AS FILED WITH THE COMMISSION ON MAY 11, 1998 FILE NO. 333-45875
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Pre-Effective Amendment No. 2 to
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
INNOVACOM, INC.
(Name of small business issuer in its charter)
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)
Thomas E. Burke, 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
<TABLE>
<CAPTION>
Proposed
Title of each maximum aggregate
class of Proposed offering Amount of
securities to be Amount to be maximum price registration fee
registered registered{(1)} offering price{(5)}
<S> <C> <C> <C> <C>
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
</TABLE>
(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, including accrued interest
at the rate of 10% per annum. 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 of $5 million of
principal and $500,000 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
<PAGE>iii
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
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 May 11, 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, at the rate of 10% per annum. 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) from April 22,
1998 through May 21, 1998, 82.5% 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 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) 66% of the
aggregate principal amount of the Debentures may be converted from April 22,
1998 through May 21, 1998, and (ii) 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.
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 May ___, 1998, the
average high and low price of a share of the Company's Common Stock was $____
as reported on the OTC Bulletin Board. The Debentures, Warrants, Additional
<PAGE>2
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 May 11, 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 9,855,769 8,152,116
Loss before Income Taxes 11,062,103 8,192,595
Net Loss 11,065,303 8,193,395
Basic and Diluted Loss per share $ .62 $ 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 7,054,685
Long-term debt 3,318,949
Stockholders' equity (deficit) $ (2,052,305)
<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
$11,065,303 and $8,193,395 and had an accumulated deficit of $19,261,098 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 May 1,
1998, the amount of principal and interest outstanding under the Credit
Facility and Note was $4,491,621. 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."
CONFLICT OF INTERESTS. The Company has previously, and may in the future,
enter into transactions with certain members of the Company's Board of
Directors or with companies that have common directors with, or owners who are
directors of, the Company. Therefore, these directors will be subject to
various potential conflict of interests. Further, in a previous transaction
involving a company owned by a director of the Company and the Company, the
Company was required to record a loss. See "Certain Transactions." The
Company intends to adopt a policy of having a related party transaction be
subject to approval by a majority of the disinterested directors.
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."
<PAGE>7
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 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
<PAGE>8
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, and executive officers will beneficially own approximately 30.39% of
the outstanding Common Stock of the Company. As a result of their ownership,
the directors and executive officers 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 "Management", "Principal Shareholders" and
"Description of Securities."
POSSIBLE DILUTION FROM DEBENTURES, WARRANTS, AND A NOTE. As of May 1, 1998,
there were 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 2,515,849 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.
<PAGE>9
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 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) from April 22, 1998 through May 21,
1998, 82.5% 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)
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) 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 May 31, 1998, the amount of principal and accrued
interest outstanding under the Note and Credit Facility was $4,491,621 and may
convert into 2,015,849 shares of Common Stock at an average conversion price of
$2.23.
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.
Under the terms of the Debentures, the Company is required to register the
Company's Common Stock to be issued upon conversion of the Debentures,
including interest thereon, and upon the exercise of the Warrants. In the
event the registration is not declared effective by the Commission by April 15,
1998, the Company is required to pay JNC an amount equal to the product of $5
million and 1.5% for each month the registration statement is not effective.
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
March 31, 1998 $2.81 $1.63
<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 5,527,816 5,441,088
Total costs and expenses 10,004,769 8,152,116
Operating Loss 9,855,769 8,152,116
Interest expense, net 1,203,775 8,989
Income tax expense 3,200 800
Net loss 11,065,303 8,193,395
Basic and Diluted net loss per share: $ 0.62 $ 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 7,054,685 215,996
Long-term debt 3,318,949 -
Stockholders' equity (deficit) $ (2,052,305) $ (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 continuing
operating losses 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>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
$5,528,000 for the year ended December 31, 1997, which was an increase of
approximately $87,000, or 2%, 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 $2,836,000 higher in
1997 than in 1996, an increase of 139%. 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. Selling, general and administration expense for
1997 also includes approximately $242,000 of amortization of goodwill
recognized in connection with the acquisition of Sierra Vista. No similar
amortization was incurred in 1996.
<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
$11,065,000 and $8,193,000, respectively. The net loss during 1997 was offset
by non-cash items relating to amortization expense related to the goodwill
recognized in connection with the acquisition of Sierra Vista, 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, 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
<PAGE>15
received was offset by the acquisition of 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
<PAGE>17
MPEG committee adopted the first technical 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
<PAGE>19
convert to digital 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 in use for other types
<PAGE>20
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 equal to 20% during year one; 15% during year two; 8%
during year three; 5% during year four; 3% during year five; 1% during year
six; and 1% during year seven. If the Company makes product sales utilizing
the technology, the preceding percentages will be applied to the Company's
foundry costs. After the seventh year, 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
<PAGE>22
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 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 consulting fee 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 two 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. The form of acquisition may be by
merger or acquisition of substantially all of the assets of Intelligent
Instruments, and will be negotiated by Intelligent Instruments Corporation and
the Company. 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. The proposed
acquisition price was determined by negotiations between Mr. Koz and Mr.
Anderson on behalf of the Company. In considering the number of Common Shares
to be issued to Intelligent Instruments, the Company considered the value to
the Company of the patent and pending patent that may be utilized in the
Company's products and that the shares of Common Stock to be issued will be
restricted. The primary assets of Intelligent Instruments consist of a patent
that will allow the Company to design and build MPEG-2 decoder set-top boxes
that support more than one compression technology and a proprietary server
design that will allow simultaneous transmitting of multiple video data over
digital subscriber lines. Set-top boxes are used in cable connections for
descrambling special channels. Intelligent Instruments is a company wholly-
owned by Mark C. Koz, the Company's President and Chief Executive Officer.
Subject to entering into a definitive agreement, the acquisition was approved
by the Company's Board of Directors with Mr. Koz abstaining from voting.
<PAGE>23
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.
INNOVATIVE TECHNICAL SOLUTIONS, INC.
In January 1998, the Company entered into a binding letter of intent to
acquire the business and intellectual property of Innovative Technical
Services, Inc. After further review by each party, the parties decided to
rescind their agreement without any obligations to the other.
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.
<PAGE>24
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 the amount of
approximately $665,000 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 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, and with regards to Checkers Foundation that no monies is due
to it. 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
<PAGE>25
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. They have agreed (except Japan Tobacco) to settle
their dispute. Under the settlement agreement, the Company, Mark Koz,
Intelligent Instruments Corporation, Masato Hata and FutureTel settled 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. Further,
the Company and Japan Tobacco have agreed in principle to dismiss with
prejudice each claim against each other subject to entering into a definitive
settlement agreement. The settlement agreement is anticipated to be finalized
and executed soon.
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 approximate amount of $80,000 for interest,
directors' fees and cost reimbursements. 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
Thomas E. Burke 5 President, Chief Executive May 1998
Officer, Director
Mark C. Koz 43 Senior Vice President, Chief March 1993
Technical Officer and Chairman
of the Board
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
Peter J. Sprague 58 Director May 1998
The following sets forth the principal occupations during the past five
years of the directors and executive officers of the Company and it
subsidiaries.
THOMAS E. BURKE (AGE 58) has been President and Chief Executive Officer of
the Company and as a member of the Board of the Directors of the Company since
May 1, 1998. 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.
MARK KOZ (AGE 43) has been Chairman of the Board since March 3, 1993, and
Senior Vice President and Chief Technical Officer since 1998. From 1993 to
1998, Mr. Koz served as President and Chief Executive Officer of the Company.
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.
<PAGE>27
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.
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
<PAGE>28
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.
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.
PETER J. SPRAGUE (AGE 58) has been a director of the Company since May 1,
1998. 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.
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. Mr. Sprague
received options to acquire 200,000 shares of common stock at $2.50 per share.
These options expire in five years and vest in one-third increments,
beginning on Mr. Sprague's one year anniversary date as serving as a director.
EXECUTIVE COMPENSATION.
The following table sets forth the Compensation of Mr. Koz, the Company's
President and Chief Executive Officer, and Mr. Anderson, the Company's
Executive Director, Corporate Strategy and Finance during 1997. No other
<PAGE>29
officers received annual compensation in excess of $100,000 during 1997.
Effective May 1, 1998, Mr. Thomas E. Burke was hired as President and Chief
Executive Officer.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards Payouts
Other Securities
Annual Restricted Underlying
Compensa- Stock Options LTIP All Other
tion Award(s) (#) Payouts Compensa-
Name and Principal Year Salary ($) ($) ($) 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
</TABLE>
(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.
On March 23, 1998, the Company hired Thomas E. Burke. 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
<PAGE>30
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.
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. Mr. Burke assumed his duties on May 1, 1998.
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
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
<PAGE>31
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>
<CAPTION>
Percentage of Total
Options/SARs Granted to
Name Options/SARs Granted Employees in Fiscal Year 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 $2.59 Nov. 18, 2002
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
The following table sets forth the value of exercised and unexercised options
and SARs held by the named executive at fiscal year end.
<TABLE>
<CAPTION>
Value of Unexercised in-
Options/SARs at Fiscal the Money Options/SARs
Year-End Exercisable at Fiscal Year-End
Shares Acquired on (E)/ Subject to Exercisable (E)/
Name Exercise Value Realized ($) Repurchase (U) to Repurchase (U)
<S> <C> <C> <C> <C>
Mark C. Koz None None None None
James Anderson None None None None
</TABLE>
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
<PAGE>32
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 May 1, 1998, the aggregate amount of principal and accrued interest
outstanding on the Credit Facility was $4,491,621 million with an average
conversion price of $2.23 per share. Through the merger with Sierra Vista and
a subsequent transaction, Micro Technology received 2,500,000 shares of Common
Stock which, at the time of the merger, would have represented approximately a
12% 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. The acquisition of Intelligent
Instruments Corporation may take the form of the acquisition of substantially
all of its assets. The actual structure will be based on negotiations between
the parties. 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.
In determining the value of Intelligent Instruments Corporation, the board
considered the patents owned and pending which are held by Intelligent
Instruments the potential markets in which products may be developed using
Intelligent Instruments Corporation's patents and that the Common Stock to be
issued will be restricted. The proposed purchase price was negotiated between
Mr. Koz and Mr. Anderson on behalf of the Company. Subject to entering into a
definitive agreement, the acquisition was approved by the Board of Directors,
with Mr. Koz abstaining from voting.
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.
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
<PAGE>33
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 reserved
its advances. Digital Hollywood, Mark Koz, the Company and Decorah Company are
currently in litigation. See "Legal Proceedings."
CONSULTANT CONTRACT WITH MR. SPRAGUE. Effective May 1, 1998, the
Company entered into a one year consulting services contract with Peter J.
Sprague, a director of the Company. Mr. Sprague will assist the Company in
the development and marketing of its video compression and processing
technology, to assist in the development of the Company's business
operations, and to assist in the implementation of production methods for
existing and new business. For his services, Mr. Sprague shall received
$10,000 per month and options to acquire 100,000 shares of Common stock at
$2.00 per share.
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. The Company has no
formal policy regarding entering into future transactions with an affiliate.
However, in general, any transaction involving an affiliate will be approved by
the disinterested directors with the interested director abstaining from
voting.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 1, 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 May 1, 1998, there were 20,561,897 shares of Common Stock
outstanding.
<PAGE>34
COMMON STOCK
Percentage
Number of Beneficially
NAME AND ADDRESS SHARES{(1)} OWNED
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
Thomas E. Burke 333,334{(4)} 1.6%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Rand E. Shrader 402,000{(5)} 1.9%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
Stanton Creasey 200,000{(6)} *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
John Champlin, MD 100,000{(7)} *
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
<PAGE>35
Peter J. Sprague 100,000{(8)} *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
All officers and directors as a 6,598,334{(9)} 30.39%
group (10 persons)
*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.
(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 333,334 shares of the Company's Common Stock
expiring on March 23, 2008.
(5) Includes options to purchase 400,000 shares of the Company's Common Stock
at $2.75 per share, expiring May 27, 2002.
(6) Includes options to purchase 200,000 shares of the Company's Common Stock
at $1.75 per share, exercisable within sixty days.
(7) Includes options to purchase 100,000 shares of the Company's Common Stock
at $3.375 per share, exercisable within sixty days.
(8) Includes warrants to purchase 100,000 shares of the Company's Common
Stock expiring on May 1, 2005.
(9) Includes 1,148,334 options and warrants to acquire shares of Common Stock
and 1,000,000 shares subject to a voting agreement discussed in footnotes
(2) through (8).
<PAGE>36
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock by the Selling Stockholders as of May 1,
1998, and the number of shares of Common Stock covered by this Prospectus.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF Number of Number of Number of
STOCKHOLDER shares of Shares of Shares of
Common Stock Common STOCK Common Stock
Beneficially OFFERED Beneficially
OWNED PRIOR TO HEREBY{(1)} Owned FOLLOWING
THE OFFERING THE OFFERING
<S> <C> <C> <C> <C> <C>
# OF SHARES % OF CLASS # OF SHARES % OF CLASS
JNC Opportunity Fund Ltd. 2,924,072{(2)} 12.45% 5,611,904 21.44% 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
Atlanta, GA 30326 250,000{(3)} 1.20% 250,000 1.20% 0{(6)}
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 May 1, 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 May 1, 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 May 1,
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 (both long and short to the extent permitted under
the federal securities laws), 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 May 1, 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)
from April 22, 1998 through May 21, 1998, 82.5% 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)
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) 66% of the aggregate principal amount of the
Debentures may be converted from April 22, 1998, through May 21,
1998, and (ii) 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. Interest accrues on the Note at the rate of 10% per
annum. 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 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-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................F-10
<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 $2,052,305, 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.
/s/HEIN + ASSOCIATES LLP
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
GOODWILL, net of accumulated amortization of $242,323 848,129
DEPOSITS 89,879
-------------
TOTAL ASSETS $ 7,054,685
=============
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 16,219,653
Deficit accumulated during development stage (19,261,098)
-------------
Total stockholders' (deficit) (2,052,305)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,054,685
=============
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>
<S> <C> <C> <C>
MARCH 3, 1993
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 5,527,816 5,441,088 10,968,904
-------------- -------------- --------------
Total costs and expenses 10,004,769 8,152,116 18,156,885
-------------- -------------- --------------
OPERATING LOSS (9,855,769) (8,152,116) (18,007,885)
-------------- --------------- --------------
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 (11,062,103) (8,192,595) (19,254,698)
INCOME TAX EXPENSE 3,200 800 6,400
-------------- ------------- --------------
NET LOSS $ (11,065,303) $ (8,193,395) $ (19,261,098)
============== ============= ===============
BASIC AND DILUTED NET LOSS PER SHARE $ (.62) $ (.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>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
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 5,100,000 $ 5,100 $ - $ 3,400 $ - $ 8,500
per share (March 1993)
Net loss - - - - (800) (800)
----------- ----------- ----------- ------------ ------------ ---------
BALANCES, December 31, 5,100,000 5,100 - 3,400 (800) 7,700
1993
Net loss - - - - (800) (800)
----------- ----------- ----------- ------------ ------------ ---------
BALANCES, December 31, 5,100,000 5,100 - 3,400 (1,600) 6,900
1994
Net loss - - - - (800) (800)
----------- ----------- ----------- ------------ ------------ ----------
BALANCES, December 31, 5,100,000 5,100 - 3,400 (2,400) 6,100
1995
Issuance of common stock
at $0.50 per share to 900,000 900 - 449,100 - 450,000
directors for services
performed (March 1996)
Acquisition of Jettson
Realty Development, Inc. 561,069 561 - 168,184 - 168,745
at $0.30 per share (June
1996)
Sale of common stock,
net of expenses at 4,620,015 4,620 - 715,380 - 720,000
$0.16 per share (July
1996)
Issuance of common stock
at $0.50 per share to 500,000 500 - 249,500 - 250,000
employees for services
performed (July 1996)
(CONTINUED)
<PAGE>F-6
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS CAPITAL STAGE (DEFICIT)
Issuance of common
stock at $1.36 per 250,000 250 - 388,960 - 389,210
share for consulting
services performed
(July 1996)
Sale of common stock
at $5.00 per share, 280,000 280 - 1,399,720 - 1,400,000
net of expenses
(October 1996)
Compensation recognized - - - 2,493,873 - 2,493,873
upon issuance of stock
options
Contribution of Product - - - 1,275,000 - 1,275,000
License
Net loss - - - - (8,193,395) (8,193,395)
------------ ----------- ----------- ------------- ------------- -------------
BALANCES, December 31, 12,211,084 12,211 - 7,143,117 (8,195,795) (1,040,467)
1996
Issuance of common
stock in exchange 100,000 100 - 499,900 - 500,000
for technology at $5.00
per share (January 1997)
Sale of common stock,
net of expenses at 229,310 229 - 664,771 - 665,000
$2.90 per share
(February 1997)
Acquisition of Sierra 8,514,500 8,515 - 4,248,735 - 4,257,250
Vista at $0.50 per
share (May 1997)
Issuance of common
stock at $2.43 per 7,003 7 - 16,976 - 16,983
share for legal
services rendered
(June 1997)
(CONTINUED)
<PAGE>F-7
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT)
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT WARRANTS Capital STAGE (DEFICIT)
Shares returned per (500,000) (500) - 500 - -
settlement agreement
at par value
Warrants issued with
sale of convertible - - 968,578 - - 968,578
debentures (December 1997)
Allocation of proceeds
from notes payable and - - - 2,086,988 - 2,086,988
and long-term liabilities
due to beneficial conversion
features
Compensation recognized - - - 1,558,666 - 1,558,666
upon issuance of stock
options
Net loss - - - - (11,065,303) (11,065,303)
----------- ---------- ---------- ----------- ------------- ------------
BALANCES, December 31, 20,561,897 $ 20,562 $ 968,578 $16,219,653 $(19,261,098) $(2,052,305)
1997 =========== ========== ========== =========== ============= ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FIANNCIAL STATEMENTS.
<PAGE>F-8
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FOR THE YEARS MARCH 3, 1998
ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1997 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,065,303) $ (8,193,395) $ (19,261,098)
--------------- ---------------- ----------------
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 415,979 21,175 437,154
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
issuance of stock and stock
options 1,575,649 3,583,083 5,158,732
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 291,680 879,100 1,173,180
------------ ------------ -------------
Net adjustments 3,958,985 6,223,201 10,176,086
------------ ------------ -------------
Net cash used in operating
activities (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
------------ ----------- -------------
(CONTINUED)
<PAGE>F-9
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS MARCH 3, 1993
ENDED (INCEPTION) TO
December 31, DECEMBER 31,
1997 1996 1997
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 $ 1,340,452 $ - $ 1,340,452
============ ========== =============
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-10
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. The fair market value per share of the common stock issued
in the transaction was $0.50. The resulting purchase price was
$4,257,250 with $1,090,452 being allocated to goodwill. 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 presentation.
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-11
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.
GOODWILL - Goodwill, representing the excess of the cost over the net
tangible and identifiable intangible assets of acquired business, is
stated at cost and is amortized on a straight-line basis over the
future periods to be benefited, estimated to be three years. On an
annual basis the Company reviews the recoverability of goodwill based
primarily upon an analysis of undiscounted cash flows from the
acquired business. Amortization expense was $242,323 for the year
ended December 31, 1997.
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.
<PAGE>F-12
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
amortization of goodwill 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.
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
<PAGE>F-13
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
$11,065,303 for the year ended December 31, 1997, and its negative
working capital of $1,454,500 and its stockholder's deficit of
$2,052,305 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
<PAGE>F-14
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
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
===========
<PAGE>F-15
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
===========
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;
<PAGE>F-16
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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;
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.)
<PAGE>F-17
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
litigtion (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
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. 250,000 shares of the common stock and 700,000 of the 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
<PAGE>F-18
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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-19
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-20
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-21
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 $ (12,594,406) $ (8,229,908)
============== =============
Net loss per common share $ (.70) $ (.98)
============== =============
<PAGE>F-22
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-
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.
<PAGE>F-23
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
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.
<PAGE>F-24
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 restrive legends on the
stock currently owned. The Company has accrued $75,000 for unpaid wages as
of December 31, 1997. Management believes, based on current information,
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 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
<PAGE>F-25
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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-26
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-27
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%)
Nondeductible license costs - 5.3 2.3
Nondeductible goodwill .7 - .4
Effect of valuation allowance 33.3 28.7 31.3
------- ------- -------
-% -% -%
======= ======= =======
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-28
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) (757,852) - (11,062,102)
Depreciation and
amortization 169,259 246,720 - 415,979
Capital expenditures 715,151 53,030 - 768,181
Identifiable assets 8,484,342 3,533,218 (4,962,875) 7,054,685
</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-29
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 upon 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.
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.
<PAGE>II-3
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. Manhattan West
received an option to acquire one share of Common Stock for every $2.00 raised.
The exercise price was $3.00 per option. The transaction was exempt from
registration upon reliance of Section 4(2) and Regulation D of the Securities
Act.
In July 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{(3)}
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)}
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{(3)}
10.18 Accord and satisfaction and Release Agreement between the Company
and Technical Systems Associates, Inc., dated January 16, 1998{(3)}
10.19 Employment Agreement with Thomas E. Burke, dated March 23, 1998{(3)}
10.20 1996 Incentive and Nonstatutory Stock Option Plan (originally filed
as exhibit 3.1){(1)}
<PAGE>II-4
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{(3)}
21.1 Subsidiaries of the small business issuer{(3)}
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{(3)}
27.1 Financial Data Schedule{(3)}
99.1 Consent of Thomas E. Burke{(3)}
99.2 Consent of Peter J. Sprague{(3)}
(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.
(3) Previously filed with the Company's Registration Statement on
amendment no. 1 to Form SB-2 on April 16, 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.
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
<PAGE>II-5
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.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
May 11, 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. 2 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 May 6, 1998.
InnovaCom, Inc.
THOMAS E. BURKE
By: Thomas E. Burke, President,
Chief Executive Officer
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.
May 6, 1998 THOMAS E. BURKE
Thomas E. Burke, President, Director
(Principal Executive Officer)
May 6, 1998 MARK C. KOZ
Mark C. Koz, Chairman of the Board of Directors
May 6, 1998 STANTON R. CREASEY
Stanton R. Creasey, Chief Financial Officer
(Principal Financial and Accounting Officer)
May 6, 1998 TONY LOW
Tony Low, Director
May 6, 1998 F. JAMES ANDERSON
F. James Anderson, Director
May 6, 1998 ROBERT SIBTHORPE
Robert Sibthorpe, Director
May 6, 1998 JOHN CHAMPLIN
John Champlin, Director
May , 1998
Peter J. Sprague, Director
