless cable
or MMDS systems are typically deployed in areas where there may not
be an existing wired cable system or as an alternative to existing
wired cable systems in high-density urban centers. The Company
intends to target this market once its DVImpact Chip is commercially
available through the development of video and audio compression and
multiplexing systems which are intended to have the capability of
increasing the number of video channels available to wireless
networks using the same amount of radio spectrum.
Wired cable networks, which include such varied architectures as
switched digital video, fiber to the curb (FTTC), HFC and twisted
pair schemes such as ADSL and HDSL, are currently in the early stages
of deployment by telecommunications suppliers and digital cable
providers. Switched digital networks can provide a much higher level
of interactivity compared to either DBS or MMDS including the
potential for full two-way video communication. However, the
significant investment in new infrastructure, presents a major
barrier to market penetration as the cost of this infrastructure is
likely to be passed onto the consumer. However, the Company intends
to target this market once its DVImpact Chip is commercially
available through the development of video and audio compression and
multiplexing systems which are intended to have the capability of
increasing the number of video channels available to wired cable
networks using the same amount of bandwidth available over the cable
system.
VIDEO APPLICATIONS IN COMPUTERS AND COMPUTER NETWORKS
Manufacturers and consumers of computer technology are
increasingly embracing digital video applications for use in
educational, entertainment communication and training applications.
Furthermore, computers are emerging as the technical platform of
choice for video editing and video encoding through the integration
of dedicated video-specific hardware. The Company intends to target
this market as its system level solutions and DVImpact Chip become
commercially available. Hardware systems involving DVD-ROMs may
incorporate some of the Company's video encoding technology on an OEM
basis. Computers are commonly used as video post-production systems
though the addition of appropriate capture and encoding hardware and
application software enabling the system to provide digital editing
and/or content encoding. The Company's technology, especially its
digital authoring software technology, would have applications in
this market as well. Finally, the Company intends to market its
products and systems for use over local area networks and wide area
networks providing a cost effective solution for live video streams
over network applications.
VIDEO APPLICATIONS IN CONSUMER ELECTRONICS
One emerging growth market for the Company's technology is in
consumer electronics. Through the use of MPEG-2 compression, video
can be stored, reproduced and distributed on the same media currently
<PAGE>20
in use for other types of digital data, such as 5-inch (12 cm) CDs
that are commonly used for digital audio. Emerging applications for
digital video capture, playback and distribution at the consumer
level are being advanced by the rapid adoption of new consumer-
oriented media formats such as VideoCD Players, DVD Players,
Recordable DVD and Consumer Digital Video Cameras. The Company
intends to target the consumer market once its DVImpact Chip is
commercially available through the development of video and audio
compression and multiplexing systems with specific applications in
the consumer electronics market.
COMPETITION
The Company faces competition from numerous companies, some of
which are more established, have greater market recognition, and have
greater financial, production and marketing resources than the
Company. The Company's products compete on the basis of certain
factors, including first to market product capabilities, product
performance, price, support of industry standard, ease of use and
customer support as well as user productivity.
The market for the Company's products is intensely competitive,
subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants.
The Company faces direct and indirect competition from a broad range
of competitors who offer a variety of products and solutions to the
Company's current and potential customers. The Company's principal
competition comes from: (i) companies offering competing systems; and
(ii) companies offering competing technologies capable of addressing
certain components of the Company's technology. Many of the
Company's competitors have longer operating histories, including
greater experience in the market, significantly greater financial,
technical and other resources than the Company, greater name
recognition and a larger installed base of customers.
C-Cube Microsystems ("C-Cube") is a direct competitor to the
Company and is similarly focused on video encoded compression. C-
Cube has grown very rapidly through the sales of its MPEG products,
primarily in the MPEG-1 market, and has significantly greater
resources than the Company. However, C-Cube generally sells
components rather than the complete hardware and software digital
video compression and processing systems the Company hopes to develop
for its customers.
IBM was expected to compete with a single-chip MPEG-2 encoder
and decoder, but has not done so yet. The Company and many other
market participants presently buy a 3-chip MPEG-2 chipset from IBM
for their own current board products. IBM is expected to release its
own single chip encoder in the future.
Other major potential competitors include companies such as
Phillips and SGS-Thomson, as well as large, integrated Japanese and
Korean consumer electronics companies, such as Sony, Hyundai,
Toshiba, NEC and Samsung, which have their own semiconductor design
and manufacturing capacity. In high-level MPEG-2 decoders as well as
MPEG-1 encoders, LSI Logic has substantial market share. In many of
these cases, the Company hopes to be able to work jointly with these
companies to enhance quality encoding and decoding in the mass
markets.
Among the Company's smaller competitors is FutureTel, which
primarily serves the video authoring marketplace with boards and
software toolkits for encoding video sequences for television
broadcast studios. Minerva is a venture-funded, fast-growing system
reseller using C-Cube and other chip sources. Another market
participant, 3DO, started shipping MPEG-2 encoder/decoders for the
Apple MacIntosh in 1996, based on IBM's chipset, and may decide to
compete in the personal computer market. Several other companies
develop specialized professional video production boards.
<PAGE>21
The Company's competitors can be expected to continue to improve
the design and performance of their products and to introduce new
products with more competitive prices and performance features.
Maintaining the technological and other advantages of the Company's
products over its competitors' products will require a continued high
level of investment by the Company in both research and development
and operations. No assurances can be given that the Company will be
able to continue to make such investments and receive the necessary
capital or that the Company will be able to achieve the technological
advances necessary to achieve competitive advantages.
RESEARCH AND DEVELOPMENT
For the past two years, substantially all of the Company's time
has been devoted toward the research and development of digital video
compression and processing products and systems. Internal research
is supplemented through the utilization of consultants who specialize
in various areas. Product development is largely performed at the
Company's headquarters in California by approximately 20 engineers
who are supported and assisted by five to ten engineer consultants
and by one technician. The Company's total expenditures for research
and development were approximately $4,388,000 and $2,711,000 for the
years ended December 31, 1997 and 1996, respectively.
FUTURETEL LICENSE AGREEMENT
The Company has entered into an agreement with FutureTel whereby
FutureTel has licensed to the Company certain proprietary technology
related to digital video compression. The license agreement was
entered into on March 7, 1996 and was exclusive for a period of one
year and became non-exclusive thereafter. Under the license
agreement, FutureTel granted the Company the right to develop,
manufacture and distribute products using the licensed technology and
derivative works. Under the terms of the license agreement, the
Company will also have the right to sublicense the technology.
FutureTel's proprietary technology is currently subject to
patents and in the event FutureTel decides not to continue to protect
its patents, the Company has the right to enforce and protect the
patents which are subject to the license.
For its right to use the technology, the Company shall pay to
FutureTel a percentage of gross revenues related from the sale of
products using the technology by sublicenses or by the Company equal
to 20% during year 1; 15% during year 2; 8% during year 3; 5% during
year 4; 3% during year 5; 1% during year 6 and 1% during year 7.
Thereafter, the Company will not be responsible for any further
payments. Further, the royalty payments are subject to maximum
cumulative amount not to exceed $3 million.
SIERRA VISTA ENTERTAINMENT, INC. Sierra Vista Entertainment,
Inc.("Sierra Vista") was incorporated under the laws of Nevada on
April 3, 1996, for purposes of engaging in the production of
television or theatrical feature films. Sierra Vista intends to
produce feature motion pictures with a production budget of between
$1 million and $5 million per film.
The Company and Sierra Vista entered into a Plan and Agreement
of Reorganization ("Reorganization") in which the Company acquired
100% of Sierra Vista's issued and outstanding common stock in
exchange for 8,514,500 shares of Common Stock of the Company. Upon
consummation of the Reorganization, Sierra Vista became a wholly-
owned subsidiary of the Company. As a condition of the closing of
the Reorganization, certain shareholders of Sierra Vista who held, in
the aggregate, approximately 5.5 million shares of Sierra Vista
voting common stock entered into a voting agreement with Mr. Koz who
then owned approximately 4.9 million shares of Common Stock of the
Company. Pursuant to the voting agreement the parties agreed to
nominate six directors of the Company, three of which to be nominated
by Mr. Koz and three of which to be nominated by Sierra Vista
shareholders. Currently, Mr. Koz and one other shareholder are
<PAGE>22
subject to the voting agreement. Further as a condition of the
closing to the Reorganization, Sierra Vista was required to raise $3
million, which was used by the Company for working capital upon
consummation of the Reorganization. Sierra Vista also arranged for a
$5 million Credit Facility which has been used by the Company for
working capital.
Sierra Vista employs three full-time employees and is currently
seeking financing to produce one motion picture. However, Sierra
Vista is dependent on the Company for its working capital and has
been limited in its production activities due to the financial
constraints of the Company. As the Company continues to expend
resources on the development of its systems and products, management
anticipates re-evaluating the propriety of continuing Sierra Vista's
production activities. No assurance can be given that the Company
will continue Sierra Vista's production activities in the future.
CHINA JOINT VENTURE
The Company entered into a joint venture agreement with CRI, a
Chinese corporation located in Beijing ("CRI"), in September 1997.
The joint venture intends to establish an exhibition facility in
China to display United States technology and products and to provide
a forum for various companies and individuals to develop potential
business relationships and projects. The Company and CRI are
currently completing the necessary documentation for operation of the
joint venture in China. Pursuant to the terms of the agreement, the
Company will contribute $200,000 to the joint venture and CRI will
contribute $100,000. The joint venture will divide any profits in
amounts in proportion to their investment. As of March 31, 1998, the
Company has not contributed any funds to the joint venture. In
connection with entering into the joint venture with CRI, the Board
of Directors approved the issuance of 100,000 shares of Common Stock
to NATV Marketing, a salary of $60,000 per year and the opportunity
to receive up to 50% of the Company's joint venture interest provided
that the joint venture achieves certain objectives, including, but
not limited to, full subscription of all rental facilities at the
trading pavilion.
INTELLIGENT INSTRUMENTS CORPORATION
The Company's Board of Directors has approved the acquisition of
Intelligent Instruments for 2 million shares of Common Stock of the
Company, subject to review of tax and accounting consideration and
subject to completion of negotiations and final documentation.
Intelligent Instruments holds the patent for a proprietary set-top
box design and has applied for a patent for a proprietary server
design, both of which may potentially be compatible with the digital
video compression and processing technology being developed by the
Company. Intelligent Instruments is a company wholly-owned by Mark
C. Koz, the Company's President and Chief Executive Officer.
TECHNICAL SYSTEMS ASSOCIATES, INC.
The Company entered into an interim agreement to acquire
Technical Systems Associates, Inc. ("TSA"), an antenna company
located in Orlando, Florida, in March of 1997. After conducting a
due diligence review of TSA, the Company determined that the
acquisition would not likely meet its current business objectives.
In October 1997, the Company entered into an agreement for a release
from the interim agreement. Under this agreement, the Company paid
TSA an aggregate of $300,000, of which approximately $180,000 had
previously been paid, and agreed to provide a certain amount of
contingent debt financing in exchange for an option to be held by the
Company to acquire TSA and for the release. In January 1998, the Company
fully terminated the relationship and paid TSA approximately $58,000 for
a discharge of any financing or other obligations under the previous
agreements.
<PAGE>23
EMPLOYEES
As of March 31, 1998, the Company had approximately 45 full-time
employees.
FACILITIES
The Company is currently renting approximately 22,000 square
feet of space in Santa Clara, California, which includes offices and
research space. The Company has entered into a five (5) year lease
agreement effective January 1998, with an option to extend for an
additional three (3) year term, for the leasing of new offices of
approximately 18,000 square feet. The monthly base rent is $28,800
for 1998, increasing by $900 per month for each year thereafter, plus
operating expenses for the common areas of the entire complex equal
to the Company's pro-rata square footage of the complex
(approximately 47% of the building, 27% of the project).
Approximately 4,000 square feet is also being rented pursuant to a
sublease agreement which expires on June 30, 1998, and a monthly
payment of $9,000.
The offices are used primarily for engineering, software
development and administrative purposes. The Company does not
maintain its own manufacturing or production facilities.
Sierra Vista entered into a three (3) year lease agreement
effective October 1, 1997. The lease is for approximately 2,800
square fee of office space in Beverly Hills, California. The monthly
base rent is $5,882 for the first eighteen months and $6,162
thereafter.
Sierra Vista is also currently leasing a single family residence
of approximately 2,500 square fee in Beverly Hills, California. The
monthly rent is currently approximately $7,000 per month, increasing
to $7,300 in October 1998.
Sierra Vista's offices are used primarily for its film and video
production business.
LEGAL PROCEEDINGS
JETTSON REALTY DEVELOPMENT CORPORATION. On November 10,
1997, InnovaCom filed suit against Michael D. Haynes, David S.
Jett, Manhattan West, Inc., Marketing Direct Concepts, Inc.,
Checkers Foundation, Atlas Stock Transfer Corporation, Arun Pande,
Edwin Reedholm, and others in the Superior Court of the County of San
Francisco (Case Number 990965). The complaint alleges that in
connection with the reverse merger of Jettson Realty Development
Corporation ("Jettson") and InnovaCom, a Florida corporation, the
Company issued shares of Common Stock to Michael D. Haynes and
David S. Jett and entities controlled by them based upon fraudulent
misrepresentations. Further, the Company is alleging that Manhattan
West and Marketing Direct Concepts and Checkers Foundation, an entity
alleged to be controlled by Messrs. Haynes and Jett, were issued
fees, Common Stock, and options to acquire shares of Common Stock
based upon misrepresentations, including that they could raise
capital to assist the Company in its business. The Company has
received monies in connection with a stock purchase agreement between
the Company and Checkers Foundation, but will not issue the shares of
Common Stock until this litigation involving Checkers Foundation has
been resolved. The Company is also alleging that Atlas Stock
Transfer, the Company's former transfer agent, breached its contract
in issuing shares of Common Stock in these transactions. In
addition, the Company is alleging that Mr. Pande, a former director
and officer of InnovaComm, violated his fiduciary duty by receiving
shares of InnovaComm Common Stock based upon misrepresentations and
inadequate or no consideration, and made inappropriate and
unauthorized expenditures on behalf of the Company for his personal
benefit, and that Mr. Reedholm, a former director of the Company,
received shares of Common Stock of the Company without the payment of
adequate consideration. The Company is also alleging RICO (Racketeer
<PAGE>24
Influenced Corrupted Organizations Act) against all defendants. The
Company is seeking damages in excess of $26 million plus punitive
damages.
In response to InnovaCom's lawsuit, certain defendants have
filed cross-claims against the Company. Mr. Pande filed a
counterclaim against the Company, and its directors, officers and
attorneys for breach of contract, fraud, negligent misrepresentation
and other claims. Mr. Pande is alleging that the Company breached
his employment contract, failed to recognized Mr. Pande's ownership
in InnovaComm, failed to acknowledged Mr. Pande's stock options, and
failed to reimburse Mr. Pande for expenses made on behalf of the
Company. Mr. Pande is requesting damages of $11 million plus
punitive damages. The Company is disputing each of Mr. Pande's
claims. In addition, Marketing Direct Concepts has filed a counter-
claim against the Company and Manhattan West for damages for breach
of a financial consultant contract requesting damages of
approximately $1 million. Manhattan West has also filed a counter-
claim against the Company alleging breach of its consulting contract
with InnovaCom. Further, Atlas Stock Transfer has filed a claim
against the Company and all other defendants seeking indemnity.
A number of defendants have defaulted, including Michael Haynes,
David Jett and Checkers Foundation. InnovaCom will be seeking an
entry of judgment against the defaulting defendants including that
the Common Stock that they own may be canceled. The Jettson
litigation is in its initial stage and limited discovery has been
conducted.
In February, 1998, the Staff of the Division of Enforcement of
the Securities and Exchange Commission advised the Company that they
are performing an informal inquiry surrounding the circumstances of
the reverse acquisition involving Jettson and subsequent litigation
and has requested certain documents related to these transactions.
The Company has complied with the Staff's request.
JAPAN TOBACCO, MASATO HATA, FUTURETEL, ET. AL. On July 25, 1996,
Mark C. Koz, Intelligent Instruments Corporation and the Company
filed suit against Japan Tobacco, Masato Hata, FutureTel, et al., in
the Santa Clara County Superior Court (Case No. CV 759582). The
Company and the other plaintiffs are claiming fraud by the defendants
in the formation of a business venture involving the development and
marketing of multimedia technology. On or about September 5, 1996,
FutureTel filed a cross-complaint against the Company alleging breach
of contract by the Company for failure to pay FutureTel for salaries,
payroll taxes and insurance for certain personnel, rental equipment
expenses incurred by FutureTel, and legal fees all representing, in
the aggregate, approximately $123,000. The parties recently agreed
to settle their dispute. Under the settlement agreement, each party
dropped their claims against each other, the Company paid FutureTel
$100,000, and the Company and FutureTel amended the Company's
license to manufacture, use, distribute, sell and otherwise deal with
the video compression technology from FutureTel to make it
irrevocable. At the time of litigation, neither Mr. Koz nor
Intelligent Instruments Corporation were associated with FutureTel.
MATURI. On October 7, 1996, InnovaCom filed a complaint for
declaratory relief in Santa Clara County Superior Court (Case No. CV
761218) against Gregory V. Maturi, a former employee. The complaint
seeks clarification that Mr. Maturi is not entitled to any further
payments or benefits under his employment agreement with the Company,
and that certain payments amounting to approximately $150,000 made by
InnovaCom to Mr. Maturi should be returned to the Company. On
October 18, 1996, Mr. Maturi filed a cross-complaint against the
Company for breach of contract, fraud and deceit, and breach of the
implied covenant of good faith and fair dealing, seeking damages in
excess of $5 million. The parties have conducted limited discovery.
No trial date has yet been set.
DECORAH COMPANY. On June 9, 1997, the Decorah Company and Edwin
Reedholm, a former director of the Company, filed a complaint against
Digital Hollywood, the Company and Mark C. Koz in the Circuit Court
of Cook County, Illinois County Department, Law Division, Case No.
97L06866. Plaintiffs are alleging breach of contract in the amount
<PAGE>25
of $7,225 lent to the Company. In addition, Decorah Company is
alleging that it has lent funds to Digital Hollywood which has yet
to be repaid and is seeking damages of approximately $900,000.
Further, Decorah Company is seeking damages against Mr. Koz because
he guaranteed the repayment of the monies by Digital Hollywood to
Decorah Company secured by a portion of Mr. Koz's Common Stock in the
Company. Discovery has yet to begin in this proceeding. In
addition, the Company has recently filed suit against Mr. Reedholm
for breach of fiduciary duty in the Jettson Realty litigation.
<PAGE>26
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as
follows:
Held Position
NAME AGE POSITION SINCE
Mark C. Koz 43 President, Chief Executive 1993
Officer, Director
F. James Anderson 49 Secretary, Executive Director, May 1997
Corporate Strategy and Finance,
Director
Rand E. Shrader 43 Chief Operating Officer May 1997
Stanton Creasey 44 Chief Financial Officer April 1997
Simone Anderson 34 President, Sierra Vista May 1997
Tony Low 44 Director October 1996
Robert Sibthorpe 48 Director May 1997
John Champlin, M.D. 42 Director October 1997
The following sets forth the principal occupations during the
past five years of the directors and executive officers of the
Company and it subsidiaries.
MARK KOZ (AGE 43) has been Chairman, Chief Executive Officer
and President of the Company since March 3, 1993. Mr. Koz was also
Chief Executive Officer, Chief Technical Officer and a Director of
FutureTel from 1993 to 1995, and has been Chief Executive Officer of
Intelligent Instruments Corporation since 1993. Mr. Koz has five
years of technical education at Florida Technological University
(University of Central Florida). In addition, he is a voting member
of the Moving Picture Experts Group, the international
standards-setting body for MPEG.
F. JAMES ANDERSON (AGE 49) has been Secretary, Executive Director,
Corporate Strategy and Finance, and Director of the Company since May 1997.
Mr. Anderson is also and has been a director of Sierra Vista since January
1997. Prior to forming Sierra Vista in January 1997, Mr. Anderson was
engaged in reviewing and pursuing business opportunities. From January
1993 to the present, Mr. Anderson served as Director General of the Moscow
Country Club, a Russian-American joint venture formed to develop a country
club in Moscow, Russia, and from February 1992 to May 1995 Mr. Anderson was
President and Chairman of the Board of the Moscow Country Club,
Inc.("MCCI" ) which owned 50% of that joint venture. From December 1991 to
April 1993 Mr Anderson was CEO and Director of Brush Creek Mining and
Development, Co., Inc., a Nevada corporation, which was engaged in
exploration and development of precious mineral properties in the US and
other countries. Mr. Anderson is the spouse of Simone Anderson.
<PAGE>27
As previously discussed, Mr. Anderson was an executive officer
and Chairman of the Board of MCCI which entered into joint venture
with an agency of the Russian Government ("Russian Partner"). MCCI
believes that the Russian Partner illegally seized the assets of the
joint venture which is currently the subject of an arbitration
proceeding in accordance with the terms of the joint venture
agreement. As a result of the Russian Partner's seizure of the joint
venture's assets, MCCI was unable to pay its obligations when they
became due and, as a result, certain creditors of MCCI filed an
involuntary bankruptcy action against MCCI (Case No. 95-22770-C-7 and
95-24391-C-11 United States Bankruptcy Court Eastern District of
California). The Bankruptcy Court has approved a plan of
reorganization for MCCI allowing all creditors to be repaid from the
potential judgment proceeds in the arbitration proceeding.
RAND E. SHRADER (AGE 43) has been Chief Operating Officer since May
1997. Prior to joining the Company, Mr. Shrader was employed with ITT
Automotive (now part of ITT Industries) for 12 years. Mr. Shrader was
Quality Manager at one of Dayton-Walther's (now part of Lucas-Varity)
plants for 6 years before joining ITT.
STANTON RICHARD CREASEY (AGE 44) has been Chief Financial
Officer since April 1997. From March 1996 through April 1997, Mr.
Creasey was an independent consultant and from September 1994 through
March 1996, he was at Purus Inc. Mr. Creasey was Chief Financial
Officer and President of Sixty-Eight Thousand, Inc. from September
1989 through March 1994, and left that company in April 1994. In
June 1994, Sixty-Eight Thousand, Inc., a company which made Macintosh
compatible workstations, filed for bankruptcy protection in San Jose,
California (Case No.: 94-54123). Mr. Creasey is a CPA with 19 years
of experience in finance, first with Arthur Andersen & Co., and then
with a number of high technology manufacturing companies, including
National Semiconductor Corporation. He has served as chief financial
officer of several Silicon Valley start-up companies during the past
ten years.
SIMONE ANDERSON (AGE 34) was a Director of the Company from May
1997 to March 1998, and has been the Marketing Director and
President of Sierra Vista since January 1997. She has been a
director and officer of MCCI from February 1992 until May 1995 and
was previously a director and chief financial officer of Brush Creek
Mining and Development Co., Inc. from April 1989 to February 1993.
Prior to forming Sierra Vista, Ms. Anderson, along with her husband,
F. James Anderson, was engaged in the review and pursuit of new
business opportunities. As discussed above, certain creditors of
MCCI filed an involuntary bankruptcy action against MCCI. MCCI is
still currently in bankruptcy.
TONY LOW (AGE 44) has been a Director of the Company since
October 1996. Since July 1997, Mr. Low has been Chief Operating
Officer of Darwin Digital, a newly formed Saatchi & Saatchi Vision
Company involved in interactive advertising and media buying. Prior
to that, from January 1996 through June 1997, Mr. Low was director
of business affairs at the Los Angeles based Saatchi Entertainment
Group, a division of Saatchi & Saatchi, the multinational advertising
agency. From June 1993 through January 1996 he was President of
Tercer Mundo, Inc., a company marketing sound recordings, and from
October 1983 through June 1993 he was Partner and Business Manager of
Oberman, Tivoli, Miller and Low, an accounting company specializing
in the entertainment industry.
ROBERT ALAN SIBTHORPE (AGE 49) has been a Director of the
Company since May 1997. Mr. Sibthorpe has been owner of Mag South
Research, Inc., a geological and financial consulting firm since
October 1996. From June 1986 through April 1996 Mr. Sibthorpe was
with Yorkton Securities, Inc. involved in investment banking Mr.
Sibthorpe has an MBA in Finance and a Bachelor of Science in Earth
Sciences both from the University of Toronto.
<PAGE>28
JOHN JOSEPH CHAMPLIN, M.D. (AGE 42) has been a Director of the
Company since October 1997. He has been owner and president of the Med
Center Medical Clinic in Carmichael, California, since 1993. Prior to
founding Med Center Medical Clinic, he was a medical director of Madison
Center from 1988 to 1993. He is also associate clinical professor, family
practice, at the University of California at Davis since 1986. Mr.
Champlin earned his M.D. at the University of Florida.
COMMITTEES OF THE BOARD.
The Board has an Audit Committee and a Compensation Committee. The
Audit Committee consists of Messrs. Low and Sibthorpe, and the Compensation
Committee consists of Messrs. Koz and Sibthorpe.
The primary functions of the Audit Committee are to review the scope
and results of audits by the Company's independent auditors, the Company's
internal accounting controls, the non-audit services performed by the
independent accountants, and the cost of accounting services.
The Compensation Committee administers the Company's 1996 Incentive
and Nonstatutory Stock Option Plan and approves compensation, remuneration,
and incentive arrangements for officers and employees of the Company.
The board has also established a litigation committee consisting
of Mr. Anderson, who serves as chairman, and Messrs. Low and
Sibthorpe.
DIRECTOR COMPENSATION.
Directors do not receive cash compensation for serving as such.
However, during the year ended December 31, 1997, Messrs. Sibthorpe,
Low and Champlin each received options to acquire 200,000 shares of
Common Stock at $2.59 which represented the closing price of the
Company's Common Stock at the date of grant. The options are for a
period of five years and vest in one-third increments beginning on
November 18, 1998.
EXECUTIVE COMPENSATION.
The following table sets forth the Compensation of the Company's
President and Chief Executive Officer and the Executive Director,
Corporate Strategy and Finance during 1997. No other officer
received annual compensation in excess of $100,000 during 1997.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
Other Securities All
Annual Restricted Underlying Other
Compensa- Stock Options LTIP Comp-
tion Award(s) (#) Payouts ensa-
Name and Principal Year Salary ($) ($) ($) tion
Position
Mark C. Koz 1997 $241,500 $10,500{(1)} $0 300,000{(2)} $0 $0
President and CEO 1996 $120,000 $0 $0 2,000,000{(2)} $0 $0
F. James Anderson 1997 $112,500 $37,500{(3)} $0 300,000{(4)} $0 $0
Executive Director,
Corporate Strategy
and Finance
<PAGE>29
(1) Represents a car allowance of $1,500 per month.
(2) Represents incentive stock options to acquire 192,770 shares of Common
Stock at $2.85 per share and non-qualified stock option to acquire 107,230
shares of Common Stock at $2.59 per share. Also includes options to acquire
2,000,000 shares of Common Stock at $3.00 per share.
(3) Represents a $3,500 per month housing allowance and a $1,500 per month car
allowance.
(4) Represents options to acquire 300,000 shares of Common Stock at $2.59.
On May 15, 1997, the Company and Mr. Koz entered into a five year
employment contract. Under the terms of Mr. Koz's employment contract, Mr.
Koz shall receive a salary of $240,000 per annum subject to a 7% cost of
living increase and other increases as determined by the Board of
Directors. In addition, pursuant to Mr. Koz's employment contract, in the
event that Mr. Koz is terminated in connection with a change in control,
Mr. Koz shall be entitled to receive a lump sum payment equal to three
times his then annual salary. Finally, pursuant to his contract, Mr. Koz
shall be indemnified by the Company for serving as an officer and director.
On May 15, 1997, the Company and Mr. Anderson entered into a five year
employment contract. Under the terms of Mr. Anderson's employment
contract, Mr. Anderson shall serve as Director of Strategic Planning and
President of the Company's Entertainment Division and his salary shall be
$180,000 per annum subject to a 7% cost of living increase and increases as
determined by the Board of Directors. In addition, pursuant to Mr.
Anderson's employment contract, in the event that Mr. Anderson is
terminated in connection with a change in control, Mr. Anderson shall be
entitled to receive a lump sum payment equal to three times his then annual
salary. Finally, pursuant to his contract, Mr. Anderson shall be
indemnified by the Company for serving as Director of Strategic Planning
and President of The Company's Entertainment Division.
FUTURE PRESIDENT AND CHIEF EXECUTIVE OFFICER
On March 23, 1998, the Company hired Thomas E. Burke as President and
Chief Executive Officer of the Company and as a member of the Board of the
Directors of the Company to commence May 1, 1998. As discussed below, Mr.
Burke's employment is subject to certain conditions. For the past 17
years, Mr. Burke has been employed by TRW, most currently as Director of
Strategic Requirements which is responsible for identifying and evaluating
major trends and issues that can affect TRW's Space and Electronics Group.
Prior to being Director of Strategic Requirements, Mr. Burke was with TRW's
automotive group where he was vice president of advanced products and
systems for the Automotive Electronic Group. From 1981 to 1991 Mr. Burke
held positions with TRW's Space and Technology and the Electronic Systems
Groups in Los Angeles. Mr. Burke received a doctorate in chemistry form
the California Institute of Technology and his bachelor's degree in
chemistry for the University of Minnesota.
Pursuant to his employment contract, Mr. Burke shall receive a salary
of $250,000 per year, a signing bonus equal to $200,000 net of taxes, a car
allowance equal to $1,000 per month net of taxes, a housing allowance equal
to $7,500 per month net of taxes, a life insurance policy equal to
$1,500,000, and other benefits granted to employees of the Company. Mr.
Burke's employment is for a term of five years and, upon each anniversary
date, shall be automatically extended by an additional one year term unless
either party gives prior notice not to extend. Mr. Burke shall be eligible
to receive an annual bonus of up to two times Mr. Burke's annual salary
based on achieving certain targets as mutually agreed upon by Mr. Burke and
the Board of Directors. Mr. Burke shall also receive options to acquire
during a ten year term up to 1,000,000 shares of Common Stock of the
Company at an exercise price equal to $1.75 per share. The options shall
vest in one-third increments with one increment vesting immediately and
the remaining two increments on each anniversary date thereafter. In the
event of a change of control, all the options shall vest immediately.
<PAGE>30
Mr. Burke's employment contract may be terminated for cause by the
Company or for good reason by Mr. Burke. In general, the term "for cause"
includes the conviction of a felony, consistent willful failure to
substantially perform stated duties, a willful act of fraud, or a willful
act of misconduct. In general, the term good reason includes assignment
of duties inconsistent with Mr. Burke's position, failure to comply with or
breach of Mr. Burke's employment agreement, relocation of principal place
of employment, failure to extend the employment term, or an occurrence of a
change of control. In the event of termination without cause or for good
reason, the Company shall pay Mr. Burke an amount equal to his salary due
for the remaining term of his contract and any bonuses due, such an amount
not to exceed $1,000,000 unless the Company has earnings before deduction
of any interest, taxes, depreciation, amortization in excess of $2,000,000.
In addition, all unvested options shall immediately vest. In the event Mr.
Burke's employment contract is terminated for cause or without good reason,
Mr. Burke shall be entitled to all accrued but unpaid amounts and unvested
options shall be forfeited.
Mr. Burke's obligations under the employment contract are contingent
on the Company obtaining financing in an amount of not less than $5,000,000
on or before April 15, 1998. The failure of the Company to secure such
financing or the occurrence of any material adverse changes in the business
affairs and financial prospects of the Company, prior to May 1, 1998, could
result in termination of the employment contract by Mr. Burke. Further,
the Company must secure its performance under the employment contract for a
period of two years by the issuance of a letter of credit in the aggregate
amount of $1,000,000 for the benefit of Mr. Burke.
ADDITIONAL DIRECTOR
Effective May 1, 1998, Mr. Peter J. Sprague will become a member of
InnovaCom's Board of Directors. Age 58, Mr. Sprague has been Chairman of
the Board and Chief Executive Officer since 1988 of Wave Systems Corp, a
public company engaged in the commercialization of electronic content
(data, graphic software, video and audio sequence that can be digitally
transmitted) distribution networks. From 1965 to May 1995, Mr. Sprague was
Chairman of the Board of National Semiconductor Corporation. He is
currently a director of EnLighten Software and Pantepee International and
Trustee of the Strang Clinic. Mr. Sprague is also a member of the academy
of Distinguished Entrepreneurs, Babson College.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted certain indemnification provisions to its
bylaws that allows the Company to indemnify current and former directors,
officers, employees or agents for expenses, including attorney fees, as a
result of any threatened, pending suit or proceedings arising as a result
of such person being a director, officer, employee or agent of the Company.
Further, the Company has entered into indemnification agreements, and has
obtained liability insurance, with its officers and directors.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions,
or otherwise, the small business issuer has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
STOCK PLANS
1996 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN. The Company has
established a 1996 Incentive and Nonstatutory Stock Option Plan (the "1996
Plan"). The purpose of the 1996 Plan is to encourage stock ownership by
employees and officers of the Company to give them a greater personal interest
in the success of the business and to provide an added incentive to continue to
advance in their employment by or service to the Company. A total of 1,500,000
<PAGE>31
shares of Common Stock are authorized to be issued under the 1996 Plan. The
exercise price of any incentive stock option granted under the 1996 Plan may
not be less than 100% of the fair market value of the Common Stock of the
Company on the date of grant. The fair market value for which an optionee may
be granted incentive stock options in any calendar year may not exceed
$100,000. Shares subject to options under the 1996 Plan may be purchased for
cash. The 1996 Plan is administered by the Compensation Committee which has
discretion to determine optionees, the number of shares to be covered by each
option, the exercise schedule, and other terms of the options. The 1996 Plan
may be amended, suspended, or terminated by the Board, but no such action may
impair rights under a previously granted option. Each option is exercisable,
during the lifetime of the optionee, only so long as the optionee remains
employed by the Company. No option is transferrable by the optionee other than
by will or the laws of descent and distribution.
Option/SAR Grants in Last Fiscal Year
</TABLE>
<TABLE>
<CAPTION>
Percentage of Total
Options/SARs Granted to
Employees in Fiscal Year
Options/SARs Granted
Name Exercise Price $/sh
Expiration Date
<S> <C> <C> <C> <C>
Mark C. Koz 192,770 $2.85 Nov. 18, 2002
Mark C. Koz 107,230 7.97 $2.59 Nov. 18, 2002
James Anderson 300,000 7.97 $2.59 Nov. 18, 2002
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
The following table sets forth the value of exercised and unexercised options
and SARs held by the named executive at fiscal year end.
<TABLE>
<CAPTION>
Value of Unexercised in-
the Money Options/ SARs
at Fiscal Year-End
Options/SARs at Fiscal Exercisable (E)/ Subject
Year-End Exercisable to Repurchase (U)
(E)/ Subject to
Shares Acquired on Repurchase (U)
Name Exercise Value Realized ($)
<S> <C> <C> <C> <C>
Mark C. Koz None None None None
James Anderson None None None None
</TABLE>
<PAGE>32
CERTAIN TRANSACTIONS
MICRO TECHNOLOGY CREDIT FACILITY. In July 1997, a promissory note
(the "Note") was issued to Micro Technology in connection with a credit
facility agreement (the "Credit Facility"). The Credit Facility and Note
provide for an aggregate amount not to exceed $5 million. The Credit
Facility terminates and the Note is due on June 30, 1998 and bears interest
at the lower of 10% or the maximum rate allowed by law (Federal Reserve
Bank of San Francisco rate plus 5%) The Company has the right to prepay the
Note. The principal and interest on the Note may be converted, at the
option of the holder, into shares of Common Stock in an amount equal to 80%
of the trading price of a share of Common Stock on the date an advance of
funds was made pursuant to the Credit Facility. Advances made under the
Credit Facility are secured by all of the assets of the Company including,
but not limited to, receivables, goods, equipment, inventory, contract
rights and other property interests.
As of March 31, 1998 the aggregate amount of principal and accrued
interest outstanding on the Credit Facility was $4,181,421 million with an
average conversion price of $2.40 per share. Through the merger with
Sierra Vista, Micro Technology received 2,500,000 shares of Common Stock
which, at the time, represented approximately a 14% interest in the
Company. Prior to their investment in Sierra Vista, the owners of Micro
Technology were unaffiliated with Sierra Vista and the Company.
ACQUISITION OF INTELLIGENT INSTRUMENTS CORPORATION. The Board of
Directors has agreed to acquire Intelligent Instruments Corporation, an
intellectual property holding company owned by Mark Koz, in exchange for
two million shares of the Company's Common Stock. Intelligent Instruments
Corporation holds the patent for a proprietary set-top box design and has
applied for a patent for a proprietary server design, both of which
complement and enhance the technology being developed by the Company. The
acquisition of the intellectual property of Intelligent Instruments
Corporation is subject to both parties analyzing structure, tax and
accounting issues and entering into a definitive agreement. During the
negotiations, Mr. Anderson represented the Company.
FUTURETEL. The Company has a license ("FutureTel License Agreement")
from FutureTel to manufacture, use, distribute, sell and otherwise deal
with the video compression technology which is the subject of docket
numbers 2056 and 2057 for patent applications. Under the FutureTel License
Agreement, the Company has the rights to use, duplicate, distribute, modify
and enhance the technology for the development, manufacture and
distribution of its products and to sublicense the technology to others
for the enhancement, development, manufacture and distribution of its
products. The term of the license from FutureTel to the Company is in
perpetuity.
From 1993 to 1996, Mr. Mark C. Koz was a substantial shareholder of
and Chief Executive Officer and Chairman of the Board of FutureTel. In
connection with his departure from FutureTel, Mr. Koz exchanged his
interest in FutureTel for the remaining interest held by a third party in
Intelligent Instruments Corporation. In addition, FutureTel granted the
Company rights under the FutureTel License Agreement. The Company, with
Mark C. Koz and Intelligent Instruments Corporation, filed a lawsuit
against FutureTel and others claiming fraud by the defendants in the
formation of a business venture involving the development and marketing of
multimedia technology. This litigation was settled by the Company paying
FutureTel $100,000 and the parties amending the FutureTel License Agreement
to make it irrevocable. See LEGAL PROCEEDINGS.
With respect to each transaction between the Company and an affiliate of
the Company, the Company believes that such transactions were on terms at least
as favorable to the Company as they would have been had they been consummated
with unrelated third parties under similar circumstances.
<PAGE>33
SETTLEMENT AGREEMENT WITH MARK KOZ. The Company has entered into a
Settlement Agreement with Mark C. Koz which was adopted by the Company's
Litigation Committee of the Board of Directors. The Settlement Agreement
concerns the lawsuit recently filed by the Company regarding Jettson Realty
Development Corporation and concerns transactions and contracts, including
stock options and consulting agreements, entered into by the Company while
Mr. Koz was an officer and director of the Company. The parties enter into
this settlement in light of their desire to resolve any issues and in light
of the Company's dependence on Mr. Koz for future technology. Under the
terms of the Settlement Agreement, Mr. Koz has agreed to return to the
Company for cancellation 500,000 shares of Common Stock in exchange for a
mutual release. See "Legal Proceedings" for a discussion regarding the
Jettson Realty litigation.
DIGITAL HOLLYWOOD, INC. Beginning in March 1996, the Company made
advances to Digital Hollywood, Inc. in the aggregate amount of
approximately $139,000. Digital Hollywood is a corporation owned by Mr.
Mark C. Koz, the Company's president, and was formed to make and distribute
a musical video recorded on a digital video disk ("DVD") utilizing MPEG-2
compliant compression technology. Digital Hollywood was unable to sell its
video and because all of Digital Hollywood's assets were secured by another
lender, the Company wrote-off its advances. Digital Hollywood, Mark Koz,
the Company and Decorah Company are currently in litigation. See "Legal
Proceedings."
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 31, 1998, certain
information with respect to the beneficial ownership of the Company's
Common Stock by (i) each stockholder known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock, (ii) each
officer and director of the Company, and (iii) directors and executive
officers of the Company and its subsidiary as a group.
As of March 31, 1998, there were 20,561,897 shares of Common Stock
outstanding.
COMMON STOCK
Percentage
Number of Beneficially
NAME AND ADDRESS SHARES{(1)} OWNED
[S] [C] [C]
Mark C. Koz 5,463,000{(2)} 26.55%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
507784 BC Ltd. 5,463,000{(3)} 26.55%
10th Fl., Four Bentall Centre
P.O. Box 49333
1055 Dunsmuir Street
Vancouver BC V7X 1L4
Canada
Rand E. Shrader 402,000{(4)} 1.9%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
<PAGE>34
Stanton Creasey 200,000{(5)} *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
John Champlin, MD 100,000{(6)} *
4373 Meadow Circle
Rescue, CA 95672
James Anderson -0- -0-
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Simone Anderson -0- -0-
Sierra Vista Entertainment
9350 Wilshire Blvd., Suite 100
Beverly Hills, CA 90212
Robert Sibthorpe -0- -0-
6311 E. Naumann Dr.
Paradise Valley, AZ 85253
Tony Low -0- -0-
The Saatchi Entertainment Group
37 26th Avenue
Venice, CA 90291
All officers and directors as a group
(7 persons) 6,165,000{(7)} 28.97%
*Less than one percent
(1) Except as otherwise indicated, the Company believes that the
beneficial owners of Common Stock listed above, based on information
furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where
applicable. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities.
Shares of Common Stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding
for purposes of computing the percentage ownership of the person
holding such options or warrants, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
(2) Includes 1,000,000 shares of Common Stock owned by 507784 BC Ltd.
and 4,463,000 shares beneficially owned by Mark C. Koz, all of which
are subject to a Voting Agreement by and between 507784 BC Ltd. and
Mark C. Koz, wherein Mr. Koz has the right to nominate three (3)
members of the six (6) member board of directors of the Company and
507784 BC Ltd, a former Sierra Vista shareholder, has the right to
nominate the remaining three (3) members of the six (6) member board
of directors of the Company, and all the shares subject to the voting
agreement shall vote in favor of the six (6) nominees. The voting
agreement is for a period of five years ending on February 27, 2002.
The voting agreement may be extended for an additional five years.
The owners of 507784 BC Ltd. are unaffiliated with either the Company
or Mr. Koz. Also includes options to purchase 15,000 shares of
Common Stock at $0.50 per share expiring August 7, 2001, held by Mr.
Koz's wife.
<PAGE>35
(3) Includes 1,000,000 shares of Common Stock owned by 507784 BC Ltd.
and 4,478,000 shares beneficially owned by Mark C. Koz, all of which
are subject to a Voting Agreement by and between 507784 BC Ltd. and
Mark C. Koz, wherein Mr. Koz has the right to nominate three (3)
members of the six (6) member board of directors of the Company and
507784 BC Ltd, a former Sierra Vista shareholder, has the right to
nominate the remaining three (3) members of the six (6) member board
of directors of the Company, and all the shares subject to the voting
agreement shall vote in favor of the six (6) nominees.
(4) Includes options to purchase 400,000 shares of the Company's Common Stock
at $2.75 per share, expiring May 27, 2002.
(5) Includes options to purchase 200,000 shares of the Company's Common
Stock at $1.75 per share, exercisable within sixty days.
(6) Includes options to purchase 100,000 shares of the Company's Common
Stock at $3.375 per share, exercisable within sixty days.
(7) Includes 715,000 options to acquire shares of Common Stock and
1,000,000 share subject to a voting agreement discussed in footnotes
(2) through (6).
<PAGE>36
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock by the Selling Stockholders as of
March 31, 1998, and the number of shares of Common Stock covered by this
Prospectus.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF Number of shares of Common Number of Shares of Common Number of Shares of
STOCKHOLDER Stock Beneficially OWNED STOCK OFFERED HEREBY{(1)} Common Stock
PRIOR TO THE OFFERING Beneficially Owned
FOLLOWING THE
OFFERING
<S> <C> <C> <C> <C>
# OF SHARES % OF CLASS # OF SHARES % OF CLASS
JNC Opportunity Fund Ltd. 2,924,072{(2)} 11.79% 5,611,904 21.24% 0{(5)}
c/o Olympia Capital (Bermuda)
Ltd.
Williams House,
20 Reid Street
Hamilton HM11, Bermuda
Cardinal Capital Management,
Inc.
3340 Peachtree Road, N.E.
Suite 620 250,000{(3)} 1.20% 250,000 1.20% 0{(6)}
Atlanta, GA 30326
Micro Technology S.A.
P. O. Box 556
Charlestown
Nevis 1,742,358{(4)} 7.81 1,742,358 7.81 0{(7)}
</TABLE>
(1) In order to provide for (i) fluctuations in the market price of the
Common Stock, (ii) provisions in the formula for determining the
conversion price of the Debentures provided for in the terms thereof
(see "Description of Securities - Debentures"), and (iii) shares of
Common Stock which may be issued in payment of interest on the
Debentures, the aggregate number of shares of Common Stock
registered hereby exceeds the aggregate number of such shares
issuable upon conversion of the Debentures, and interest thereon, at
the conversion price in effect on February 6, 1998. JNC has agreed
to restrict its ability to convert the Debentures, and interest
thereon, and exercise of the Warrants to the extent that the number
of shares of Common Stock held by JNC and its affiliates, after such
conversion and/or exercise, exceeds 4.999% of the then issued and
outstanding shares of Common Stock following such conversion and/or
exercise.
(2) Includes (i) the number of shares of Common Stock
issuable upon conversion of the Debentures, (ii)
payments of interest thereon, and (iii) exercise of the
Warrants, assuming conversion at the formula price in
effect on March 31, 1998, (which price will fluctuate
from time to time based on changes in the market price
of the Common Stock and provisions in the formula for
determining the conversion price). The Debentures were
issued by the Company to JNC on December 22, 1997, in a
transaction exempt from the registration requirements of
the Securities Act of 1933 pursuant to Regulation D
thereunder (the "Private Placement"). JNC has agreed
to restrict its ability to convert the Debentures, and
interest thereon, and exercise of the Warrants to the
extent that the number of shares of Common Stock held by
JNC and its affiliates, after such conversion and/or
exercise, exceeds 4.999% of the then issued and
outstanding shares of Common Stock following such
conversion and/or exercise.
(3) Includes the number of shares of Common Stock issuable upon exercise
of warrants issued to Cardinal in consideration for investment
advisory services provided in connection with the Private Placement.
(4) Includes (i) the number of shares of Common Stock
issuable upon conversion of the Note and (ii) payments
of interest thereon, assuming conversion of all such
principal and interest on March 31, 1998.
(5) Assumes resale of all shares of Common Stock issuable
upon conversion of the Debentures, and interest thereon, and
exercise of the Warrants.
(6) Assumes resale of all shares of Common Stock issuable
upon exercise of the Additional Warrant.
(7) Assumes resale of all shares of Common Stock upon
conversion of the Note, and interest thereon.
<PAGE>37
PLAN OF DISTRIBUTION
The Selling Stockholders may, from time to time, sell all or a
portion of the Shares on the OTC Bulletin Board, or any other
exchange or market upon which the Shares may be quoted, in
privately negotiated transactions or otherwise, at fixed prices
that may be changed, at market prices prevailing at the time of
sale, at prices related to such market prices or at negotiated
prices. The Shares may be sold by the Selling Stockholders by one
or more of the following methods, without limitation, (a) block
trades in which the broker or dealer so engaged will attempt to
sell the Shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction, (b) purchases
by broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus, (c) an exchange
distribution in accordance with the rules of such exchange, (d)
ordinary brokerage transactions and transactions in which the
broker solicits purchasers, (e) privately negotiate transactions,
(f) market sales, and (g) a combination of any such methods of
sale. In effecting sales, brokers and dealers engaged by the
Selling Stockholders may arrange for other brokers or dealers to
participate. Brokers or dealers may receive commissions or
discounts from the Selling Stockholders (or, if any such broker-
dealer acts as agent for the purchaser of such shares, from such
purchaser) in amounts to be negotiated which are not expected to
exceed those customary in the types of transactions involved.
Broker-dealers may agree with the Selling Stockholders to sell a
specified number of such Shares at a stipulated price per share,
and, to the extent such broker-dealer is unable to do so acting as
agent for the Selling Stockholders, to purchase as principal any
unsold Shares at the price required to fulfill the broker-dealer
commitment to the Selling Stockholders. Broker-dealers who acquire
Shares as principal may thereafter resell such Shares from time to
time in transactions (which may involve block transactions and
sales to and through other broker-dealers, including transactions
of the nature described above) in the over-the-counter market or
otherwise at prices and on terms then prevailing at the time of
sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may
pay to or receive from the purchasers of such Shares commissions as
described above. The Selling Stockholders may also sell the Shares
in accordance with Rule 144 under the Securities Act, rather than
pursuant to this Prospectus.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders in sales of the Shares
may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any
profit on the resale of the Shares purchased by them may be deemed
to be underwriting commissions or discounts under the Securities
Act.
From time to time, the Selling Stockholders may pledge
their Shares pursuant to the margin provisions of its customer
agreements with its brokers. Upon default by the Selling
Stockholders, the broker may offer and sell the pledged Shares
from time to time. Upon sales of the Shares, the Selling
Stockholders intend to comply with the prospectus delivery
requirements, under the Act, by delivering a prospectus to
each purchaser in the transaction. The Company intends to
file any amendments or other necessary documents in compliance
with the Securities Act which may be required in the event a
Selling Stockholder defaults under any customer agreement with
brokers.
The Company is required to pay all fees and expenses incident
to the registration of the Shares, including fees and disbursements
of counsel to the Selling Stockholders. The Company has agreed to
indemnify the Selling Stockholders, against certain losses, claims,
damages and liabilities, including liabilities under the Securities
Act.
<PAGE>38
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of
50,000,000 shares of Common Stock, par value $0.001. As of
March 31, 1998, there were outstanding 20,561,897 shares of
Common Stock held of record by stockholders.
COMMON STOCK
Each stockholder is entitled to one vote for each share of
Common Stock held on all matters submitted to a vote of
stockholders. Each holder of Common Stock has the right to
cumulate his votes, which means each share shall have the number of
votes equal to the number of directors to be elected and all of
which votes may be cast for any one nominee. Subject to such
preferences as may apply to any Preferred Stock which may be
outstanding at the time, the holders of outstanding shares of
Common Stock are entitled to receive dividends out of assets
legally available therefor at such times and in such amounts as the
Board of Directors may from time to time determine. The Common
Stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon the liquidation, dissolution, or
winding up of the Company, the holders of Common Stock and any
participating Preferred Stock outstanding at that time would be
entitled to share ratably in all assets remaining after the payment
of liabilities and the payment of any liquidation preferences with
respect to any outstanding Preferred Stock. Each outstanding share
of Common Stock now is, and all shares of Common Stock that will be
outstanding after completion of the offering will be, fully paid
and non-assessable.
DEBENTURES
The Company has issued 7% Convertible Debentures in the
aggregate principal amount of $5 million (the "Debentures"). The
Debentures accrue interest at the rate of 7% per annum and are
convertible into shares of the Company's Common Stock at a
conversion price equal to the lesser of $3.47 per share or, (i)
through April 21, 1998, 85% of the average closing bid price of a
share of Common Stock for the five trading days prior to conversion
(the "Conversion Average Price"), or (ii) from April 22, 1998
through May 21, 1998, 82.5% of the Conversion Average Price, or
(iii) after May 21, 1998 to December 22, 2002, 80% of the
Conversion Average Price. The Debentures may be converted into
shares of Common Stock at the option of the holder in whole or in
part as follows: (i) 33% of the aggregate principal amount of the
Debentures may be converted prior to the earlier of April 21, 1998
or the effectiveness of this registration statement, (ii) 66% of
the aggregate principal amount of the Debentures may be converted
from April 22, 1998, through May 21, 1998, and (iii) the balance of
the aggregate principal amount of the Debentures may be converted
thereafter. The Debentures have a term of five years, expiring
December 22, 2002 (the "Due Date"), and any remaining amounts of
principal and accrued interest not previously converted or prepaid
on the Debentures automatically converts into shares of Common
Stock.
PROMISSORY NOTE
The Note in the aggregate principal amount of $3 million
was issued to MicroTechnology in connection with the Credit
Facility on July 1, 1997, and amended by Addendum on December
18, 1997, to increase the Credit Facility and Note from $3
million to $5 million. The principal and interest on the Note
may be converted, at the option of the holder, into shares of
Common Stock in an amount equal to 80% of the trading price of
a share of Common Stock on the date an advance of funds was
made pursuant to the Credit Facility. Advances made under the
Credit Facility are secured by all of the assets of the
Company including, but not limited to, receivables, goods,
equipment, inventory, contractual rights and other property
interests. The Note and Credit Facility expire on June 30,
1998.
<PAGE>39
LEGAL MATTERS
The validity of the shares of Common Stock offered by the
Company and Common Stock offered by the Selling Stockholders
will be passed upon by Bartel Eng Linn & Schroder, Sacramento,
California. Certain members of the firm of Bartel Eng Linn &
Schroder own Common Stock in InnovaCom representing, in the
aggregate, less than 1% of InnovaCom's outstanding shares.
CHANGE IN ACCOUNTANTS
Subsequent to the reverse merger between InnovaCom, Inc.,
a Florida corporation, and Jettson, on June 4, 1997, the
Company's Board of Directors approved to retain Hein +
Associates LLP as the Company's independent accountants and
Michael Hoffer, Jettson's former accountant, was not retained.
During the relationship between Jettson and Michael Hoffer,
there were no disagreements regarding any matters with respect
to accounting principles or practices, financial statement
disclosure, or audit scope or procedure, which disagreements,
if not resolved to the satisfaction of the former accountant,
would have caused Michael Hoffer to make reference to the
subject matter of the disagreement in connection with its
report. Michael Hoffer's report for Jettson's financial
position as of December 31, 1995, July 9, 1996 and July 31,
1996 and the results of its operations and cash flows for the
periods July 10, 1996 to July 31, 1996, January 1, 1996 to
July 9, 1996, for the year ended December 31, 1995 and from
October 3, 1990 (inception) to July 31, 1996 are not a part
of the financial statements of the Company included in this
Prospectus. Such report did not contain an adverse opinion
or disclaimer of opinion or qualification of modifications as
to uncertainty, audit scope or accounting principles under
generally accepted auditing standards. However, such report
includes comments by the former accountant that cast
substantial doubt on Jettson's ability to continue as a going
concern. Prior to retaining Hein + Associates LLP, the
Company had not consulted with Hein + Associates LLP regarding
accounting principles.
EXPERTS
The audited consolidated financial statements of the
Company as of December 31, 1997, and for each of the two years
in the period ended December 31, 1997, and from inception have
been included in this Prospectus and Registration Statement in
reliance upon the report of Hein + Associates LLP, independent
certified public accountants, appearing elsewhere herein and
in the Registration Statement, and upon the authority of such
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2, including
amendments thereto, relating to the shares of Common Stock
offered hereby, has been filed by the Company with the
Commission under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration
Statement and the exhibits thereto. Statements contained in
this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and, in each
instance, reference is made to the copy of such contract or
other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects
by such reference. For further information with respect to
the Company and the Common Stock and Warrants offered hereby,
reference is made to such Registration Statement and exhibits.
In addition, the Company is subject to the informational
requirements of the Securities Exchange Act of 1934 ("Exchange
Act") and in accordance therewith files periodic reports with
the Commission. A copy of such reports and this Registration
Statement may be inspected by anyone without charge at the
public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the regional offices of the
Commission located at Room 1228, 75 Park Place, New York
10007, and Northwestern Atrium Center, 500 West Madison
<PAGE>40
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or
any part of the Registration Statement and the exhibits
thereto and periodic reports may be obtained from those
offices upon the payment of certain fees prescribed by the
Commission. In addition, the Commission maintains a Web site
(http://www.sec.gov) that contains reports proxy and
information statements and other information regarding issuers
that file electronically with the Commission.
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED BALANCE SHEET - December 31, 1997 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS - For the
Years Ended December 31, 1997 and 1996, and For the
Period from March 3, 1993 (inception) to December 31, 1997 F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) -
For the Period from March 3, 1993 (inception) to December 31, 1997 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended
December 31, 1997 and 1996, and For the Period from March 3, 1993
(inception) to December 31, 1997 F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
InnovaCom, Inc. and Subsidiaries (a Development Stage Enterprise)
Santa Clara, California
We have audited the accompanying consolidated balance sheet of InnovaCom, Inc.
and subsidiaries (a Development Stage Enterprise) as of December 31, 1997, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended December 31, 1997 and 1996, and
for the period from March 3, 1993 (inception) to December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 InnovaCom, Inc. and
subsidiaries (a Development Stage Enterprise) as of December 31, 1997, and the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, and for the period from March 3, 1993 (inception) to
December 31, 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to
the financial statements, the Company has suffered recurring losses from
operations, and as of December 31, 1997 has negative working capital of
$1,454,500, and has a stockholders deficit of $2,900,434, that raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are also described in Note 3.
The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 6, 1998, except for the last paragraph of Note 14, which is as of
March 23, 1998
<PAGE>F-3
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
1997
ASSETS
CURRENT ASSETS:
Cash $ 4,148,434
Cash - restricted 8,480
Prepaid and other expenses 176,627
-------------
Total current assets 4,333,541
PROPERTY AND EQUIPMENT, net 772,457
FILM RIGHTS AND FILM COST INVENTORY 277,500
DEBT ISSUANCE COSTS, net of accumulated
amortization of $3,295 664,815
ACQUISITION COSTS 68,364
DEPOSITS 89,879
-----------
TOTAL ASSETS $ 6,206,556
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable - related parties $ 4,091,174
Accounts payable 691,247
Accrued liabilities 1,005,620
-----------
Total current liabilities 5,788,041
LONG-TERM DEBT, less unamortized discount of
$1,681,051 3,318,949
----------
Total liabilities 9,106,990
----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 9) -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 50,000,000 shares
authorized, 21,061,897 shares issued and 20,561,897
outstanding 20,562
Warrants 968,578
Additional paid-in capital 15,129,201
Deficit accumulated during development stage (19,018,775)
-------------
Total stockholders' (deficit) (2,900,434)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,206,556
=============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>F-4
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 3, 1993
<S> <C> <C> <C>
FOR THE YEARS ENDED (INCEPTION) TO
December 31, DECEMBER 31,
1997 1996 1997
REVENUES $ 149,000 $ - $ 149,000
------------ ------------ ------------
COSTS AND EXPENSES:
Costs of goods sold 52,538 - 52,538
Research and development 4,388,180 2,711,028 7,099,208
Production expenses 36,235 - 36,235
Selling, general and administrative 5,285,493 5,441,088 10,726,581
------------ ----------- ------------
Total costs and expenses 9,762,446 8,152,116 17,914,562
------------ ------------ ------------
OPERATING LOSS (9,613,446) (8,152,116) (17,765,562)
------------ ------------ -------------
OTHER INCOME (EXPENSE):
Interest income 10,462 1,622 12,084
Interest expense (1,214,237) (10,611) (1,224,848)
Loss on disposal of
property and equipment (2,559) - (2,559)
Other income (expense) - (31,490) (31,490)
----------- ----------- ------------
(1,206,334) (40,479) (1,246,813)
----------- ----------- ------------
LOSS BEFORE INCOME TAX EXPENSE (10,819,780) (8,192,595) (19,012,375)
INCOME TAX EXPENSE 3,200 800 6,400
----------- ----------- ------------
NET LOSS $(10,822,980) $ (8,193,395) $(19,018,775)
============ =============
BASIC AND DILUTED NET LOSS PER SHARE $ (.60) $ (.98)
============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 17,895,305 8,361,597
============ =========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>F-5
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
<S> <C> <C> <C> <C> <C> <C>
ACCUMULATED TOTAL
ADDITIONAL DURING STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT Warrants CAPITAL STAGE (Deficit)
COMMON STOCK, issued to
form company at
$0.0017 per share
(March 1993) 5,100,000 $ 5,100 $ - $ 3,400 $ - $ 8,500
Net loss - - - - (800) (800)
--------- ----------- ---------- ------------ ---------- -----------
BALANCES, December 31,
1993 5,100,000 5,100 - 3,400 (800) 7,700
Net loss - - - - (800) (800)
--------- ----------- ----------- ------------- ---------- -----------
BALANCES, December 31,
1994 5,100,000 5,100 - 3,400 (1,600) 6,900
Net loss - - - - (800) (800)
--------- ---------- ----------- ------------- ---------- -----------
BALANCES, December 31,
1995 5,100,000 5,100 - 3,400 (2,400) 6,100
Issuance of common stock
at $0.50 per share to
directors for services
performed (March 1996) 900,000 900 - 449,100 - 450,000
Acquisition of Jettson
Realty Development
Inc. at $0.30 per
share (June 1996) 561,069 561 - 168,184 - 168,745
Sale of common stock,
net of expenses at
$0.16 per share
(July 1996) 4,620,015 4,620 - 715,380 - 720,000
Issuance of common
stock at $0.50 per
share to employees
for services performed
(July 1996) 500,000 500 - 249,500 - 250,000
<PAGE>F-6
Issuance of common
stock at $1.36 per
share for consulting
services performed
(July 1996) 250,000 250 - 388,960 - 389,210
Sale of common stock
at $5.00 per share,
net of expenses
(October 1996) 280,000 280 - 1,399,720 - 1,400,000
Compensation
recognized upon
issuance of stock
options - - - 2,493,873 - 2,493,873
Contribution of
Product License - - - 1,275,000 - 1,275,000
Net loss - - - - (8,193,395) (8,193,395)
----------- -------- -------- ----------- -------------- -------------
BALANCES, December 31,
(1996) 12,211,084 12,211 - 7,143,117 (8,195,795) (1,040,467)
Issuance of common
stock in exchange
for technology at
$5.00 per share
(January 1997) 100,000 100 - 499,900 - 500,000
Sale of common
stock, net of
expenses at $2.90
per share
(February 1997) 229,310 229 - 664,771 - 665,000
Acquisition of
Sierra Vista
net of expenses
at $0.37 per share
(May 1997) 8,514,500 8,515 - 3,158,283 - 3,166,798
<PAGE>F-7
Issuance of common
stock at $2.43 per
share for legal
services rendered
(June 1997) 7,003 7 - 16,976 - 16,983
<PAGE>F-8
Shares returned per
settlement agreement
at par value (500,000) (500) - 500 - -
Warrants issued with
sale of convertible
debentures
(December 1997) - - 968,578 - - 968,578
Allocation of proceeds
from notes payable and
long-term liabilities
due to beneficial
conversion features - - - 2,086,988 - 2,086,988
Compensation recognized
upon issuance of stock
options - - - 1,558,666 - 1,558,666
Net loss - - - - (10,822,980) (10,822,980)
---------- ---------- ---------- ----------- ------------ ------------
BALANCES, December 31,
1997 20,561,897 $ 20,562 $ 968,578 $15,129,201 $(19,018,775) $(2,900,434)
========== =========== ========== ============ ============= ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 3, 1993
<S> <C> <C> <C>
FOR THE YEARS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1997 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,822,980) $ (8,193,395) $ (19,018,775)
--------------- --------------- ---------------
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 173,656 21,175 194,831
Loss on disposal of property and
equipment 2,559 - 2,559
Interest related to beneficial
conversion features of notes
payable and long-term liabilities 1,101,107 - 1,101,107
Compensation recognized upon 3,648,083
issuance of stock or stock options 1,575,649 3,648,083 5,223,732
Contribution of product license - 1,275,000 1,275,000
Write down of purchased incomplete
research and development 500,000 - 500,000
Write-off of related party
receivable 45,532 94,062 139,594
Changes in operating assets and
liabilities:
Cash-restricted 1,026 (9,507) (8,481)
Prepaid and other expenses (173,427) 5,300 (176,627)
Film rights and film cost inventory (27,500) - (27,500)
Deposits (70,581) (19,298) (89,879)
Accounts payable 296,961 394,286 691,247
Accrued liabilities 291,680 814,100 1,108,180
------------ ------------ -------------
Net adjustments 3,716,662 6,223,201 9,933,763
------------ ------------ -------------
Net cash used in operating (7,106,318) (1,970,194) (9,085,012)
------------ ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition of
Sierra Vista Entertainment 2,916,798 - 2,916,798
Cost incurred for organization of
joint venture (68,364) - (68,364)
Advance to related party (45,532) (94,062) (139,594)
Purchases of property and
equipment (768,181) (205,166) (973,347)
Proceeds from sale of assets 3,500 - 3,500
------------- ----------- --------------
Net cash provided by (used in)
inveseting activities 2,038,221 (299,228) 1,738,993
------------- ----------- --------------
<PAGE>F-10
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft (38,574) 38,574 -
Proceeds from sale of common stock 665,000 2,224,170 2,897,670
Proceeds from notes payable 3,981,512 106,478 4,087,990
Net proceeds from sale of debenture
with detachable warrants 4,608,593 - 4,608,593
Principal payments on notes payable - (99,800) (99,800)
---------- ---------- --------------
Net cash provided by financing
activities 9,216,531 2,269,422 11,494,453
---------- ---------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,148,434 - 4,148,434
CASH AND CASH EQUIVALENTS,
beginning of period - - -
------------- ---------- -------------
CASH AND CASH EQUIVALENTS,
end of period $ 4,148,434 $ - $ 4,148,434
============= =========== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ - $ 9,079 $ 9,079
============= =========== ============
Income taxes $ 4,800 $ - $ 4,800
============= =========== =============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net assets acquired, net of cash,
through acquisition of Sierra
Vista Entertainment $ 250,000 $ - $ 250,000
============= =========== =============
Return of 500,000 shares of
common stock per settlement
agreement $ 500 $ - $ 500
============= =========== =============
Acquisition of technology
for stock $ 500,000 $ - $ 500,000
============= =========== =============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>F-11
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
InnovaCom, Inc. ("the Company") was formed to develop, manufacture
and/or supply Very Large Scale Integrated Circuits ("VLSI") and other
related products for the specific application of broadcast quality
encoded video using the Second Generation Standard of the Motion
Picture Experts Group standard for video and audio compression ("MPEG-
2"). The Company employs VLSI to create an MPEG-2 digital video
encoding system on a chip.
The Company was formed pursuant to a business reorganization effective
July 10, 1996 between Jettson Realty Development, Inc. ("JRD"), a
Nevada corporation formed in 1990 and InnovaCom Corp. (InnovaCom
Florida), a Florida corporation formed in 1993. Under the
reorganization, JRD issued 6,000,000 previously unissued restricted
common shares in exchange for all of the issued and outstanding common
stock of InnovaCom Florida. JRD's board of directors then changed the
name of JRD to InnovaCom, Inc. and InnovaCom Florida became its wholly
owned subsidiary. Prior to the reorganization, JRD had no operations.
This transaction was accounted for as a reverse acquisition of JRD by
InnovaCom Florida.
On May 14, 1997, the Company acquired 100% of the issued and
outstanding shares of Sierra Vista Entertainment, Inc., a Nevada
Corporation ("Sierra Vista"), solely in exchange for common stock of
the Company. Sierra Vista was originally incorporated under the name
of Simone Anderson Productions under the laws of the state of Nevada
on April 3, 1996. Simone Anderson Productions changed its name to
Sierra Vista Entertainment, Inc. on February 21, 1997. Sierra Vista
was formed to produce, acquire, and distribute low-budget feature
films. The Company agreed to acquire all of the issued and
outstanding shares of common stock of Sierra Vista for 8,514,500
previously unissued shares of common stock of the Company. The
agreement between the Company and Sierra Vista obligates the Company
to use its best efforts to register the shares issued in the
acquisition with the SEC. The agreement calls for the Board of
Directors to consist of six members; three to be nominated by the
Company and three to be nominated by Sierra Vista, and the nominations
approved by all shareholders. The transaction was accounted for as a
purchase. Management believes that this transaction is a capital
transaction in substance rather than a business combination.
Therefore, no goodwill has been recorded. Sierra Vista had no
material activity prior to the merger, therefore, the statements
presented for the year ended December 31, 1997 resemble those that
would be shown in a proforma.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
STATEMENT OF CASH FLOWS - For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
<PAGE>F-12
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over the
estimated useful lives (3 years) of the respective assets. The cost
of normal maintenance and repairs is charged to operations as
incurred. Material expenditures which increase the life of an asset
are capitalized and depreciated over the estimated remaining useful
life of the asset. The cost of fixed assets sold, or otherwise
disposed of, and the related accumulated depreciation or amortization
are removed from the accounts, and any gains or losses are reflected
in current operations.
FILM RIGHTS AND FILM COST INVENTORY - Film rights are stated at the
fair market value of the stock issued upon contribution to the
Company, which has become the cost of the assets, and consists of
screen plays, foreign films, and other materials related to the film
industry. Such amounts will be amortized to expense over their
estimated useful lives. In compliance with Financial Accounting
Standards Board (FASB) Statement Number 53 "Financial Reporting by
Producers and Distributors of Motion Picture Films," the Company has
capitalized production costs as film cost inventory. Such amounts
will be amortized using the individual - film - forecast - computation
method. Currently the Company has only incurred costs related to
story rights and scenarios.
DEBT ISSUANCE COSTS - Debt issue costs represent the offering costs
associated with the sale of the debentures (See Note 7) and are being
amortized using the interest method over the life of the debentures.
ACQUISITION COSTS - Acquisition costs represent the cost incurred to
date for the organization of the joint venture. (See Note 9) Such
costs will be considered additional purchase price if the joint
venture is ultimately formed, or otherwise charged to expense.
RESEARCH AND DEVELOPMENT COSTS - Research and Development costs are
charged to operations in the period incurred.
INCOME TAXES - The Company accounts for income taxes under the
liability method, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statements and tax basis
of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. The
actual results could differ from those estimates.
The Company's financial statements are based upon a number of
significant estimates, including the estimated useful lives selected
for property and equipment, amortization of film cost inventory and
other assets, and the adequacy of valuation allowances. Due to the
uncertainties inherent in the estimation process, it is at least
reasonably possible that these estimates will be further revised in
the near term and such revisions could be material.
<PAGE>F-13
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and
circumstances indicate that the cost of long-lived assets may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash
flow value is required.
STOCK-BASED COMPENSATION - The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB25) and related interpretations in accounting
for its employee stock options. In accordance with FASB123 entitled
"Accounting for Stock-Based Compensation", the Company will disclose
the impact of adopting the fair value accounting of employee stock
options. Transactions in equity instruments with non-employees for
goods or services have been accounted for using the fair value method
prescribed by FASB123.
CONCENTRATIONS OF CREDIT RISK - Credit Risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or groups of counterparties
when they have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly effected by
changes in economic or other conditions. In accordance with FASB105
entitled "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations
of Credit Risk," the credit risk amounts shown in Note 10 do not take
into account the value of any collateral or security.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments, under FASB107 entitled "DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS", are determined at discrete points in
time based on relevant market information. These estimates involve
uncertainties and cannot be determined with precision. The estimated
fair values of the Company's financial instruments, which includes all
cash, accounts payable, long-term debt, and other debt, approximates
the carrying value in the consolidated financial statements at
December 31, 1997.
EARNINGS PER SHARE - In February 1997, the FASB issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
(FASB128). FASB128 provides for the calculation of "basic" and
"diluted" earnings per share versus primary and fully diluted earnings
per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common stockholders by the weighted
average number of shares of common stock outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. The
Company has implemented this statement for the current year and has
appropriately reflected the adoption in the statement of operations.
The results of operations and financial position were unaffected by
this implementation.
IMPACT OF RECENTLY ISSUED STANDARDS - The FASB recently issued
Statement of Financial Accounting Standards 130 "Reporting
Comprehensive Income" (FASB130) and Statement of Financial Accounting
Standards 131 "Disclosures About Segments of an Enterprise and Related
Information" (FASB131). FASB130 establishes standards for reporting
<PAGE>F-14
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, FASB130 requires
that all components of comprehensive income shall be classified based
on their nature and shall be reported in the financial statements in
the period in which they are recognized. A total amount for
comprehensive income shall be displayed in the financial statements
where the components of other comprehensive income are reported.
FASB131 supersedes Statement of Financial Accounting Standards 14
"Financial Reporting for Segments of a Business Enterprise." FASB131
establishes standards on the way that public companies report
financial information about operating segments in annual financial
statements and requires reporting of selected information about
operating segments in interim financial statements issued to the
public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. FASB131
defines operating segments as components of a company about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
FASB130 and FASB131 are effective for financial statement for period
beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Because of the recent issuance of
these standards, management has been unable to fully evaluate the
impact, if any, the standards may have on the future financial
statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of these standards.
3. BASIS OF PRESENTATION:
The financial statements have been prepared on a going concern basis,
which contemplates, among other things, the realization of assets and
the satisfaction of liabilities in the normal course of business.
However, there is substantial doubt about the Company's ability to
continue as a going concern because of the magnitude of its loss of
$10,822,980 for the year ended December 31, 1997, and its negative
working capital of $1,454,500 and its stockholder's deficit of
$2,900,434 as of December 31, 1997. The Company's continued existence
is dependent upon its ability to raise substantial capital, to
generate revenues and to significantly improve operations.
Management has taken several actions in response to these conditions.
In May 1997, the Company acquired Sierra Vista in exchange for shares
of its common stock (See Note 1). As a condition of completing the
transaction, Sierra Vista raised approximately $3,000,000 in a private
placement of its common stock, of which in excess of $2,000,000 was
allocated for the Company's operations. In June 1997, the Company
obtained a $5,000,000 convertible debt facility from a shareholder
(See Note 6). In December 1997, the Company sold $5,000,000 of 7%
convertible debentures through a private placement
(See Note 7). Management believes that these actions will allow the
Company to continue as a going concern.
Accordingly, the financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities or any other
adjustment that might be necessary should the Company be unable to
continue as a going concern.
<PAGE>F-15
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
DECEMBER 31,
1997
----
Computer and equipment $ 897,079
Office equipment and furniture 69,233
---------
966,213
Accumulated depreciation 193,855
---------
$ 772,457
=========
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
DECEMBER 31,
1997
----
Accrued payroll and benefits $ 377,841
Accrued consulting 216,402
Other 411,378
-----------
$ 1,005,621
===========
6. NOTES PAYABLE - RELATED PARTIES:
Note payable - shareholder bearing
interest at 10%, secured by all assets
of the Company. $ 4,083,247
Note payable - related party in the
original amount of $50,000 bearing
interest at 18%, collateralized by
certain stock of the Company, due on 7,927
demand (See Note 9)
-----------
$ 4,091,174
===========
<PAGE>F-16
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note payable - shareholder is related to a revolving convertible debt
facility with a shareholder that calls for maximum outstanding principal
balance not to exceed $5,000,000, bearing interest at 10%. The balance
includes all borrowing and accrued interest outstanding. The debt is
convertible into common stock at 80% of the market price for a share of
common stock at the time a draw is funded. The Company has recorded
interest expense and additional paid-in capital totaling $1,020,812 equal to
the intrinsic value of the beneficial conversion feature of the debt. The
principal and any unpaid interest are due June 1998.
7. LONG-TERM DEBT:
In December 1997, the Company issued $5,000,000 of 7% convertible
debentures, with two detachable warrants due December 2002. The net
proceeds from the issuance totaled $4,608,593 and are being used for
operations.
The sales price of the debenture was allocated between the debt securities
and the detachable warrants based on their relative fair values. In
addition to the $391,407 of offering costs paid, a third warrant was issued
as a finders fee. The third warrant entitles the holder to purchase 250,000
shares of the Company's common stock at a price of $2.43 per share and
expires December 2002. The total offering costs have been allocated
proportionately between the debentures and detachable warrants.
Each of the two warrants attached to the debt securities entitle the holder
to purchase up to 250,000 shares of the Company's common stock. The
exercise price of warrant one is $3.00 per share and for warrant two is
$4.00 per share. Both warrants expire December 2002.
The debentures are convertible into shares of common stock as follows:
1) 33% of the aggregate principal amount upon the earlier of (a)
effective date of registration of the shares or (b) the 120th day
after the Original Issue Date;
2) 33% of the aggregate principal amount at any time prior to the
150th day after the Original Issue Date; and
3) The balance any time after the 150th day after the Original Issue
Date and prior to the closing on the maturity date.
The conversion price to be used to determine the number of shares of common
stock into which the debentures can be converted is the lesser of (1) $3.47
per share or (2) the applicable percentage multiplied by the average market
price calculated on the conversion date. The applicable percentages are as
follows:
1) 85% of the average market price for any conversion prior to 120th
day after the Original Issue Date;
<PAGE>F-17
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2) 82.5% of the average market price for any conversion on or after
the 120th day and prior to 150th day after the Original Issue Date;
and
3) 80% of the average market price for any conversion after the 150th
day after the Original Issue Date.
The Company must maintain a minimum trading volume of its common stock and
must register the shares of common stock issuable upon conversion of the
debentures, payment of interest thereon and exercise of the warrants.
Interest is payable quarterly and may be paid with cash or registered shares
of common stock. Accrued interest in the amount of $8,069 is included in
accrued liabilities at December 31, 1997.
The outstanding balance of the debentures of $3,318,949 as of December 31,
1997 has been reduced from the face amount due to allocation of the relative
fair value of the detachable warrants and the beneficial conversion feature.
The discount totalled $1,758,051 and is being amortized using the interest
method. Amortization of the discount totalled $77,000 for the year ending
December 31, 1997 and is included in interest expense. The amount related to
the warrants ($691,875) is being amortized over the life of the debenture of
5 years. The discount related to the beneficial conversion feature
($1,066,176) is being amortized over the conversion period.
8. STOCKHOLDERS' EQUITY:
In March 1996, the Company granted 900,000 shares of common stock to two
directors for services performed in 1996. The Company has recognized
$450,000 in compensation expense related to their services for the year
ended December 31, 1996. The shares were valued by the Board of Directors,
and the 900,000 shares of common stock are the subject of current
litigation. (See Note 9)
In March 1996, a company controlled by the Company's president contributed a
license to the Company. The Company recorded the license at the cost
recorded by the contributing company of $1,275,000. (See Note 9,
Commitments and Contingencies, Product License.)
In July 1996, the Company issued 500,000 shares of common stock to certain
officers and directors of JRD for services rendered. The Company has
recognized $250,000 in compensation expense related to these services for
the year ended December 31, 1996. The shares were valued by the Board of
Directors, and the 500,000 shares of common stock are the subject of current
litigation (See Note 9).
In October, 1996, the Company adopted the 1996 Incentive and Nonstatutory
Stock Option Plan (the 1996 Plan) covering 1,500,000 shares. In 1997 this
was increased to 3,000,000 shares pending shareholder approval. Under the
plan, the Company can grant to key employees, directors, and consultants
either incentive, non-statutory, or performance based stock options. The
price of the options granted pursuant to the plan shall not be less than
100% of the fair market value of the shares on the date of grant. The board
of directors will decide the vesting period of the options, if any, and no
option will be exercisable after ten years from the date granted. Prices
<PAGE>F-18
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for incentive options granted to employees who own 10% or more of the
Company's stock are at least 110% of market value at date of grant.
During 1996, the Company issued 380,000 shares of common stock and options
to purchase 1,099,500 shares of common stock to consultants for services
rendered. The options were granted with exercise prices ranging from $0.001
to $3.00 per share, vesting throughout 1999 and expire from one to five
years after the date of grant. The majority of these options were granted as
a form of compensation to the consultants, and the exercise price was
determined by the then Board of Directors. Of the options granted, 369,500
were granted under the 1996 Plan and 700,000 were granted for services
rendered in connection with a private placement of the Company's common
stock. Certain of these options are the subject of litigation (See Note 9).
The Company has recognized $2,292,406 in compensation expense related to
these services for the options and $389,210 for the stock for the year ended
December 31, 1996. The 369,500 options granted under the Plan were forfeited
during 1997.
In October 1996, the Company granted non-plan options to purchase 3,500,000
shares of common stock to three individuals who are officers, directors and
shareholders of the Company. The options were granted with an exercise
price of $3.00 per share and expire in October 2001. The options vest as
follows: 1,166,666 vest if fiscal 1997 revenues exceeds $5,000,000,
1,166,667 vest if fiscal 1998 revenue exceeds $25,000,000 and 1,166,667 vest
if fiscal 1999 revenue exceeds $50,000,000. The 1,166,666 options related
to 1997 expired due to lack of performance. These options are the subject of
litigation. (See Note 9)
In January 1997, the Company purchased the rights to certain proprietary
technology from a third party in exchange for 100,000 shares of the
Company's common stock. This technology was valued at $500,000 or $5.00 per
share which was the current market value of the Company's common stock. At
December 31, 1997, the $500,000 of the technology cost is included in
research and development costs.
During 1997 and 1996, the Company granted options under the 1996 plan to
purchase 1,278,640 shares of common stock to employees who were hired in
1997 and 1996. The options were granted with exercise prices ranging from
$0.50 to $3.75 per share, expire in 2002 and vest over three years from the
date of hire. The Company has recognized $509,354 and $201,467 in
compensation expense related to services provided for the years ending
December 31, 1997 and 1996, respectively. During 1997, 171,050 of these
options were forfeited.
In April 1997, the Company granted options to purchase 100,000 shares of
common stock for $3.375 per share for a term of three years in exchange for
consulting services. Compensation expense in the amount of $272,480 was
recognized during the year ended December 31, 1997 for services provided.
In May 1997, the Company granted options to purchase 1,000,000 shares of
common stock under the 1996 Plan to an officer. The options were granted
with exercise prices ranging from $2.75 to $4.75 per share. 200,000 options
vested upon grant, the remainder vest upon attainment of certain performance
criteria.
<PAGE>F-19
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1997, the Company granted 122,160 options to purchase common stock
for prices ranging from $0.50 to $3.00 per share for consulting services
rendered. Consulting expense in the amount of $374,295 was recorded for the
year ending December 31, 1997.
In July 1997, the Company retained the services of an investment advisor to
assist in raising up to $15,000,000 in a private placement. In connection
with these services, the Company granted options to purchase 400,000 shares
of common stock under the Plan at $2.50 per share. 200,000 of the options
were exercisable upon grant, the remainder will be exercisable upon the
successful completion of a $15,000,000 private placement.
In October 1997, the Company granted options to purchase 261,233 shares of
common stock to employees under the 1996 Plan. The options were granted with
an exercise price equal to market, $3.0625 per share. The options expire in
2002 and vest over three years or upon attainment of certain performance
criteria. As of December 31, 1997, 65,500 of these options were forfeited.
In November 1997, the Company granted options to purchase 105,000 shares of
common stock to employees under the 1996 Plan. The options were granted
with an exercise price equal to market, $2.5938 per share. The options
expire in 2002 and vest over three years or upon a specific date.
In November 1997, the Company granted non-plan options to purchase 1,500,000
shares of common stock to directors of the Company. The options were
granted with an exercise price equal to market, $2.5938 per share, and
expire in 2002. The options vest evenly over three years.
In December 1997, the president of the Company returned 500,000 shares of
common stock originally issued at par value. The stock was returned to
settle any potential claims the Company may hold against him relating to the
November 10, 1997 legal action described in Note 9. The return of these
shares was recorded based on their original issue cost.
<PAGE>F-20
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth activity for all options granted under the
Plan:
AVERAGE
EXERCISE PRICE
Number PER SHARE
------ ---------------
OUTSTANDING, from
inception through
December 31, 1995 - $ -
Granted 369,500 1.62
Forfeited - -
Exercised - -
---------- ---------------
BALANCE, December 31, 1996 369,500 1.62
Granted 3,044,873 2.60
Forfeited (606,050) 1.84
Exercised - -
---------- ---------------
BALANCE, December 31, 1997 2,808,323 $ 2.63
========== ===============
Presented below is a comparison of the weighted average exercise price and
market price of the Company's common stock on the grant date for all options
granted under the 1996 Plan during the year ended December 31, 1997.
1997
NUMBER EXERCISE MARKET
of Shares Price Price
Market price equal to
exercise price 1,064,533 $ 3.00 $ 3.00
Market price greater than
exercise price 940,340 $ 1.37 $ 3.39
Exercise price greater than
market price 1,040,000 $ 3.29 $ 2.53
<PAGE>F-21
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 options to purchase 958,557 shares were exercisable at
prices ranging from $0.50 to $3.375 per share. The remaining 1,849,766
options outstanding become exercisable as follows:
WEIGHTED
NUMBER OF AVERAGE
YEAR ENDING DECEMBER 31, SHARES EXERCISE PRICE
1998 1,337,647 $ 3.04
1999 340,666 1.44
2000 171,453 2.99
--------- ------
1,849,766 $ 2.74
========= ======
If not previously exercised, all options outstanding will expire during the
year ended December 31, 2002.
The following is a summary of all of the activity for non-plan options:
WEIGHTED
NUMBER OF AVERAGE PRICE
Shares Per Share
OUTSTANDING, from inception
through December 31, 1995 - $ -
Vested options granted to
consultants 730,000 2.90
Performance options
granted to officers 3,500,000 3.00
Vested options exercised by
consultants (30,000) 0.50
---------- ----------
BALANCE, December 31, 1996 4,200,000 3.00
Vested options granted to
consultants 217,500 2.89
Options granted to consultants 4,660 .50
Options granted to directors 1,500,000 2.59
Expired/cancelled options (1,171,667) 3.00
----------- -----------
BALANCE, December 31, 1997 4,750,493 $ 2.86
=========== ===========
<PAGE>F-22
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Presented below is a comparison of the weighted average exercise price and
market price of the Company's common stock on the grant date for all non-
plan options granted during the year ended December 31, 1997:
1997
NUMBER EXERCISE MARKET
of Shares Price Price
Market price equal to
exercise price 1,602,500 $ 2.64 $ 2.64
Market price greater than
exercise price 119,660 $ 2.43 $ 4.19
Exercise price greater than
market price - $ - $ -
At December 31, 1997 options to purchase 914,220 shares were exercisable at
prices ranging from $0.50 to $3.37 per share. The remaining 3,836,273
options outstanding become exercisable as follows:
WEIGHTED
YEAR ENDING NUMBER OF AVERAGE
DECEMBER 31, Shares Exercise Price
1998 1,668,888 $ 2.87
1999 1,667,387 2.88
2000 499,998 2.59
--------- ---------
3,836,273 $ 2.84
========= =========
If not previously exercised, all options will expire during the year ended
December 31, 2002.
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FASB123 for employees. Had compensation cost for stock options
issued to employees been determined based on the fair value at grant date
for awards in 1997 and 1996 consistent with the provisions of FASB123, the
Company's net loss and net loss per share would have been adjusted to the
proforma amounts indicated below:
1997 1996
Net loss $ (12,352,083) $ (8,229,908)
============== =============
Net loss per common share $ (.69) $ (.98)
============== =============
The fair value of each option is estimated on the date of grant using the
present value of the exercise price and is pro-rated based on the percent of
time from the grant date to the end of the vesting period. The weighted-
<PAGE>F-23
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
average fair value of the options on the grant date for 1997 and 1996 was
$2.10 and $3.22 per share, respectively. The following assumptions were
used for grants in 1997 and 1996: risk-free interest rates of 6.22% and
6.17%, respectively; expected lives of three years; dividend yield of 0%;
and expected volatility of 144.0% and 164.7%, respectively.
9. COMMITMENTS AND CONTINGENCIES:
In June 1997, the Company entered into an agreement with a foundry company in
anticipation of manufacturing the Company's single chip MPEG-2 encoder. The
agreement calls for payment of $225,000 for design and manufacture of the
chip. As of December 31, 1997, the Company made a $90,000 non-refundable
deposit to this entity for the start of design work. The remaining amounts
are due upon shipment of the prototypes.
In July 1997, the board of directors approved the Company entering into an
agreement to obtain a 66% interest in a joint venture with China
International Radio Development. As part of this agreement, the Company
will have to fund up to $200,000 of expenses. The purpose of the joint
venture is to develop an exhibition center in China to display new high-tech
products. In connection with obtaining the joint venture interest, the
Company will be issuing 100,000 shares of common stock to a third party as a
finder's fee upon close of the agreement. As of December 31, 1997, the
Company had not made this investment.
In July 1997, the Company entered into an interim agreement to acquire all
of the issued and outstanding shares of Technical Systems Associates ("TSA")
in exchange for 100,000 shares of common stock. In October 1997, the
Company rescinded the interim agreement and entered into an Option to
Purchase and Mutual Release Agreement. Under the new agreement, the Company
had the option to purchase TSA under the terms of the interim agreement
through November 30, 1997 in exchange for $300,000. In addition, the
Company agreed to provide up to $150,000 in debt financing if TSA obtained a
certain purchase order. The debt financing was never provided. In January
1998, the Company entered into an Accord and Satisfaction and Release
Agreement which stated that the Company would make a final payment in the
amount of $58,000 to TSA for full release from any prior agreements entered
into. This amount is included in accrued liabilities at December 31, 1997.
LEASES
The Company leases office space in California and certain office equipment
under long-term operating leases. The Company's leases include the cost of
real property taxes and maintenance expenses. Insurance and utilities are
the Company's responsibility. Future minimum lease payments for all non-
cancelable operating leases are as follows:
<PAGE>F-24
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, AMOUNT
1998 $ 549,387
1999 490,615
2000 401,685
2001 349,306
2002 348,688
-----------
$ 2,139,681
===========
Rent expense was $193,214 for 1997.
EMPLOYMENT AGREEMENT
In connection with the acquisition of Sierra Vista Entertainment, Inc. (See
Note 1), the Company entered into five year employment agreements with its
president and the president of Sierra Vista which provide for minimum annual
salaries totaling $420,000 and other incentives, as well as severance
payments equal to one year's salary for termination without cause, and three
years salary for termination without cause in connection with a change in
control.
LITIGATION
On October 7, 1996, the Company filed a complaint for declaratory relief
against a former employee. The lawsuit states that the person breached a
written employment agreement between the two parties. In response to the
action, the employee filed a similar cross-complaint, which was subsequently
amended after an unsuccessful mediation process. The amended cross
complaint seeks damages in excess of $5,000,000 and 2% of the Company's
stock outstanding as of April 1996. Management intends to pursue and defend
this lawsuit vigorously and believes, based on current information, that no
material adverse impact will arise as a result of the litigation.
On December 27, 1996, the Company issued a purchase order to Compass Design
Automation (Compass) in the amount of $1,021,300 for software tools. On
March 18, 1997, the Company canceled this purchase order because it believes
Compass reneged on certain commitments. In July 1997, Compass made a demand
for payment. Company management has had discussions with Compass to resolve
this issue, however, no agreement has been reached. Management believes,
based on current information, that any settlement would not have a material
adverse impact on the Company.
On June 18, 1997, the Decorah Company and Edwin Reedholm, a shareholder and
former director and officer, commenced a lawsuit seeking to recover in
excess of $900,000 on a promissory note given to the plaintiffs by Digital
Hollywood, Inc., a company controlled by the Company's president. The
Company's president allegedly guaranteed the note through the pledging of
approximately six million shares of the Company's stock. In addition to the
original note amount, the Decorah Company and Edwin Reedholm seek to recover
the pledged shares as well as a $7,225 balance on a promissory note
<PAGE>F-25
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
including interest and $69,746 in accrued wages and other expenses, both of
which are accrued as of December 31, 1997. Management believes, based on
current information, that this lawsuit will have no additional material
adverse impact on the Company.
Future Tel, Inc., filed claims amounting to $123,000 against the Company for
recovery of unpaid lease payments and wages under an alleged reimbursement
agreement. The parties have reached an agreement whereby the Company will
pay $100,000. The Company has accrued this amount as of December 31, 1997.
On November 10, 1997 the Company filed a suit against former officers and
directors of the Company for breach of fiduciary duty and third parties who
were involved in the initial merger between the Company and Jettson Realty
Development as well as private placements of the Jettson Realty Development
stock. The suit claims fraud, breach of fiduciary duty and negligence
surrounding the acquisition. As part of this lawsuit, a director of the
Company has filed a counterclaim asserting approximately $11,000,000 in
damages. In addition, the suit also seeks to remove restrictive legends on
the stock currently owned. The Company has accrued $75,000 for unpaid wages
as of December 31, 1997. Management believes that this lawsuit will not have
any material adverse impact on the Company. The litigation is in its initial
stages and no discovery has commenced. Management intends to pursue this
lawsuit vigorously and believes, based on current information, that no
material adverse impact will arise as a result of the litigation. The
Company has entered into a settlement agreement with the Company's president
related to this suit whereby the Company's president agreed to return
500,000 shares of common stock. (See Note 8)
On December 10, 1997, certain employees filed suit against the Company for
compensation and waiting time penalties. The parties have reached an
agreement whereby the Company will pay $34,370. The Company has accrued
this amount at December 31, 1997.
A former consultant has asserted claims against the Company for unpaid
compensation of approximately $30,000 and stock option rights involving
169,500 shares. Settlement discussions are now underway. The unpaid
compensation has been accrued as of December 31, 1997. Management believes,
based on current information, that this lawsuit will not have any additional
material adverse impact on the Company.
PRODUCT LICENSE
In March 1996, a company controlled by the Company's president contributed a
license to the Company. The Company recorded the license at the cost
recorded by the contributing company of $1,275,000. The license grants the
Company rights to use and grant sublicenses to use proprietary technology to
develop the MPEG-2 video encoding systems on a chip. In accordance with
Statement of Financial Accounting Standards 2, the cost of intangibles that
are acquired from others for a particular research and development project
and that have no alternative future use are research and development costs
at the time the costs are incurred. As stated in Note 2, research and
development costs are charged to operations in the period incurred.
Consequently, the cost of acquiring the license was charged to research and
development expense during 1996.
<PAGE>F-26
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is committed under the license to pay royalties to a third party
for a percentage of gross revenue on sublicenses and for a percentage of the
Foundry price for silicon in connection with sales to end users as follows:
12- MONTH PERIOD
Ending March 26, Percentage
1998 15%
1999 8%
2000 5%
2001 3%
2002 1%
2003 1%
The maximum amount of royalties to be paid under the license shall not
exceed $3,000,000. No royalties have been earned or paid through December
31, 1997.
10. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK:
As of December 31,1997, the Company maintained cash in banks that was
approximately $3,648,000 in excess of the federally insured limited.
11. RELATED PARTY TRANSACTION:
During 1997 and 1996, the Company made advances to a company controlled by
the Company's president totaling $45,532 and $94,062, respectively.
Management does not believe that the advances made are realizable and, as a
result, has written off the receivable as of December 31, 1997, and 1996.
In October 1997, the Company agreed to acquire certain patents from a
company controlled by the Company's president in exchange for 2,000,000
shares of common stock. As of February 6, 1998, the exchange had not taken
place.
<PAGE>F-27
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES:
Income tax expense is comprised of the following:
MARCH 3, 1993
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1997 1996 1997
Current
Federal $ - $ - $ -
State 3,200 800 6,400
---------- ---------- ---------
3,200 800 6,400
---------- ---------- ---------
Deferred
Federal - - -
State - - -
---------- ---------- -------
Income tax expense $ 3,200 $ 800 $ 6,400
========== ========== =======
Deferred income tax assets (liabilities) are comprised of the following
at December 31, 1997:
Current deferred income tax assets
(liabilities):
Accounts receivable allowance $ 13,767
Accrued vacation 42,648
Accrued wages 102,813
Stock based compensation 1,626,689
Accrued settlement 74,002
Other 2,193
-------------
1,862,112
Valuation allowance (1,862,112)
-------------
Net current deferred tax asset $ -
=============
Long-term deferred tax assets (liabilities):
Depreciation/amortization $ 217,720
Net operating loss carryforward 4,801,223
Research and development credit 521,364
-------------
5,540,307
Valuation allowance (5,540,307)
-------------
Net long-term deferred tax asset $ -
=============
<PAGE>F-28
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory tax rates to pre-tax income as follows:
MARCH 3, 1993
FOR THE YEARS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1997 1996 1997
Total expense (benefit) computed
by applying the U.S. statutory rate (34.0%) (34.0%) (34.0%)
statutory rate
Nondeductible license costs - 5.3 2.3
Effect of valuation allowance 34.0 28.7 31.7
------ ------ ------
- % - % - %
====== ====== =======
As of December 31, 1997, the Company has available net operating loss
carryforwards for income taxes of $11,052,533 for federal purposes and
$11,218,948 for California purposes which begin to expire in the year 2011 and
2001, respectively. The benefit of the net operating loss to offset future
taxable income may be subject to limitation as a result of changes in stock
ownership as prescribed in Internal Revenue Code Section 382.
13. BUSINESS SEGMENTS:
The Company's operations have been classified into two business segments:
technology and motion picture. The technology segment includes the
development, manufacture, and/or supply of MPEG-2 video encoding systems and
other related products. The motion picture segment includes the production,
acquisition and distribution of feature films.
<PAGE>F-29
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information by segment for the year ended December 31,
1997 is as follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
AND
TECHNOLOGY MOTION PICTURE ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Revenues $ 149,000 $ - $ - $ 149,000
Interest income 6,080 4,382 - 10,462
Interest expense (1,214,237) - - (1,214,237)
Loss before income
tax expense (10,304,250) (515,530) - (10,819,780)
Depreciation and
amortization 169,259 4,397 - 173,656
Capital expenditures 715,151 53,030 - 768,181
Identifiable assets 7,393,890 2,685,089 (3,872,423) 6,206,556
</TABLE>
During 1997, the Company acquired the motion picture segment, therefore,
there are no segments to report for the year ended December 31, 1996.
14. SUBSEQUENT EVENTS:
In January 1998, the Company established the InnovaCom, Inc. 401(K) Profit
Sharing Plan (the Plan) covering substantially all of its employees and the
employees of its subsidiaries. Management determines, at its discretion,
the amount of any matching or other contributions to the Plan.
In February 1998, the Company granted 142,500 options to employees under the
1996 Plan. The options were granted at market of $2.50 per share, and vest
over 3 years at 30% for the first year, 30% for the second year, and 40% in
the third year.
In February 1998, the Company established a Gecko Chip Release Bonus whereby
if a prototype of the Gecko chip is functioning by April 30, 1998, the
design team will be eligible for a cash payment of $60,000 plus 100,000
options, with the distribution to be determined by the design team manager.
In February 1998, the Company established a bonus pool for the design team
working on the Gecko chip. The team members employed on January 1, 1998
would be eligible for 2% of the 1998 revenue generated by the Gecko chip and
1% of the 1999 revenue generated by the Gecko chip. The 1999 bonus shall not
exceed $600,000. Eligibility will be determined based on employment status.
<PAGE>F-30
On March 23, 1998, the Company hired a new individual to become President,
Chief Executive Officer and a member of the Board of Directors of the
Company effective May 1, 1998. The Company has entered into an employment
agreement with this individual which provides for a signing bonus of
$200,000 and an annual salary of $250,000 and other incentives including
options to purchase up to 1,000,000 shares of the Company's common stock for
$1.75 per share and severance payments up to $1,000,000 for termination
without cause. The options expire in ten years. One third of the options
vest immediately, one third vest in one year and the remainder vest in two
years. The initial term of the employment agreement is five years. The
employment agreement is contingent on the Company's obtaining $5,000,000 in
financing on or before April 15, 1998, and securing its performance under
the agreement by the issuance of a $1,000,000 letter of credit.
<PAGE>II-1
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Company has adopted Section 78.751 of the Domestic and Foreign
Corporation Laws of the State of Nevada in its bylaws. Section 78.751
states:
1. A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, except an action by or in the right of
the corporation, by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by
him in connection with the action, suit or proceeding if he acted in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal
action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
2. A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him
in connection with the defense or settlement of the action or suit if he
acted in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to
which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to
the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit
was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the
person is fairly and reasonably entitled to indemnity for such expenses
as the court deems proper.
The Company has entered into indemnification agreements with its
officers and directors. Pursuant to the agreements, The Company has agreed
to defend and indemnify such officers and directors for all expenses and
liabilities for acting as such.
In addition, the Company carries directors' and officers' insurance
pursuant to authority in its Bylaws to maintain a liability insurance
policy which insures directors or officers against any liability incurred
by them in their capacity as such, or arising out of their status as such.
<PAGE>II-2
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by the
Company in connection with the issuance and distribution of the securities
being registered hereunder. No expenses shall be borne by the Selling
Stockholders except for commissions and expenses, if any, related to the
sale of their shares. All of the amounts shown are estimates, except for
the SEC registration fees.
SEC registration fee $ 6,415.64
Accounting fees and expenses * $ 50,000
Legal fees and expenses * $ 60,000
Printing costs $ 2,500
Miscellaneous * $ 1,500
TOTAL $ 120,415.64
*estimated
Item 26. Recent Sales of Unregistered Securities.
On December 22, 1997, the Company sold to JNC, an institutional
investor, 7% Convertible Debentures in the aggregate principal amount of $5
million and warrants to purchase 250,000 shares of Common Stock at an
exercise price of $3.00 per share and warrants to purchase 250,000 shares
of Common Stock at an exercise price of $4.00 per share. At the same time,
the Company issued warrants to purchase 250,000 shares of Common Stock at
$2.43 per share to Cardinal Capital Management, Inc., an institutional
investor, in consideration for investment advisory services provided in
connection with the private placement. In addition, the Company
commissions in the aggregate amount of $300,000 to Cardinal Capital
Management, Inc. The transactions were exempt from registration upon
reliance of Section 4(2) and Regulation D of the Securities Act.
In June 1997, Patrick Johnson, Esq. received 7,003 shares of Common
Stock in consideration for approximately $17,000 worth of legal services
previously rendered. The transaction was exempt from registration upon
reliance of Section 4(2) and Regulation D promulgated under the Securities
Act. No commissions were paid.
On May 12, 1997, the Company issued 8,514,500 shares of Common Stock
to approximately 65 purchasers in exchange for all of the outstanding
shares of Sierra Vista. No commission was paid by the Company, and the
Company shares of Common Stock were not registered with the Commission upon
reliance of Section 3(a)(10) of the Securities Act. The shares were issued
pursuant to a fairness hearing held by the California Department of
Corporations.
<PAGE>II-3
On February 19, 1997, the Company sold to the Checkers Foundation, a
foundation located in Vaduz, Liechtenstein, 229,310 shares of Common Stock
for an aggregate purchase price of $665,000. No commission was paid. The
transaction was exempt from registration upon reliance upon Section 4(2)
and Regulation D of the Securities Act.
In January 1997, the Company issued 100,000 shares of Common Stock to
Dr. Paul Kim, an unaffiliated third party, in exchange for an MPEG-1 board
design. The trading price of a share of Common Stock on the date of the
exchange was $5.00 per share. The transaction was exempt from registration
upon reliance of Section 4(2) and Regulation D promulgated under the
Securities Act. No commissions were paid.
On November 19, 1996, the Company issued approximately 240,000 shares
of Common Stock in exchange for $1,200,000 at $5.00 per share. No
commission was paid. The transaction was exempt from registration upon
reliance of Section 4(2) and Regulation D of the Securities Act.
On July 3, 1996, the Company issued approximately 5,028,215 shares of
Common Stock in exchange for approximately $819,142 at approximately $.16
per share. No commission was paid. The transaction was exempt from
registration upon reliance of Section 3(b) and Regulation D of the
Securities Act.
Item 27. Exhibits.
3.1 Certificate of Incorporation, as amended, of the Company
(originally filed as exhibit 2.1){(1)}
3.2 Amended and Restated Bylaws of the Company (originally filed as
exhibit 2.2){(1)}
5.1 Opinion of Bartel Eng Linn & Schroder re Legality
10.1 Plan and Agreement of Reorganization, dated February 27, 1997, as
amended April 1, 1997 and May 14, 1997, between the Company and
Sierra Vista (originally filed as exhibit 6.1){(1)}
10.2 License Agreement, dated as of March 7, 1996, between the Company
and FutureTel (originally filed as exhibit 6.2){(1)}
10.3 Employment Agreement with Mark C. Koz, dated as of May 15, 1997
(originally filed as exhibit 6.3){(1)}
10.4 Employment Agreement with F. James Anderson, dated as of May 15,
1997 (originally filed as exhibit 6.4){(1)}
10.5 Escrow Agreement and Instructions between the Company, Sierra Vista
and Bartel Eng Linn & Schroder, dated as of February 27, 1997
(originally filed as exhibit 6.5){(1)}
10.6 Lease between Cooperage-Rose Properties II and the Company
(originally filed as exhibit 6.6){(1)}
10.7 Credit Facility Agreement between the Company and Micro Technology
S.A., dated as of July 1, 1997 (originally filed as exhibit
6.7){(1)}
10.8 Security Agreement between the Company and Micro Technology S.A.,
dated as of July 1, 1997 (originally filed as exhibit 6.8){(1)}
10.9 Convertible Debenture Purchase Agreement, dated as of December 22,
1997, with JNC (originally filed as exhibit 6.9){(2)}
10.10 7% Convertible Debentures, due December 22, 2002, payable to JNC
(originally filed as exhibit 6.10){(2)}
10.11 Registration Rights Agreement, dated as of December 22, 1997, with
JNC (originally filed as exhibit 6.11){(2)}
10.12 Escrow Agreement, dated December 22, 1997, between the Company, JNC
and Robinson Silverman Pearce Aronsohn & Berman LLP (originally
filed as exhibit 6.12){(2)}
10.13 Warrants dated December 22, 1997, to purchase up to 500,000 shares
of Common Stock held by JNC (originally filed as exhibit 6.13){(2)}
10.14 Warrants dated December 22, 1997, to purchase up to 250,000 shares
of Common Stock held by Cardinal (originally filed as exhibit
6.14){(2)}
<PAGE>II-4
10.15 Addendum to Credit Facility, dated December 18, 1997, with Micro
Technology S.A. (originally filed as exhibit 6.15){(2)}
10.16 Settlement Agreement between the Company and Mark Koz (originally
filed as exhibit 6.16){(2)}
10.17 Joint Venture contract between the Company and CRI, dated September
13, 1997
10.18 Accord and satisfaction and Release Agreement between the Company
and Technical Systems Associates, Inc., dated January 16, 1998
10.19 Employment Agreement with Thomas E. Burke, dated March 23, 1998
10.20 1996 Incentive and Nonstatutory Stock Option Plan (originally filed
as exhibit 3.1){(1)}
10.21 Voting Agreement of InnovaCom, Inc., dated February 27, 1997, and
amended as of April 1, 1997, May 14, 1997, June 10, 1997, and
December 1, 1997, between Mark Koz and 507784 BC Ltd. (originally
filed as exhibit 5.1){(1)}
16.1 Letter regarding change in certifying accountant
21.1 Subsidiaries of the small business issuer
23.1 Consent of Hein + Associates LLP is filed herein (Page II- 6)
23.2 Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5.1
27.1 Financial Data Schedule
99.1 Consent of Thomas E. Burke
99.2 Consent of Peter J. Sprague
(1) Previously filed with the Company's Form 10-SB on December 12, 1997
(2) Previously filed with the Company's Registration Statement on Form
SB-2 on February 9, 1998.
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the 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 Company of expenses incurred or paid
by a director, officer, or controlling person of the Company in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the Company 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.
<PAGE>II-5
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, that 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 small business issuer pursuant to 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;
and
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of Prospectus as a new
registration statement for to the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering thereof.
The Company undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
<PAGE>II-6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
InnovaCom, Inc., a Nevada corporation:
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated February 6, 1998, except for the last paragraph of Note 14 which
is as of March 23, 1998, relating to the consolidated financial statements of
InnovaCom, Inc., a Nevada corporation, and Subsidiaries. We also consent to
the reference to our firm under the caption "Experts" in the Prospectus.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
April 15, 1998
<PAGE>II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing pre-effective amendment no. 1 to Form SB-2
and authorizes this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on March 31, 1998.
InnovaCom, Inc.
/S/ MARK C. KOZ
By: Mark C. Koz, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
March 31, 1998 /S/ MARK C. KOZ
Mark C. Koz, President and Chairman of the
Board of Directors (Principal Executive
Officer)
March 31, 1998 /S/ STANTON R. CREASEY
Stanton R. Creasey, Chief Financial Officer
(Principal Financial and Accounting Officer)
March 31, 1998 /S/ TONY LOW
Tony Low, Director
March 31, 1998 /S/ F. JAMES ANDERSON
F. James Anderson, Director
March 31, 1998 /S/ ROBERT SIBTHORPE
Robert Sibthorpe, Director
March 31, 1998 /S/ JOHN CHAMPLIN
John Champlin, Director
April 16, 1998
Board of Directors
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Re: Common Stock of InnovaCom, Inc.
Gentlemen:
We act as counsel to InnovaCom, Inc. (the "Company"), a Nevada
corporation, in connection with the registration under the Securities Act
of 1933, as amended (the "Securities Act"), of 8,611,904 shares of the
Company's Common Stock (the "Shares"), of which up to 5,111,904 may be
issued upon the conversion of the 7% Convertible Debenture which are
currently issued and outstanding; 750,000 may be issued upon the exercise
of warrants, and up to 2,750,000 may be issued upon the conversion of a
Promissory Note, all as further described in a registration statement on
Form SB-2 filed under the Securities Act (the "Registration Statement").
For the purpose of rendering this opinion, we examined originals or
photostatic copies of such documents as we deemed to be relevant. In
conducting our examination, we assumed, without investigation, the
genuineness of all signatures, the correctness of all certificates, the
authenticity of all documents submitted to us as originals, the conformity
to original documents of all documents submitted to us as certified or
photostatic copies and the authenticity of the originals of such copies,
and the accuracy and completeness of all records made available to us by
the Company. In addition, in rendering this opinion, we assumed that the
Shares will be offered in the manner and on the terms identified or
referred to in the prospectus, including all amendments thereto.
EXHIBIT 5.1 and 23.1
<PAGE>
April 16, 1998
Page 2
Our opinion is limited solely to matters set forth herein. Attorneys
practicing in this firm are admitted to practice in the State of California
and we express no opinion as to the laws of any other jurisdiction other
than the laws of the State of Nevada and the laws of the United States.
Based upon and subject to the foregoing, after giving due regard to
such issues of law as we deemed relevant, and assuming that (i) the
Registration Statement becomes and remains effective, and the prospectus
which is part thereof (the "Prospectus"), and the Prospectus delivery
procedures with respect thereto, fulfill all of the requirements of the
Securities Act, throughout all periods relevant to the opinion, and (ii)
all offers and sales of the Shares have been and will be made in compliance
with the securities laws of the states, having jurisdiction thereof, we are
of the opinion that the Shares to be issued upon the conversion of the 7%
Convertible Debenture, the exercise of warrants and the conversion of the
Promissory Note will be validly issued, fully paid, and nonassessable.
We hereby consent in writing to the use of our opinion as an exhibit
to the Registration Statement and any amendment thereto.
Very truly yours,
Bartel Eng Linn & Schroder,
a Law Corporation
EXHIBIT 5.1 and 23.1
EXHIBIT 10.17
Joint Venture Contract
for
Beijing International High-New Tech Products
Exhibition Consultant Service Company
Beijing CRI Development Company (hereafter referred to as Party Aand
Innovacom, Inc., (hereafter referred to as Party B) have agreed to sign this
contract on September 12{th} of 1997 in Beijing of the People's Republic of
China.
Article One
General Principle
In the principle of mutual benefit And equity and through friendly
discussions, Party A and Party B have agreed to create a joint venture of
Beijing International High-tech products Exhibition consultant Service Company
according to "The Law of the People's Republic of China on Joint Ventures Using
Chinese and Foreign Investment" and "The Law of the People's Republic of China
on Company" as well as other concerned regulations and this contract. The two
parties agreed to sign this contract as follows.
Article Two
Parties of the Joint Venture
2.1 The parties who signed the contract are:
(1) Party A is Beijing CRI Development Company, a legal entity under
Chinese law which has registered in Beijing. Its legal address is, 2
Fuxingmenwai Street, west district of Beijing, China.
It's legal representative
Name: Wei Jianqun
Position: General Manager
Native: China
(2) Party B is InnovaCom, Inc., a legal entity under U.S. Law. Its
legal address is 2855 Kifer Road, Suite 100, Santa Clara, CA 95051
Name: Mark Koz
Position: Chairman
Native: the United States
Article Three
Representations and Warranties
Provided by the parties
3.1 Party A represents and warrants to party B that:
(1) It is an organization duly organized and validly exhisting under the
Laws of China and has full legal right, power and authority to enter into this
contract and to perform its obligations hereunder.
(2) Party A has the rights to have business with any companies, to sign
contracts and its representative is legal and can execute its obligations
validly.
<PAGE>
(3) The execution, delivery and performance of this contract by party A
does not violate any provisions of its organization or foundation documents,
any contract or instrument to which it is a party or by which it or its assets
are bound, or any law, decree, regulation or order of China.
(4) It has obtained, or will obtain prior to the Registration, all
approvals, consents or licences from, and has given, or will give prior to
registration, all notices to all necessary governmental committees,
departments, councils, ministries or other bodies which are necessary to enable
it to enter into this contract and to perform its obligations hereunder,
including but not limited to the establishment, ownership, funding but
operation of Joint Venture.
3.2 Party B represents and warrants to party A:
(1) It is a company duly organized and validly existing under the Laws
of the USA and has full legal right, power and authority to enter into this
contract and to perform its obligations hereunder.
(2) Party B has the rights to have business with any companies and sign
contracts and its representative is legal and can execute its obligations
validly.
(3) The execution, delivery and performance of this contract does not
violate any provisions of its organizational or foundation documents, any
contract or instrument to which it is a party or by which it or its assets are
bound, or the laws of the jurisdiction of incorporation of InnovaCom or any
other law, decree, regulation or order of the United States or the State of
California or any local municipal governmental body having authority over its
business.
(4) No governmental approvals, consents or licenses are required to be
obtained by it under laws of its jurisdiction of incorporation in order to
enable it to enter into this contract and perform its obligations hereunder
except for expoprt licenses or other governmental approvals as may be required
for the sale, transfer or other disclosure of technical data equipment.
Article Four
Establishment of the Joint Venture Company
4.1 Establishment of the Joint Venture Company
The two parties have agreed to establish this Joint Venture Company
according to "The Law of the People's Republic of China on Joint Ventures Using
Chinese and Foreign Investment". "Law of the People's Republic of China on
Companies" and other Chinese laws, administrative regulations as well as this
contract.
4.2 Name and address of the joint venture company:
(1) Name of the company in Chinese: (Chinese characters not translated)
(2) Name of the company in English: Beijing International High-New Tech
Products Exhibition Consultant Service Company
(3) Legal address of the company: 2 Fuxingmenwai Street, west district
oLd Beijing, China.
<PAGE>
4.3 Organization form of the company
It is a company Ltd. The two parties will be liable for debts of the
company with their registered fund. The two parties will share profits or bear
the risks and losses according to their registered funds.
4.4 Laws and regulations:
The Joint Venture Company is a legal entity under Chinese laws and it is
an independent and legal qualification. The venture's business will be
protected and administered by Chinese laws, decrees and concerned regulations.
Article Five
Objectives and Scope of its Business
5.1 The objectives of its business is to rent an exhibition centre to
display high-new tech products from the United States and other foreign
companies and provides year round service. Chinese companies, enterprises and
individuals can come to visit, discuss to set up their joint venture
enterprises and other cooperative business. The venture may have other
projects. The joint venture company will receive exhibition fees and service
fees to pay their costs of rents, translation and promotion, in order to
promote the establishment of other joint ventures and development of other
business.
Article Six
Total Investment and Registered Fund
6.1 Total investment
Total investment of the company is three hundred thousand US dollars (US$
300,000).
6.2 Total registered fund
The total registered fund is three hundred thousand US dollars (US$
300,000).
6.3 Forms of registered fund
(1) Form of party A's registered fund:
The share will be in cash of eight hundred twenty thousand US dollars and
two hundred yuan of Renminbi (RMB 820200 yuan), converted to US dollars of one
hundred thousand (US$ 100,00). Party A's share is 34 percent (34%)
(2) Form of party B's registration fund
Party B's share will be in cash of two hundred thousand US dollars (US$
200,000) and the share is 66 percent (66%).
6.4 The joint venture can not reduce its registered fund during the
period of its operation.
<PAGE>
6.5 Deadline of the registered fund
The registered fund should be handed over within 30 days after the company
registered.
6.6 Certificate of the registered fund
After one party paid its registered fund. it should be examined by China
Registered Accountants Society with its examination report. Another
certificate will be issued with the signatures of Chairman and Vice Chairman of
the company.
6.7 Transfer and mortgage of the registered fund
(1) Consent by the board of directors and priority of purchase:
In case one party intends to make a complete or partial transfer of its
interest in the venture, it shall provide notice of the proposed transfer to
the other party, who shall have an option for thirty (30) day from receipt of
notice of the proposed transfer to agree to purchase the interest at the same
price and on the same terms and conditions contained in the notice. In the
event two or more parties receiving the notice choose to exercise the option to
purchase the interest described in the notice. The selling party shall sell
the interest to the other party on a pro rata basis. If the other party didn't
inform the selling party within thirty (30) days. then the selling party must
sign a contract and confirm to execute the obligations of the selling party
(2) Goverment's approval
The transfer and selling of the above-mentioned interest must be reported
to the organization which approved the joint venture and then the transfer will
come into effect. When the party received the approval. it must arrange the
registered procedure in the local bureau of industry and commerce.
6.8 Increase of registered fund
Subject to the agreement of the Board of Directors, the parties have the
right to make additional investments proportional to their shares to the
initial regisetered fund or in other proportions. After it is inspected by
approval organizatiion, the company must arrange the change of the registered
fund in local bureau of industry and commerce.
Article Seven
Rights and Obligations of the Parties.
7.1 The parties in the venture, in addition to their rights stipulated
in the contract, have the
following rights:
(1) To participate in the management of the venture as determined by the
contract and applicable law;
(2) To share the results of operation of the venture in the amount and
forms provided for by this contract;
(3) To give its profits to other participants or third party in
accordance with the rules of the contract and applicable law;
<PAGE>
(4) To have free access to any information and data concerning the
activities of the venture, the state of its assets, profits and losses.
7.2 Parties in the venture, along with their obligations stipulated in
the contract, will have the following obligations:
(1) To make initial and additional contributions to the registered fund
as determined by the contract and decisions of the Board;
(2) To participate in the management of the venture as determined by the
contract;
(3) To provide the venture with the information necessary for the
efficient activities of the Joint Venture if such information is not considered
by the parties as confidential;
(4) To assist the venture in achieving the objects of its activity by
advertising its service and by other means.
7.3 The parties shall make every effort to expand the activities of the
venture. The parties undertake to not enter into any other joint venture or
other form of activity competing with or adversely affecting the activities of
the venture.
Article Eight
Rights and Obligations of Party A
8.1 In addition to its rights stipulated in other articles of the
contract, party A has the following rights:
Party A insists on that after the registered fund arrived, party A's
registered fund should not be used. Only after enough companies have signed
aggreementsto participate in the exhibition and expenses can be met,
approximately ($800,000), can Party A's registered fund be used. If due to
decrease of exhibitors and the venture has loss, party B will bear the
responsibility and not use party A's registered fund. When the venture is in
normal operation, if party A wants to transfer its share, Party B has the
priority to purchase party A's share.
8.2 In addition to its obligations stipulated in other articles of the
contract, party A has the following obligations:
(1) To promptly and timely obtain all required governmental licenses,
permits and approvals to allow the venture to carry out its activities;
(2) To promptly and timely obtain the rights to use facilities,
electricity, water supply, heating, telephone and telecommunications permits
necessary for the operation of the facility;
(3) To promptly and timely obtain visas for representatives of
InnovaCom, staff of the venture and clients of the venture, and to assist in
obtaining all permitting and custom procedures associated with business trips
and shipping and receiving of venture's cargos;
<PAGE>
(4) To ensure obtaining necessary rights to the venture to carry out its
activities as defined in the present contract;
(5) To ensure obtaining guarantees of governmental, legislative and
other competent bodies to protect foreign investments in acceptable for
international banking institutions;
(6) To officially inform all diplomatic commercial and other foreign
representatives on setting up the venture with party A participation and of
services provided by it;
(7) To assist the venture in its establishment and operations in China
including assistance in its registration as a legal entity, in the opening of
hard currency accounts in China, in renting and or acquisition of office and
other premises;
(8) To assist the venture on terms to be agreed in an efficient
advertising and realization of its services and in finding clients for the
venture;
(9) To assist the venture office with telecommunication facilities,
including one international telephone direct line, one international facsimile
direct line, one line for computeer communication, and all public utilities
necessary for the operation of the venture on terms and conditions to be
agreed; and
(10) To assist the venture to make use of Chines laws, regulations to get
preferential policies on tax and foreign investment.
Article Nine
Rights and Obligations of Party B
9.1 In addition to its rights and obligations stipulated in other
articles of the contract, party B has the following obligations:
(1) To market and promote the services of the venture. To confirm to
invite forty (40) companies which will pay eight hundred thousand US dollars
(US$800,000) to the joint venture. If there are more than forty companies to
participate in the exhibition, each of the rest of the companies must still pay
twenty thousand US dollars (US$20,000) to the joint venture. The temperary and
professional exhibitions will be paid separately. The two parties will discuss
the cost separately.
(2) To organize the management of the venture in accordance with
international standards on terms and conditions to be agreed;
(3) To organize the venture staff training in the USA or other western
countries on terms and conditions proposed by InnovaCom and approved by the
Board;
(4) To assist the venture in finding clients among foreign firms,
companies and corporations;
(5) To assist the venture in obtaining foreign entry visas for party A's
representatives, the Chinese venture staff, and clients of the venture
travelling on the venture's business;
(6) To assist the venture in selecting foreign highly professional staff
for the venture which should be agreed by the joint venture.
<PAGE>
Article Ten
Board of Directors
10.1 Board of Directors:
(1) The date of the venture's registration is the day of the founding of
the Board of Directors.
(2) The board is consisted of five (5) directors (including the
Chairman). Party A will appoint two directors and party B will appoint three
(3) directors.
(3) Normally, term as directors is for three years. They can be
directors for another term if they are appointed by their party.
(4) Reasonable expenses used by the directors for their business in
China will be covered by the venture.
(5) Approved by the Board, the directors can be as general manager or
deputy general manager of the venture.
(6) The Chairman will be appointed by party B and he is the legal
representative of the venture. He can execute his power according to "The Law
of the People's Republic of China on Joint Ventures Using Chines and Foreign
Investment" and "Law of the People's Republic of China on Company" as well as
the regulations of the Board of Directors of the venture.
(7) The venture will have a Vice-Chairman who will be appointed by party
A.
10.2 The power of the Board of Directors:
(1) The Board of Director is the highest body of the venture.
(2) The following items will be decided by all members of directors or
their representatives with unanimous approval by votes.
(a) Ractification of contract and statitue;
(b) To integrate, unite with other organizations or to set up affiliated
organizations;
(c) Reorganization and dissolution of the venture;
(d) Increase or transfer of the venture's registered fund;
(e) The important signing, supplement, amendament, termination or
transfer of the venture's contract;
(f) The mortgage of the venture's fund and assets;
(g) Members of auditors, procedures of audition and proposals.
(3) All propsoals must be put forward in the meetings of the Board of
<PAGE>
Directors and should be approved by directors or their representatives
attending the meetings by votes of over a majority of the Board.
(4) If all directors decided the matters with unanimous written notices,
it is not necessary for the board to call the meetings. The notices will be in
file. The decisions have the same effect as the votes cast by the directors.
Article Eleven
Organization of Operation and Management
11.1 Organization of Management
The Chairman will be responsible overall for the venture's operation. The
general manager will be in charge of daily work who is under the leadership of
the Board of Directors. The venture will have one general manager and one
deputy general manager. The general manager will be appointed by party A and
the deputy general manager will be appointed by party B. They will be approved
and appointed by the Board of Directors with the term of three years. They can
be changed by majority votes of the meetings of the Board of Directors. If
thee general manager or deputy general manager have the full term or ousted by
the Board of Directors, the new members will be proposed by their parties and
should be approved by the Board of Directors.
11.2 Responsibility and power of the general manager:
The general manager will be responsible to the Board of Directors and
execute his business appointed by the Board of Directors. The general manager
is in charge of venture's finance, daily management and operation. The deputy
general manager will assist the general manager. They should have regular
meeting to discuss their work, study and handle the important matters in daily
operations.
11.3 If the venture uses its stamp for business with other companies, at
least it should be agreed by one director from both sides or agreed by the
general manager by signature. Registration procedure should be carried out.
11.4 Expenses of the venture of fortythousand yuan (RMB) or over that
figure, at least it should be approved by one director from both sides with
their signatures.
Article Twenlve
Taxation and Insurance
12.1 Taxation
Employees of the venture should pay tax according to Chines laws and
administrative regulations on taxation. The venture will do its best to exempt
from tax according to the Chinese law for important equipment, technologies,
conusming articles, softwares and other matters.
12.2 Insurrance
The venture will make insurance in the registered insurance company in
China. The Board of Directors will decide the value of insurance.
<PAGE>
Article Thriteen
Term of the Joint Venture
13.1 Term of the Joint Venture
The term of the joint venture is fifteen years. The date of the founding
of the joint venture will be the day of the registration.
13.2 Postpone of the term
One party can make proposal which should be approved by the Board of
Directors unanimously to apply for postponement of the joint venture and they
must apply six months before the termination.
Article Fourteen
Reorganization and Liquidation of
the Joint Venture
14.1 The venture can be reorganized or liquidated. The reorganization
may take the form of transfer of shares or withdraswal of a party. The
decision will come into effect only after it is agreed by the two parties and
approved by the original approval department.
14.2 The venture may also be liquidated before the end of the term of the
contract due to mutual agreement of fully property settlement.
Article Fifteen
Non-Performance or Breach
15.1 If one party doesn't perform its obligations stupilated in the
contract and the statute, or seriously breaches the contract or regulations in
the statute, or if party B failed to invite forty companies to attend the
exhibition, or if party A failed to invite two hundred enterprises to attend
the exhibition, then the joint venture can't reach its business aim. That will
be deemed that the party breached the contract which terminated the contract.
The other party has the right to ask compensation from the party who breached
the contract and it has the right to terminate the contract ahead of time. If
the other party continues to conduct the business, it is also deemed as the act
of breach.
15.2 The party that can't fulfil its obligations or can't completely
fulfil its obligations, thus causing losses to the other party, it should be
liable to the other party. If losses are caused by the two parties, they will
be liable for their respect responsibility according to the actual conditions.
Article Sixteen
Settlement of Disputes and the
Applicable Laws
16.1 The contract, its effect, explanation, fulfilment and settlement of
disputes are under the jurisdiction of laws of the People's Republic of China.
16.2 All parties will settle their disputes through friendly
negotiations. Disputes among the parties which cannot be resolved within ninty
(90) days of formal notice, will be referred to China International Foreign
Trade Arbitration Commission or to United Arbitration organization in
Stockholm, Sweden.
<PAGE>
16.3 During the period of arbitration for the dispute, the two parties
will continue to perform other articles in the contract.
16.4 During the period of the arbitration, the two parties will not
defend their own amnesty or the relating rights, which will obtruct the
procedures of the arbitration.
Articles Seventeen
Force Majeure
17.1 Force majeure referred to earthquake, typhoon, flood, fire, war and
other s beyond the control of the venture which lead to the non performance of
the contract. the affected party will be obliged immediately within fifteen
days of the event to inform the other party by fax. The party should provide
all detailed information of the event which will be proved by the authorized
department of the government. According to the degree of the event, the two
parties will decide whether to terminate the contract, or partly perform the
contract, or extend the contract.
17.2 No party will be liable for the non-performance caused by the force
majeure.
17.3 Either party whose performance has not been impaired shall have the
right to issue a termination notice under regulations of the contract when an
event of force majeure is impairing the activity of the venture for more than
180 consecutive days.
Article Eighteen
The Contract in Force
The contract will be in force from the date of its signing by the parties.
Additional documents attached to the contract will be effective as the
contract.
Article Ninteen
Other Provisions of the Contract
19.1 All notices, written records will be sent by registered letters, fax
or handed over the following addresses:
Party A: Beijing CRI Development Company
2 Fuxingmenwat Street, Beijing, China
Post Code: 100866
Telephone: 86-10-6609-3743
Fax: 86-10-6609-3749
Party B: InnovaCom, Inc.
2855 Kifer Road, Suite 100
Santa Clara, CA 95051. USA
19.2 If one party changed its address, it should inform the other party
ahead of time by registered letter or by fax. The stamp of post office will be
the prove, or date of fax sent, or three days to hand it to the other party.
19.3 The official language of the venture will be English, the operative
language will be English and Chinese. All documents will be in English.
<PAGE>
19.4 Founding and liquidation of the joint venture will be announced
publicly. The content of the announcement will be decided by the two parties.
19.5 The contract is signed with three original copies in English, three
copies in Chinese which are equally valid, one copy in English and one copy in
Chinese for each party. One copy in English and one copy in Chinese will be
sent to the Approval Department of the government.
By: /S/ WEI JIAN CHUN By: /S/ MARK KOZ 17 SEPT. 97
Wei Jian Chun Mark Koz
Legal Representative Legal Representative
Beijing CRI Development Company InnovaCom, Inc. USA
EXHIBIT 10.18
ACCORD AND SATISFACTION
AND
RELEASE AGREEMENT
This Accord and Satisfaction and Release Agreement (the "Agreement")
is entered into as of this 16th day of January, 1998 by and between
InnovaCom, Inc., a Nevada corporation ("InnovaCom"), Technical Systems
Associates, Inc. ("TSA") and Eugene P. Augustin and Terrymay S. Augustin,
TSA's sole shareholders, (the "Augustins") (collectively referred to as
"the parties").
WHEREAS, the parties originally entered into an Interim Agreement
dated March 24, 1997 (the "Interim Agreement") which contemplated
InnovaCom's acquiring of all outstanding shares of TSA (the "TSA Shares"),
pursuant to formal agreements which were to be drafted and executed by a
certain date (the "Expiration Date"); and
WHEREAS, formal agreements were never entered into by the Expiration
Date and, subsequently, the parties' obligations under the Interim
Agreement were released and InnovaCom was granted an option to purchase the
TSA Shares, pursuant to an Option to Purchase and Mutual Release Agreement
dated October 15, 1997 (the "Option Agreement"); and
WHEREAS, under the Option Agreement, InnovaCom agreed to pay TSA the
aggregate amount of $300,000 and, contingent upon TSA's receipt of a
certain purchase order from Baron Services ("Baron") for, approximately,
$1.3 million, InnovaCom agreed to provide TSA debt financing in an amount
not to exceed $150,000; and
WHEREAS, InnovaCom did perform it duties under the Option Agreement by
paying the full amount of $300,000 but a dispute has arisen as to whether
TSA received the required purchase order from Baron, as contemplated in the
Option Agreement, which would obligate InnovaCom to provide the debt
financing; and
WHEREAS, as an Accord and Satisfaction of the obligations of InnovaCom
to provide such debt financing and for the full release of any and all
obligations and liabilities of InnovaCom to TSA and/or the Augustins
including, but not limited to, those contained in the Interim Agreement and
Option Agreement, InnovaCom has agreed to make a final payment to TSA in
the amount of $58,000.
NOW, THEREFORE, based on the foregoing premises, and in consideration
of the mutual promises and conditions set forth herein, the parties agree
as follows:
<PAGE>
I. ACCORD AND SATISFACTION.
A. PAYMENT. InnovaCom herewith delivers to TSA and the
Augustins a check or wire transfer in the amount of Fifty Eight Thousand
Dollars ($58,000) in full satisfaction and extinction of any and all
obligations of InnovaCom to TSA and the Augustins, jointly and severally,
including, but not limited to, any obligation to provide debt financing to
TSA, as contained in Section 2 of the Option Agreement.
B. RECEIPT. TSA and the Augustins, jointly and severally and on
behalf of their officers, directors, shareholders, employees, attorneys,
agents, heirs, executors, administrators, and assigns, hereby agree to
accept such payment, as described in Section 1(A) above, in full
satisfaction and extinction of any and all obligations of InnovaCom to TSA
and the Augustins including, but not limited to, any obligation to provide
debt financing to TSA, as contained in Section 2 of the Option Agreement.
TSA and the Augustins further agree that this constitutes full satisfaction
and extinction of any and all obligations, of any nature whatsoever, of
InnovaCom to TSA and/or the Augustins which may now exist or later be
discovered from the beginning of time until the date of this Agreement.
II. RELEASE AND INDEMNIFICATION.
A. RELEASE. This Agreement shall constitute a full and final
settlement of all of TSA's and the Augustins' claims, demands, disputes and
controversies with InnovaCom, and TSA and the Augustins hereby release
InnovaCom, its agents, attorneys, officers, directors, employees, and
assigns, from all claims, demands, acts or omissions and any causes of
action, known or unknown, suspected or unsuspected, which may now exist or
later be discovered, arising from, relating to, or connected with the
Interim Agreement, the Option Agreement, or any related agreements or from
any other facts, actions, occurrences, or transactions from the beginning
of time until the date of this Agreement. This release shall not apply to
or detract from the obligations of the parties arising under this
Agreement. TSA and the Augustins acknowledge that their release is a
general release and, as further consideration hereunder, expressly waive
Section 1542 of the California Civil Code which provides:
a general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
<PAGE>
B. INDEMNIFICATION. TSA and the Augustins hereby agree to
indemnify, to the maximum extent permitted by law, and to defend InnovaCom,
with counsel of InnovaCom's choice, and to hold InnovaCom, its officers,
directors, shareholders, employees, attorneys and agents free and harmless
from and against any obligations, damages, liabilities, losses, costs,
claims, judgments, attorneys fees, and attachments arising from or out of
any act or omission of TSA and/or the Augustins which occurred prior to the
date of this Agreement.
III. GENERAL PROVISIONS.
A. ARBITRATION. Any controversy between the parties involving
the construction or application of any term of this Agreement, or any other
matter, shall be submitted to binding arbitration pursuant to the rules and
procedures of the American Arbitration Association then in effect.
B. ADVISE OF COUNSEL. TSA and the Augustins represent and
warrant that they have been advised, and are hereby advised, to seek the
representation of counsel for the transactions contemplated herein prior to
executing this Agreement.
C. ATTORNEY FEES. If any action at law or equity or
arbitration is necessary to enforce or interpret the terms of this
Agreement, the prevailing party shall be entitled to reasonable attorneys'
fees, costs, and necessary disbursements in addition to any other relief to
which the party may be entitled.
D. ENTIRE AGREEMENT. This Agreement supersedes any and all
other agreements, either oral or written, between the parties hereto with
respect to the subject matter hereof and contains all of the covenants and
agreements of the parties with respect thereto.
E. FURTHER ASSURANCES. Each party hereto agrees to do and
perform or cause to be done and performed all such further acts and to
execute and deliver all such other agreements, certificates, instruments
and documents as any other party hereto reasonably may request in order to
carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.
F. SEVERABILITY. Should any provision of this Agreement be
declared or be determined by any court of competent jurisdiction to be
illegal, invalid, or unenforceable, the legality, validity and
enforceability of the remaining parts, terms or provisions shall not be
affected thereby, and said illegal, unenforceable or invalid part, term or
provisions shall be deemed not to be a part of this Agreement.
G. MODIFICATION. Any modification of this Agreement will be
effective only if it is in writing and signed by the party to be charged.
H. EFFECT OF WAIVER. The failure of any party to insist on
strict compliance with any of the terms of this Agreement by the another
party shall not be deemed a waiver of that term, nor shall any waiver or
relinquishment of any right or power at any one time, or from time to time,
be deemed a waiver or relinquishment of that right or power in the future,
or a waiver of any similar right or power.
I. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
J. VENUE AND JURISDICTION. The parties agree that any
proceeding, including any arbitration, brought in connection with this
Agreement may be brought and heard and may only be brought and heard in the
County of Los Angeles, California, and hereby submit themselves to the
personal jurisdiction of any tribunal in that county before which, under
<PAGE>
this Agreement, such action or proceeding may be brought.
K. COUNTERPARTS. This Agreement may be executed in any number
of counterparts (including facsimile signature) each of which shall be
deemed an original, and all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement in Santa
Clara, California effective as of the date first above written.
THE COMPANY - INNOVACOM, INC.
Date: January 16, 1998 By: Mark C. Koz, President
TSA - TECHNICAL SYSTEMS ASSOCIATES, INC.
Date: January 16, 1998 By: Eugene P. Augustin, President
THE AUGUSTINS
Date: January 16, 1998 Eugene P. Augustin
Date: January 16, 1998 Terrymay S. Augustin
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered
into as of the twenty-third day of March, 1998 between InnovaCom, Inc., a
Nevada corporation (the "Company"), and Thomas E. Burke, an individual
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to secure the services of the Executive
as the President and Chief Executive Officer of the Company and as a
member of the Board of Directors of the Company on the terms and
conditions set forth herein; and
WHEREAS, the Executive is willing to serve as the President and
Chief Executive Officer of the Company and as a member of the Board of
Directors of the Company on the terms and conditions set forth herein;
and
WHEREAS, the Board of Directors of the Company has approved and
authorized the Company's execution, delivery and performance of this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises contained herein, the parties hereto do hereby agree as follows:
1. Employment Period.
The Company shall employ and otherwise retain the services of
the Executive, and the Executive shall serve the Company, for a
period (the "Employment Period") commencing as of the Commencement
Date (as defined below) and continuing through and until five (5)
years thereafter, subject to the terms and conditions contained in
this Agreement. On the first anniversary of the Commencement Date
and on each anniversary date thereafter, the Employment Period shall
automatically be extended for an additional period of one (1) year;
provided, however, that either party hereto may elect not to so
extend the Employment Period by giving notice thereof to the other
party at least three (3) months prior to the relevant anniversary
date. As used herein, the "Commencement Date" shall mean May 1,
1998 or such later date as the Executive may hereafter designate in
writing (but in no event later than June 1, 1998). Notwithstanding
the foregoing, the Executive's employment hereunder may be earlier
terminated subject to Section 5 hereof.
2. Position and Duties.
During the Employment Period, the Company agrees to employ and
otherwise retain the services of the Executive as the President and
Chief Executive Officer of the Company and as a member of both the
Board of Directors of the Company (sometimes referred to herein as
the "Board of Directors" or the "Board") and, if one exists, the
Executive Committee of thc Board. During and throughout the
Employment Period, the Executive shall report directly and
exclusively to the Board of Directors and shall exercise such
authority, perform such executive duties and functions and discharge
such responsibilities as are reasonably associated with the
Executive's position, commensurate with the authority vested in the
Executive pursuant to this Agreement and consistent with the bylaws
of the Company. As President and Chief Executive Officer, the
Executive shall have effective supervision and control over, and
responsibility for, the strategic direction and general and active
day-to-day management of the Company and its direct and indirect
subsidiaries. Toward that end, all management and other personnel
of the Company and its direct and indirect subsidiaries shall report
to the Executive. The Executive shall perform his services
hereunder primarily at the Company's current headquarters in Santa
Clara, California or such other location not more than twenty-five
(25) miles distant therefrom as the Board of Directors may hereafter
prescribe as the Company's headquarters. During the Employment
Period, the Executive shall devote substantially his full business
time, skill and efforts to the business of the Company.
Notwithstanding the foregoing, the Executive shall have the right to
devote time to other directorships and other business, professional,
civic, educational and charitable endeavors so long as such
activities do not materially impair the Executive's performance of
his duties hereunder.
3. Compensation and Benefits.
(a) Signing Bonus. Promptly following the execution and
delivery of this Agreement, the Company shall pay to the Executive
that amount which, after deduction of the full amount of any and all
income, employment and other taxes thereon (including federal income
tax at the highest marginal rate applicable to a citizen or resident
of the United States and California personal income tax at the
highest marginal rate applicable to a full-time resident), shall
equal the sum of $200,000.
(b) Base Salary. During the Employment Period, the Company
shall pay to the Executive, as compensation for the performance of
his duties and obligations under this Agreement, an annual base
salary at the initial rate of $250,000, payable in approximately
equal installments not less frequently than monthly and otherwise in
accordance with the normal payroll practices of the Company. Such
annual base salary shall be subject to review each year for possible
increase by the Board of Directors in its sole discretion, but shall
in no event shall such annual base salary for the second or any
subsequent year during the Employment Period be increased by less
than ten percent (10%) from its rate during the immediately
preceding year of the Employment Period.
(c) Annual Bonus. For each fiscal year ending during the
Employment Period, the Executive shall be eligible to receive an
annual target bonus (the "Bonus") of at least two (2) times the
Executive's annual base salary at the rate in effect as of the close
of the year to which the Bonus relates based upon the Company's
achievement of its target performance goals for such year (the
"Annual Target"). In the event the Company achieves eighty percent
(80%) of its Annual Target for any fiscal year, the Bonus for such
year shall equal one (1) times the Executive's annual base salary at
the rate in effect at the close of such year. In the event the
Company achieves more than eighty percent (80%), but less than 100%,
of its Annual Target for any year, the Bonus for such year shall
equal the sum of (i) one (1) times the Executive's annual base
salary at the rate in effect at the close of such year and (ii) the
product of one (1) times such annual base salary and a fraction, the
numerator of which is the difference between the Company's
percentage achievement of its Annual Target and eighty percent (80%)
and the denominator of which is twenty percent (20%). At the sole
discretion of the Board of Directors, a payment in excess of two (2)
times the Executive's annual base salary may be made. The
establishment of Annual Targets shall be mutually agreed upon by the
Executive and the Board of Directors by July 31 in the case of the
1998 fiscal year and by March 31 in the case of each fiscal year
thereafter. In all cases, such Annual Targets shall be reasonable
and shall be based solely on factors capable of objective
measurement. In the event that the Executive and the Board of
Directors do not reach an agreement regarding the establishment of
the Annual Target by the applicable date in any fiscal year, the
Annual Target shall be as follows: in the case of the 1998 fiscal
year, such Annual Target as the Compensation Committee of the Board
of Directors shall determine in its reasonable discretion; and in
the case of any subsequent fiscal year, the consensus estimate for
earnings per share of the Company as published by Nelson
Publications as of such date or, if there shall be none, the Annual
Target established for the immediately preceding year. Each Bonus
shall accrue upon, and be payable not later than forty-five (45)
days after, the completion of the fiscal year concerned. In the
event that the Board of Directors shall approve a change in the
fiscal year of the Company, the parties shall promptly negotiate an
amendment to this Section 3(c) which takes into account the change
in fiscal year but does not have an adverse financial impact on the
Executive.
(d) Equity Participation. The Executive shall be granted
stock options (the "Options") to purchase an aggregate of 1,000,000
shares of the common stock of the Company in accordance with and
subject to the following:
(i) The per-share exercise price of the Options shall be
equal to the lower of $1.75 per share and the closing price per
share of the Company's common stock on the trading day
immediately preceding the day on which the Company makes a
public announcement of this Agreement.
(ii) Subject to the terms and conditions of this
Agreement and of the Plan, the Options shall vest and become
exercisable in the following increments and at the following
times: 33.3334% of the Options, entitling the Executive to
purchase 333,334 shares of the Company's common stock, shall
vest and become exercisable on the Commencement Date; 33.3333%
of the Options, entitling the Executive to purchase 333,333
shares of the Company's common stock, shall vest and become
exercisable on the day immediately preceding the first
anniversary of the Commencement Date; and 33.3333% of the
Options, entitling the Executive to purchase 333,333 shares of
the Company's common stock, shall vest and become exercisable
on the day immediately preceding the second anniversary of the
Commencement Date (the "Final Vesting Date"). Notwithstanding
the preceding sentence, in the event of a Change in Control of
the Company as defined in Section 6 hereof or in the event that
the Executive's employment hereunder shall be terminated by the
Company without Cause (as defined below) or by the Executive
for Good Reason (as defined below) at any time prior to the
Final Vesting Date, then the above vesting schedule shall be
accelerated and all of the Options (entitling the Executive to
purchase an aggregate of 1,000,000 shares of the Company's
common stock) that have not previously vested and become
exercisable shall immediately vest and become exercisable.
(iii) Except as expressly provided otherwise in Section 5
of this Agreement, the Options shall remain exercisable until,
and shall not expire earlier than, ten (10) years from the date
of grant.
(iv) As soon as practicable following the Executive's
request therefor (whether during or after the Employment
Period), the Company shall register the shares of the Company's
common stock subject to the Options under the federal
securities laws and shall take such other steps as may be
necessary or advisable to enable such shares to be offered and
sold to the public under the federal securities laws and any
other applicable laws.
(v) In the event that the outstanding shares of the
Company's common stock are increased or decreased in number or
are changed into or exchanged for a different number or kind of
securities of the Company or any other corporation by reason of
any recapitalization, reclassification, stock split, reverse
stock split, combination of shares, stock dividend or other
similar event or by reason of any combination of the foregoing,
an appropriate adjustment of the number and kind of securities
with respect to which the Options may be exercised and the
exercise price at which the Options may be exercised shall be
made.
(vi) The Options shall be granted to the Executive
outside the terms of the Company's 1996 Incentive and
Nonstatutory Stock Option Plan, as amended.
(vii) The parties intend that the Options shall be
subject to a stock option agreement to be negotiated in good
faith between the parties on terms and conditions consistent
with this Section 3(d) and the other provisions of this
Agreement. Notwithstanding the foregoing, the Options shall be
effective as of the date of grant in accordance with the terms
and conditions contained herein, irrespective of whether such a
stock option agreement is or has been executed by the parties.
(e) Office Facilities. During the Employment Period, the
Company shall provide the Executive with, and the Executive shall be
allowed full use of, office facilities, secretarial and clerical
assistance and other Company property and services of a quality,
nature and extent no less favorable to the Executive than the
offices facilities, secretarial and clerical assistance and other
Company property and services now or hereafter provided to the
Company's Chairman of the Board or to other senior executives of the
Company or its subsidiaries.
(f) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the plans,
policies, programs and practices of the Company on a basis no less
favorable than that applicable to other senior executives of the
Company or its subsidiaries, but in no event shall the Executive be
entitled to less than thirty (30) days of paid vacation per year
during the Employment Period and in no event shall the number of
accrued unused vacation days permitted to be accumulated by the
Executive be less than sixty (60) days.
(g) Other Benefits. During the Employment Period, the
Executive shall be entitled to participate in all of the employee
benefit plans, programs, policies and arrangements of the Company in
effect during the Employment Period which are generally available to
senior executives of the Company or its subsidiaries, subject to and
on a basis consistent with the terms, conditions and overall
administration of such plans, programs, policies and arrangements.
Without limiting the foregoing, the Executive shall be entitled to
full participation, on a basis commensurate with his position with
the Company and no less favorable to the Executive than that
accorded to any other officer or director of the Company or its
subsidiaries, in all present and future plans of accident,
disability, medical, dental, health, welfare, pension, savings,
deferred compensation, profit sharing, stock option, stock purchase,
incentive compensation and similar benefits which generally are made
available to senior executives of the Company or its subsidiaries.
In addition, during the Employment Period, the Executive shall be
entitled to fringe benefits and perquisites no less favorable to the
Executive than those of other senior executives of the Company or
its subsidiaries. Without limiting the foregoing, the Company shall
provide the Executive with the following: (i) medical, dental,
optical and other health insurance coverage for the Executive and
his dependents pursuant to traditional indemnity insurance plans,
with reasonable contributions, deductibles and reimbursement
payments and with no pre-existing condition exclusions and no
waiting periods for coverage; and (ii) long-term disability
insurance coverage paying benefits equal to at least 100% of the
Executive's then-current annual base salary and annual target bonus
for the duration of any permanent and total disability of the
Executive, either through an individual disability insurance policy
or otherwise.
(h) Life Insurance. During the Employment Period, the
Company shall fund the premiums payable on a life insurance policy
of the Executive's choice. Such policy shall be issued by an
insurer satisfactory to the Executive, shall be owned by the
Executive and shall have a death benefit of $1,500,000 payable to
such beneficiary or beneficiaries as the Executive shall designate.
(i) Automobile Allowance. During the Employment Period, the
Company shall pay to the Executive an automobile allowance of $1,000
per month.
(j) Housing Allowance. For a period of twenty-four (24)
consecutive months commencing on the Commencement Date or such later
date not more than ninety (90) days thereafter as the Executive
shall designate, the Company shall pay to the Executive a housing
allowance of $7,500 per month.
(k) Business Expenses. The Company shall promptly pay or
reimburse the Executive for all reasonable business expenses
(including travel and entertainment expenses, home office expenses,
cellular telephone and other mobile communications expenses and the
costs of membership in clubs, trade associations and other
organizations) incurred by the Executive in the performance of his
duties under this Agreement upon the submission of appropriate
vouchers or receipts to the Company in accordance with the Company's
policies.
(l) Relocation Expenses. Upon the submission of appropriate
vouchers or receipts, the Company shall pay or reimburse the
Executive for all of the relocation expenses incurred by the
Executive in changing his principal residence from McLean, Virginia
to the Santa Clara, California and surrounding area, including all
packing, shipping, insurance, storage and similar expenses and
further including those amounts necessary to cover up to three (3)
"househunting" trips by the Executive and his spouse and up to
ninety (90) days of hotel or other temporary accommodations for the
Executive and his spouse.
(m) Tax Gross-up. To the extent that the Executive shall be
required to pay federal, state, local or other tax in respect of any
expense reimbursement, allowance or other benefit paid or provided
pursuant to subsections (h), (i), (j), (k) and (l) of this Section
3, the Company shall pay to the Executive promptly upon request such
amount or amounts as may be necessary to place the Executive in the
same after-tax financial position that the Executive would have been
in if the Executive had not incurred any tax liability in respect of
such expense reimbursement, allowance or other benefit and if the
Executive had not received any amount or amounts pursuant to this
provision.
4. Termination of Employment.
(a) Death or Disability. The Executive's employment
hereunder shall terminate automatically upon the Executive's death
during the Employment Period. If any Disability (as defined below)
of the Executive shall occur during the Employment Period, the
Company, through its Board of Directors, may give to the Executive
notice in accordance with Section 12 hereof of its intention to
terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on
the sixtieth day after receipt of such notice by the Executive (the
"Disability Effective Date") unless the Executive shall have
returned to substantially full time performance of the Executive's
duties hereunder within sixty (60) days after receipt of such
notice. For purposes of this Agreement, "Disability" shall mean the
absence of the Executive from the performance of the Executive's
duties with the Company on a full time basis for the entire period
of six (6) consecutive months as a result of incapacity due to
mental or physical illness which is determined to be total and
permanent by an independent physician selected by the Company or its
insurers and acceptable to the Executive or the Executive's legal
representative. Notwithstanding the foregoing, in no event shall
the Executive be terminated by reason of any Disability unless the
Executive is eligible for and has qualified to receive the long-term
disability benefits described in Section 3(g) hereof.
(b) Cause. The Company, through its Board of Directors, may
terminate the Executive's employment hereunder at any time during
the Employment Period for Cause or without Cause. For purposes of
this Agreement, "Cause" shall mean solely the following: (i) the
conviction of the Executive for, or the plea by the Executive of
nolo contendere to, a charge of commission of a felony involving
specific intent; (ii) the consistent, willful failure of the
Executive to substantially perform his stated duties hereunder
(other than such failure resulting from physical or mental
incapacity), but only if such failure has a material adverse effect
on the Company; (iii) the willful commission by the Executive of an
act of fraud, but only if such act of fraud has a material adverse
effect on the Company; or (iv) an act of willful gross misconduct by
the Executive which is materially and demonstrably injurious to the
Company. Notwithstanding the foregoing, no act or failure to act by
the Executive shall be considered "willful" unless committed without
good faith and without a reasonable belief that the act or failure
to act was in the Company's best interest, and no act or failure to
act shall constitute "Cause" unless the Board of Directors shall
have notified the Executive in writing of the conduct allegedly
constituting Cause and the Executive shall have failed to correct
such conduct within thirty (30) days after the date of his receipt
of such notice. Moreover, the termination of the Executive's
employment hereunder shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than
two-thirds of the entire membership of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice
shall have been provided to the Executive and the Executive shall
have been given an opportunity, together with counsel, to be heard
before the Board), finding that Cause exists in the good faith
opinion of the Board and specifying the particulars thereof in
detail.
(c) Good Reason. The Executive's employment hereunder may be
terminated by the Executive at any time during the Employment Period
for Good Reason or without Good Reason. For purposes of this
Agreement, "Good Reason" shall mean any of the following:
(i) The assignment to the Executive of any duties
inconsistent with the Executive's position (including his
offices, titles, status and reporting relationship), authority,
duties or responsibilities as contemplated by Section 2 hereof,
or any removal of the Executive from or any failure to
nominate, elect or appoint the Executive to any of the offices
or positions referred to in Section 2 hereof, or any other act
or omission by the Company which results in a diminution in
such position, authority, duties or responsibilities, excluding
for these purposes an isolated and insubstantial action not
taken in bad faith which is remedied by the Company promptly
after receipt by the Company of notice thereof given by the
Executive. For purposes of this subsection (c), any act or
omission of the Board of Directors or the stockholders of the
Company that would give rise to "Good Reason" if it were an act
or omission of the Company shall be attributed to, and be
deemed to constitute an act or omission of, the Company.
(ii) Any failure by the Company to comply with any of the
provisions of Section 3 hereof (including, for this purpose,
any material reduction by the Company in the Executive's
employee benefit package as in effect immediately prior to such
reduction), other than an isolated and insubstantial failure
not occurring in bad faith which is remedied by the Company
promptly after receipt by the Company of notice thereof given
by the Executive.
(iii) Any material breach by the Company of the
provisions of this Agreement (including Section 11 hereof
regarding the assumption of this Agreement by any successor of
the Company) or any other agreement with the Executive.
(iv) Any relocation of the Executive's principal place of
employment in a manner inconsistent with that provided in
Section 2 hereof or any requirement that the Executive travel
on the Company's business to an extent materially greater than
the Executive's normal business travel obligations.
(v) Any failure by the Company to extend the Employment
Period by giving the Executive notice to that effect as
provided in Section 1 hereof.
(vi) The occurrence of a Change in Control of the Company
as defined in Section 6 hereof.
(d) Notice of Termination. Any termination of the
Executive's employment hereunder by the Company for Cause, or by the
Executive for Good Reason, shall be communicated to the other
relevant party by a Notice of Termination (as defined below). In
the case of a termination by the Executive for Good Reason, such
Notice of Termination shall be given within ninety (90) days of the
occurrence of the event that is claimed as serving the basis for the
termination as a condition of such claim being treated as a Good
Reason termination hereunder. For purposes of this Agreement, a
"Notice of Termination" means a notice given in accordance with
Section 12 hereof which (i) indicates the specific termination
provision in this Agreement that is relied upon, (ii) to the extent
applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated, and (iii)
if the Date of Termination (as defined below) is other than the date
of receipt of such notice, specifies the termination date (which
date shall be not more than thirty (30) days after the giving of
such notice). The failure by the Executive or the Company to set
forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any
right of the Executive or the Company, respectively, hereunder or
preclude the Executive or the Company, respectively, from asserting
such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(e) Date of Termination. As used herein, the "Date of
Termination" shall mean the following: (i) if the Executive's
employment is terminated by the Company for Cause or by the
Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein that is within
thirty (30) days of the date of receipt of such notice; (ii) if the
Executive's employment is terminated by the Company without Cause,
the Date of Termination shall be the date on which the Company
notifies the Executive of such termination or any later date
specified therein that is within thirty (30) days of the date of
receipt of such notice; (iii) if the Executive's employment is
terminated by the Executive without Good Reason, the date specified
in the Notice of Termination (which date shall not be less than
sixty (60) days after the date of receipt of such notice); and (iv)
if the Executive's employment is terminated by reason of the death
or Disability of the Executive, the Date of Termination shall be the
date of death or the Disability Effective Date, as the case may be.
5. Consequences of Termination.
(a) Without Cause or for Good Reason. In the event of a
termination of the Executive's employment hereunder by the Company
without Cause (other than by reason of any Disability of the
Executive) or by the Executive for Good Reason, the Company shall
pay and provide to the Executive all of the following:
(i) Lump-sum Payment. A lump-sum cash payment, payable
not later than ten (10) days after the Date of Termination,
equal to the sum of the amounts specified in clauses (A), (B)
and (C) below (subject to the limitation specified in clause
(D) below):
(A) Salary. The Executive's then-current annual base
salary (subject to increase from year to year by the minimum percentage
amount specified in Section 3(b) hereof) payable over the remainder of
the then-current Employment Period, discounted to the then-present value
by applying a discount rate equal to four percent (4%) per annum (the
"Discount Rate") to each future payment of salary from the time when it
otherwise would have become payable to the Date of Termination. For all
purposes of this Agreement, the term "then-current Employment Period"
shall include any extensions of the Employment Period which shall have
become effective on or before the Date of Termination and shall be
determined without regard to the termination of the Executive's
employment hereunder except that such term shall not include any
extensions of the Employment Period that would or might have become
effective after the Date of Termination.
(B) Bonuses. The maximum annual bonus amounts payable
for each fiscal year of the Company that would have been completed during
the remainder of the then-current Employment Period, with such bonus
amounts to be calculated based on the Executive's then-current annual
base salary (subject to increase from year to year by the minimum
percentage amount specified in Section 3(b) hereof) and the applicable
bonus percentages that would have been used for such years. In the case
of any fiscal year that would only have been partially completed during
the remainder of the then-current Employment Period, for purposes of this
provision, such fiscal year shall be deemed to have been completed on the
date when the then-current Employment Period would otherwise have
expired, and the bonus amount for such fiscal year shall be calculated as
described above except that such bonus amount shall be pro
rated by a fraction, the numerator of which shall be the number of
calendar days during such fiscal year prior to the date when the then-
current Employment Period would otherwise have expired and the
denominator of which shall be 365 days. All such amounts shall be
discounted to the then-present value by applying the Discount Rate to
each future payment of bonus from the time when it otherwise would have
become payable to the Date of Termination.
(C) Accrued but Unpaid Amounts. The sum of any
previously earned but unpaid salary through the Date of Termination, any
previously earned but unpaid bonus amounts for any fiscal year completed
on or before such date, the value of any accrued but unused vacation days
through such date and the aggregate amount of any previously incurred but
unreimbursed business expenses or other amounts due to the Executive as
of such date.
(D) Limitation. Notwithstanding the foregoing, the
lump-sum cash payment payable to the Executive under this Section 5(a)(i)
shall not exceed $1,000,000 until such time as the EBITDA of the Company
(as defined below) shall, as of any calculation date specified below
occurring on or before the Date of Termination, exceed $2,000,000. For
purposes of this Agreement, the "EBITDA of the Company" shall mean the
Company's earnings before deduction of any interest, taxes, depreciation,
amortization or similar items and before deduction of any non-recurring
or non-cash items (such as non-cash stock compensation expenses) during
the period commencing on the Commencement Date and continuing through and
until the Date of Termination and shall be calculated and determined on a
cumulative basis as of the last day of each calendar month during such
period.
(ii) Equity. To the extent that any portion of the
Options shall not have vested prior to the Date of Termination,
such portion shall immediately vest in the Executive. In no
event shall the ten-year option terms of the Options be
truncated. To the extent that the Executive shall not have
exercised all or any portion of the Options (including any
portion whose vesting was accelerated as described above) prior
to the Date of Termination, the Executive shall be entitled to
exercise the same in such increments and at such times as the
Executive shall determine in his sole discretion for so long as
the ten-year option terms shall remain unexpired.
(iii) Employee Benefits. During the remainder of the
then-current Employment Period, the Executive (and, where
applicable, his dependents) shall be entitled to continued
participation in all health, welfare, life, accident,
disability and similar employee benefit plans, programs and
arrangements of the Company on the same basis as that which
applied immediately prior to the Date of Termination, provided
that continued participation is possible under the general
terms and provisions of such plans, programs and arrangements.
In the event that participation by the Executive (and, where
applicable, his dependents) in any such plan, program or
arrangement is barred, the Company shall arrange to provide the
Executive (and, where applicable, his dependents) with benefits
substantially similar to those which the Executive (and, where
applicable, his dependents) would otherwise have been entitled
to receive under such plans, programs and arrangements at the
same or lower after-tax cost to the Executive. During the
remainder of the then-current Employment Period, the Executive
shall also be entitled to continue with those benefits
described in subsections (h), (i), (j), (l) and (m) of Section
3 hereof. If and to the extent that the Executive and his
dependents are covered under substitute benefit plans, programs
or arrangements of another employer prior to the expiration of
the then-current Employment Period, the Company will no longer
be obligated to continue the respective coverages provided for
in this Section 5(a)(iii).
(b) Death, Disability or Without Good Reason After Five
Years. In the event of a termination of the Executive's employment
hereunder by reason of the death or Disability of the Executive or
by the Executive without Good Reason on or after completion of five
(5) years of employment, then subject to Section 5(f) hereof, the
Company shall pay and provide to the Executive all of the following:
(i) Accrued but Unpaid Amounts. A lump-sum cash
payment, payable not later than ten (10) days after the Date of
Termination, equal to the sum of any previously earned but
unpaid salary through the Date of Termination, any previously
earned but unpaid bonus amounts for any fiscal year completed
on or before such date, the value of any accrued but unused
vacation days through such date and the aggregate amount of any
previously incurred but unreimbursed business expenses or other
amounts due to the Executive as of such date.
(ii) Equity. To the extent that any portion of the
Options shall have vested on or before the Date of Termination,
such portion shall remain vested in the Executive and in no
event shall the ten-year option terms of the Options be
truncated. To the extent that the Executive shall not have
exercised all or any portion of the Options (excluding, for the
avoidance of doubt, any portion of the Options that has not
vested as described above) on or before the Date of
Termination, the Executive shall be entitled to exercise the
same thereafter in such increments and at such times as the
Executive shall determine in his sole discretion for so long as
the ten-year option terms shall remain unexpired.
(iii) Employee Benefits. During the Severance Period (as
defined below), the Executive (and, where applicable, his
dependents) shall be entitled to continued participation in all
accident, disability, medical, dental, health, welfare, life
and similar employee benefit plans, programs and arrangements
of the Company on the same basis as that which applied
immediately prior to the Date of Termination, provided that
continued participation is possible under the general terms and
provisions of such plans, programs and arrangements. In the
event that participation by the Executive (and, where
applicable, his dependents) in any such plan, program or
arrangement is barred, the Company shall arrange to provide the
Executive (and, where applicable, his dependents) with benefits
substantially similar to those which the Executive (and, where
applicable, his dependents) would otherwise have been entitled
to receive under such plans, programs and arrangements at the
same or lower after-tax cost to the Executive. As used herein,
the "Severance Period" shall mean the first twelve (12) months
following the Date of Termination if such date occurs on or
before the first anniversary of the Commencement Date or the
first twenty-four (24) months following the Date of Termination
if such date occurs after the first anniversary of the
Commencement Date. During the Severance Period, the Executive
shall also be entitled to continue with those benefits
described in subsections (h), (i), (j), (l) and (m) of Section
3 hereof. If and to the extent that the Executive and his
dependents are covered under substitute benefit plans, programs
or arrangements of another employer prior to the expiration of
the Severance Period, the Company will no longer be obligated
to continue the respective coverages provided for in this
Section 5(b)(iii).
(iv) Severance Payment. Solely in the event that the
Executive's employment hereunder is terminated by the Executive
without Good Reason on or after completion of five (5) years of
employment (and not in the event that the Executive's
employment is terminated by reason of death or Disability), the
Executive shall be entitled to receive a severance payment not
later than ten (10) days after the Date of Termination,, it
being understood and agreed that the amount of such severance
payment shall be determined by the Board of Directors in its
sole discretion.
(c) Termination for Cause or Without Good Reason Before Five
Years. In the event that the Executive's employment with the
Company is terminated during the Employment Period by the Company
for Cause or by the Executive without Good Reason prior to the
completion of five (5) years of employment, the following shall
apply:
(i) Accrued but Unpaid Amounts. The Company shall pay
to the Executive, not later than ten (10) days after the Date
of Termination, a lump-sum cash payment equal to the sum of any
previously earned but unpaid salary through the Date of
Termination, any previously earned but unpaid bonus amounts for
any fiscal year completed on or before such date, the value of
any accrued but unused vacation days through such date and the
aggregate amount of any previously incurred but unreimbursed
business expenses or other amounts due to the Executive as of
such date.
(ii) Lapse of Options. If and to the extent that any
portion of the Options shall not have vested prior to the Date
of Termination, such portion shall not vest in the Executive
and shall be forfeited. If and to the extent that any portion
of the Options shall have vested prior to the Date of
Termination and shall remain unexercised on such date, the
option terms of such portion shall expire ninety (90) days
after the Date of Termination.
(d) Other Arrangements. The benefits payable to the
Executive under this Agreement are not in lieu of any benefits
payable under any employee benefit plan, program or arrangement of
the Company, except as provided specifically herein, and upon
termination the Executive will receive such benefits or payments, if
any, as the Executive may be entitled to receive pursuant to the
terms of such plans, programs and arrangements.
(e) No Mitigation or Offset. The Executive shall have no
obligation to mitigate damages or the amount of any payments or
benefits set forth in this Agreement (whether by seeking substitute
employment or otherwise), and except as specifically provided in the
last sentence of Section 5(a)(iii) hereof or the last sentence of
Section 5(b)(iii) hereof, there shall be no offset of or reduction
in the payments or benefits set forth in this Agreement by virtue of
any payments or benefits received by the Executive from any other
source (including any payments or benefits received by the Executive
from another employer).
(f) Designated Beneficiary. In the event of the death of the
Executive at any time when amounts are then payable or shall
thereafter be payable to the Executive under the provisions of this
Agreement, such payments shall thereafter be made to such person or
persons as the Executive may specifically designate (successively or
contingently) to receive payments under this Agreement following the
Executive's death by filing a written beneficiary designation with
the Company during the Executive's lifetime. Such beneficiary
designation shall be in such form as may be prescribed by the
Company and may be amended from time to time or may be revoked by
the Executive pursuant to written instruments filed with the Company
during his lifetime. Beneficiaries designated by the Executive may
be any natural or legal person or persons, including a fiduciary,
such as a trustee of a trust or the legal representative of an
estate. Unless otherwise provided by the beneficiary designation
filed by the Executive, if all of the persons so designated die
before the Executive on the occurrence of a contingency not
contemplated in such beneficiary designation, then the amount or
amounts payable under this Agreement shall be paid to the
Executive's estate.
6. Change in Control.
Notwithstanding any other provision of this Agreement, in the
event that a Change in Control of the Company shall occur, all of
the Options that have not previously vested and become exercisable
pursuant to Section 3(d) hereof shall immediately vest and become
exercisable and the Executive shall have Good Reason to terminate
his employment with the Company pursuant to Section 4(c) hereof.
For purposes of this Agreement, a "Change in Control" shall be
deemed to have occurred if and when any of the following shall
occur:
(a) Individuals who as of the date six (6) months after the
Commencement Date (the "Six Month Date") constitute the entire Board
and any new directors whose election by the Board, or whose
nomination for election by the Company's stockholders, shall have
been approved by a vote of at least a majority of the directors then
in office who either were directors as of the Six Month Date or
whose election or nomination for election shall have been so
approved shall cease for any reason to constitute a majority of the
members of the Board.
(b) Any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) shall after the Commencement Date become the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of securities of the Company
representing thirty percent (30%) or more of the voting power of all
then-outstanding securities of the Company having the right under
ordinary circumstances to vote in an election of the Board (it being
understood and agreed that, for this purpose, any securities of the
Company that any person has the right to acquire pursuant to any
agreement, upon exercise of any conversion rights, warrants or
options or by any other means, shall be deemed beneficially owned by
such person).
(c) There shall be approved by a vote of the Company's
shareholders or other appropriate corporate action any corporate
transaction, including a consolidation or merger, involving the
Company (regardless of whether the Company is the continuing or
surviving corporation) or pursuant to which shares of the Company's
capital stock are converted into cash, securities or other property,
other than a consolidation or merger of the Company in which the
holders of the Company's voting stock immediately prior to the
consolidation or merger shall, upon consummation thereof, own that
number of shares of the capital stock of the continuing or surviving
corporation sufficient to provide such holders with at least fifty-
one percent (51%) of the voting power of all shares of the capital
stock of the continuing or surviving corporation.
(d) There shall be approved by a vote of the Company's
shareholders or other appropriate corporate action any sale, lease,
exchange or transfer (whether in a single transaction or a series of
related transactions) of all or substantially all of the assets or
business of the Company or any liquidation, dissolution or winding
up of the Company.
7. Excess Parachute Payments.
(a) Gross-up Payments. Subject to the provisions of Section
8 hereof, if the Executive becomes subject to the excise tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code") on "excess parachute payments" as defined in Section
280G of the Code or the Executive incurs any interest or penalties
with respect to such excise tax (such excise tax, together with any
such interest or penalties, being hereinafter collectively referred
to as the "Excise Tax"), the Company shall promptly pay to the
Executive that amount (a "Gross-up Payment") that is necessary to
place the Executive in the same after-tax (taking into account all
federal, state, local and other taxes) financial position that the
Executive would have been in if he had not incurred any tax
liability under Section 4999 of the Code or otherwise relating to
the Excise Tax. In no case will the Executive file a tax return
which takes a position that any Excise Tax is payable unless the
Executive receives a written opinion from his tax advisor(s) that it
is more likely than not that the Excise Tax is due and payable.
Upon receipt of such written opinion, the Executive shall deliver a
copy of such written opinion to the Company, using reasonable
efforts whenever practicable to do so not less than thirty (30) days
prior to filing the tax return to which the opinion refers. After
receiving the written opinion and prior to the due date for the
filing of such tax return, the Company shall pay to the Executive
the full amount of the Gross-up Payment as described above. In all
cases, the Company shall pay or reimburse the Executive, upon the
presentation of appropriate vouchers or receipts, for the reasonable
costs incurred by the Executive in obtaining any such opinion
(regardless of the conclusion of such opinion) or in seeking any
advice relating to the matters to be addressed in any such opinion.
(b) Subsequent Assessments. In the event the Internal
Revenue Service subsequently may assess or seek to assess from the
Executive an amount of the Excise Tax in excess of that determined
in accordance with the foregoing, the Company shall pay to the
Executive an additional Gross-up Payment, calculated as described
above in respect of such excess Excise Tax, including a Gross up
Payment in respect of any interest or penalties imposed by the
Internal Revenue Service with respect to such excess Excise Tax.
(c) Notice of Claims. Each party will notify the other in
writing of any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company of any Gross-up
Payment. Such notification shall be given as soon as practicable
but no later than ten (10) business days after such party is
informed in writing of such a claim and such party shall apprise the
other party of the nature of such claim and the date on which such
claim is requested to be paid. The Company shall bear and pay
directly all costs and expenses (including legal and accounting fees
and additional interest and penalties) incurred in connection with
any such claim or proceeding, to the extent related to the Excise
Tax, and shall indemnify and hold harmless the Executive, on an
after-tax basis as provided in Section 7(a) hereof, from and against
any income, excise or other tax (including any interest, penalties
or additions to tax with respect thereto) imposed as a result of
such representation and the payment of such costs and expenses.
(d) Interpretation. For purposes of this Agreement, (i) any
reference to a particular section of the Code shall be deemed to
include any and all successor provisions of federal law, any and all
similar or analogous provisions of state, local or other law, and
any and all applicable rules and regulations relating to the
foregoing, and (ii) any reference to the Internal Revenue Service
shall be deemed to include any and all applicable state, local and
other tax authorities.
8. Limitation on Gross-up Payments.
(a) General Rule. Notwithstanding Sections 5, 6 and 7
hereof, if any of the payments, benefits or property transfers
provided for in this Agreement, together with any other payments,
benefits or property transfers which the Executive has the right to
receive from the Company, would constitute a "parachute payment" (as
defined in Section 280G(b)(2) of the Code), then the payments,
benefits or property transfers pursuant to this Agreement shall be
reduced so that the present value of the total amount received by
the Executive that would constitute a "parachute payment" will be
$1.00 less than three (3) times the Executive's "base amount" (as
defined in Section 280G of the Code) and so that no portion of the
payments, benefits or property transfers received by the Executive
would be subject to the excise tax imposed by Section 4999 of the
Code. If the amount of the aggregate payments, benefits or property
transfers to the Executive must be reduced pursuant to the preceding
sentence, the Executive shall direct in which order the payments,
benefits or transfers are to be reduced. All calculations required
by this Section 8 shall be by such nationally recognized accounting
firm as may be designated by the Executive (the "Accounting Firm"),
based on information supplied by the Company and the Executive, and
shall be binding on the Company and the Executive. All fees and
expenses of the Accounting Firm shall be paid by the Company.
(b) Underpayments and Overpayments. As a result of
uncertainty in the application of Sections 280G and 4999 of the Code
at the time of an initial determination by the Accounting Firm
hereunder, it is possible that a payment will have been made by the
Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could
have been made (an "Underpayment"). In the event that the
Accounting Firm, based upon the assertion of a deficiency by the
Internal Revenue Service against the Company or the Executive that
the Accounting Firm believes has a high probability of success,
determines that an Overpayment has been made, such Overpayment shall
be treated for all purposes as a loan to the Executive that the
Executive shall repay to the Company, together with interest thereon
at the applicable federal rate specified in Section 7872(f)(2) of
the Code; provided, however, that no amount shall be payable by the
Executive to the Company if and to the extent that such payment
would not reduce the amount that is nondeductible under Section 280G
of the Code or is subject to an excise tax under Section 4999 of the
Code. In the event that the Accounting Firm determines that an
Underpayment has been made, such Underpayment shall promptly be paid
or transferred by the Company to, or for the benefit of, the
Executive, together with interest thereon at the applicable federal
rate specified in Section 7872(f)(2) of the Code.
(c) Exception to General Rule. Notwithstanding any other
provision of this Agreement (including Sections 8(a) and 8(b)
hereof), if and to the maximum extent that the EBITDA of the Company
shall, as of any calculation date specified in Section 5(a)(i)(D)
hereof, equal or exceed the amount of any Gross-up Payment that
would be required to be paid to the Executive under Section 7(a)
hereof (determined without regard to Sections 8(a) and 8(b) hereof),
then from that date forward, the limitations imposed by Sections
8(a) and 8(b) on the Executive's right to receive payments, benefits
or property transfers shall no longer apply.
9. Confidential Information.
During the Employment Period and at all times thereafter, the
Executive shall not, without the prior written consent of the Board,
disclose or use for any purposes (except in the course of his
employment under this Agreement and in furtherance of the business
of the Company) any confidential information, proprietary data and
customer lists of the Company, except as required by applicable law
or legal process; provided, however, that "confidential information,
proprietary data and customer lists" shall not be deemed to include
any information known generally to the public or ascertainable from
public or published information (other than as a result of
unauthorized disclosure by the Executive) or any information of a
type not otherwise considered confidential by persons engaged in the
same business or a business similar to that conducted by the
Company. The Executive agrees to deliver to the Company, as soon as
practicable following the termination of the Executive's employment
hereunder, all memoranda, notes, plans, records, lists, reports and
other documents (including all copies thereof) that contain any
confidential information, proprietary data or customer lists of the
Company which the Executive may then have in his possession or under
his control.
10. Indemnification.
The Company shall indemnify and hold harmless the Executive and
his legal representatives, to the fullest extent permitted by
applicable law, from and against all judgments, fines, penalties,
excise taxes, amounts paid in settlement, liabilities, losses, costs
and expenses (including reasonable attorneys' fees and legal costs)
if the Executive is made, is threatened to be made or in good faith
expects to be made a party or a material witness to any threatened
or pending or completed action, suit, proceeding or investigation,
whether civil, criminal, administrative or otherwise, including an
action by or in the right of the Company or any of its affiliated
companies to procure a judgment in its favor, by reason of the
Executive being or having been a director, officer or employee of
the Company or by reason of the Executive serving or having served
in any capacity whatsoever (including as a director, officer or
employee) any other corporation, partnership, joint venture, limited
liability company, trust, employee benefit plan or other enterprise
at the request of the Company. The Executive's right to
indemnification provided in this Section 10 shall not be deemed
exclusive of any other rights to which the Executive may now or
hereafter be entitled under any law or the charter or bylaws of the
Company or any of its affiliated companies or otherwise, both as to
action in the Executive's official capacity and as to action in
another capacity while holding such position, and such right shall
continue after the Executive has ceased to be a director or officer
and shall inure to the benefit of the Executive's heirs, executors
and administrators. Any reimbursement obligation arising hereunder
shall be satisfied on an as-incurred basis. In addition, the
Company agrees to secure (if it has not already done so) and
maintain in effect customary and appropriate directors and officers
liability insurance throughout the Employment Period and for a
period of not less than six (6) years commencing immediately
thereafter, it being understood and agreed that the Executive shall
be added as a named insured to any and all such insurance policies
and shall be entitled to the protection of any and all such
insurance policies on no less favorable a basis than is now or
hereafter provided to any other officer or director of the Company
or any of its affiliated companies.
11. Successors.
(a) Company's Successors. The Company shall require any
corporation or other entity that directly or indirectly acquires all
or substantially all of the Company's business or assets (whether by
purchase, lease, merger, consolidation, liquidation or otherwise)
and each corporation or other entity that directly or indirectly
becomes a parent or otherwise acquires control of the Company (each
such event being sometimes referred to herein as a "succession"), by
an agreement in substance and form satisfactory to the Executive, to
assume this Agreement and to agree expressly to perform this
Agreement in the same manner and to the same extent as the Company
would be required to perform it in the absence of any such
succession. The Company's failure to obtain such an assumption
agreement or to deliver it to the Executive prior to the
effectiveness of any such succession shall be a material breach of
this Agreement. For all purposes under this Agreement, the term
"Company" shall be deemed to include each corporation or other
entity that directly or indirectly acquires all or substantially all
of the Company's business or assets and each corporation or other
entity that directly or indirectly becomes a parent or otherwise
acquires control of the Company.
(b) Executive's Successors. This Agreement and all rights of
the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees
and legatees.
12. Notices.
Each notice pursuant to this Agreement shall be in writing and
shall be given to the other party by delivering the same in person
or by courier, or by transmitting the same by telegraph, telex or
telecopier, or by sending the same by express, registered or
certified mail, postage prepaid, addressed as follows (or at such
other address as the other party may from time to time designate by
notice in accordance with this Section 12):
If to the Executive:
Mr. Thomas E. Burke
6657 Hampton Park Court
McLean, Virginia 22101
Telecopier: _____________
With a copy to:
Dewey Ballantine
300 South Hope Street, 30th Floor
Los Angeles, California 90017
Attn: James S. Cochran, Esq.
Telecopier: (213) 625-0562
If to the Company:
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, California 95054
Attn: Secretary
Telecopier: (408) 727-6625
With a copy to:
Bartel Eng Linn & Schroeder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Attn: Scott E. Bartel, Esq.
Telecopier: (916) 442-3442
Any properly addressed notice shall be deemed duly given to the other
party on the date of delivery if delivered in person, one (1) business
day after the date of deposit if deposited with a same day or overnight
courier service with all charges prepaid, one (1) business day after
being telegraphed, telexed or telecopied if appropriate confirmation is
received, or three (3) business days after the date of deposit if
deposited in the U.S. mail as specified above.
13. Representations and Warranties.
The Company hereby represents and warrants to the Executive as
follows: (a) the Company has received all authorizations necessary
for the execution of this Agreement on the terms and conditions set
forth herein and for the grant of the Options as set forth in
Section 3(d) hereof and has taken all actions necessary to make such
grant; (b) there are no regulatory or other governmental consents or
approvals that are necessary for the execution and performance of
this Agreement by the Company; (c) the Company's entering this
Agreement and the performance of its obligations hereunder will not
violate any agreement between the Company and any other person, firm
or organization or any law or governmental regulation; (d) to the
best of the Company's knowledge, all written materials, information
and data regarding the Company's business, assets and financial
position (including the draft audited financial statements for the
fiscal years ending December 31, 1996 and December 31, 1997 and the
notes thereto) which have been provided to the Executive by the
Company through its officers, directors, attorneys and agents are
true and complete and not misleading in any material respect; and
(e) the Company has no knowledge of any facts or circumstances not
already disclosed to the Executive which would or might adversely
affect the ability of the Company to perform its obligations under
this Agreement.
14. Security for Company's Performance.
The Company's obligations under this Agreement shall be secured
for a period of not less than two (2) years from the Commencement
Date by one or more letters of credit issued by a bank acceptable to
the Executive in favor of the Executive in an aggregate principal
amount of not less than $1,000,000. The form and substance of such
letters of credit, as well as the transactions used to fund such
letters of credit, shall be subject to the Executive's reasonable
prior approval. Except as the parties shall otherwise agree in
writing, the Company will provide all of the letters of credit
specified above to the Executive on or before June 1, 1998, it being
understood and agreed that letters of credit in an aggregate
principal amount of at least $500,000 shall be provided to the
Executive on or before May 1, 1998. For the avoidance of doubt, any
failure on the part of the Company to comply in a timely manner with
the provisions of this Section 14 shall be deemed a material breach
of this Agreement by the Company.
15. Arbitration and Legal Fees.
(a) Arbitration of Disputes. In the event of any controversy
or claim between the Company or any of its affiliates and the
Executive arising out of or relating to this Agreement or any other
agreement between the Executive and the Company or any of its
affiliates, including any controversy or claim relating to the
breach or alleged breach thereof, the Executive may retain counsel
of his choice at the expense of the Company. If either party
delivers to the other party a written demand for arbitration of a
controversy or claim then such demand shall be submitted to binding
arbitration. The binding arbitration shall be administered by the
American Arbitration Association under its Commercial Arbitration
Rules. The arbitration shall take place in San Francisco,
California. Each of the Company and the Executive shall appoint one
person to act as an arbitrator, and a third arbitrator shall be
chosen by the first two arbitrators (such three arbitrators being
referred to herein as the "Panel"). The Panel shall have no
authority to award punitive damages against the Company or the
Executive. The Panel shall have no authority to add to, alter,
amend or refuse to enforce any portion of this Agreement or any
other relevant agreement. The Company (on behalf of itself and its
affiliates) and the Executive hereby waive any right to a jury trial
in any action or proceeding of any kind arising out of or relating
to this Agreement.
(b) Legal Fees. The Executive is not required to pay for
expenditures associated with obtaining, enforcing or defending any
rights or benefits under this Agreement or any other agreement
between the Executive and the Company or any of its affiliates
(including any plan, program or arrangement maintained by the
Company or any of its affiliates under which the Executive is or may
be entitled to receive compensation or benefits). Consequently, the
Company shall indemnify and hold harmless the Executive for all such
expenditures and pay them as they become due. The Company shall
also pay all reasonable legal fees and expenses incurred by the
Executive in connection with any arbitration or other proceeding
(whether or not instituted by the Company or the Executive) relating
to the interpretation or enforcement of any provision of this
Agreement or any other agreement between the Executive and the
Company or any of its affiliates (including any action seeking to
obtain or enforce any right or benefit provided by the foregoing) or
in connection with any tax audit or proceeding relating to the
application of Section 4999 of the Code to any payment or benefit
provided by the Company.
16. Miscellaneous Provisions.
(a) Publicity. The parties shall mutually approve the timing
and content of any public announcements or news stories issued or
authorized by the Company which relate directly or indirectly to the
Executive, the Executive's employment by the Company, the subject
matter of this Agreement or the transactions contemplated hereunder.
(b) Entire Agreement. This Agreement constitutes the entire
agreement by the Company and the Executive with respect to the
subject matter hereof and except as specifically provided herein,
supersedes any and all prior agreements or understandings between
the Executive and the Company with respect to the subject matter
hereof, whether written or oral. This Agreement may be amended or
modified only by a written instrument executed by the Executive and
the Company.
(c) No Waiver. No waiver by either party of any breach of
any provision of this Agreement shall be deemed a waiver of any
preceding, succeeding or continuing breach of the same or any other
provision hereof.
(d) Severability. If for any reason any provision of this
Agreement is adjudged or held by a court or arbitrator to be invalid
or unenforceable, such adjudication or holding shall in no way
affect any other provision of this Agreement or the validity or
enforceability of the remainder of this Agreement, and the affected
provision shall be modified or curtailed only to the extent
necessary to bring it into compliance with applicable law.
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California
applicable to agreements made and wholly to be performed therein.
(f) No Setoff or Counterclaim. Except as specifically
provided in the last sentence of Section 5(a)(iii) hereof and in the
last sentence of Section 5(b)(iii) hereof, the Company's obligation
to pay and provide to the Executive the compensation and other
benefits specified herein shall be absolute and unconditional and
shall not be affected by any circumstance whatsoever, including any
setoff, counterclaim, recoupment, defense or other right which the
Company may now or hereafter have against the Executive. All
amounts payable by the Company hereunder shall be paid without
notice or demand.
(g) Withholding Taxes. All payments required to be made by
the Company to the Executive hereunder shall be subject to the
deduction and withholding of such income, employment and other taxes
as the Company may from time to time be required to deduct and
withhold pursuant to applicable law or regulation.
(h) Interpretation. For purposes of this agreement, any form
of the word "include" shall be deemed to be followed by the words
"without limitation," the term "person" shall include a corporation,
partnership, limited liability company, business trust, association
or other organization as well as a natural person, and terms such as
"herein," "hereof," "hereby" and "hereunder" shall refer to this
agreement as a whole and not to any particular provision of this
agreement, unless the context clearly indicates otherwise. Terms
used in one gender shall be inclusive of the other genders. The
headings and captions contained herein are for convenience only and
shall not control or affect the meaning or construction of any
provision hereof.
(i) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original
but all of which together shall constitute one and the same
instrument. Signatures may be exchanged by facsimile, and each
party hereto agrees to be bound by its own facsimile signature and
to accept the facsimile signature of the other party.
(j) Successors and Assigns. This agreement, and all rights
and obligations hereunder, shall be binding upon and inure to the
benefit of the parties and their respective successors and permitted
assigns.
17. Conditions Precedent.
The obligations of the Executive hereunder are expressly
conditioned upon the absence of any material adverse change in the
business, affairs and financial prospects of the Company and its
affiliates between the date of this Agreement and the Commencement
Date. For purposes of the foregoing, the failure of the Company to
secure financing in an amount at least equal to $5,000,000 prior to
April 15, 1998 shall be deemed a material adverse change in the
business, affairs and financial prospects of the Company. If any
material adverse change shall occur on or before the Commencement
Date, the Executive shall have the right in his sole discretion to
terminate this Agreement upon written notice thereof to the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
INNOVACOM, INC.
By:______________________________
Name:
Title:
_________________________________
Thomas E. Burke
EXHIBIT 16.1
MICHAEL HOFFER
Certified Public Accountant
4535 West Sahara Avenue, Suite 111
Las Vegas, NV 89102
April 10, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir/Madam:
We have read and agree with the information contained in the section
entitled "Change in Accountants" included in InnovaCom's Registration
Statement on Form SB-2 filed with the Commission insofar as such comments
relate to us.
Yours truly,
/s/ Michel Hoffer
Michael Hoffer
EXHIBIT 21.1
SUBSIDIARIES OF THE ISSUER
InnovaCom, a Florida corporation
Sierra Vista Entertainment, Inc., a Nevada corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM SB-2
FILED BY INNOVACOM, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,156,914
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,333,541
<PP&E> 966,213
<DEPRECIATION> 193,855
<TOTAL-ASSETS> 6,206,556
<CURRENT-LIABILITIES> 5,788,041
<BONDS> 0
0
0
<COMMON> 20,562
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,206,556
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,762,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,214,237
<INCOME-PRETAX> (10,819,780)
<INCOME-TAX> 3,200
<INCOME-CONTINUING> (10,822,980)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,822,980)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
EXHIBIT 99.1
CONSENT TO BE NAMED A DIRECTOR OF INNOVACOM, INC.
The undersigned hereby consents to be named in the Registration
Statement on Form SB-2 to be filed by InnovaCom, Inc. (the "Company") with
the Securities and Exchange Commission, as a director of the Company to be
effective May 1, 1998.
/S/ THOMAS E. BURKE
Thomas E. Burke
EXHIBIT 99.2
CONSENT TO BE NAMED A DIRECTOR OF INNOVACOM, INC.
The undersigned hereby consents to be named in the Registration
Statement on Form SB-2 to be filed by InnovaCom, Inc. (the "Company") with
the Securities and Exchange Commission, as a director of the Company to be
effective May 1, 1998.
/S/ PETER J. SPRAGUE
Peter J. Sprague
