AS FILED WITH THE COMMISSION ON FEBRUARY 9, 1998 File No. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
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.)
2855 Kifer Road, Suite 100, Santa Clara, California 95051; (408) 727-2447
(Address and telephone number of principal executive offices)
2855 Kifer Road, Suite 100, Santa Clara, California 95051; (408) 727-2447
(Address of principal place of business or intended principal place of
business)
Mark Koz, President & Chief Executive Officer
InnovaCom, Inc.
2855 Kifer Road, Suite 100
Santa Clara, California 95051
(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 Proposed maximum
class of maximum aggregate Amount of
securities to be Amount to be offering price{(4)} offering registration
registered registered{(1)} price fee
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 ("Common Stock")
Underlying 7%
Convertible Debentures 5,111,904 (2) 2.50 $12,779,760 $3,872.66
Common Stock to be issued upon
the exercise of warrants 750,000 (3) 2.50 1,875,000 568.18
Total 5,861,904 2.50 $14,654,160 $4,440.84*
</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 $3.37 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 (i) 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. Further, the Company hereby
registers such number of shares of Common Stock, as is necessary, into
which the Debentures may be converted. Pursuant to the terms of the private
placement, 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) 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."
*Of this amount, $4,260.60 was paid by wire transfer on February 5, 1998, and
$180.24 was paid by wire transfer on February 6, 1998.
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>iii
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 Front Cover
Prospectus
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 Limitation of Liability and
Securities Act Liabilities Indemnification Matters
15. Organization Within Last Five Certain Transactions
Years
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and
Analysis or Plan of Operation Management's Discussion and
Analysis
18. Description of Property Facilities
19. Certain Relationships and Certain Transactions
Related Transactions
20. Market for Common Equity and
Related Stockholder Matters Prospectus Summary
21. Executive Compensation Management
22. Financial Statements Consolidated Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure Not Applicable
<PAGE>1
Subject to Completion, dated February 9, 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 above are collectively referred to as the "Warrants"), and
(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"). The
Debentures are convertible into shares of the Company's Common Stock at a
conversion price equal to the lesser of $3.37 per share or, (i) prior to April
22, 1998, 85% of the average closing bid price of a share of the Company's
Common Stock for the five trading days prior to conversion (the "Conversion
Average Price"), or (ii) from April 22, 1998 through May 21, 1998, 82.5% of the
Conversion Average Price, or (iii) from May 22, 1998 to December 22, 2002,
80% of the Conversion Average Price. The Debentures have a term of five (5)
years, expiring December 22, 2002. The Debentures may be convereted into
shares of Common Stock at the option of the holder in whole or in part as
follows: (i) 33% of the aggregate principal amount of the Debentures may
be converted prior to the earlier of April 21, 1998, or the effectiveness of
this registration statement, (ii) 66% of the aggregate principal amount of
the Debentures may be converted from April 22, 1998 through May 21, 1998, and
(iii) the balance of the aggregate principal amount of the Debentures may
be converted thereafter. 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. JNC and Cardinal 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 underlying
the Debentures, Warrants and Additional Warrant (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 February 5, 1998, the average
high and low price of a share of the Company's Common Stock was $2.50 as
reported on the OTC Bulletin Board. The Debentures, Warrants and Additional
Warrant 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 February 9, 1998.
<PAGE>2
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 a
development stage technology company based in Santa Clara, California. Its
principal product focus is video compression technology (single chip, multiple
chip, board and integrated solution levels). The Company has several key
strategic alliances in place including those with DEC, Litton-Fibercom, Sun
Microsystems, Mitsubishi Chemical, ESS Technology, Telia and others.
The Company believes that it has an advantage in the globally accepted
video compression format, referred to as "MPEG-2", which was instituted less
than two years ago by the Moving Picture Experts Group ("MPEG") and where the
market is now heading. The Company is currently shipping video compression
software with boards using the 3-chip compression technology from IBM on an
original equipment manufacturing basis. These products are scheduled to be
replaced with the Company's own single chip solution in the second quarter of
1998, and with future chip generations thereafter. The Company's single-chip
design has been completed and will be tested over the next four months, and
will then go into volume production.
InnovaCom was originally incorporated under the laws of Florida in 1993 by
its founder, Mark Koz, as a research and development company
("InnovaCom-Florida"). From 1993 to 1996, InnovaCom-Florida was essentially
dormant. Mr. Koz also founded FutureTel, Inc. in Santa Clara, California
("FutureTel"). He was CEO, chief technical officer and a director of FutureTel
from 1993 to 1995. After Mr. Koz left FutureTel, where he was in charge of the
development of the "gecko" video compression chip, he used InnovaCom-Florida to
license the "gecko" technology and to continue development of the chip.
In July 1996, InnovaCom-Florida acquired Jettson Realty Development
Corporation, a Nevada corporation ("Jettson"). The acquisition took the form
of a share for share exchange, where all of the shares of InnovaCom-Florida
were exchanged for a controlling block of shares of Jettson, a "shell" company
whose shares were trading on the OTC Bulletin Board. Thereafter, the name of
Jettson was changed to InnovaCom. InnovaCom's common stock currently trades on
the OTC Bulletin Board under the symbol "MPEG."
In May 1997, InnovaCom acquired Sierra Vista Entertainment, Inc., a Nevada
corporation ("Sierra Vista") in a share exchange by issuing 8,514,500 shares of
its common stock. As a result of the acquisition of Sierra Vista, InnovaCom
gained access to approximately $3 million of Sierra Vista's working capital and
a credit facility of up to $5 million in convertible debt from one of Sierra
Vista's original shareholders. The principal amount outstanding on the credit
facility as of October 31, 1997 was approximately $2,835,000 with an average
conversion price of $2.66 per share.
In January 1998, InnovaCom entered into a binding letter of intent to
acquire the business and intellectual property of Innovative Technical
Solutions, Inc. of Concord, Massachusetts ("ITS"). Subject to final
documentation, InnovaCom will acquire ITS for a total consideration of
7,700,000 shares of the Company's Common Stock and $2,400,000 in cash.
The Company has been in the development stage from its inception, and has
concentrated its marketing to date on developing future major customer and
partner relationships for joint ventures and sales of technologies, chips,
<PAGE>3
boards and system designs. Several patents have been issued to the Company and,
recently, InnovaCom agreed to acquire substantially all of the intellectual
property of Intelligent Instruments Corporation, an intellectual property
holding company, in exchange for two million shares of InnovaCom common stock.
Intelligent Instruments Corporation, whose principal shareholder is Mark Koz,
the President of InnovaCom, 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 InnovaCom.
Acquisition of these patent rights by the Company shall be finalized pending
the completion and execution of final documentation.
InnovaCom's principal engineering and administrative office is located at
2855 Kifer Road, Suite 100, Santa Clara, California 95051 (408-727-2447).
Unless otherwise indicated, reference to InnovaCom in this registration
statement includes its wholly owned subsidiary Sierra Vista.
SUMMARY OF RISK FACTORS
Investment in InnovaCom's Common Stock involves certain risks which should
be carefully considered, including but not limited to quarterly and yearly
fluctuations in results, the timely availability of new products, the impact of
competitive products and pricing, lack of profits, dependence on key personnel,
competition, and the need for additional capital. 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 payment of interest thereon, and
exercise of the Warrants and Additional Warrants. The shares of Common Stock
issuable upon conversion of the Debentures, and interest thereon, and exercise
of the Warrants and Additional Warrants 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."
<PAGE>4
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."
<TABLE>
<CAPTION>
Years Ended Nine Months
DECEMBER 31 SEPTEMBER 30
<S> <C> <C> <C> <C>
1995 1996 1996 1997
Statement of Operations Data:
Revenues $ 0 $ 0 $ 0 $ 149,000
Income (Loss) from ( 300) (8,183,606) (6,265,972) (7,031,667)
operations
Income (Loss) before Income ( 300) (8,192,595) (6,271,052) (7,606,768)
Taxes
Provision (Benefit) for 800 800 800 1,600
Income Taxes
Net Income (Loss) (1,100) (8,193,395) (6,271,852) (7,608,368)
Net Income (Loss) per share (0.00) (0.98) (0.88) (0.46)
Shares used in per share 5,122,869 8,361,597 7,100,597 16,455,744
calculation
</TABLE>
As at
SEPTEMBER 30, 1997
ACTUAL AS ADJUSTED{(1)}
Balance Sheet Data:
Working Capital (deficit) (3,617,119) 1,382,881
Total Assets 1,205,876 6,205,876
Long-term debt - 5,000,000
Stockholders' equity (deficit) (2,653,394) (2,653,394)
(1) As adjusted to give effect to the Company's issuance of $5 million in 7%
Convertible Debentures, which convertible shares have been registered for
resale herein.
<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 in 1993, InnovaCom has
generated nominal revenues. Its primary activities to date have been the
research and development of MPEG-2 products. InnovaCom's success is
dependent upon the development and marketing of its existing and 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 sales and
marketing. The failure of InnovaCom to meet any of these conditions could
have a materially adverse effect upon InnovaCom's operations. No assurance
can be given that InnovaCom can or will ever be profitable.
OPERATING LOSSES. Since its inception, InnovaCom has incurred losses. For
the year ended December 31, 1996, InnovaCom incurred a net loss of
$8,193,395 and had an accumulated deficit of $8,196,220. InnovaCom expects
to continue to incur losses and to continue to accumulate a deficit through
the year ending December 31, 1997, and the first half of 1998, until
InnovaCom develops and markets its DVImpact chip. There can be no
assurance that InnovaCom will achieve profitability.
QUALIFIED OPINION. The report of InnovaCom's independent accountants
contains an explanatory paragraph regarding InnovaCom's ability to continue
as a going concern. Among the factors cited by the accountants as raising
substantial doubt as to InnovaCom's ability to continue as a going concern
are the facts that InnovaCom has no established source of operating income
and that InnovaCom has recurring losses from operations.
NEED FOR ADDITIONAL CAPITAL. Development of new products requires
substantial capital. InnovaCom'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 InnovaCom's ability to successfully market its products. Because
InnovaCom currently does not have significant revenues, and will not have
revenues until it begins to market its products, InnovaCom will be required
to raise additional capital through equity or debt financings for its
operations. Any equity financings could result in dilution to InnovaCom's
then-existing stockholders. Sources of debt financing will result in
interest expense. If InnovaCom is unable to raise additional funds,
InnovaCom may be required to reduce its operations.
COMPETITION. The digital video and audio industry is marked by numerous
small as well as large competitors. Some of InnovaCom's competitors
include C-Cube, Inc., IBM and LSI Logic, Inc. Additionally, InnovaCom
competes in an industry segment in which numerous competitors have
substantially greater resources than InnovaCom. There can be no assurance
that existing or potential competitors of InnovaCom will not develop
products equal to or better than those developed by InnovaCom.
DEPENDENCE ON INDEPENDENT MANUFACTURERS/SUBCONTRACTORS AND SUPPLIERS OF
COMPONENTS. InnovaCom does not maintain its own manufacturing or
production facilities, and does not intend to do so in the foreseeable
<PAGE>6
future. InnovaCom anticipates that its products will be manufactured and
its components will be supplied by independent companies. Many of these
independent companies may manufacture and supply products for InnovaCom's
existing and potential competitors. As is customary in the manufacturing
industry, InnovaCom does not have any licensing or other supply agreements
with its manufacturers and suppliers. Therefore, these suppliers could
terminate their relationship with InnovaCom at any time. In the event
InnovaCom were to have difficulties with its present manufacturers and
suppliers, InnovaCom could experience delays in supplying products to its
customers.
UNCERTAINTY OF MARKET ACCEPTANCE. To date, InnovaCom has had minimal sales
of its products. InnovaCom'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 assurance can be given that the
technology industry will accept InnovaCom's existing and proposed products.
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 InnovaCom's products obsolete or less
competitive. InnovaCom will be required to devote substantial efforts and
financial resources to enhance its existing products and to develop new
products. There can be no assurance that other products will not be
developed which would render InnovaCom's products obsolete.
DEPENDENCE ON MPEG-2 ACCEPTANCE AND CONTINUATION AS STANDARD. InnovaCom
has focused much of its resources on the MPEG-2 technology and the success
of that standard will impact InnovaCom's success. There can be no
assurance that the MPEG-2 standard will remain in favor in the industry.
Furthermore, should the standard be modified or replaced, there can be no
assurance that InnovaCom's research and development work will successfully
transfer to an alternative standard.
RELIANCE ON OEM CUSTOMERS AND RETAIL DISTRIBUTORS. InnovaCom'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 sell InnovaCom's products in the marketplace. There
can be no assurance that InnovaCom 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. InnovaCom has a worldwide license to
manufacture, use, sell and otherwise deal with the video compression
technology which is the subject of docket numbers 2056 and 2057 for patent
applications. The license was exclusive to InnovaCom for the one year
period from March 1996 through March 1997, but is now nonexclusive. The
Company is presently negotiating to extend the term of the exclusive
license. InnovaCom is also receiving the patent for a proprietary set-top
box design and a pending patent for a proprietary server design from
Intelligent Instruments Corporation. InnovaCom holds trademarks on
InnovaCom's name and the names of its products. InnovaCom is presently
applying for copyright protection on its logo and software codes.
However, there can be no assurance that another company will not
attempt to infringe upon the licenses, patents, patent applications,
trademarks, or copyrights on InnovaCom's products and technology. Such
infringement could result in protracted and costly litigation and sales
losses. Further, there can be no assurance that others will not
independently develop products or technology that are equivalent or
superior to those of InnovaCom.
<PAGE>7
DEPENDENCE ON KEY PERSONNEL. InnovaCom'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 InnovaCom's key personnel, particularly Mark Koz, the Company's
President and Chief Executive Officer, could have a material adverse effect
on InnovaCom's business, financial condition and operating results.
InnovaCom's success will also depend upon its ability to hire and retain
additional qualified personnel. There can be no assurance that InnovaCom
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 accrued interest
thereon. The Debentures convert at the lower of $3.37 per share or, (i)
prior to April 22, 1998, 85% of the average closing bid price of a share of
Common Stock for the five trading days prior to conversion (the
"Conversion Average Price"), or (ii) from April 22, 1998 through May 21,
1998, 82.5% of the Conversion Average Price, or (iii) after May 21,
1998 to December 22, 2002, 80% of the Conversion Average Price. The
Debentures may be converted into shares of Common Stock at the option of the
holder on 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 convered 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.
The shares of Common Stock issuable upon conversion of the Debentures
(including accrued interest thereon) and upon exercise of the Warrants and
Additional Warrants 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.
Pursuant to the terms of the private placement, 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 and Additional Warrants.
<PAGE>8
USE OF PROCEEDS
The Company will not receive any proceeds from the resale of the Shares
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
InnovaCom's Common Stock began trading on the OTC Bulletin Board under
the symbol "MPEG" on July 15, 1996. The high and low prices of InnovaCom's
Common Stock on a quarterly basis is as follows:
QUARTER ENDED HIGH LOW
September 30, 1996 $9.25 $ .96
December 31, 1996 $8.12 $4.25
March 31, 1997 $5.87 $1.65
June 30, 1997 $5.00 $2.50
September 30, 1997 $4.06 $2.16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data presented below
for the years ended December 31, 1995 and 1996, 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 statements of operations data for
the nine months ended September 30, 1996 and 1997 and consolidated balance
sheet data as of September 30, 1997 are derived from the unaudited
consolidated financial statements of the Company. In the opinion of the
Company, such unaudited consolidated financial statements include all
necessary adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of results for such periods. 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.
<PAGE>9
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
NINE MONTHS ENDED
SEPTEMBER 30
<S> <C> <C> <C> <C>
1995 1996 1996 1997
Statement of Operations Data:
Revenues: $ 0 $ 0 $ 0 $149,000
Cost and expenses:
Cost of Goods Sold 0 0 0 52,538
Research and development 0 2,711,028 1,961,914 2,987,715
Selling, general and 300 5,472,578 4,304,058 4,140,414
administrative
Total costs and expenses 300 8,183,606 6,265,972 7,180,667
(Loss) from operations (300) (8,183,606) (6,265,972) (7,031,667)
Interest expense, net 0 (8,989) (5,080) (575,101)
(Loss) before income (300) (8,192,595) (6,271,052) (7,606,768)
taxes
Income tax expense 800 800 800 1,600
Net (loss) (1,100) (8,193,395) (6,271,852) (7,608,368)
Net (loss) per share: (0.00) (0.98) (0.88) (0.46)
Shares used in per share 5,122,869 8,361,597 7,100,597 16,455,744
calculations
</TABLE>
AS OF SEPTEMBER 30, 1997
Balance Sheet Data:
Working capital (deficit) (3,617,119)
Total assets 1,205,872
Long-term debt -
Stockholders' equity (deficit) (2,653,394)
<PAGE>10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discusses 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 also 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.
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 document.
OVERVIEW
The Company is a development stage technology company with a principal
focus in video compression technology compliant with MPEG-2 standards. The
Company is currently shipping development systems to targeted potential
customers and expects to begin shipment of commercial volume products in
the second quarter of 1998. 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 does not believe that its business is seasonal.
PLAN OF OPERATIONS
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 DV2000 MPEG-2 encoder board, and a number of smaller
products are at advanced stages of development and are expected to begin
significant volume shipment in the near future. Management anticipates
that the Company will become profitable in 1998, but that continuing
operating losses early in 1998 combined with the requirements of increased
inventories and accounts receivable will require additional funding in
1998. No assurances can be given that 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.
In concert with the transition from development to production,
management anticipates increases in staffing in production, marketing,
sales and administration. Management has no plans for significant
purchases of plant or equipment, but the Company has entered into an
agreement to lease a larger facility.
The Company does not believe that inflation will have an impact on its
results of operations.
<PAGE>11
Management of Sierra Vista anticipates entering into production of one
feature-length film in the next twelve months, but does not anticipate
significant revenues in this period. Production of this film is expected
to be accomplished principally with outside contractors and temporary
employees. No significant increases in permanent employees and no
significant purchases of plant and equipment are anticipated.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
REVENUES
Revenues for the nine months ended September 30, 1997 were $149,000 as
compared to zero in the nine months ended September 30, 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 level
encoding products. The Company's products were at an earlier state of
development in 1996, and accordingly there was no revenue.
GROSS MARGINS
Gross margins were approximately $96,000, or 64% of revenues, for the
nine months ended September 30, 1997, as compared to zero for the nine
months ended September 30, 1996. The gross margin percentage in 1997 is
not necessarily representative of the margins that the Company expects on
its commercial products when they begin shipment.
RESEARCH AND DEVELOPMENT
Research and development expense in the nine months ended September
30, 1997 totaled approximately $2,988,000. This was an increase of
approximately $1,026,000, or 52%, from the research and development expense
for the same period in 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), partially offset by a reduction in
the amount of purchased research and development expenses in 1997 relative
to 1996.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were approximately
$4,140,000 in the nine months ended September 30, 1997 which was a decrease
of approximately $164,000, or 4%, from the same period in 1996. The total
in 1996 included approximately $3,396,000 in expense recognized in
conjunction with the issuance of stock and stock options at prices below
fair market value to various consultants for services rendered. This
expense was not repeated in 1997. Except for this $3,396,000 item,
selling, general and administrative expense in the nine months ended
September 30, 1997 would have been approximately $3,232,000 higher than in
the same period in 1996, an increase of 353%. This increase is related to
a substantial increase in employees, an increase in the period of time they
were present in 1997 relative to 1996 (activity in the first half of 1996
was low because the Company did not receive significant funding until July
of 1996), expense related to Sierra Vista which was present in 1997 but not
in 1996, and significant increases in consulting, legal, auditing and
travel expenses.
INTEREST INCOME
Interest income increased from zero in the first nine months of 1996
to approximately $6,000 in the same period in 1997. This increase reflects
the return from the temporary investment of surplus cash.
<PAGE>12
INTEREST EXPENSE
Interest expense increased from approximately $5,000 to approximately
$581,000 from the nine months ended September 30, 1996 , as compared to the
same period in 1997. This increase resulted from a credit facility created
in 1997 against which the Company had drawn approximately $2,129,000 as of
September 30, 1997. The outstanding balance of this note may be converted
into common stock of the Company at a discount to the market price of the
stock. Accordingly, the value of this discount, approximately $541,000 at
September 30, 1997, is recorded as interest expense in the nine month
period then ended.
INCOME TAX EXPENSE
Income tax expense for the nine months ended September 30, 1997 was
approximately $2,000 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.
YEAR ENDED DECEMBER 31, 1996
REVENUES
The Company had no revenues in 1996, and management does not expect
significant revenues in 1997. Revenues will become significant only at
such time as the Company's development of significant products is
completed.
RESEARCH AND DEVELOPMENT
Research and development expense for 1996 was approximately
$2,711,000. This included a charge of $1,275,000 for purchased research
and development. The balance of the expense was principally for salaries
and other employee-related expenses, supplies and software or tools, and
outside consulting expenses. Management anticipates that research and
development expenses will increase in the year ended December 31, 1997 from
the levels seen in 1996 due in large part to increases in staffing.
Expenses in 1997 will include the amount of any research and development
purchased which might be significantly different than the amount reported
in 1996.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses in 1996 were
approximately $5,473,000. This included approximately $3,411,000 in
expense recognized in conjunction with the issuance of stock and stock
options at prices below fair market value to various consultants for
services rendered. The largest part of the remaining expense was for
salaries, related employee expenses and director fees. Management expects
that selling, general and administrative expenses will be lower in 1997
than in 1996 as substantial increases in staffing and related spending, and
most other expense line items will be more than offset by the fact that the
expense recognized in 1996 for issuance of stock and stock options for
services rendered will not repeat.
INTEREST INCOME
Interest income in 1996 of approximately $2,000 was earned on the
temporary investment of surplus cash. Management anticipates that
similarly small amounts will be earned in 1997.
<PAGE>
INTEREST EXPENSE
The Company recorded interest expense in the year ended December 31,
1996 of approximately $11,000. The level of interest expense in 1997 will
depend on the amount of debt financing incurred by the Company, the periods
over which this debt is outstanding and the terms of the indebtedness.
Interest expense could increase significantly in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997 and December 31, 1996, the Company had
negative working capital of approximately $3,617,000 and $1,244,000,
respectively. For the year ended December 31, 1996 and for the nine months
ended September 30, 1997, the Company has had no significant positive cash
flow from operations and has relied on the placement of capital stock and
debt to fund its development stage losses and its investments in capital
assets.
As of September 30, 1997, the Company's debt consisted of advances
against a $5,000,000 credit facility granted by a shareholder with a
principal balance of approximately $2,125,000 and accrued interest of
approximately $40,000. This note matures in 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. The Company has been advised by the lender that the
lender does intend to convert this debt into common stock.
The Company does not anticipate any material capital expenditures in
the next twelve months.
BUSINESS
CORPORATE INFORMATION
InnovaCom, Inc. ("InnovaCom" or the "Company") was originally
incorporated in Florida in 1993. The Company was incorporated as a
research and development company but was essentially inactive from 1993 to
1996. In 1996, the Company's founder and current President, Mark Koz,
licensed the "gecko" video compression chip and technology through the
Company. In July, 1996, the Company acquired Jettson in a share for share
exchange whereby the Company exchanged all of its shares for a controlling
block of shares of Jettson, whose shares were publicly traded on the OTC
Bulletin Board. Thereafter, the name of Jettson was changed to "InnovaCom,
Inc."
In May, 1997, the Company acquired Sierra Vista in a share for share
exchange. As a result of the acquisition of Sierra Vista, the Company
gained access to approximately $3 million of Sierra Vista's working capital
and credit facility.
The Company's primary business focus is the development of video
compression technology for a variety of applications. The Company is
currently shipping video compression software and circuit boards utilizing
3-chip compression technology on an original equipment manufacturing basis.
However, the Company is developing a single chip solution to replace the 3-
chip technology and intends to begin production in the second quarter of
1998.
<PAGE>14
DIGITAL VIDEO INDUSTRY OVERVIEW
Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats. Digital video technology, including
InnovaCom's technology, provides several benefits over analog video
technology. Unlike analog video, digital video can be compressed,
providing significant storage and transmission efficiencies, and can be
transmitted and reproduced without perceptible image degradation. In the
1980s, the benefits of digital format led the consumer audio industry to
convert from analog long playing records ("LPs") to digital compact discs
("CDs"). In the 1990s, the ongoing evolution from analog to digital is
transforming the way in which video data is produced, stored, transmitted
and viewed.
In 1988, a group of industry experts formed an international standards
organization ("ISO") known as the Moving Picture Experts Group ("MPEG").
The group's charter was to develop a worldwide industry standard for the
digital compression of video data of all forms of motion pictures,
including theatrical films. In 1991, the MPEG committee ratified a
standard known as MPEG-1, for digital video for personal computers with
quality equivalent to video tape, thereby establishing a technical standard
for "compressing full motion video." MPEG uses the discrete cosine
transform, or DCT, to remove spatial redundancies from single frames of
video data.
Video, however, introduces a second type of redundancy: temporal.
Temporal redundancies are the elements of several video frames that are
similar or identical. Because video represents movement, it is possible to
detect and estimate the movement of similar picture elements between video
frames, a process called motion estimation. MPEG motion estimation uses
the content of previous and future frames to predict the content of the
current frame. To perform motion estimation, a frame is divided into small
blocks of pixels, and each block is compared to a range of blocks on a
reference frame. When a match is found, the estimated block can be
replaced by a motion vector and a difference value that compensates for the
lack of a perfect match.
The MPEG committee realized that a higher quality digital video
standard was needed to broadcast quality video. Thus, the MPEG committee
ratified the Second Generation Standard of the Moving Picture Experts Group
for video and audio compression ("MPEG-2"), which was made a permanent
standard in 1994. The MPEG-2 video compression standard defines the
standard applicable to broadcast quality video, permits effective storage
and transmission of digital video and produces universal access to the
fundamental benefit of digital video.
MPEG-2 enables playback of broadcast quality video on audio size CDs.
All standards other than MPEG-2 cannot produce broadcast quality video at
data rates supported by CD ROM drives. MPEG-2 video has been selected as
the video standard of the future. For example, MPEG-2 video will be used
for the long-awaited, high definition television, or HDTV.
MPEG-2 TECHNOLOGY
InnovaCom provides Very Large Scale Integrated Circuits ("VLSI") for
the specific application of broadcast quality encoded video using MPEG-2.
The Applications Specific Integrated Circuit ("ASIC"), or "chip," developed
by InnovaCom is known as DVImpact, which is a single chip video encoder
providing MPEG-2 video encoding and system multiplexing in a single chip.
InnovaCom has a license 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 License Agreement, InnovaCom has the rights to
use, duplicate, distribute, modify and enhance the technology for the
<PAGE>15
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
InnovaCom is in perpetuity. InnovaCom also holds trademarks under docket
numbers 2014, 2015, 2016, 2017, 2018, 2019 and 2020 on InnovaCom's name and
the names of its products. InnovaCom is also in the process of applying
for copyright protection on its logo and software codes.
InnovaCom's technology was developed by Mark Koz, a Silicon Valley
technologist credited with many advances in the field, and by a team of
MPEG engineers that the Company believes is as extensive as any in the
industry. Mr. Koz has assigned his most relevant and most important
patents in this field to the Company, including a set-top box design patent
that broadly covers much of the future industry, and which will provide
significant long-term licensing revenues. MPEG-2 is believed to be the
most broadly accepted coming technology for high-quality video encoding and
decoding, and InnovaCom's strength is expected in the most complex
operation, the encoding side. Video compression encoding requires
processing power equivalent to 200 Pentiums on a single chip and software
that accurately digitizes video at high resolutions in real time. The
engineers at InnovaCom have worked specifically on MPEG solutions since
the Company's inception and have a strong track record.
THE COMPANY'S PRODUCTS
InnovaCom, a technology leader, develops core technologies and
methodologies for video compression and networking applications. The
Company's adherence to "open standards" helps to ensure that its customers
the flexibility of developing solutions based on InnovaCom's current products
and future products as they are developed and released. This also helps to
ensure that the customers' products meet time-to-market requirements. The
following are products currently available or currently under development
by the Company.
APPLICATIONS DEVELOPMENT PLATFORM ("ADP"), InnovaCom's first product,
consists of encoder and decoder circuit boards in a personal computer using
Intel's Pentium Microprocessor, Windows NT or Windows '95 operating systems
and allowing the plug-in of encoder and decoder boards into standard PCI
connectors. InnovaCom's ADP provides MPEG-2 video encoding with sufficient
compression to store 5 to 6 hours of broadcast quality video content on a
single audio CD-sized Digital Versatile Disk, or DVD, for playback on a
consumer electronics DVD player. ADP is both a stand alone product
allowing MPEG authoring, and a software development platform. Engineers
working for InnovaCom's customers use the ADP product as a software
development platform for the DVImpact system on a chip encoder.
DV-1100 MPEG 1 ENCODER/DECODER (codec) board is presently available
for sale. Designed for applications where network bandwidth conservation
is crucial, this low cost product also fits in the consumer market. The
DV-1100 is targeted at major corporations planning to deploy in mass
quantities, PC workstations with low cost codecs that are required to send
audio/video over low bandwidth networks. The second market is the general
consumer who wants to create video content on a video CD-ROM or to send
MPEG compressed video over normal telephone lines.
DV-2100 MPEG 2 REAL-TIME ENCODER BOARD is currently available for
sale. This product is used in the development of applications that will
soon reach the market. No other MPEG encoder company offers a product with
the flexibility of the type of host platforms this product supports. The
single slot DV-2100 can be used on PCs running Windows '95 and NT Operating
Systems, and may soon be deployed on the SUN workstation using the Solaris
operating system, depending on the outcome of a joint development effort
between the Company and Sun MicroSystems. Other Unix platforms may also be
supported in the future.
<PAGE>16
The DV-2100 will target market sectors including telemedicine, remote
court arraignment, distance learning, conferencing, broadcast video
distribution (video trunking), video surveillance, satellite news gathering
and DVD authoring. The Company believes that the Software Developers Kit
(SDK) and other analysis tools available are the most flexible and useful
on the market.
DV-2110 MPEG 2 REAL-TIME ENCODER BOARD is the second generation of the
DV-2100. It uses all the features of the first generation, but possesses
significantly richer feature set, flexibility and modularity. All
development work performed for the DV-2100 can be seamlessly used on the
DV-2110. The DV-2110 is in development and the Company expects to be able
to ship the product soon.
The DV-2110 is the platform for future generations of encoders,
decoders, and other digital audio and video related products. The DV-2110
incorporates a PCI mastering device with a programmable RISC processor with
additional processing power for data manipulation. The DV-2110 also
supports a secondary PCI bus and Movie2 bus that provides high bandwidth
data capabilities and additional card expansion.
The DV-2112 is the first of many daughter cards for use with the DV-
2110. The DV-2112 incorporates the single chip encoder with an audio
encoder to provide the next generation MPEG-2 encoder. The DV-2112 mounts
directly to the DV-2110 while still meeting the power and size requirements
for a single PCI card slot.
The DV-2110 will target the same markets as the DV-2100, but may
additionally capture new markets due to its enhanced feature set,
flexibility and modular design. The board's modular design expands its
utilization to the latest generation encoder chips, as well as networking
and A/V muxing chips. The Company knows of no other MPEG-2 encoder board
on the market with the rich feature set of the DV-2110's plus the added
flexibility, modularity or video quality.
DVIMPACT SINGLE CHIP MPEG-2 ENCODER. The DVImpact is scheduled to
become available in the first quarter of 1998 for customer sampling. The
chip will have MPEG-1 capabilities for impressive audio/video quality over
lower bandwidth networks and MPEG-2 capabilities for broadcast quality
audio/video. The DVImpact chip sets a new standard in integration and
associated economy which opens new markets with significant potential, such
as adding the recording function to DVD players, TV set-top boxes and
camcorders. The DVImpact chip also provides MPEG-2 video encoding to
telephone and cable companies to transmit broadcast quality television over
the equivalent of 64 voice telephone lines rather than the present analog
television that requires the equivalent of 2,400 voice telephone lines.
The market is projected to expand quickly in all the above targeted
mentioned market areas, in addition to new applications such as embedded
systems, PC/workstation motherboards, DVD encoding platforms and multimedia
video players.
There is no other single chip MPEG-2 encoding product available today.
The InnovaCom DVImpact single chip MPEG-2 encoder will be made available
for sampling with developer tools including software developed for the
DV-2100 and the DV-2110 products. This should greatly reduce the time to
market of products developed using the DVImpact chip.
EXPLORER is a very powerful MPEG analysis tool. Developed for the
MPEG systems engineer, this unique tool gives the engineer the ability to
perform analysis of MPEG-2 program and transport streams. An intuitive
Windows interface and excellent visual representation make it very simple
to analyze the MPEG stream.
<PAGE>17
COMPETITIVE ADVANTAGE
InnovaCom believes that its products will provide the following
advantages over competitor products:
COMPARABLE BROADCAST PICTURE QUALITY AT HALF THE DATA RATE. Better
techniques of motion estimation translate into a competitive advantage by
requiring lower data rates to obtain the desired video quality. InnovaCom,
as a result of proprietary techniques, can obtain the broadcast picture
quality at a data rate of 3 megabytes per second, whereas competitors
require 6 megabytes per second to accomplish this quality. For example, in
satellite transmission applications, this competitive advantage effectively
doubles the digital channels per satellite transponder. This represents a
significant economic advantage to the user. InnovaCom's proprietary
techniques used to enhance compression involve field and frame simultaneous
searching and two stage motion estimation.
FIELD AND FRAME SIMULTANEOUS SEARCHING. An analog video stream that
is the input to the MPEG-2 video encoder is made up of three types of
screens: field 1, field 2 and frame. Field 1 and field 2 are odd and even
line information that when superimposed on each other, or interlaced,
become a full frame of information. InnovaCom's competitors' MPEG-2
encoders encode all field 1 or field 2 information and only when encoding
is completed can the determination be made that the data was a frame and
not a field. The result is that time is wasted encoding a field as a
frame. InnovaCom has developed and implemented into its single chip
encoder a proprietary method of simultaneously encoding field and frame
data that results in saving time and increases throughput at a given data
rate.
TWO STAGE MOTION ESTIMATION. The task of compression for a video
stream is complex and involves techniques of estimating the motion of
subsequent frames relative to a base image or I frame. A frame of digital
video is composed of picture elements, or pixels. One typical frame is a
matrix for PAL, the European television standard. The matrix contains 704
elements in a row and 580 rows for a total of 408,320 pixels.
Motion estimation techniques used by competitive MPEG-2 encoders are:
(i) brute force comparison of each pixel in the subsequent to reference
frame, or (ii) comparison of the center pixel to an edge pixel. In the
brute force method, each pixel is compared. The process starts at the
upper left hand corner of the first row of the screen and continues across
each row until the right hand corner of the bottom row is reached. When
the comparison of center to edge pixel technique is used, the left hand
side of the first row is identical to the center of the screen setting off
a pixel by pixel comparison similar to the first case.
COMPRESSION OF THE TIME TO MARKET CUSTOMERS' PRODUCTS. InnovaCom
intends to offer its products in design kits with all the necessary
hardware, software and reference designs to provide its customers with the
advantage of "time to market" products at a price substantially less than
other products. In addition, InnovaCom intends to offer "upward"
compatibility for its products to its customers such that any custom
designed software and/or hardware for one of its customers' products will
be compatible with future InnovaCom products. The hardware intensive
design fixes the MPEG related parameters and algorithms, leaving only a
minimum layer that the design engineer needs to access to customize for
each specific customer product. InnovaCom's chip has been designed from
the perspective of the systems engineer. The single chip covers all the
popular input and output combinations such as allowing both D-l and
Phillips video input rather than competitors' products (which allow only
Phillips input) and program elementary stream (PES). The layers of the
chips that are useful to be accessed by the customers' design engineers are
the Video Encoder and the Video System. These layers are accessible
through graphical user interfaces, or GUIs, where parameters such as choice
of input and output video stream and encoding and output data rates in the
range of 1-40 megabits per second are selected.
<PAGE>18
EFFICIENT DESIGN REDUCES POWER AND SPACE REQUIREMENTS. The DVImpact
single chip will allow the output to be in the variable data rates required
in DVD applications. To accomplish this task, the competitive encoders
would require the writing of extremely complex custom microcode.
InnovaCom's DVImpact chip also allows modification of the output data
rate, whereas the competitors' products must stop and restart to change the
data rate. In addition to the motion estimation and frame and field
encoding of video, the critical elements of MPEG encoding are multiplexing
of the audio to the video and the output communications protocol. The task
of matching the timing to coordinate the audio and video is complex. If
the coordination isn't exact, the picture is out of sync with the voice.
Plans for InnovaCom's next MPEG-2 chip include having the multiplexing
function built into the chip. Most competitors have not addressed the
multiplexing function and are relying on their customers' engineers to
write code resident on host computers to perform this complex function.
Likewise, some competitors have manufactured video compression products and
not addressed the important function of multiplexing video and audio. By
planning to build the multiplexing function into the chip, InnovaCom will
make it easier for its customers' engineers to implement their product
design and shorten the time to market process.
Another aspect of the process that InnovaCom's competitors have not
yet addressed is the output communications protocol. Competitors only
provide packets of MPEG data output which have to be loaded "first in,
first out" on the host and be ported into the various communications
protocols. InnovaCom's next MPEG-2 chip will have the popular protocols of
ATM and PES technologies in addition to MPEG packet output.
MARKET FOR PRODUCTS
The key markets for InnovaCom's MPEG-2 based products are
broadcasting, networking, consumer devices and content authoring. The
transmission and exchange of video requires standardized technology (a
"standard") with which every device in the industry can communicate. MPEG
is a primary standard and a vital part of the present data compression
market alongside JPEG (still pictures), MJPEG (motion JPEG) and various
other techniques. MPEG represents the bulk of the compressed video market,
and MPEG-2 is the chosen standard worldwide for video compression of the
future. For example, it is mandated in all DVD standards, in future HDTV,
and will appear in computing and networking and communications platforms of
all types.
Alliances and standards are pushing convergence within the entire
video industry. The Digital TV (DTV) Alliance between Microsoft, Compaq
and Intel demonstrates how fast the standards are being adopted. Such
alliances will speed the development of such applications as distance
learning, telemedicine, broadcasting, teleconferencing and entertainment.
The overall market potential for compressed video applications is very
large, and expanding with bandwidth improvements and with increasingly
ubiquitous networks. According to Dataquest projections, by 2001 there
will be 268 million PCs on-line or networked in some fashion, including
intranets and the Internet. In 2001, this means that the market for
internet software (essentially all networked computers) is expected to
reach $32 billion, up from $7 billion this year. At the end of 1997, 82
million computers are expected to be connected to the Internet, up 71% from
1996, and this growth is continuing.
InnovaCom is carefully targeting the market segments and niches in
which it can establish and maintain the highest quality products and
profitability in the future. Many of the emerging markets for MPEG-2 chips
and devices are described below:
<PAGE>19
HIGH-END VIDEO WORKSTATION MARKETS
Business applications for both video authoring and video dissemination
are growing rapidly. In addition, business markets include training and
distance learning, as well as professional conferencing. InnovaCom intends
to aggressively pursue this market. To that end, InnovaCom has established
an important relationship with Sun Microsystems and is planning to install
a video encoder/decoder board on a Sun Sparc platform. See DV-2100 MPEG-2
description under InnovaCom's Products.
An MPEG-2 video compression encoding board currently is priced upward
of $25,000 but is anticipated to come down to an average of $10,000 in 1998
as production costs decline with volume and as InnovaCom's single chip
solutions arrive. InnovaCom expects to sell chips to other board-makers
and thereby participate in the entire marketplace. Rather than compete
broadly with its own board-level customers, InnovaCom intends to capture
only selective shares of board markets in those applications where
InnovaCom can best create custom integrated multimedia boards.
DIGITAL VIDEO CDS (VCD) MARKET
The market for VCDs has been growing rapidly for several years in Asia
and continues to look attractive. InnovaCom believes that there is an
opportunity to create the next generation of VCD players for Asia. Such an
encoder/decoder product, cheaply produced in China under a joint venture
now being negotiated there, could be imported into the US as a transitional
and less expensive product for those consumers that will not be ready to
move to DVD standards immediately.
PROFESSIONAL AND CONSUMER SET-TOP BOX DESIGN MARKET
Through a strategic relationship with ESS Corporation, InnovaCom has
been asked to design and build MPEG-2 decoder set-top boxes in 1998.
InnovaCom holds a patent on set-top box implementations that support more
than one compression technology, and InnovaCom believes that the ESS
Corporation relationship is the beginning of a serious role for the Company
in future set-top box markets.
Digital set-top boxes will offer opportunities for decoders first, and
encoders later. InnovaCom intends to participate in this market from the
outset and as the market evolves. Digital technologies and advanced
semiconductors are reshaping the consumer electronics world. The
introduction of exciting new products such as DVD-Video players and direct
broadcast satellite (DBS) set-top boxes creates many opportunities. These
can be divided into prosumer markets (early adopters and drivers of demand)
and consumer markets (mass adoption of new devices).
Set-top boxes are required for cable connections for at least half of
all cable connections and are essential for descrambling special channels
such as pay-per-view movies and subscription services. With 63 million
homes now listed as subscribers, there are now over 35 million set-top
boxes which are being rapidly updated for digital services, and this market
is expected to show a rapid growth rate based on the extra benefits users
will be offered.
Other "black box" devices are appearing to enhance consumer video
technology. What is called the TV/PC convergence is making the computing
device just another audio/video (A/V) component of the entire entertainment
experience. The TV acts as no more than an output device, switching
between the regular TV and specialized devices like video disc players,
video game consoles and Web enabled devices. This includes Web TV-branded
units from Microsoft, Sony and Phillips, future DVD/Web machines, the Sega
Saturn with NetLink and other future products. This creates another market
where MPEG chips may become important, as consumers are increasingly able
to edit multiple media sources.
<PAGE>20
THE PERSONAL COMPUTER MARKET FOR MPEG-2 COMPRESSION
Intel has stated that by the year 2000, all of the PCs shipped will be
digital television receivers as well as computers, an estimated market of
more than 100 million units annually. A large percentage of these will be
able to record via MPEG encoders as well as play via MPEG decoders.
Ninety-eight percent of households now have TV, and only thirty-five
percent thus far have computers, but the gap is decreasing.
Recently introduced DVD components for PCs will take a five percent
market share of high-end PCs, or approximately 5 million DVD players, all
with decoders on board. Recordable DVD-RAMs are also expected to begin
appearing in quantity in 1998, shipping at least another million units,
each needing an encoder as well as a decoder if there is to be any
recording of uncompressed analog and digital television broadcasts or
camcorder inputs. This PC segment is, therefore, a very promising market
for InnovaCom even in the near term.
THE CABLE HEAD-END BROADCASTING MARKET
Of some 15,000 total cable transmission facilities in the United
States, there are more than 1,000 sizable cable head-ends which will need
up to 500 MPEG-2 chips per head-end for a total potential market for chips
alone of approximately 7.5 million chips. In 1998, InnovaCom anticipates
that this market will just begin to emerge, and InnovaCom will attempt to
penetrate this market toward the end of that year.
THE DVB - DIGITAL VIDEO BROADCASTING MARKET
There are 1,600 TV broadcast stations in the United States alone, and
conversion to digital broadcast is mandated by the FCC. HDTV is estimated
to require at least $2 million investment per station, including
transmission tower, top-quality encoding/decoding equipment and digital
cameras. All stations are mandated for conversion within 6 years, a $3
billion dollar total investment. The larger metropolitan areas must
convert by 1999, and 53% of U.S. consumers will be able to receive at least
3 digital TV or HDTV channels at that time. InnovaCom anticipates
marketing its chips to the broadcast encoding business.
Wireless forms of digital broadcast other than television abound,
especially in high-frequency and microwave installations and dedicated
business networks. These are not as yet used for video to any great extent
but have available bandwidth that would be sufficient to become a serious
market in the future.
INTERNET OPPORTUNITIES
The Internet links to any and all transmission media, thereby making
those sources part of the global Internet. While digital video, even
compressed, cannot be transferred quickly enough to be very practical on
the Internet as it exists today, there are many private networks and
segments of the Internet, such as fiberoptic and high-speed telephone
lines, that are fully capable of carrying compressed digital video for
corporate and bulk-transmission uses. An effort to build an "Internet2"
using ATM and Gigabit Ethernet, as opposed to fiberoptic, that will offer
bandwidth on demand with fewer limitations, is presently being
contemplated. Since InnovaCom anticipates including ATM in its next
generation of the MPEG-2 chip, it hopes to capitalize on this potential
change. Carrier networks are increasingly offering such services even to
standard Internet users via cable modems and other means. Advances in this
area have consistently exceeded forecasters' expectations.
<PAGE>21
THE DBS SATELLITE MARKET
In the satellite video markets, digital broadcast has been
well-developed for some time. Video is compressed by MPEG-2 encoders
located at groundstations, uplinked to satellites, broadcast and, finally,
decoded at the receivers.
Sales are increasing at the rate of 1% per week (DBS Digest), a
compound rate of nearly 70% a year. Hughes has recently begun to offer a
combined DBS and PC-Internet dish, the first of its kind, which will
accelerate the convergence of TV and PC digital data. This development is
quite promising for InnovaCom and the MPEG industry, as the dissemination
of digital video will become much easier and more widespread.
CABLE MODEM VIDEO DELIVERY
Digital interactive video transmission over cable modems is a growing
reality via TCI, Cox, Shaw, @home and Com21 cable modem technologies, among
others. In the U.S., there are 63.2 million cable subscribers. By the end
of 1997, Time Warner is projecting that its cable modems will serve 168,000
subscribers and pass more than 2.4 million homes. Operators worldwide are
now conducting commercial trials and have placed orders for hundreds of
thousands of units. In Europe, more than a third of all homes are
cable-ready, and high telecommunications costs for the most part push
consumers toward cable as the medium of choice for high-bandwidth services
such as video. Given substantial penetration of cable modems and resulting
interactive video services which need encoders as well as decoders,
InnovaCom anticipates participating in this market as well.
VIDEO DELIVERY OVER NORMAL TELEPHONE LINES
Somewhat lower in performance than cable modems but nevertheless
important is the growth of ADSL modems and ISDN modems, which can operate
over a relatively large portion of the "plain old telephone system" (POTS).
Some 2 million ISDN lines toward the end of 1998 in the US (Dataquest) and
perhaps as many as 2 million ADSL connections by 1999 will allow for
greater penetration of compressed video applications into mainstream
consumer markets in America. The capacity expansion which is feasible in
POTS over the next decade will open up many new applications.
DIGITAL VIDEO PRODUCTION OR AUTHORING
Digital video production is performed on high-end specialized
workstations on boards that process video. But in the authoring segment,
both additional filtering of video streams in the workstation and further
processing in the cameras provide supplementary opportunities.
A market segment in which InnovaCom may participate is the MPEG Filter
application, where the highest level of digital video quality is assured
for content producers and distribution. Patented techniques in InnovaCom's
forthcoming chips are expected to provide a level of quality superior to
the competition. With the advent of high-definition video in HDTV, such
sophistication becomes even more important.
VIDEOCONFERENCING
InnovaCom plans to develop a low-cost videoconferencing encoder chip
in 1998. A joint venture presently in formation will provide InnovaCom
with additional markets for this application. Videoconferencing is
increasingly enabled in faster hardware and in software such as Microsoft's
Netmeeting, but compression is still too limited to provide quality
<PAGE>22
sufficient to grow this market as quickly as projected in the past.
InnovaCom anticipates contributing to the creation of more cost-effective
solutions, and as bandwidth is increased in many arenas, this market is
expected to grow.
TELECOMMUNICATIONS CARRIERS AND SWITCHES
There are approximately 15,000 sites where the major
telecommunications carriers, specifically AT&T, MCI, GTE, Sprint and the
European Telecoms, provide high-speed switching, including video
transmission. Videoconferencing, distance learning and video-on-demand
switching by these carriers will require about 10 encoders per site.
Additional communications carrier applications include digital
transmission from studios to cable head-ends, from remote sites to studios,
digital video and multimedia within businesses, distance learning from and
between educational facilities and other private networks. All of these
require encoders on site as well as decoders.
Carriers and telephone companies will increasingly use gigabit
ethernet and ATM to manage their data networks, and these technologies
handle video very effectively. The advent of gigabit ethernet will also
greatly hasten the penetration of bandwidth-friendly equipment. MPEG-2 is
the ideal standard technology by which to send compressed video over these
newly outfitted transmission lines, requiring encoders and decoders at
every node.
The increase in access speed made possible by cable modems and soon by
DSL technologies (digital subscriber lines, replacing ISDN) radically
changes the cost/benefit of information delivery to the home. Cable
companies can offer up to 10 Mbit access for $30-40 per month, leaving ISDN
and T1 services uncompetitive. Whether the ultimate winner of the consumer
is the telephone or the cable company, InnovaCom anticipates a growing
market for its chips.
VIDEO STORAGE MARKETS
One of the valuable patents assigned by Intelligent Instruments to the
Company deals with the storage of digitally compressed video, which broadly
covers an entire segment of the future video storage industry.
Video always has to be efficiently stored somewhere for later
retrieval, and the best way is to encode and compress it first. There are
many professional markets, and several developing niches which may become
very large, such as the archiving of high-resolution security videos for
later use in legal pursuit of criminals. Simulations in military and
training applications generate video for later training that must be stored
and remixed for later training or review.
Medical imaging, an area where InnovaCom's current alliance partner
Mitsubishi Chemical is particularly strong, represents a multi-billion
dollar industry, and images are increasingly becoming digital, multi-image,
or motion-video representations of medical conditions. Not only motion
video but single-frame materials can greatly benefit from video
compression. Thus a series of radiological images or geological maps may
be stored using minimum disk capacity. Some original images need to remain
uncompressed for legal reasons, but medical diagnosis from remote locations
(e.g. second opinions) will be a prime application for video/image
compression. In one application, 3D images supplement the diagnostic
information in 2D cross-sectional images provided by X-ray computed
tomography (CT) and magnetic resonance imaging (MRI). There is a new
procedure for surgical planning and surgical support that combines live
video of the patient with the computer-generated 3D anatomy of the patient.
Prior to surgery, this video mixing permits surgeons to plan access to the
pertinent pathology within the patient. Another application is remote
viewing of images for expert consultation. Substantial high-quality
<PAGE>23
compression would be necessary for any remote viewing, and growth in DSL
lines and other high speed modems will encourage such applications.
COMPETITION
InnovaCom faces competition from numerous companies, some of which are
more established, have greater market recognition, and have greater
financial, production and marketing resources than InnovaCom. InnovaCom'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 InnovaCom's products is intensely competitive, subject
to rapid change and significantly affected by new product introductions and
other market activities of industry participants. InnovaCom faces direct
and indirect competition from a broad range of competitors who offer a
variety of products and solutions to InnovaCom's current and potential
customers. InnovaCom's principal competition comes from: (i) companies
offering competing systems; and (ii) companies offering competing
technologies capable of addressing certain components of InnovaCom's
technology. Many of InnovaCom's competitors have longer operating
histories, including greater experience in the market, significantly
greater financial, technical and other resources than InnovaCom, greater
name recognition and a larger installed base of customers. InnovaCom's
principal competitors are C-Cube Microsystems and IBM. Other competitors
include LSI Logic and Matsushita.
C-Cube Microsystems ("C-Cube") is the only really direct competitor to
InnovaCom and is one of the few companies similarly focused on compression.
On the basis of the MPEG-1 compression standard, C-Cube's sales grew very
rapidly to over $300 million. Since the MPEG-2 standard is less than 2
years old, only a small percentage of C-Cube's sales is as yet in that
segment. C-Cube also typically sells components rather than the complete
hardware/software solutions InnovaCom anticipates offering its customers.
IBM was at one time expected to compete with a single-chip MPEG-2
encoder and decoder (codec), but has recently indicated it will not go in
that direction and will buy future chips from other sources. IBM thus
becomes an opportunity for future cooperation with InnovaCom. InnovaCom
and many other market participants presently buy a 3-chip MPEG-2 chipset
from IBM for their own current board products.
Other major potential competitors, chip and board manufacturers at the
lower end of the markets, who may become players in InnovaCom's target
markets, are 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, InnovaCom intends to work jointly with these companies to
enhance quality encoding and decoding in the mass markets. Consequently,
these companies will become customer prospects for InnovaCom.
Among smaller competitors is FutureTel, which serves primarily the
video authoring marketplace with boards and software toolkits for encoding
video sequences for TV 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 enter
the PC market. Several such companies develop specialized professional
video production boards.
<PAGE>24
The Company believes that future competitive risk is reduced by its
many strategic alliances and that any interest in the field from
consumer-oriented companies like Intel will lead to expanded markets. For
the most part, InnovaCom's focus on encoders will mean that it does not
compete with increasingly powerful CPUs from Intel, DEC or Motorola, or
from specialized companies such as Zoran. In addition, because MPEG-2 is
now entrenched as a DE FACTO standard, other alternative video compression
technologies such as wavelet and fractal algorithms are unlikely to pose a
serious competitive threat.
InnovaCom'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 InnovaCom's products over its
competitors' products will require a continued high level of investment by
InnovaCom in both research and development and operations. InnovaCom
believes it can maintain its competitive position by continuing to supply
updated, state-of-the-art system features, by providing complete aftersales
support and by continuing to develop improved features for its systems to
meet sophisticated customer needs. There can be no assurance that
InnovaCom will be able to continue to make such investments or that
InnovaCom will be able to achieve the technological advances necessary to
maintain its current competitive advantages.
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. However, Sierra
Vista had no significant operations until April 1997, when it commenced its
search for suitable film properties in earnest. InnovaCom purchased all of
the outstanding shares of Sierra Vista in May, 1997, in a stock for stock
exchange that also brought a significant amount of cash into the Company.
A long term purpose of InnovaCom's acquisition will be to implement
MPEG and other video technology in a film production setting, where
eventually such technology will become an important differentiator.
Digital technology will, for example, permit multiple endings or multiple
camera angles to be made available to consumers. All future Sierra Vista
films are intended to be created with DVD format in mind, as this new
format is becoming one of the new standards in home video. Rights to
convert other existing films to digital programming and DVD are currently
being negotiated.
ACQUISITION OF INNOVATIVE TECHNICAL SOLUTIONS, INC.
On or about January 28, 1998, the Company entered into a binding
letter of intent to acquire the business and intellectual property of
Innovative Technical Solutions, Inc. of Concord, Massachusetts ("ITS").
ITS is a research and development engineering firm specializing in
electronic system and software design and in product development. Examples
of the types of projects ITS has worked on include streaming digital video,
ATM (asynchronous transfer mode), bus interfaces, residential broadband,
general purpose hardware, and general purpose software. Some of ITS's
clients include Ascom Nexion, Computer Sciences Corporation, Digital
Equipment Corporation, Digital Switch Corporation, and United Electronics
Industries. The Company will acquire ITS for a total consideration of
7,700,000 shares of the Company's Common Stock plus $2,400,000 in cash. Of
the total consideration, 3,175,000 shares of the Company's Common Stock and
$1,000,000 in cash shall be payable at closing, with an additional
$1,000,000 in cash, plus interest at the prime rate, payable one year from
closing. The remaining 4,525,000 shares of Common Stock and $400,000 in
cash shall be payable upon the occurrence of certain events and the
achievement of certain milestones by ITS. The acquisition of ITS is
intended to be a tax free reorganization under Section 368(a)(1) of the
Internal Revenue Code. As an integral part of the acquisition, several key
personnel of ITS have agreed to enter into three-year employment agreements
with the Company. The Company shall grant piggyback registration rights in
the definitive reorganization agreement, which registration rights shall be
subordinate to the registration rights granted to third parties in capital
<PAGE>25
raising transactions. John Trimper of ITS will be appointed to the Board
of Directors of the Company concurrent with the closing of the ITS
acquisition.
EMPLOYEES
As of February 5, 1998, the Company had approximately 61 full-time
employees.
FACILITIES
InnovaCom is currently renting approximately 8,200 square feet of
space in Santa Clara, California, which includes offices and research space
pursuant to a sublease agreement entered into on March 28, 1996. The term
of the sublease covers the period of April 1, 1996 through February 28,
1998 on two parcels, and on June 30, 1998 on a third parcel, and required
monthly payments are $14,000. The Company is hopeful that the landlord
will be able to re-rent the property quickly as the rental market in the
area is tight.
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,
also in Santa Clara, California.
The monthly base rent will be $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).
The offices will be used primarily for engineering, software
development and administrative purposes. InnovaCom 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 2,801 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's offices are used primarily for its film and video
production business.
LEGAL PROCEEDINGS
JAPAN TABACCO, MASATO HATA, FUTURETEL, ET. AL. On July 25, 1996, Mark
Koz, Intelligent Instruments Corporation and InnovaCom filed suit against
Japan Tabacco, Masato Hata, FutureTel, et al., in the Superior Court of the
State of California case no. CV 759582. InnovaCom and the other plaintiffs
are claiming fraud by the defendants in the formation of a business venture
involving the development and marketing of multimedia technology. On or
about September 5, 1996, FutureTel filed a cross-complaint against
InnovaCom alleging breach of contract by InnovaCom for failure to pay
FutureTel for salaries, payroll taxes and insurance for certain personnel
and rental equipment expenses incurred by FutureTel representing
approximately $65,000 in the aggregate. The above legal proceeding is at
its initial stage. The parties agreed to settle their dispute and are
presently reducing the agreement to writing. Under the agreement,
InnovaCom will pay $100,000, without admitting any liability.
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 under Mr. Maturi's employment agreement under which InnovaCom
believe that Mr. Maturi is not entitled to any further payments or benefits
under his employment agreement and that certain payments amounting to
approximately $150,000 made by InnovaCom to Mr. Maturi should be returned
to InnovaCom. On October 18, 1996, Mr. Maturi filed a cross-complaint
<PAGE>26
against InnovaCom 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 litigation is in its initial stages.
DECORAH COMPANY. On June 9, 1997, the Decorah Company and Edwin
Reedholm filed a complaint against Digital Hollywood, InnovaCom and Mark
Koz in the Circuit Court of Cook County, Illinois County Department, Law
Division, Case No. 97L06866. Plaintiffs are alleging breach of contract in
the amount of $7,225.19 lent to InnovaCom. In addition, Decorah Company
alleges that it has lent funds to Digital Hollywood which has yet to be
paid and is alleging that its damages are approximately $900,000, and that
Mark Koz has guaranteed the repayment of the monies by Digital Hollywood to
Decorah Company, secured by a portion of Mr. Koz's InnovaCom Common Stock.
Discovery has yet to begin in this proceeding.
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., Ann Denton, Ronald Thomas,
Arun Pande, Edwin L. Reedholm, Atlas Stock Transfer Corporation, Geneva
Capital International, Inc., Geneva Consolidated Group, Inc., Delphi-Riker
International, Inc., Zelton Foundation, Checkers Foundation, United West
Communications, Inversora Greenway, Norbury Foundation, Whittington
Foundation, Conception One Foundation, The Delhaas Group, Incorporated, The
Delhaas Group, Inc., Chaerpico Industrial Development, Inc., Silicon
Software International Ltd., Bransome and Associates, Inc., David F. Bahr,
Tariq Kahn, The Checkers Group, Ltd., and Maxwell Ventures.
The complaint, Case Number 990965 in San Francisco Superior Court,
claims fraud, breach of fiduciary duty and negligence, surrounding the
Jettson Realty Development Corporation acquisition, and seeks compensation
in excess of $26 million. The litigation is in its early stages and no
discovery has commenced.
CHECKERS FOUNDATION. InnovaCom and Checkers Foundation entered into a
Stock Purchase Agreement in February 1997, whereby Checkers Foundation
purchased 229,310 shares of InnovaCom's Common Stock. Before the stock was
issued, the Jettson Realty Development Corporation lawsuit was filed,
naming Checkers Foundation among the parties. As a result, the stock
issuance has not been completed and will not be completed, and the Stock
Purchase Agreement may become the subject of litigation.
<PAGE>27
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of InnovaCom are as follows:
<TABLE>
<CAPTION>
Held Position
NAME AGE POSITION SINCE
<S> <C> <C> <C>
Mark C. Koz 42 President, Chief Executive 1993
Officer, Director
Tony Low 43 Director October 1996
F. James Anderson 48 Secretary, Executive Director, May 1997
Corporate Strategy and Finance,
Director
Simone Anderson 33 Director May 1997
Robert Sibthorpe 48 Director May 1997
John Champlin, M.D. 42 Director October 1997
Stanton Creasey 43 Chief Financial Officer April 1997
Rand E. Shrader 42 Chief Operating Officer May 1997
</TABLE>
The following sets forth the principal occupations during the past
five years of the directors and executive officers of the Company and it
subsidiary Sierra Vista.
MARK KOZ - CHAIRMAN, PRESIDENT & CEO, (AGE 42) has been the founder,
the technologist, the largest shareholder, and the key executive of
InnovaCom since its inception. He was founder, CEO, chief technical
officer and a director of FutureTel from 1993 to 1995, and CEO of
Intelligent Instruments Corporation 1993 to 1996. His background includes
a NASA technical internship at an early age, a broadcast engineering
license at age 16, five years of technical education at Florida
Technological University (University of Central Florida), and setting up of
operations for a series of television broadcasting stations in the
Caribbean and South America. He is a voting member of the Moving Picture
Experts Group, the international standards-setting body for MPEG. Mark
Koz's vision and unique experience in the broadcasting and digital video
markets give the Company a substantial lead in addressing the problems
which make this technology so difficult to implement.
F. JAMES ANDERSON - SECRETARY AND EXECUTIVE DIRECTOR, CORPORATE
STRATEGY AND FINANCE AND DIRECTOR (AGE 48), has served in these capacities
since the Company's acquisition of Sierra Vista in May 1997. Mr. Anderson
founded Sierra Vista and served as Director General of the Moscow Country
Club, a Russian-American joint venture and was President of the American
holding company which owned 50% of that venture. He has acted as CEO of
Brush Creek Mining and Development, Co., Inc., a Nevada corporation, and
was Chairman of the Board of Trans-Russian Exploration and Development,
Inc., both of which engaged in exploration and development of precious
mineral properties in the US and Canada. He has had a long and highly
successful career as a businessman in a variety of industries, including
establishment of a series of profitable auto dealerships, management of
mining and oil and gas properties, and management of several public
utilities companies. He has assisted numerous companies in raising capital
domestically and internationally.
<PAGE>28
RAND E. SHRADER - CHIEF OPERATING OFFICER (COO), (AGE 42) has
extensive experience in technical product and program management, technical
sales management and quality management. Immediately before joining
InnovaCom in May 1997, Mr. Shrader had been with ITT Automotive (now part
of ITT Industries) for 12 years. Mr. Shrader was with Dayton-Walther (now
part of Lucas-Varity) for 6 years before joining ITT. In his last position
there, he made major improvements as Quality Manager of the firm's largest
plant.
STANTON R. CREASEY - CHIEF FINANCIAL OFFICER (CFO), (AGE 43) has
been the CFO since April 1997. Mr. Creasey is a CPA with 19 years of
experience in finance, first with Arthur Anderson & 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. He
was Chief Financial Officer and/or 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). From September 1994 through March
1996, Mr. Creasey was at Purus Inc. From March 1996 through April 1997, he
was an independent consultant.
SIMONE ANDERSON became a Director of the Company in May 1997. She is
the Marketing Director and CFO for Sierra Vista, and has been at Sierra
Vista since 1997. She has been a director of the Moscow Country Club joint
venture with Russia, and was previously CFO of Brush Creek Mining and
Development Co., Inc. from 1989 to 1994 and Trans-Russian Exploration and
Development, Inc. from 1991 to 1993. She has been instrumental in many
business ventures with her husband, F. James Anderson.
JOHN CHAMPLIN, M.D. became a Director of the Company in October 1997.
He has done extensive work in the application of computers and video in the
field of medicine and is the owner and president of the Med Center Medical
Clinic in Carmichael, California, since 1993. Prior to that he was an
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. He earned his M.D. at the University of Florida.
ANTHONY LOW became a Director of the Company in October 1996. He is
currently the Chief Operating Officer at Darwin Digital since July 1997, a
newly formed Saatchi & Saatchi Vision Company involved in interactive
advertising and media buying. Prior to that, he was director of business
affairs at the Los Angeles based Saatchi Entertainment Group, a division of
Saatchi & Saatchi, the multinational ad agency from January 1996 through
June 1997. From June 1993 through January 1996 he was President of Tercer
Mundo, Inc., a company marketing sound recordings. From October 1983
through June 1993 he was Partner and Business Manager of Oberman, Tivoli,
Miller and Low.
ROBERT A. SIBTHORPE became a Director of the Company in May 1997. He
has been in the securities industry and corporate acquisitions for more
than 20 years, most recently with Yorkton Securities, Inc., Toronto, from
June 1986 through April 1996, and Midland Walwyn Ltd., Toronto. He has
raised venture capital for small-cap technology and resource companies,
such as InnovaCom, Diamond Fields, Ltd. and Stikine Resources. He is an
investment banker with extensive experience in corporate finance, with an
MBA in Finance and a Bachelor of Science in Earth Sciences.
<PAGE>29
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.
EXECUTIVE COMPENSATION.
The following table sets forth the Compensation of the Company's
president and chief executive officer during the past three years. No
other officer received annual compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other Annual
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($)
Mark Koz President and CEO 1996 $120,000 $0
On May 15, 1997, InnovaCom and Mr. Koz entered into a five year
employment contract. Under the terms of Mr. Koz's employment contract, Mr.
Koz shall serve as President and Chief Executive Officer of InnovaCom and
his salary shall be $240,000 per annum subject to a 7% cost of living
increase and increases as determined by the Board of Directors. In
addition, pursuant to Mr. 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
InnovaCom for serving as President and Chief Executive Officer.
On May 15, 1997, InnovaCom 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 InnovaCom'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 InnovaCom for serving as Director of Strategic Planning and
President of InnovaCom's Entertainment Division.
<PAGE>30
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 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.
1997 DIRECTORS' STOCK OPTION PLAN. Subject to stockholder approval,
the Company has also established a 1997 Directors' Stock Option Plan (the
"1997 Plan"). The purpose of the 1997 Plan is to encourage stock ownership
by Directors of the Company and to attract qualified individuals to serve
on the Company's Board of Directors. A total of 2,000,000 shares of Common
Stock are authorized under the 1997 Plan. Adoption of the Plan is subject
to stockholder approval at the Company's next annual meeting.
CERTAIN TRANSACTIONS
MICRO TECH CREDIT FACILITY. As a result of the acquisition of Sierra
Vista, Micro Technology, SA ("Micro Tech"), received 2,500,000 shares of
InnovaCom Common Stock (approximately 11.2%) in exchange for Micro Tech's
shares of Sierra Vista. In July 1997, Micro Tech and the Company entered
into a credit facility agreement of up to $5 million in convertible debt.
The principal amount outstanding on the credit facility as of October 31,
1997 was approximately $2,835,000 with an average conversion price of $2.66
per share.
The credit facility and related promissory notes shall become due in
July 1998, and accrue interest at the rate of 10% per year, or the maximum
rate allowed by law, whichever is lower. InnovaCom has the right to
require Micro Tech to make advances to the $5 million limit, but may pre-
pay without penalty. The credit line is secured by all of the assets of
the Company, including all receivables, goods, equipment, inventory,
contract rights and other property interests.
ACQUISITION OF INTELLIGENT INSTRUMENTS CORPORATION. The Company has
agreed to acquire substantially all of the intellectual property of
Intelligent Instruments Corporation, an intellectual property holding
company owned by Mark Koz, in exchange for two million shares of InnovaCom
common stock. Intelligent Instruments Corporation holds the patent for a
proprietary set-top box design and has applied for a patent for a
proprietary server design, both of which complement and enhance the
technology being developed by InnovaCom. The acquisition of the
intellectual property of Intelligent Instruments Corporation is finalized,
pending the completion and execution of final documentation.
FUTURETEL. Mark Koz was the founder, CEO, chief technical officer and
a director of FutureTel from 1993 to 1996, where he was in charge of the
development of the "gecko" video compression chip. When Mr. Koz left
<PAGE>31
FutureTel in early 1996, he used InnovaCom to license the "gecko"
technology and to continue development of the chip. FutureTel also
transferred certain rights to technology to Mr. Koz and/or Intelligent
Instruments Corporation.
InnovaCom has a license 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 License Agreement, InnovaCom 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
InnovaCom is in perpetuity.
Recently InnovaCom, with Mark Koz and Intelligent Instruments
Corporation, has filed a lawsuit naming FutureTel among the defendants.
See LEGAL PROCEEDINGS.
With respect to each transaction between the Company and an affiliate
of the Company, the Company believes that such transactions were on terms
at least as favorable to the Company as they would have been had they been
consummated with unrelated third parties under similar circumstances.
SETTLEMENT AGREEMENT WITH MARK KOZ. The Company has entered into a
Settlement Agreement with Mark 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. The settlement agreement is finalized, pending
completion and execution of final documentation. See LEGAL PROCEEDINGS.
PRINCIPAL STOCKHOLDERS
The Company is a publicly owned corporation, the shares of which are
owned by United States residents and residents of other countries. To the
best of the Company's knowledge, it is not indirectly controlled by any
other corporation or foreign government. The Company is not aware of any
arrangement, the operation of which may, at a subsequent date, result in a
change of control of the Company.
The following table sets forth, as of February 9, 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 10% of the Company's Common Stock, and (ii) directors
and executive officers of the Company and its subsidiary as a group.
As of February 9, 1998, there were 20,811,084 shares of Common Stock
outstanding.
<PAGE>32
COMMON STOCK
<TABLE>
<CAPTION>
Percentage
Number of Beneficially
NAME AND ADDRESS SHARES{(1)} OWNED
<S> <C> <C>
Mark C. Koz 7,463,000{(2)} 35.9%
InnovaCom, Inc.
2855 Kifer Road, Suite 100
Santa Clara, CA 95051
Micro Technology S.A. 2,500,000 12.0%
c/o Rhone Finance S.A.
10 Route de l'aeroport
CH-1215
Geneva 15
Switzerland
507784 BC Ltd. 6,097,500{(3)} 29.3%
10th Fl., Four Bentall Centre
P.O. Box 49333
1055 Dunsmuir Street
Vancouver BC V7X 1L4
Canada
Rand Shrader 400,000{(4)} 1.9%
InnovaCom, Inc.
2855 Kifer Road, Suite 100
Santa Clara, CA 95051
Stan Creasey 100,000{(5)} *
InnovaCom, Inc.
2855 Kifer Road, Suite 100
Santa Clara, CA 95051
John Champlin, MD 100,000{(6)} *
4373 Meadow Circle
Rescue, CA 95672
James Anderson -0- -0-
InnovaCom, Inc.
2855 Kifer Road, Suite 100
Santa Clara, CA 95051
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
<PAGE>33
Tony Low -0- -0-
The Saatchi Entertainment Group
37 26th Avenue
Venice, CA 90291
All officers and directors as a group (8 8,063,000{(7)} 38.7%
persons)
</TABLE>
*Less than one percent
(1) Except as otherwise indicated, InnovaCom 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
4,948,000 owned by Mark Koz, all of which are subject to a Voting
Agreement by and between 507784 BC Ltd. and Mark Koz, wherein Mr. Koz
has the right to nominate three (3) members of the six (6) member
board of directors of InnovaCom 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 InnovaCom, and all
the shares subject to the voting agreement shall vote in favor of the
six (6) nominees. Includes an additional 2,000,000 shares to be
issued to Intelligent Instruments Corporation, less 500,000 shares
which Mr. Koz has agreed to surrender in settlement of any possible
claims relating to any alleged breach of fiduciary duty by Mr. Koz in
connection with the formation of the Company. 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
4,948,000 owned by Mark Koz, all of which are subject to a Voting
Agreement by and between 507784 BC Ltd. and Mark Koz, wherein Mr. Koz
has the right to nominate three (3) members of the six (6) member
board of directors of InnovaCom 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 InnovaCom, and all
the shares subject to the voting agreement shall vote in favor of the
six (6) nominees.
(4) Includes options to purchase 400,000 shares of the Company's Common
Stock at $2.75 per share, expiring May 27, 2002.
(5) Includes options to purchase 100,000 shares of the Company's Common Stock
at $3.375 per share, which shall become exercisable upon the filing of
this Registration Statement.
(6) Includes options to purchase 100,000 shares of the Company's Common
Stock at $3.375 per share, expiring April 22, 2000.
(7) Includes those items noted in footnotes 3, 4, 5 and 6 to this table.
<PAGE>34
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock by the Selling Stockholders as of
February 9, 1998, and the number of shares of Common Stock covered by this
Prospectus.
<TABLE>
<CAPTION>
Name and Address of Number of shares of Common Number of Shares of Common Number of Shares of
STOCKHOLDER Stock Beneficially OWNED STOCK OFFERED HEREBY{(1)} Common Stock
PRIOR TO THE OFFERING Beneficially Owned
Following the
OFFERING{(4)}
<S> <C> <C> <C> <C> <C>
# OF SHARES % OF CLASS # OF SHARES % OF CLASS
JNC Opportunity Fund 2,924,072(2) 12.32% 5,611,904 21.24% 0(4)
Ltd.
c/o Olympia Capital
(Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Cardinal Capital
Management, Inc. 250,000 1.19% 250,000 1.19% 0(5)
3340 Peachtree Road, N.E.
Suite 620
Atlanta, GA 30326
</TABLE>
(1) In order to provide for (i) fluctuations in the market price of the
Common Stock, (ii) provisions in the formula for determining the
conversion price of the Debentures provided for in the terms thereof
(see "Description of Securities - Debentures"), and (iii) shares of
Common Stock which may be issued in payment of interest on the
Debentures, the aggregate number of shares of Common Stock
registered hereby exceeds the aggregate number of such shares
issuable upon conversion of the Debentures, and interest thereon,
at the conversion price in effect on February 6, 1998. JNC has agreed
to restrict its ability to convert the Debentures, and interest
thereon, and exercise of the Warrants to the extent that the
number of shares of Common Stock held by JNC and its affiliates,
after such conversion and/or exercise, exceeds 4.999% of the then
issued and outstanding shares of Common Stock following such conversion
and/or exercise.
(2) Includes (i) the number of shares of Common Stock issuable upon
conversion of the Debentures, (ii) payments of interest thereon,
and (iii) exercise of the Warrants, assuming conversion at the
formula price in effect on February 6, 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) Assumes resale of Common Stock issuable upon conversion of the
Debentures, and interest thereon, and exercise of the
Warrants.
(5) Assumes resale of all shares of Common Stock issuable upon exercise
of the Additional Warrant.
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),
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
<PAGE>35
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 short sale transaction.
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.
DESCRIPTION OF SECURITIES
InnovaCom's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $0.001. As of February 9, 1998, there were
outstanding 20,811,084 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.
<PAGE>36
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
$3.37 per share or, (i) through April 21, 1998, 85% of the average closing
bid price of a share of Common Stock for the five trading days prior to
conversion (the "Conversion Average Price"), or (ii) from April
22, 1998 through May 21, 1998, 82.5% of the Conversion Average Price, or
(iii) after May 21, 1998 to December 22, 2002, 80% of the Conversion
Average Price. The Debentures may be converted into shares of Common Stock
at the option of the holder in whole or in part as follows: (i) 33% of
the aggregate principal amount of the Debentures may be converted prior to
the earlier of April 21, 1998 or the effectiveness of this registration
statement, (ii) 66% of the aggregate principal amount of the Debentures may
be converted from April 22, 1998, through May 21, 1998, and (iii) the
balance of the aggregate principal amount of the Debentures may be
converted thereafter. The Debentures have a term of five years, expiring
December 22, 2002.
WARRANTS
Warrants were issued to JNC on December 22, 1997, and allow the holder
to purchase 250,000 shares of Common Stock at $3.00 per share and 250,000
shares of Common Stock at $4.00 per share. The Warrants expire on
December 22, 2002. Additional Warrants were issued to Cardinal on
December 22 ,1997, and allow the holder to purchase 250,000 shares of
Common Stock at $2.43 per share. The Additional Warrants also expire on
December 22, 2002.
LEGAL MATTERS
The validity of the shares of Common Stock and Warrants offered by the
Company and Common Stock offered by the Selling Stockholders will be passed
upon by Bartel Eng Linn & Schroder, Sacramento, California.
EXPERTS
The audited consolidated financial statements of the Company as of
December 31, 1996, and for each of the two years in the period ended
December 31, 1996, 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,
<PAGE>37
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. A copy of the 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 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.
Item 24. Indemnification of Directors and Officers
InnovaCom 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.
<PAGE> 38
InnovaCom has entered into indemnification agreements with its
officers and directors. Pursuant to the agreements, InnovaCom has agreed to
defend and indemnify such officers and directors for all expenses and
liabilities for acting as such.
In addition, InnovaCom 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.
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 related to the sale of their
shares. All of the amounts shown are estimates, except for the SEC and NASD
registration fees.
SEC registration fee $4,440.84
NASD registration fee $ 0
Accounting fees and expenses * $20,000
Legal fees and expenses * $50,000
Printing costs $ 2,500
Miscellaneous * $ 1,500
_________
TOTAL $78,440.84
*estimated
Item 26. Recent Sales of Unregistered Securities.
In January 1997, InnovaCom issued 100,000 shares of Common Stock to
Dr. Paul Kim, an unaffiliated third party, in exchange for an MPEG-1 board
design.
On May 12, 1997, InnovaCom issued 8,500,000 shares of Common Stock to
approximately 65 purchasers in exchange for all of the outstanding shares of
Sierra Vista. No commission was paid by InnovaCom, and the InnovaCom shares
of Common Stock were not registered with the Commission upon reliance of
Section 3(a)11 of the Securities Act. The shares were issued pursuant to a
fairness hearing held by the California Department of Corporations.
In June 1997, Patrick Johnson received shares of Common Stock in
consideration for approximately $17,000 worth of legal services previously
rendered.
On December 22, 1997, InnovaCom 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, an institutional investor, in consideration
for investment advisory services provided in connection with the private
placement. The transactions were exempt from registration upon reliance of
Section (4)(2) and Regulation D of the Securities Act.
On November 19, 1996, InnovaCom issued approximately 240,000 shares of
Common Stock in exchange for $1,200,000. No commission was paid. The
transaction was exempt from registration upon reliance of Section (4)(2) and
Regulation D of the Securities Act.
On July 3, 1996, InnovaCom issued approximately 5,028,215 shares of
Common Stock in exchange for approximately $819,142. No commission was paid.
The transaction was exempt from registration upon reliance of Section (4)(2)
and Regulation D of the Securities Act.
<PAGE>39
Item 27. Exhibits.
(2) Charter and by-laws
2.1 Certificate of Incorporation, as amended, of InnovaCom{(1)}
2.2 Amended and Restated Bylaws of InnovaCom{(1)}
(3) Instruments defining the rights of security holders
3.1 1996 Incentive and Nonstatutory Stock Option Plan{(1)}
(5)
5.1 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.{(1)}
5.2 Opinion of Bartel Eng Linn & Schroder re Legality*
(6) Material Contracts
6.1 Plan and Agreement of Reorganization, dated February 27, 1997,
as amended April 1, 1997 and May 14, 1997, between InnovaCom and
Sierra Vista{(1)}
6.2 License Agreement, dated as of March 7, 1996, between InnovaCom
and FutureTel{(1)}
6.3 Employment Agreement with Mark C. Koz, dated as of May 15, 1997{(1)}
6.4 Employment Agreement with F. James Anderson, dated as of May 15,
1997{(1)}
6.5 Escrow Agreement and Instructions between InnovaCom, Sierra Vista
and Bartel Eng Linn & Schroder, dated as of February 27, 1997{(1)}
6.6 Lease between Cooperage-Rose Properties II and InnovaCom{(1)}
6.7 Credit Facility Agreement between InnovaCom and Micro Technology
S.A., dated as of July 1, 1997{(1)}
6.8 Security Agreement between InnovaCom an Micro Technology S.A.,
dated as of July 1, 1997{(1)}
6.9 Convertible Debenture Purchase Agreement, dated as of December 22,
1997, with JNC 6.10 7% Convertible Debentures, due December 22,
2002, payable to JNC 6.11 Registration Rights Agreement, dated as
of December 22, 1997, with JNC
6.12 Escrow Agreement, dated December 22, 1997, between the Company,
JNC and Robinson Silverman Pearce Aronsohn & Berman LLP
6.13 Warrants dated December 22, 1997, to purchase up to 500,000
shares of Common Stock held by JNC
6.14 Warrants dated December 22, 1997, to purchase up to 250,000 shares of
Common Stock held by Cardinal
6.15 Addendum to Credit Facility, dated December 18, 1997, with
Micro Technology S.A.*
(21)
21.1 Subsidiary of the small business issuer
23.1 Consent of Hein + Associates LLP is filed herein
23.2 Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5
24.1 Power of attorney is contained on signature page
* To be filed by Amendment
(1) Filed with the Company's Form 10-SB on December12, 1997
<PAGE>40
Item 28. Undertakings
The Company hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
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, 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 registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
The Company undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
<PAGE>41
(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>42
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 on 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 February 9, 1998.
InnovaCom, Inc.
February 9, 1998 MARK C. KOZ
By: Mark C. Koz, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
February 9, 1998 MARK C. KOZ
Mark C. Koz, President and
Chairman of the Board of
Directors (Principal
Executive Officer)
February 9, 1998 STANTON R. CREASEY
Stanton R. Creasey, Chief
Financial Officer (Principal
Financial and Accounting
Officer)
February 9, 1998 TONY LOW
Tony Low, Director
February 9, 1998 F. JAMES ANDERSON
F. James Anderson, Director
February 9, 1998 SIMONE ANDERSON
Simone Anderson, Director
February 9, 1998 ROBERT SIBTHORPE
Robert Sibthorpe, Director
February 9, 1998 JOHN CHAMPLIN
John Champlin, Director
<PAGE>
INNOVACOM, INC.
AND SUBSIDIARIES
Financial Statements
For the Years Ended
December 31, 1995 and 1996,
For the Nine Months Ended
September 30, 1996 and 1997 (unaudited)
and For the Period
From May 11, 1990 (inception) to
September 30, 1997 (unaudited)
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITOR'S REPORT...........................................F-2
CONSOLIDATED BALANCE SHEETS - December 31, 1996 and September 30,
1997 (unaudited)....................................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended
December 31, 1995 and 1996, for the Nine Months Ended September
30, 1996 and 1997 (unaudited) and for the Period from May 11,
1990 (inception) to September 30, 1997 (unaudited).................F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - For the Period
from May 11, 1990 (inception) to September 30, 1997 (The period
from January 1, 1997 to September 30, 1997 is unaudited)..........F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended
December 31, 1995 and 1996, for the Nine Months Ended
September 30, 1996 and 1997 (unaudited) and for the
Period from May 11, 1990 (inception) to September 30, 1997
(unaudited).........................................................F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................F-10
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
InnovaCom, Inc. (a Development Stage Enterprise) and Subsidiaries
Santa Clara, California
We have audited the accompanying consolidated balance sheet of InnovaCom, Inc.
(a Development Stage Enterprise) and subsidiaries as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the twp year period ended
December 31, 1996 and the period from May 11, 1990 (inception) to December 31,
1996. 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. (a
Development Stage Enterprise) and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for each of the years in the
two year period ended December 31, 1996 and for the period from May 11, 1990
(inception) to December 31, 1996 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 negative working capital of
$1,243,756, a stockholders' deficit of $1,040,467, and has suffered significant
losses from operations that raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 3. The financial statements do not included any
adjustments relating to the recoverability and classification of reported asset
amounts or the amounts and classification of liabilities that might result from
the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
October 15, 1997
<PAGE>F-3
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ - $ 88,082
Cash - restricted 9,507 8,480
Other receivables 3,200 12,594
Prepaid expenses - 132,995
---------- ------------
Total current assets 12,707 242,151
PROPERTY AND EQUIPMENT, net 183,991 650,063
FILM RIGHTS - 250,000
DEPOSITS 19,298 63,662
---------- ------------
TOTAL ASSETS $ 215,996 $ 1,205,876
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank overdraft $ 38,574 $ -
Notes payable 6,678 2,172,976
Accounts payable 394,286 593,199
Accrued liabilities 816,925 1,093,095
--------- ------------
Total current liabilities 1,256,463 3,859,270
--------- ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 8 and 11) - -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value,
50,000,000 shares authorized,
12,211,084 and 21,061,897
(unaudited) shares issued and
outstanding 12,211 21,062
Additional paid-in capital 7,143,542 13,130,133
Deficit accumulated during
development stage (8,196,220) (15,804,589)
---------- ----------
Total stockholders' equity
(deficit) (1,040,467) (2,653,394)
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 215,996 $ 1,205,876
=========== ===========
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>
MAY 11, 1990
FOR THE YEARS ENDED FOR THE NINE MONTHS (INCEPTION) TO
DECEMBER 31, ENDED SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997 1997
---------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES $ - $ - $ - $ 149,000 $ 149,000
---------- ------------ ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of Goods Sold - - - 52,538 52,538
Research and
development - 2,711,028 1,961,914 2,987,715 5,698,743
Selling, general
and administrative 300 5,472,578 4,304,058 4,140,414 9,613,417
---------- ---------- ---------- --------- ---------
Total costs
and expenses 300 8,183,606 6,265,972 7,180,667 15,364,698
---------- ---------- ---------- --------- ----------
OPERATING LOSS (300) (8,183,606) (6,265,972) (7,031,667) (15,215,698)
---------- ---------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income - 1,622 - 5,641 7,263
Interest expense - (10,611) (5,080) (580,742) (591,353)
---------- ----------- ---------- ----------- ---------
- (8,989) (5,080) (575,101) (584,090)
---------- ---------- --------- --------- ---------
LOSS BEFORE
INCOME TAX EXPENSE (300) (8,192,595) (6,271,052) (7,606,768) (15,799,788)
INCOME TAX EXPENSE 800 800 800 1,600 4,800
--------- --------- --------- --------- -----------
NET LOSS $ (1,100) $ (8,193,395) $ (6,271,852) $ (7,608,368) $ (15,804,588)
========== ============ ============ ============ =============
NET LOSS PER SHARE
$ (.00) $ (.98) $ (.88) $ (.46)
========== ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 5,122,869 8,361,597 7,100,597 16,455,744
========== ============ =========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>F-5
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING TOTAL
COMMON STOCK PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY (DEFICIT)
------ ------ -------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Common stock issued to form company
at $0.0017 per share (May 1990) 5,122,869 $ 5,123 $ 3,377 $ - $ 8,500
Net loss - - - (125) (125)
--------- ------- --------- ----------- --------------
BALANCES, December 31, 1990, 1991,
and 1992 5,122,869 5,123 3,377 (125) 8,375
Net loss - - - (800) (800)
--------- ------- --------- ----------- --------------
BALANCES, December 31, 1993 5,122,869 5,123 3,377 (925) 7,575
Net loss - - - (800) (800)
--------- ------- --------- ----------- --------------
BALANCES, December 31, 1994 5,122,869 5,123 3,377 (1,725) 6,775
Net loss - - - (1,100) (1,100)
--------- ------- --------- ------------ --------------
BALANCES, December 31, 1995 5,122,869 5,123 3,377 (2,825) 5,675
Issuance of common stock at $0.50
per share to directors for 900,000 900 449,100 - 450,000
services performed (March 1996)
Issuance of common stock at $0.50
per share to employees for services 130,000 130 64,870 - 65,000
performed (May 1996)
Sale of common stock, net of
expenses at $0.26 per 408,200 408 103,762 - 104,170
share (June 1996)
Sale of common stock, net of
expenses at $0.16 per 4,620,015 4,620 715,380 - 720,000
share (July 1996)
Issuance of common stock at $0.50
per share to employees for services 500,000 500 249,500 - 250,000
(July 1996)
Issuance of common stock at $1.36
per share for consulting services
performed (July 1996) 250,000 250 388,960 - 389,210
(Continued)
<PAGE>F-6
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
DEFICIT
ACCUMULATED
ADDITIONAL DURING TOTAL
COMMON STOCK PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY (DEFICIT)
------ ------ ------- ----------- ----------------
Sale of common stock at $5.00 per
share, net of expenses 280,000 280 1,399,720 - 1,400,000
(October 1996)
Compensation recognized upon
issuance of stock - - 2,493,873 - 2,493,873
options
Contribution of Product License - - 1,275,000 - 1,275,000
Net loss - - - (8,193,395) (8,193,395)
----------- ------- ---------- ----------- -----------
BALANCES, December 31, 1996 12,211,084 12,211 7,143,542 (8,196,220) (1,040,467)
Issuance of common stock in exchange
for technology at $5.00 per share 100,000 100 499,900 - 500,000
(January 1997) (unaudited)
Sale of common stock, net of
expenses at $2.90 per share (February 229,310 229 664,771 - 665,000
1997) (unaudited)
Acquisition of Sierra Vista net of
expenses at $.37 per share (April 8,514,500 8,515 3,158,283 - 3,166,798
1997) (unaudited)
Issuance of common stock at $2.43
per share for legal services rendered
(June 1997) (unaudited) 7,003 7 16,976 - 16,983
Interest calculated for possible
debt conversion (unaudited) - - 541,349 - 541,349
Compensation recognized upon
issuance of stock options (unaudited) - - 1,105,312 - 1,105,312
Net loss (unaudited) - - - (7,608,368) (7,608,368)
----------- -------- ------------ -------------- -------------
BALANCES, September 30, 1997 21,061,897 $ 21,062 $13,130,132 $ (15,804,588) $ (2,653,394)
(unaudited) =========== ======== ============ ============== =============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>F-7
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 11, 1990
FOR THE YEARS ENDED FOR THE NINE MONTHS (INCEPTION) TO
DECEMBER 31, ENDED SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,100) $ (8,193,395) $ (6,271,852) $ (7,608,368) $ (15,804,588)
--------- ------------- ------------- ------------- --------------
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation - 21,175 9,602 103,782 124,957
Compensation costs recognized
upon issuance of stock or stock
options - 3,648,083 3,502,763 1,122,294 4,770,377
Interest related to debt - - - 541,349 541,349
conversion
Contribution of Product License - 1,275,000 1,275,000 - 1,275,000
Write-off of related party - 94,062 45,290 24,711 118,773
receivable
Changes in operating assets and
liabilities:
Cash - restricted - (9,507) - 1,027 (8,480)
Other receivables - 5,300 - (9,394) (12,594)
Prepaid Expenses - - - (132,995) (132,995)
Deposits - (19,298) (11,954) (44,364) (63,662)
Accounts payable - 394,286 256,787 198,913 593,199
Accrued liabilities 1,100 814,100 579,759 276,170 1,093,095
------- ------------ ----------- ------------ ------------
Net adjustments 1,100 6,223,201 5,657,247 2,081,493 8,299,019
------- ------------ ----------- ------------ ------------
Net cash used in operating - (1,970,194) (614,605) (5,526,875) (7,505,569)
activities ------- ------------ ----------- ------------ -------------
(continued)
<PAGE>F-8
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
(continued)
MAY 11, 1990
FOR THE YEARS ENDED FOR THE NINE MONTHS (INCEPTION) TO
DECEMBER 31, ENDED SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997 1997
---- ---- ---- ---- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM INVESTING ACTIVITIES:
Advance to related party - (94,062) (45,290) (24,711) (118,773)
Purchases of property and - (205,166) (82,812) (569,854) (775,020)
equipment -------- ----------- ---------- ---------- ----------
Net cash used in investing - (299,228) (128,102) (594,565) (893,793)
activities -------- ------------ ---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft - 38,574 - (38,574) -
Proceeds from sale of common stock - 2,224,170 824,170 4,081,798 6,314,468
Proceeds from notes payable - 106,478 106,478 2,166,298 2,272,776
Principal payments on notes - (99,800) (44,920) - (99,800)
payable -------- ----------- ---------- ---------- ----------
Net cash provided by financing - 2,269,422 885,728 6,209,522 8,487,444
activities -------- ----------- ----------- ----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - 143,021 88,082 88,082
CASH AND CASH EQUIVALENTS, beginning
of period - - - - -
------- ---------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ - $ - $ 143,021 $ 88,082 $ 88,082
======= ========== ========== =========== ==========
(continued)
<PAGE>F-9
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOW
(continued)
MAY 11, 1990
FOR THE YEARS ENDED FOR THE NINE MONTHS (INCEPTION) TO
DECEMBER 31, ENDED SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997 1997
---- ---- ---- ---- -------------
(unaudited) (unaudited) (unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ - $ 9,079 $ 5,080 $ 2,091 $ 11,170
=========== ========== ========== ========== ==========
Income taxes $ - $ - $ - $ 4,800 $ 4,800
=========== ========== ========== ========== ==========
Non-cash investing and financing
transactions:
500,000 shares of common stock
issued for contribution of
film rights $ $ - $ - $ 250,000 $ 250,000
=========== ========== =========== =========== =========
</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
(Information subsequent to December 31, 1996 is unaudited)
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 Moving 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. It is the
current intention of the Company's management to establish itself as one of
the top suppliers of MPEG-2 video encoding systems on a chip and produce a
full line of such products in a effort to meet the needs of today's digital
video market.
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 February 27, 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 that will provide a good return to its
investors. The Company agreed to acquire all of the issued and outstanding
shares of common stock of Sierra Vista for 8,514,500 previously unissued
common shares of the Company. The shares were issued on a basis of one
share of the Company for every one share of Sierra Vista stock. Upon
completion, the shares of common stock of the Company are to be registered
with the appropriate agencies. Also, the agreement calls for the Board of
Directors to consist of six members; three to be nominated by the Company
and three to be nominated by Sierra Vista, and the nominations approved by
all shareholders. The transaction was accounted for as a purchase.
Management believes that this transaction is a capital transaction in
substance rather than a business combination. Therefore, no goodwill will
be recorded. Sierra Vista had no material activity prior to the merger,
therefore the statements presented for the period ended September 30, 1997
resemble those that would be shown in a proforma.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
<PAGE>F-11
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
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.
RESTRICTED CASH - Restricted cash consists of amounts in an escrow account
for equity transactions. The Company's attorney has control over the
account and disburses funds according to agreements entered into.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation of equipment and furniture 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 - 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.
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.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are charged
to operations in the period incurred.
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 and other assets and the adequacy of valuation allowances. Due to
the uncertainties inherent in the estimation process, it is at least
reasonably possible that these estimates will be further revised in the near
term and such revisions could be material.
<PAGE>F-12
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and circumstances
indicate that the cost of assets or other 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 - In October, 1995, the Financial Accounting
Standards Board (FASB) issued a new statement titled "Accounting for Stock-
Based Compensation" (FAS 123) which the Company adopted January 1, 1996.
FAS 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on fair value. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting the new
method in the notes to the financial statements. Transactions in equity
instruments with non-employees for goods or services must be accounted for
on the fair value method. The Company has elected not to adopt the fair
value accounting prescribed by FAS 123 for employees, but is subject to the
disclosure requirements prescribed by FAS 123.
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. The Company does not believe it has any significant
concentrations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments under FAS Statement No. 107, 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, 1996.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - The FASB recently issued
Statement of Financial Accounting Standards 128, "Earnings per Share" and
Statement of Financial Accounting Standards 129 "Disclosure of Information
About an Entity's Capital Structure." Statement 128 provides a different
method of calculating earnings per share than is currently used in
accordance with Accounting Principles Board Opinion 15 "Earnings per Share."
Statement 128 provides for the calculation of "basic" and "diluted" earnings
per share. Basic earning per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. Statement 129
establishes standards for disclosing information about an entity's capital
structure. Statements 128 and 129 are effective for financial statements
issued for periods ending after December 15, 1997. Their implementation is
not expected to have a material effect on the consolidated financial
statements.
<PAGE>F-13
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
The FASB has also issued Statement of Financial Accounting Standards 130
"Reporting Comprehensive Income" and Statement of Financial Accounting
Standards 131 "Disclosures About Segments of an Enterprise and Related
Information." Statement 130 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, Statement 130 requires that all items that are
required to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that displays
with the same prominence as other financial statements. Statement 131
supersedes Statement of Financial Accounting Standards 14 "Financial
Reporting for Segments of a Business Enterprise." Statement 131 establishes
standards on the way that public companies report financial 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. Statement 131 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.
Statements 130 and 131 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.
UNAUDITED INFORMATION - The balance sheet as of September 30, 1997 and the
statements of operations for the nine month periods ended September 30, 1996
and 1997 were taken from the Company's books and records without audit.
However, in the opinion of management, such information includes all
adjustments (consisting only of normal accruals), which are necessary to
properly reflect the financial position of the Company as of September 30,
1997 and the results of operations for the nine months ended September 30,
1996 and 1997. The results of operations for the interim periods presented
are not necessarily indicative of those expected for the year.
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 $8,193,395 for the
year ended December 31, 1996, its negative working capital of $1,243,756 and
its stockholders' deficit of $1,040,467 as of December 31, 1996. The
Company's continued existence is dependent upon its ability to raise
substantial capital, to generate revenues and to significantly improve
operations.
<PAGE>F-14
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
Management has taken several actions in response to these conditions. In
February 1997, the Company acquired Sierra Vista in exchange for shares of
its common stock (See Note 1). As a condition of completing the
transaction, Sierra Vista raised approximately $3,000,000 in a private
placement of its common stock, of which in excess of $2,000,000 was
allocated for the Company's operations. In June 1997, the Company obtained
a $5,000,000 convertible debt facility from a shareholder (See Note 6). The
Company has also retained an investment advisor to assist in raising capital
through a private placement (See Note 7). Management believes that these
actions will allow the Company to continue as a going concern.
Accordingly, the financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amount and classification of liabilities or any other adjustment that
might be necessary should the Company be unable to continue as a going
concern.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
(Unaudited)
Computer and equipment $ 176,537 $ 715,126
Office equipment and furniture 28,629 59,894
---------- ----------
205,166 775,020
Accumulated depreciation 21,175 124,957
---------- ----------
$ 183,991 $ 650,063
========== ==========
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(Unaudited)
Accrued payroll and benefits $ 421,367 $ 340,955
Accrued consulting 164,094 216,402
Payable for agreement - 122,000
termination
Other 231,464 413,738
---------- ------------
$ 816,925 $ 1,093,095
========== ============
<PAGE>F-15
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
6. NOTES PAYABLE:
DECEMBER 31,
1996
------------
Note payable-related party in the
original amount of $50,000 bearing
interest at 18%, collateralized by
certain stock of the Company, due on $ 6,678
demand (See Note 8) ==========
In June 1997, the Company obtained a $5,000,000 convertible debt facility
from a shareholder with interest at 10%, secured by all assets of the
Company. The debt is convertible into common stock at 80% of the market
price for shares of common stock at the time a draw is funded. At September
30, 1997 the balance due, including accrued interest totaled $2,165,398 and
is shown in notes payable. Additionally, the Company has recorded
interest expense totaling $541,349 for the below market value conversion
feature of the debt to shares of common stock.
7. 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.
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.
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 incentive options granted pursuant to the plan are not 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. 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. The
Company has recognized $2,292,406 in compensation expense related to these
services for the options and $454,210 for the stock for the year ended
December 31, 1996.
<PAGE>F-16
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
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 revenue 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.
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.
During 1997, the Company granted options under the 1996 Plan to purchase
635,190 shares of common stock to employees who were hired in 1996. The
options were granted with exercise prices ranging from $0.50 to $3.00 per
share, expire in 2001 and vest over three years from the date of hire. The
Company has recognized $201,467 in compensation expense related to the 1996
service period for the year ended December 31, 1996.
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.
In April 1997, the Company granted options to purchase 1,320,640 shares of
common stock to employees under the 1996 Plan. The options were granted
with exercise prices ranging from $0.50 to $3.375 per share, expire in 2002
and vest over three years or upon attainment of certain performance
criteria.
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 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 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.
<PAGE>F-17
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
The following table sets forth activity for all options granted under the
1996 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 2,678,640 2.55
Forfeited (512,250) 1.62
Exercised - -
--------- -----------
BALANCE, September 30, 1997 2,535,890 $ 2.60
========= ===========
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 Plan during 1996 and through September 30, 1997.
1996
----
NUMBER EXERCISE MARKET
OF SHARES PRICE PRICE
--------- -------- ------
Market price equal to
exercise price - $ - $ -
Market price greater than
exercise price 369,500 1.62 6.39
Exercise price greater than
market price - - -
<PAGE>F-18
INNOVACOM AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
1997
----
NUMBER EXERCISE MARKET
OF SHARES PRICE PRICE
--------- -------- ------
Market price equal to
exercise price 738,300 $ 3.04 $ 3.04
Market price greater than
exercise price 1,201,390 2.00 3.29
Exercise price greater than
market price 600,000 3.67 2.85
At December 31, 1996 and September 30, 1997, options to purchase 169,500 and
500,857 shares, respectively, were exercisable at prices ranging from $.001
per share to $2.75. The remaining 2,035,033 options outstanding at
September 30, 1997 become exercisable as follows:
WEIGHTED
NUMBER OF AVERAGE
YEAR ENDING DECEMBER 31, SHARES EXERCISE PRICE
- ------------------------- --------- --------------
1997 318,200 $2.39
1998 1,122,767 3.03
1999 375,786 1.69
2000 218,280 3.22
--------- -----
2,035,033 $2.70
========= =====
If not previously exercised, all options outstanding at September 30, 1997
will expire during the year ended December 31, 2002.
The following is a summary of activity during the year ended December 31,
1996 and the period ended September 30, 1997 for all 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
<PAGE>F-19
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
--------- -------------
Vested options exercised
by consultants (30,000) .50
---------- --------
Outstanding, December 31, 1996 4,200,000 3.00
Vested options granted to
consultants 222,160 2.84
Options granted to directors 60,000 3.00
--------- --------
Outstanding, September 30, 1997 4,482,160 $ 2.99
========= ========
Presented below is a comparison of the weighted average exercise price and
market price of the Company's common stock on the measurement date for all
non-plan options granted during 1996 and September 30, 1997:
1996
----
NUMBER EXERCISE MARKET
OF SHARES PRICE PRICE
--------- -------- ------
Market price equal to
exercise price 30,000 $ .50 $ .50
Market price greater than
exercise price 700,000 3.00 6.25
Exercise price greater
than market price 3,500,000 3.00 .50
<PAGE>F-20
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
1997
----
NUMBER EXERCISE MARKET
OF SHARES PRICE PRICE
--------- -------- -------
Market price equal to
exercise price 102,500 $ 3.30 $ 3.30
Market price greater than
exercise price 179,660 2.62 5.09
Exercise price greater
than market price - - -
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FAS 123 for employees. Had compensation cost for stock
options issued to employees been determined based on the fair value at grant
date for awards in 1996 and for the period ended September 30, 1997
consistent with the provisions of FAS 123, the Company's net loss and net
loss per share would have been adjusted to the proforma amounts indicated
below:
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
Net loss $ (8,229,908) $ (9,245,770)
Net loss per common share $ (.98) $ (.56)
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 was $3.22 per share.
The following assumptions were used for grants in 1996: risk-free interest
rate of 6.17%; expected lives of three years; dividend yield of 0%; and
expected volatility of 164.7%.
8. 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.
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 September 30, 1997, the
Company had not made this investment.
LEASES
The Company leases office space in California under a long-term operating
lease. The Company's lease includes the cost of real property taxes and
maintenance expenses. Future minimum lease payments for all non-cancelable
operating leases are as follows:
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ----------
1997 $ 150,402
1998 41,052
----------
$ 191,454
==========
<PAGE>F-21
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
Rent expense was $55,728 and $ 0 for 1996 and 1995, respectively.
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 three year's salary for termination without cause.
CONSULTING AGREEMENTS
The Company has entered into non-cancelable consulting agreements. Future
minimum payments under these agreements are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1997 $ 167,000
1998 60,000
1999 25,000
---------
$ 252,000
=========
The Company recorded $141,000 in expense related to these contracts for
1996.
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.
Subsequent to December 31, 1996, 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 that any settlement would not have a material adverse
impact on the Company.
On June 18, 1997, the Decorah Company and Edwin Reedholm, a shareholder and
former director and officer, commenced a lawsuit seeking to recover in
excess of $900,000 on a promissory note given to the plaintiffs by Digital
Hollywood, Inc., a company controlled by the Company's president. The
Company's president allegedly guaranteed the note through the pledging of
approximately six million shares of his personal Company 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 accrued interest, and $69,746 in accrued wages and other expenses
(See Notes 5 and 6). Management believes that this lawsuit will have no
additional material adverse impact on the Company.
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. Management intends to pursue and defend this lawsuit vigorously and
believes that no material adverse impact will arise as a result of the
litigation.
<PAGE>F-22
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
Future Tel, Inc., a third party, 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 participated in a voluntary
mediation, which has resulted in a tentative agreement of $100,000. The
Company has accrued this amount as of December 31, 1996.
PRODUCT LICENSE
In March 1996, a company controlled by the Company's president contributed a
license to the Company. The Company has recorded the license at the cost
recorded by the contributing company of $1,275,000. The license grants the
Company rights to use and grant sublicenses to use proprietary technology to
develop the MPEG-2 video encoding systems on a chip. In accordance with
Statement of Financial Accounting Standards 2, the cost of intangibles that
are acquired from others for a particular research and development project
and that have no alternative future use are research and development costs
at the time the costs are incurred. As stated in Note 2, research and
development costs are charged to operations in the period incurred.
Consequently, the cost of acquiring the license was charged to research and
development expense during 1996.
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:
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7
- ------ ------ ------ ------ ------ ------ ------
20% 15% 8% 5% 3% 1% 1%
The maximum amount of royalties to be paid under the license shall not
exceed $3,000,000.
9. RELATED PARTY TRANSACTION:
During 1996, the Company made advances to a company controlled by the
Company's president totaling $94,062. Management does not believe that the
advances made are realizable and, as a result, has written off the
receivable as of December 31, 1996.
<PAGE>F-23
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
10. INCOME TAXES:
Income tax expense is comprised of the following:
FOR YEAR ENDED MAY 11, 1990
DECEMBER 31, (INCEPTION) TO
DECEMBER 31,
1996 1996
-------------- --------------
Current
Federal $ - $ -
State 800 3,200
--------------- --------------
800 3,200
Deferred
Federal - -
State - -
--------------- --------------
Income tax expense $ 800 $ 3,200
=============== ==============
Deferred income tax assets (liabilities) are comprised of the following at
December 31, 1996:
Deferred income tax assets:
Net operating loss carryforward $ 1,588,893
Accrued vacation 11,183
Accrued wages 106,827
Notes receivable, allowance 37,755
Accrued settlement 20,069
Accrued expenses 54,186
Stock based compensation 1,021,060
Research and development credit 137,805
Other 3,877
----------
2,981,655
Valuation allowance 2,981,655
----------
Net deferred income tax asset
(liability) $ -
==========
<PAGE>F-24
INNOVACOM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1996 is unaudited)
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory tax rates to pre-tax income as follows:
FOR YEAR
ENDED DECEMBER
31, 1996
--------------
Total benefit computed by
applying the U.S. statutory
rate $ (2,785,482)
Non-deductible license cost 433,500
State income taxes 800
Effect of valuation allowance 2,351,982
------------
$ 800
============
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $3,656,985 available to offset future federal taxable income.
The carryforward expires in 2011. The Company also had net operating loss
carryforwards of approximately $3,715,244 to offset future California
taxable income. The carryforward expires in 2001.
11. SUBSEQUENT EVENTS:
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
has 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 has agreed to provide up to $150,000 in debt financing if TSA
obtains a certain purchase order.
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.
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 of $3.0625 per share, expire in 2002 and vest over
three years or upon attainment of certain performance criteria.
EXHIBIT 6-9
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of December 22,
1997 (this "AGREEMENT"), between InnovaCom, Inc., a Nevada corporation (the
"COMPANY"), and JNC Opportunity Fund Ltd., a Cayman Islands company (the
"PURCHASER").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and the
Purchaser desires to purchase an aggregate principal amount of $5,000,000
of the Company's 7% Convertible Debentures, due December 22, 2002 (the
"DEBENTURES"), which are convertible into shares of the Company's common
stock, par value $.001 per share (the "COMMON STOCK").
IN CONSIDERATION of the mutual covenants and agreements set forth
herein and for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF DEBENTURES; CLOSING
1I.1 THE CLOSING.
(a) THE CLOSING. (i) Subject to the terms and conditions set
forth in this Agreement, the Company shall issue and sell to the Purchaser
and the Purchaser shall purchase the Debentures for an aggregate purchase
price of $5,000,000. The closing of the purchase and sale of the
Debentures (the "CLOSING") shall take place at the offices of Robinson
Silverman Pearce Aronsohn & Berman LLP (the "ESCROW AGENT"), 1290 Avenue of
the Americas, New York, New York 10104, immediately following the execution
hereof or such later date as the parties shall agree. The date of the
Closing is hereinafter referred to as the "CLOSING DATE."
(ii) Prior to the Closing, the parties shall deliver or
shall cause to be delivered to the Escrow Agent such items as are required
to be delivered by them in accordance with and subject to the terms and
conditions of the Escrow Agreement, dated as of the date hereof, by and
among the Company, the Purchaser and the Escrow Agent (the "ESCROW
AGREEMENT"), including the following: (A) the Company shall deliver (1)
Debentures, registered in the name of the Purchaser, with an aggregate
principal amount of $5,000,000, (2) two Common Stock Purchase Warrants in
the forms of Exhibit D1 and Exhibit D2 attached hereto (collectively, the
"WARRANTS"), each registered in the name of the Purchaser, and (3) the
legal opinion of Bartel Eng Linn & Schroder, substantially in the form of
EXHIBIT C ("LEGAL OPINION"); (B) the Purchaser shall deliver $5,000,000;
and (C) each party hereto shall deliver all other executed instruments,
agreements and certificates as are required to be delivered hereunder by or
on their behalf at the Closing.
1I.2 FORM OF DEBENTURES. The Debentures shall be in the form of
EXHIBIT A.
For purposes of this Agreement, "CONVERSION PRICE," "ORIGINAL
ISSUE DATE," "CONVERSION DATE" "TRADING DAY" and "PER SHARE MARKET VALUE"
shall have the meanings set forth in the Debentures; "MARKET PRICE" as at
any date shall mean the average Per Share Market Value for the five (5)
Trading Days immediately preceding such date, and "BUSINESS DAY" shall mean
any day except Saturday, Sunday and any day which shall be a federal legal
holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2II.1 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company hereby makes the following representations and warranties to the
Purchaser:
(a) ORGANIZATION AND QUALIFICATION. The Company is a
corporation, duly incorporated, validly existing and in good standing under
the laws of the Nevada, with the requisite corporate power and authority to
own and use its properties and assets and to carry on its business as
currently conducted. The Company has no subsidiaries other than as set
forth in SCHEDULE 2.1(A) attached hereto (collectively, the
"SUBSIDIARIES"). Each of the Subsidiaries is a corporation, duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the full power and authority to own
and use its properties and assets and to carry on its business as currently
conducted. Each of the Company and the Subsidiaries is duly qualified to
do business and is in good standing as a foreign corporation in each
jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to
be so qualified or in good standing, as the case may be, could not,
individually or in the aggregate, (x) adversely affect the legality,
validity or enforceability of this Agreement, the Escrow Agreement, the
Debentures, the Warrants or the Registration Rights Agreement, dated the
date hereof, between the Company and the Purchaser (the "REGISTRATION
RIGHTS AGREEMENT" and, together with this Agreement, the Escrow Agreement,
the Debentures and the Warrants, the "TRANSACTION DOCUMENTS"), (y) have a
material adverse effect on the results of operations, assets, prospects, or
condition (financial or otherwise) of the Company and the Subsidiaries,
taken as a whole, or (z) adversely impair the Company's ability to perform
fully on a timely basis its obligations under any Transaction Document (any
of the foregoing, a "MATERIAL ADVERSE EFFECT").
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to
carry out its obligations thereunder. The execution and delivery of each
of the Transaction Documents by the Company and the consummation by it of
the transactions contemplated thereby have been duly authorized by all
necessary action on the part of the Company. Each of the Transaction
Documents has been duly executed by the Company and when delivered in
accordance with the terms thereof shall constitute the legal, valid and
binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or similar laws relating to, or affecting generally the enforcement of,
creditors' rights and remedies or by other equitable principles of general
application. Neither the Company nor any Subsidiary is in violation of any
of the provisions of its respective articles of incorporation, by-laws or
other charter documents.
(c) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is set forth in SCHEDULE 2.1(C). No shares of
Common Stock are entitled to preemptive or similar rights, nor is any
holder of the Common Stock entitled to preemptive or similar rights arising
out of any agreement or understanding with the Company by virtue of any of
the Transaction Documents. Except as disclosed in SCHEDULE 2.1(C), there
are no outstanding options, warrants, script rights to subscribe to, calls
or commitments of any character whatsoever relating to, or, except as a
result of the purchase and sale of the Debentures and Warrants hereunder,
securities, rights or obligations convertible into or exchangeable for, or
giving any Person any right to subscribe for or acquire any shares of
Common Stock, or contracts, commitments, understandings, or arrangements by
which the Company or any Subsidiary is or may become bound to issue
additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. To the knowledge of the Company,
except as specifically disclosed in the SEC Documents (as defined below) or
SCHEDULE 2.1(C), no Person (as defined below) beneficially owns (as
determined pursuant to Rule 13d-3 promulgated under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT")) or has the right to acquire
by agreement with or by obligation binding upon the Company, beneficial
ownership of in excess of 5% of the Common Stock. There are no agreements
or arrangements under which the Company or any Subsidiary is obligated to
register the sale or resale of any of their securities under the Securities
Act (other than as contemplated in the Registration Rights Agreement). A
"PERSON" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
(d) ISSUANCE OF DEBENTURES AND WARRANTS. The Debentures and the
Warrants are duly authorized, and, when issued in accordance with the terms
hereof, shall be validly issued, fully paid and nonassessable, free and
clear of all liens, encumbrances and rights of first refusals of any kind
(collectively, "LIENS"). The Company has and at all times while the
Debentures and the Warrants are outstanding will maintain an adequate
reserve of duly authorized shares of Common Stock to enable it to perform
its conversion, exercise and other obligations under this Agreement, the
Warrants and the Debentures and in no circumstances shall such reserved and
available shares of Common Stock be less than the sum of (i) two times the
number of shares of Common Stock as would be issuable upon conversion in
full of the Debentures, assuming such conversion were effected on the
Original Issue Date or the Filing Date (as defined in the Registration
Rights Agreement), whichever yields a lower Conversion Price, (ii) the
number of shares of Common Stock as are issuable as payment of interest on
the Debentures, and (iii) the number of shares of Common Stock as are
issuable upon exercise in full of the Warrants. The shares of Common Stock
issuable upon conversion of the Debentures, as payment of interest in
respect thereof and upon exercise of the Warrants are sometimes referred to
herein as the "UNDERLYING SHARES," and the Debentures, Warrants and
Underlying Shares are, collectively, the "SECURITIES." When issued in
accordance with the terms of the Debentures and the Warrants, the
Underlying Shares will be duly authorized, validly issued, fully paid and
nonassessable, free and clear of all Liens.
(e) NO CONFLICTS. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated thereby do not and will not (i)
conflict with or violate any provision of the Company's articles of
incorporation, bylaws or other charter documents (each as amended through
the date hereof) or (ii) subject to obtaining the consents referred to in
Section 2.1(f), conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument (evidencing a
Company debt or otherwise) to which the Company is a party or by which any
property or asset of the Company is bound or affected, or (iii) result in a
violation of any law, rule, regulation, order, judgment, injunction, decree
or other restriction of any court or governmental authority to which the
Company is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company is bound or
affected, except in the case of each of clauses (ii) and (iii), as could
not, individually or in the aggregate, have or result in a Material Adverse
Effect. The business of the Company is not being conducted in violation of
any law, ordinance or regulation of any governmental authority, except for
violations which, individually or in the aggregate, do not have a Material
Adverse Effect.
(f) CONSENTS AND APPROVALS. Except as specifically set forth in
SCHEDULE 2.1(F), neither the Company nor any Subsidiary is required to
obtain any consent, waiver, authorization or order of, or make any filing
or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents other
than (i) the filing of a registration statement covering the resale of the
Underlying Shares by the Purchaser (the "UNDERLYING SECURITIES REGISTRATION
STATEMENT") with the Securities and Exchange Commission (the "COMMISSION"),
which shall be filed in the time period set forth in the Registration
Rights Agreement, (ii) the application for the listing of the Underlying
Shares on or with any national securities exchange, market or quotation
system on which the Common Stock is hereafter listed for trading, (iii)
blue sky securities filings as contemplated by Section 3.5, (iv) the filing
of a Form D with the Commission and (v) other than, in all other cases,
where the failure to obtain such consent, waiver, authorization or order,
or to give or make such notice or filing, could not have or result in,
individually or in the aggregate, a Material Adverse Effect (together with
the consents, waivers, authorizations, orders, notices and filings referred
to in SCHEDULE 2.1(F), the "REQUIRED APPROVALS").
(g) LITIGATION; PROCEEDINGS. Except as specifically disclosed
in the Disclosure Materials (as hereinafter defined), there is no action,
suit, notice of violation, proceeding or investigation pending or, to the
best knowledge of the Company, threatened against or affecting the Company
or any of its Subsidiaries or any of their respective properties before or
by any court, governmental or administrative agency or regulatory authority
(Federal, state, county, local or foreign) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the
Transaction Documents or the Securities or (ii) could, individually or in
the aggregate, have or result in a Material Adverse Effect.
(h) NO DEFAULT OR VIOLATION. Neither the Company nor any
Subsidiary (i) is in default under or in violation of (and no event has
occurred which has not been waived which, with notice or lapse of time or
both, would result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a claim that it is
in default under or that it is in violation of, any indenture, loan or
credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound, (ii) is in
violation of any order of any court, arbitrator or governmental body, or
(iii) is in violation of any statute, rule or regulation of any
governmental authority, except as could not individually or in the
aggregate, have or result in, individually or in the aggregate, a Material
Adverse Effect.
(i) PRIVATE OFFERING. Assuming the accuracy of the
representations and warranties of the Purchaser set forth in Section
2.2(b)-(f), the issuance and sale of the Securities to the Purchaser as
contemplated hereby are exempt from the registration requirements of the
Securities Act. Neither the Company nor any Person acting on its behalf
has taken or will take any action which might subject the offering,
issuance or sale of the Securities to the registration requirements of the
Securities Act.
(j) SEC DOCUMENTS. The Company has provided to the Purchaser
the Company's Form 10SB filed with the Commission on December 12, 1997 (the
"SEC DOCUMENTS" and, together with the Schedules to this Agreement and
other documents and information furnished by or on behalf of the Company at
any time prior to the Closing, the "DISCLOSURE MATERIALS") on a timely
basis or has received a valid extension of such time of filing and has
filed any such SEC Documents prior to the expiration of any such extension.
As of their respective dates and subject to comments by the Commission, the
SEC Documents complied in all material respects with the requirements of
the Securities Act and the Exchange Act and the rules and regulations of
the Commission promulgated thereunder, and none of the SEC Documents, when
filed, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company
included in the SEC Documents comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis during the periods involved, except
as may be otherwise specified in such financial statements or the notes
thereto, and fairly present in all material respects the financial position
of the Company as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case
of unaudited statements, to normal year-end audit adjustments. Since
January 1, 1997, except as specifically disclosed in the SEC Documents, (a)
there has been no event, occurrence or development that has had or that
could have or result in a Material Adverse Effect, (b) the Company has not
incurred any liabilities (contingent or otherwise) other than (x)
liabilities incurred in the ordinary course of business consistent with
past practice and (y) liabilities not required to be reflected in the
Company's financial statements pursuant to GAAP, (c) the Company has not
altered its method of accounting or the identity of its auditors and (d)
the Company has not declared or made any payment or distribution of cash or
other property to stockholders or officers or directors (other than in
compliance with existing Company stock option plans) with respect to its
capital stock, or purchased, redeemed (or made any agreements to purchase
or redeem) any shares of capital stock. The Company last filed audited
financial statements with the Commission on December 12, 1997, and has not
received any comments from the Commission in respect thereof.
(k) INVESTMENT COMPANY. The Company is not, and is not an
Affiliate of an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(l) CERTAIN FEES. Except for fees payable to Cardinal Capital
Management, Inc., CDC Consulting, Inc. and Elizabeth Hagopian, no fees or
commissions will be payable by the Company to any broker, financial
advisor, finder, investment banker, or bank with respect to the
transactions contemplated hereby. The Purchaser shall have no obligation
with respect to such fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section
that may be due in connection with the transactions contemplated hereby.
The Company shall indemnify and hold harmless the Purchaser, its respective
employees, officers, directors, agents, and partners, and their respective
Affiliates (as such term is defined under Rule 405 promulgated under the
Securities Act), from and against all claims, losses, damages, costs
(including the costs of preparation and attorney's fees) and expenses
suffered in respect of any such claimed or existing fees.
(m) SOLICITATION MATERIALS. The Company has not (i) distributed
any offering materials in connection with the offering and sale of the
Securities other than the Disclosure Materials and any amendments and
supplements thereto or (ii) solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
(n) EXCLUSIVITY. The Company shall not issue and sell
Debentures to any Person other than the Purchaser.
(o) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. The
Company has not in the two years preceding the date hereof received written
notice from any stock exchange, market or trading facility on which the
Common Stock is or has been listed or quoted to the effect that the Company
is not in compliance with the listing, maintenance or other requirements of
such exchange, market, trading or quotation facility. The Company has no
reason to believe that it does not now or will not in the future meet any
such requirements.
(p) PATENTS AND TRADEMARKS. The Company has, or has rights to
use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses and rights which are
necessary for use in connection with its business and which the failure to
so have would have a Material Adverse Effect (collectively, the
"INTELLECTUAL PROPERTY RIGHTS"). To the best knowledge of the Company,
there is no existing infringement of any of the Intellectual Property
Rights.
(r) DISCLOSURE. All information relating to or concerning the
Company set forth in the Transaction Documents or provided to the Purchaser
or its representatives and counsel in connection with the transactions
contemplated hereby is true and correct in all material respects and does
not fail to state any material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which
they were made, not misleading. The Company confirms that it has not
provided to the Purchaser or any of its agents or counsel any information
that constitutes or might constitute material nonpublic information. The
Company understands and confirms that the Purchaser shall be relying on the
foregoing representation in effecting transactions in securities of the
Company.
2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser
hereby makes the following representations and warranties to the Company.
(a) ORGANIZATION; AUTHORITY. The Purchaser is an entity
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite power and authority to
enter into and to consummate the transactions contemplated by the
Transaction Documents and to carry out its obligations thereunder. The
acquisition of the Securities to be acquired hereunder by the Purchaser has
been duly authorized by all necessary action on the part of the Purchaser.
Each of this Agreement, the Registration Rights Agreement and the Escrow
Agreement has been duly executed and delivered by the Purchaser and
constitutes the valid and legally binding obligation of the Purchaser,
enforceable against it in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity.
(b) INVESTMENT INTENT. The Purchaser is acquiring the
Securities to be acquired hereunder by the Purchaser for its own account
for investment purposes only and not with a view to or for distributing or
reselling such Securities or any part thereof or interest therein, without
prejudice, however, to the Purchaser's right, subject to the provisions of
this Agreement and the Registration Rights Agreement, at all times to sell
or otherwise dispose of all or any part of such Securities pursuant to an
effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration.
(c) PURCHASER STATUS. At the time the Purchaser was offered the
Securities, it was, at the date hereof, it is, and at the Closing Date, it
will be, an "accredited investor" as defined in Rule 501(a) under the
Securities Act.
(d) EXPERIENCE OF PURCHASER. The Purchaser either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment.
(e) ABILITY OF PURCHASER TO BEAR RISK OF INVESTMENT. The
Purchaser acknowledges that the Securities are speculative investments and
involve a high degree of risk and the Purchaser is able to bear the
economic risk of an investment in the Securities and, at the present time,
is able to afford a complete loss of such investment.
(f) ACCESS TO INFORMATION. The Purchaser acknowledges receipt
of the Disclosure Materials and further acknowledges that it has been
afforded (i) the opportunity to ask such questions as it has deemed
necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the offering of the Securities, and
the merits and risks of investing in the Securities, (ii) access to
information about the Company and the Company's financial condition,
results of operations, business, properties, management and prospects
sufficient to enable it to evaluate its investment, and (iii) the
opportunity to obtain such additional information which the Company
possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the
investment and to verify the accuracy and completeness of the information
contained in the Disclosure Materials. Neither such inquiries nor any
other investigation conducted by or on behalf of the Purchaser or its
representatives or counsel shall modify, amend or affect the Purchaser's
right to rely on the truth, accuracy and completeness of the Disclosure
Materials and the Company's representations and warranties contained in the
Transaction Documents.
(g) RELIANCE. The Purchaser understands and acknowledges that
(i) the Securities to be acquired by it hereunder are being offered and
sold to it without registration under the Securities Act in a private
placement that is exempt from the registration provisions of the Securities
Act and (ii) the availability of such exemption, depends in part on, and
the Company will rely upon the accuracy and truthfulness of, the foregoing
representations and such Purchaser hereby consents to such reliance.
The Company acknowledges and agrees that the Purchaser makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 TRANSFER RESTRICTIONS. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act,
to the Company or pursuant to an available exemption from or in a
transaction not subject to the registration requirements thereof. In
connection with any transfer of any Securities other than pursuant to an
effective registration statement or to the Company, the Company may require
the transferor thereof to provide to the Company an opinion of counsel
selected by the transferor, the form and substance of which opinion shall
be reasonably satisfactory to the Company, to the effect that such transfer
does not require registration under the Securities Act. Notwithstanding
the foregoing, the Company hereby consents to and agrees to register any
transfer by the Purchaser to an Affiliate of the Purchaser, or any
transfers among any such Affiliates provided that the transferee certifies
to the Company that it is an "accredited investor" as defined in Rule
501(a) under the Securities Act. The Purchaser or Affiliate transferee
shall have the rights of the Purchaser under this Agreement and the
Registration Rights Agreement.
(b) The Purchaser agrees to the imprinting, so long as is
required by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS.
[FOR DEBENTURES ONLY] THIS DEBENTURE IS SUBJECT TO CERTAIN
RESTRICTIONS ON CONVERSION SET FORTH IN SECTION 3.8 OF A CONVERTIBLE
DEBENTURE PURCHASE AGREEMENT, DATED AS OF DECEMBER 22, 1997, BETWEEN
INNOVACOM, INC. (THE "COMPANY") AND THE ORIGINAL HOLDER HEREOF. A
COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY.
Underlying Shares shall not contain the legend set forth above if
the conversion of Debentures, exercise of Warrants or other issuances of
Underlying Shares as contemplated hereby, as the case may be, occurs at any
time while an Underlying Securities Registration Statement is effective
under the Securities Act or, in the event there is not an effective
Underlying Securities Registration Statement at such time, if in the
opinion of counsel to the Company such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission).
In the event the legend referenced above is required pursuant to this
Section 3.1(b) at the time of the initial issuance of Underlying Shares,
the Company agrees that it will provide the Purchaser, upon request, with a
certificate or certificates representing Underlying Shares, free from such
legend at such time as such legend is no longer required hereunder. The
Company may not make any notation on its records or give instructions to
any transfer agent of the Company which enlarge the restrictions of
transfer set forth in this Section 3.1(b).
3.2 ACKNOWLEDGEMENT OF DILUTION. The Company acknowledges that the
issuance of Underlying Shares upon (i) conversion of the Debentures and as
payment of interest thereon and (ii) exercise of the Warrants may result in
dilution of the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company further
acknowledges that its obligation to issue Underlying Shares in accordance
with the Debentures and the Warrants is unconditional and absolute
regardless of the effect of any such dilution.
3.3 FURNISHING OF INFORMATION. As long as the Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to
Section 13(a) or 15(d) of the Exchange Act. If at any time prior to the
date on which the Purchaser may resell all of their Underlying Shares
without volume restrictions pursuant to Rule 144(k) promulgated under the
Securities Act (as determined by counsel to the Company pursuant to a
written opinion letter to such effect, addressed and acceptable to the
Company's transfer agent for the benefit of and enforceable by the
Purchaser) the Company is not required to file reports pursuant to such
sections, it will prepare and furnish to the Purchaser and make publicly
available in accordance with Rule 144(c) promulgated under the Securities
Act annual and quarterly financial statements, together with a discussion
and analysis of such financial statements in form and substance
substantially similar to those that would otherwise be required to be
included in reports required by Section 13(a) or 15(d) of the Exchange Act
in the time period that such filings would have been required to have been
made under the Exchange Act. The Company further covenants that it will
take such further action as any holder of Securities may reasonably
request, all to the extent required from time to time to enable such Person
to sell Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 promulgated under the
Securities Act, including the legal opinion referenced above in this
Section. Upon the request of any such Person, the Company shall deliver to
such Person a written certification of a duly authorized officer as to
whether it has complied with such requirements.
3.4 USE OF DISCLOSURE MATERIALS. The Company consents to the use
of the Disclosure Materials and any information provided by or on behalf of
the Company pursuant to Section 3.3, and any amendments and supplements
thereto, in connection with resales of the Securities other than pursuant
to an effective registration statement.
3.5 BLUE SKY LAWS. In accordance with the Registration Rights
Agreement, the Company shall qualify the Underlying Shares under the
securities or Blue Sky laws of such jurisdictions as the Purchaser may
request and shall continue such qualification at all times until the
Purchaser notifies the Company in writing that it no longer own Securities;
PROVIDED, HOWEVER, that neither the Company nor its Subsidiaries shall be
required in connection therewith to qualify as a foreign corporation where
they are not now so qualified or to take any action that would subject the
Company to general service of process in any such jurisdiction where it is
not then so subject.
3.6 INTEGRATION. The Company shall not and shall use its best
efforts to ensure that no Affiliate shall sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined
in Section 2 of the Securities Act) that would be integrated with the offer
or sale of the Securities in a manner that would require the registration
under the Securities Act of the issue or sale of the Securities to the
Purchaser.
3.7 INCREASE IN AUTHORIZED SHARES. At such time as the Company
would be, if a notice of conversion or exercise (as the case may be) were
to be delivered on such date, precluded from (a) converting the full
outstanding principal amount of Debentures (and paying any accrued but
unpaid interest in respect thereof in shares of Common Stock) that remain
unconverted at such date or (b) honoring the exercise in full of the
Warrants due to the unavailability of a sufficient number of shares of
authorized but unissued or re-acquired Common Stock, the Board of Directors
of the Company shall promptly (and in any case within 30 Business Days from
such date) prepare and mail to the shareholders of the Company proxy
materials requesting authorization to amend the Company's restated
certificate of incorporation to increase the number of shares of Common
Stock which the Company is authorized to issue to at least such number of
shares as reasonably requested by the Purchaser in order to provide for
such number of authorized and unissued shares of Common Stock to enable the
Company to comply with its conversion, exercise and reservation of shares
obligations as set forth in this Agreement, the Debentures and the
Warrants. In connection therewith, the Board of Directors shall (a) adopt
proper resolutions authorizing such increase, (b) recommend to and
otherwise use its best efforts to promptly and duly obtain stockholder
approval to carry out such resolutions (and hold a special meeting of the
shareholders no later than the 60th day after delivery of the proxy
materials relating to such meeting) and (c) within 5 Business Days of
obtaining such shareholder authorization, file an appropriate amendment to
the Company's certificate of incorporation to evidence such increase.
3.8 PURCHASER OWNERSHIP OF COMMON STOCK. The Purchaser shall not
convert Debentures or exercise its Warrant to the extent such conversion or
exercise would result in it beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder)
in excess of 4.999% of the then issued and outstanding shares of Common
Stock, including shares issuable upon conversion of the Debentures held by
it after application of this Section. To the extent that the limitation
contained in this Section applies, the determination of whether Debentures
are convertible (in relation to other securities owned by the Purchaser)
and of which portion of the principal amount of such Debentures are
convertible shall be in the sole discretion of the Purchaser, and the
submission of Debentures for conversion shall be deemed to be the
Purchaser's determination of whether such Debentures are convertible (in
relation to other securities owned by the Purchaser) and of which portion
of such Debentures are convertible, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation to verify
or confirm the accuracy of such determination. Nothing contained herein
shall be deemed to restrict the right of the Purchaser to convert
Debentures at such time as such conversion will not violate the provisions
of this Section. The provisions of this Section may be waived by the
Purchaser upon not less than 75 days prior notice to the Company, and the
provisions of this Section shall continue to apply until such 75th day (or
later, if stated in the notice of waiver).
3.9 LISTING OF UNDERLYING SHARES. The Company will use its best
efforts to list the Common Stock for trading on the Nasdaq SmallCap Market
or Nasdaq National Market as soon as possible after the Closing Date. If
the Common Stock hereafter is listed for trading on the Nasdaq National
Market, Nasdaq SmallCap Market (or on the American Stock Exchange or New
York Stock Exchange, or any other national securities market or exchange),
then the Company shall (1) take all necessary steps to list the Underlying
Shares thereon, including the preparation of any required additional
listing applications therefor covering at least the sum of (i) two times
the number of Underlying Shares as would be issuable upon a conversion in
full of the then outstanding principal amount of Debentures (plus all
Underlying Shares are issuable as payment of interest thereon, assuming all
such interest were paid in shares of Common Stock) and upon exercise in
full of the then unexercised portion of the Warrants and (2) provide to the
Purchaser evidence of such listing, and the Company shall thereafter
maintain the listing of its Common Stock on such exchange or market as long
as Underling Shares are issuable and/or outstanding.
3.10 CONVERSION PROCEDURES. EXHIBIT F sets forth the procedures
with respect to the conversion of the Debentures, including the form of
legal opinion, if necessary, that shall be rendered to the Company's
transfer agent and such other information and instructions as may be
reasonably necessary to enable the Purchaser to exercise its right of
conversion smoothly and expeditiously.
3.11 PURCHASER'S RIGHTS IF TRADING IN COMMON STOCK IS SUSPENDED OR
DELISTED. If at any time while the Purchaser (or any assignee thereof)
owns any Securities, the average value of shares of Common Stock traded on
the OTC Bulletin Board in each week, measured over a four week period, on a
rolling basis, is less than $750,000 or there are fewer than ten (10)
market makers actively making a market in the Common Stock (or, if after
the Closing Date the Common Stock is listed for trading on any of the
exchanges, markets or trading facilities contemplated in Section 3.9, if
the Common Stock is delisted or suspended from trading on such exchange,
market or trading facility, other than as a result of the suspension of
trading in securities on such market or exchange generally, or temporary
suspensions pending the release of material information) for more than
three (3) Trading Days, then, notwithstanding anything to the contrary
contained in any Transaction Document, at the Purchaser's option
exercisable by written notice to the Company, the Company shall repay the
entire principal amount of then outstanding Debentures (and all accrued and
unpaid interest thereon) and redeem all then outstanding Underlying Shares
then held by the Purchaser, at an aggregate purchase price equal to the sum
of (I) the aggregate outstanding principal amount of Debentures then held
by the Purchaser divided by the Conversion Price on (a) the day prior to
the date of such suspension or delisting, (b) the day of such notice or (c)
the date of payment in full of the repurchase price calculated under this
Section, whichever is less, and multiplied by the Market Price preceding
(x) the day prior to the date of such suspension or delisting, (y) the day
of such notice and (z) the date of payment in full of the repurchase price
calculated under this Section, whichever is greater, (II) the aggregate of
all accrued but unpaid interest and other non-principal amounts (including
liquidated damages, if any) then payable in respect of all Debentures to be
repaid, (III) the number of Underlying Shares then held by the Purchaser
multiplied by the Market Price immediately preceding (x) the day prior to
the date of such suspension or delisting, (y) the date of the notice or (z)
the date of payment in full by the Company of the repurchase price
calculated under this Section, whichever is greater, and (IV) interest on
the amounts set forth in I - III above accruing from the 5th day after such
notice until the repurchase price under this Section is paid in full at the
rate of 15% per annum.
3.12 USE OF PROCEEDS. The Company shall use all of the net
proceeds from the sale of the Securities for working capital and general
corporate purposes and not for the satisfaction of any Company debt (except
for reductions of the Company's indebtedness up to a maximum of $500,000)
or to redeem Company any equity or equity-equivalent securities. Pending
application of the proceeds of this placement in the manner permitted
hereby the Company will invest such proceeds in interest bearing accounts
and/or short-term, investment grade interest bearing securities.
3.13 NOTICE OF BREACHES. Each of the Company and the Purchaser
shall give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date
hereof, which would reasonably be likely to cause any representation or
warranty or other agreement of such party, as the case may be, contained in
the Transaction Document to be incorrect or breached as of such Closing
Date. However, no disclosure by either party pursuant to this Section
shall be deemed to cure any breach of any representation, warranty or other
agreement contained in any Transaction Document.
Notwithstanding the generality of the foregoing, the Company shall
promptly notify the Purchaser of any notice or claim (written or oral) that
it receives from any lender of the Company to the effect that the
consummation of the transactions contemplated by the Transaction Documents
violates or would violate any written agreement or understanding between
such lender and the Company, and the Company shall promptly furnish by
facsimile to the holders of the Debentures a copy of any written statement
in support of or relating to such claim or notice.
3.14 CONVERSION OBLIGATIONS OF THE COMPANY. The Company shall
honor conversions of the Debentures and exercises of the Warrants and shall
deliver Underlying Shares in accordance with the respective terms and
conditions and time periods set forth in the Debentures and the Warrants.
3.15 RIGHT OF FIRST REFUSAL; SUBSEQUENT REGISTRATIONS; CERTAIN
CORPORATE ACTIONS. (a) The Company shall not, directly or indirectly,
without the prior written consent of Encore Capital Management, L.L.C.
("ENCORE"), offer, sell, grant any option to purchase, or otherwise dispose
of (or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity or equity-equivalent
securities or any instrument that permits the holder thereof to acquire
Common Stock at any time over the life of the security or investment at a
price that is less than the market price of the Common Stock at the time of
issuance of such security or investment (a "SUBSEQUENT FINANCING") for a
period of 180 days after the Closing Date, except (i) the granting of
options or warrants to employees, officers and directors, and the issuance
of shares upon exercise of options granted, under any stock option plan
heretofore or hereinafter duly adopted by the Company, (ii) shares issued
upon exercise of any currently outstanding warrants and upon conversion of
any currently outstanding convertible preferred stock in each case
disclosed in SCHEDULE 3.1(C), and (iii) shares of Common Stock issued upon
conversion of Debentures, as payment of interest thereon, or upon exercise
of the Warrants in accordance with their respective terms, unless (A) the
Company delivers to Encore a written notice (the "SUBSEQUENT FINANCING
NOTICE") of its intention to effect such Subsequent Financing, which
Subsequent Financing Notice shall describe in reasonable detail the
proposed terms of such Subsequent Financing, the amount of proceeds
intended to be raised thereunder, the Person with whom such Subsequent
Financing shall be affected, and attached to which shall be a term sheet or
similar document relating thereto and (B) Encore shall not have notified
the Company by 5:00 p.m. (New York City time) on the tenth (10th) Trading
Day after its receipt of the Subsequent Financing Notice of its willingness
to cause the Purchaser to provide (or to cause its sole designee to
provide), subject to completion of mutually acceptable documentation,
financing to the Company on substantially the terms set forth in the
Subsequent Financing Notice. If Encore shall fail to notify the Company of
its intention to enter into such negotiations within such time period, the
Company may effect the Subsequent Financing substantially upon the terms
and to the Persons (or Affiliates of such Persons) set forth in the
Subsequent Financing Notice; PROVIDED, that the Company shall provide
Encore with a second Subsequent Financing Notice, and Encore shall again
have the right of first refusal set forth above in this paragraph (a), if
the Subsequent Financing subject to the initial Subsequent Financing Notice
shall not have been consummated for any reason on the terms set forth in
such Subsequent Financing Notice within thirty (30) Trading Days after the
date of the initial Subsequent Financing Notice with the Person (or an
Affiliate of such Person) identified in the Subsequent Financing Notice.
(b) Except Underlying Shares and other "Registrable Securities"
(as such term is defined in the Registration Rights Agreement) to be
registered in accordance with the Registration Rights Agreement, and other
than Company securities to be registered for resale in connection with
financings permitted pursuant to paragraph (a)(i) through (iii) of this
Section (other than the registration of securities on behalf of investment
consultants of the Company), the Company shall not, without the prior
written consent of the Purchaser, (i) issue or sell any of its or any of
its Affiliates' equity or equity-equivalent securities pursuant to
Regulation S promulgated under the Securities Act, or (ii) register for
resale any securities of the Company for a period of not less than 90
Trading Days after the date that the Underlying Securities Registration
Statement is declared effective by the Commission. Any days that the
Purchaser is unable to sell Underlying Shares under the Underlying
Securities Registration Statement shall be added to such 90 Trading Day
period for the purposes of (i) and (ii) above.
(c) As long as there are Debentures outstanding, the
Company shall not and shall cause the Subsidiaries not to, without the
consent of the holders of the Debentures, (i) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect
any rights of the holders of Debentures; (ii) repay, repurchase or offer to
repay, repurchase or otherwise acquire shares of its Common Stock other
than as to the Underlying Shares; or (iii) enter into any agreement with
respect to any of the foregoing.
3.16 TRANSFER OF INTELLECTUAL PROPERTY RIGHTS. Except in
connection with the sale of all or substantially all of the assets of the
Company that are covered under the Debentures, the Company shall not
transfer, sell or otherwise dispose of, any Intellectual Property Rights,
or allow the Intellectual Property Rights to become subject to any Liens,
or fail to renew such Intellectual Property Rights (if renewable and would
otherwise expire), without the prior written consent of the Purchaser.
3.17 CERTAIN SECURITIES LAWS DISCLOSURES; PUBLICITY. (a) The
Company shall timely file with the Commission a Form D promulgated under
the Securities Act as required under Regulation D promulgated under the
Securities Act and provide a copy thereof to the Purchaser promptly after
the filing thereof. The Company shall (i) issue a press release acceptable
to the Purchaser disclosing the transactions contemplated hereby within
three (3) Business Days after the Closing Date and (ii) file a Report on
Form 8-K disclosing this Agreement and the transactions contemplated hereby
within ten (10) Business Days after the Closing Date.
(b) In furtherance and in addition to the obligation of the
Company set forth in Section 3.18(a) above, the Company and the Purchaser
shall consult with each other in issuing any press releases or otherwise
making public statements with respect to the transactions contemplated
hereby and neither party shall issue any such press release or otherwise
make any such public statement without the prior written consent of the
other, which consent shall not be unreasonably withheld or delayed, except
that no prior consent shall be required if such disclosure is required by
law, in which such case the disclosing party shall provide the other party
with prior notice of such public statement.
3.18 CONVERSION TO PREFERRED STOCK. The parties hereto agree that
the Company shall have the right, exercisable by notice to the Purchaser
given not more than 45 days after the Closing Date, to require an exchange
of all Debentures issued and sold on the Closing Date into newly created
senior convertible preferred stock of the Company having such dividend,
conversion, redemption and other terms as are identical to the Debentures,
MUTATIS MUTANDIS; provided, that such exchange right may only be exercised
if (a) such exchange would not delay the filing or effectiveness of the
Underlying Securities Registration Statement, (b) such exchange would not
impair the conversion rights of the Purchaser as set forth in the
Debentures, as reasonably determined by the Purchaser and (c) the articles
of incorporation of the Company shall have been duly amended to provide for
the issuance of such preferred stock, as evidenced by a legal opinion of
the Company's outside legal counsel reasonably acceptable to the Purchaser.
The terms of such preferred stock shall be prepared at the expense of the
Company. Any and all representations, warranties, agreements, obligations
and remedies available to the holders of Debentures (including the
Purchaser) under the Transaction Documents with respect to the Debentures
shall be deemed to be available to and binding upon the holders of the
preferred stock and the Company, and the terms of the preferred stock shall
thereafter become a Transaction Document hereunder retroactive to the
Closing Date.
ARTICLE IV
MISCELLANEOUS
4.1 FEES AND EXPENSES. The Company shall pay the Purchaser at
the Closing $25,000 for their legal fees and disbursements in connection
with the preparation and negotiation of the Transaction Documents and for
their due diligence expenses and disbursements in connection with the
transactions contemplated hereby. Other than the amounts contemplated by
the immediately preceding sentence, and except as set forth in the
Registration Rights Agreement, each party shall pay the fees and expenses
of its advisers, counsel, accountants and other experts, if any, and all
other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The
Company shall pay all stamp and other taxes and duties levied in connection
with the issuance of the Debentures pursuant hereto. The Purchaser shall
be responsible for its own respective tax liability that may arise as a
result of the investment hereunder or the transactions contemplated by this
Agreement.
4.2 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with
the Exhibits and Schedules hereto, the Debentures and the Warrants contain
the entire understanding of the parties with respect to the subject matter
hereof and supersede all prior agreements and understandings, oral or
written, with respect to such matters.
4.3 NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior
to 7:00 p.m. (New York City time) on a Business Day, (ii) the Business Day
after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in the
Purchase Agreement later than 7:00 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) the
Business Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the
party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
If to the Company: InnovaCom, Inc.
2855 Kifer Road, Suite 100
Santa Clara, CA 95051
Facsimile No.: (408) 727-8778
Attn: Stanton Creasey
With copies to: Bartel Eng Linn & Schroder
300 Capital Mall, Suite 1100
Sacramento, CA 95814
Facsimile No.: (916) 442-3442
Attn: Scott Bartel
If to Purchaser: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Alan Brown
With copies to: Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
-and-
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
or such other address as may be designated in writing hereafter, in the
same manner, by such Person.
4.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by both the Company and the Purchaser; or, in the case of a
waiver, by the party against whom enforcement of any such waiver is sought.
No waiver of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in
the future or a waiver of any other provision, condition or requirement
hereof, nor shall any delay or omission of either party to exercise any
right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
4.5 HEADINGS. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
4.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and
permitted assigns. The Company may not assign this Agreement or any rights
or obligations hereunder without the prior written consent of the
Purchaser. Except as set forth in Section 3.1(a), the Purchaser may assign
this Agreement or any rights or obligations hereunder without the prior
written consent of the Company. The assignment by a party of this
Agreement or any rights hereunder shall not affect the obligations of such
party under this Agreement.
4.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and their respective permitted
successors and assigns and, other than with respect to permitted assignees
under Section 4.6, is not for the benefit of, nor may any provision hereof
be enforced by, any other person.
4.8 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
New York without regard to the principles of conflicts of law thereof.
Each party hereby irrevocably submits to the non-exclusive jurisdiction of
the state and federal courts sitting in the City of New York, borough of
Manhattan, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of the any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process
and consents to process being served in any such suit, action or proceeding
by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to
serve process in any manner permitted by law.
4.9 SURVIVAL. The representations, warranties, agreements and
covenants contained in this Agreement shall survive the Closing and the and
conversion of the Debentures and exercise of the Warrants.
4.10 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and
the same agreement and shall become effective when counterparts have been
signed by each party and delivered to the other party, it being understood
that both parties need not sign the same counterpart. In the event that
any signature is delivered by facsimile transmission, such signature shall
create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) the same with the same force and effect
as if such facsimile signature page were an original thereof.
4.11 SEVERABILITY. In case any one or more of the provisions of
this Agreement shall be invalid or unenforceable in any respect, the
validity and enforceability of the remaining terms and provisions of this
Agreement shall not in any way be affecting or impaired thereby and the
parties will attempt to agree upon a valid and enforceable provision which
shall be a reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this Debenture
Purchase Agreement to be duly executed by their respective authorized
persons as of the date first indicated above.
INNOVACOM, INC.
By:___________________________
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By:___________________________
Name:
Title:
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
Between
INNOVACOM, INC.
and
JNC OPPORTUNITY FUND LTD.
_____________________________
December 22, 1997
______________________________
EXHIBIT 6-10
EXHIBIT A
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON CONVERSION SET
FORTH IN SECTION 3.8 OF A CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, DATED
AS OF DECEMBER 22, 1997, BETWEEN INNOVACOM, INC. (THE "COMPANY") AND THE
ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY.
No. _-1 U.S. $250,000
INNOVACOM, INC.
7% CONVERTIBLE DEBENTURE DUE DECEMBER 22, 2002
THIS DEBENTURE is one of a series of duly authorized issued debentures
of InnovaCom, Inc., a corporation organized under the laws of the Nevada
and having a principal place of business at 2855 Kifer Road, Suite 100,
Santa Clara, California 95051 (the "COMPANY"), designated as its 7%
Convertible Debentures, due December 22, 2002 (the "DEBENTURES"), in an
aggregate principal amount of $5,000,000.
FOR VALUE RECEIVED, the Company promises to pay to JNC Opportunity
Fund Ltd., or registered assigns (the "HOLDER"), the principal sum of Two
Hundred Fifty Thousand Dollars ($250,000), on or prior to December 22, 2002
or such earlier date as the Debentures are required to be repaid as
provided hereunder (the "MATURITY DATE") and to pay interest to the Holder
on the principal sum at the rate of 7% per annum, payable quarterly in
arrears commencing December 31, 1997, but in no event later than the
earlier to occur of a Conversion Date (as defined in Section 4(a)(i)) for
such principal amount or the Maturity Date. Interest shall accrue daily
commencing on the Original Issue Date (as defined in Section 6) until
payment in full of the principal sum, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been made.
Interest shall be calculated on the basis of a 360-day year and for the
actual number of days elapsed. Interest hereunder will be paid to the
Person (as defined in Section 6) in whose name this Debenture (or one or
more predecessor Debentures) is registered on the records of the Company
regarding registration and transfers of the Debentures (the "DEBENTURE
REGISTER"). All overdue, accrued and unpaid interest and other amounts due
hereunder shall bear interest at the rate of 15% per annum (to accrue
daily) from the date such interest is due hereunder through and including
the date of payment. The principal of, and interest on, this Debenture are
payable in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts, at
the address of the Holder last appearing on the Debenture Register, except
that interest due on the principal amount (but not overdue interest) may,
at the Company's option, be paid in shares of Common Stock (as defined in
Section 6) calculated based upon the Conversion Price (as defined below) on
the date such interest was due. Other than the automatic conversion on
the Maturity Date as provided in Section 4(a) hereof, all amounts due
hereunder other than such interest shall be paid in cash and, notwithstanding
anything to the contrary contained herein, the Company may not issue
shares of Common Stock in payment of interest on the principal amount if:
(i) the number of shares of Common Stock at the time authorized, unissued
and unreserved for all purposes, or held as treasury stock, is
insufficient to pay interest hereunder in shares of Common Stock; (ii)
such shares are not either registered for resale pursuant to an Underlying
Securities Registration Statement (as defined in Section 6) or freely
transferable without volume restrictions pursuant to Rule 144(k) promulgated
under the Securities Act of 1933, as amended (the "SECURITIES ACT"), as
determined by counsel to the Company pursuant to a written opinion letter
addressed and in form and substance acceptable to the Holder and the
transfer agent for such shares; (iii) such shares are not "actively traded"
on the OTC Bulletin Board (or listed or quoted for trading on the American
Stock Exchange, Nasdaq National Market, Nasdaq SmallCap Market or The New
York Stock Exchange, and any other exchange on which the Common Stock is
then listed for trading (each, a "SUBSEQUENT MARKET")); or (iv) the issuance
of such shares would result in the recipient thereof beneficially owning more
than 4.999% of the issued and outstanding shares of Common Stock as
determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended. The Common Stock shall be deemed to be "actively traded"
on the OTC Bulletin Board under this Debenture, if (a) the average value
of the shares of Common Stock traded on the OTC Bulletin Board in each
week measured over a four (4) week period on a rolling basis equals or exceeds
$750,000 and (b) there are no fewer than ten (10) market makers actively
making a market in the Common Stock.
This Debenture is subject to the following additional provisions:
SECTION 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same but shall not be issuable in
denominations of less than integral multiplies of Fifty Thousand Dollars
($50,000) unless such amount represents the full principal balance of
Debentures outstanding to such Holder. No service charge will be made for
such registration of transfer or exchange.
SECTION 2. This Debenture has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Purchase Agreement. Prior to due presentment to the Company for transfer
of this Debenture, the Company and any agent of the Company may treat the
person in whose name this Debenture is duly registered on the Debenture
Register as the owner hereof for the purpose of receiving payment as herein
provided and for all other purposes, whether or not this Debenture is
overdue, and neither the Company nor any such agent shall be affected by
notice to the contrary.
SECTION 3. EVENTS OF DEFAULT.
(a) "EVENT OF DEFAULT", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment,
decree or order of any court, or any order, rule or regulation of any
administrative or governmental body):
(i) any default in the payment of the principal of, interest on
or liquidated damages in respect of, this Debenture, free of any claim
of subordination, as and when the same shall become due and payable
(whether on the applicable quarterly interest payment date, a
Conversion Date or the Maturity Date or by acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of, this Debenture, the Purchase Agreement or the Registration
Rights Agreement, and such failure or breach shall not have been
remedied within 10 days after the date on which notice of such failure
or breach shall have been given;
(iii) the Company or any of its subsidiaries shall commence, or
there shall be commenced against the Company or any such subsidiary a
case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences
any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is
commenced against the Company or any subsidiary thereof any such
bankruptcy, insolvency or other proceeding which remains undismissed
for a period of 60 days; or the Company or any subsidiary thereof is
adjudicated insolvent or bankrupt; or any order of relief or other
order approving any such case or proceeding is entered; or the Company
or any subsidiary thereof suffers any appointment of any custodian or
the like for it or any substantial part of its property which
continues undischarged or unstayed for a period of 60 days; or the
Company or any subsidiary thereof makes a general assignment for the
benefit of creditors; or the Company shall fail to pay, or shall state
that it is unable to pay, or shall be unable to pay, its debts
generally as they become due; or the Company or any subsidiary thereof
shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; or the Company or any
subsidiary thereof shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing; or
any corporate or other action is taken by the Company or any
subsidiary thereof for the purpose of effecting any of the foregoing;
(iv) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement
or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness of the Company in an
amount exceeding one hundred thousand dollars ($100,000), whether such
indebtedness now exists or shall hereafter be created and such default
shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable;
(v) the Common Stock shall fail to be actively traded on the OTC
Bulletin Board or fail to be listed or quoted for trading on any
Subsequent Market if after the Original Issue Date the Common Stock
shall be listed or quoted for trading on any such Subsequent Market,
or if the Common Stock shall be suspended from trading thereon without
being actively traded, relisted or having such suspension lifted, as
the case may be, within fifteen (15) days;
(vi) the Company shall be a party to any merger or consolidation
pursuant to which the Company shall not be the surviving entity (or,
if the Company is the surviving entity, the Company shall issue or
sell to another Person, or group thereof, in excess of 50% of the
Common Stock) or shall dispose of all or substantially all of its
assets in one or more transactions, or shall redeem more than a de
minimis number of shares of Common Stock (other than redemptions of
Underlying Shares);
(vii) an Underlying Securities Registration Statement shall not
have been declared effective by the Securities and Exchange Commission
(the "COMMISSION") on or prior to the 180th day after the Original
Issue Date;
(viii) an Event (as hereinafter defined) shall not have been
cured to the satisfaction of the Holder prior to the expiration of
thirty (30) days from the Event Date (as hereinafter defined) relating
thereto (other than an Event resulting from a failure of an Underlying
Securities Registration Statement to be declared effective by the
Commission on or prior to the 90th day after the Original Issue Date);
or
(ix) the Company shall fail to deliver certificates to the
Holder prior to the 15th day after the Conversion Date pursuant to
Section 4(b).
(b) If any Event of Default occurs and is continuing the full
principal amount of this Debenture (and, at the Holder's option, all other
Debentures then held by such Holder), together with interest and other
amounts owing in respect thereof, to the date of acceleration, to be, shall
become, immediately due and payable in cash. The aggregate amount payable
upon an Event of Default in respect of the Debentures shall be equal to the
sum of (i) the Mandatory Prepayment Amount plus (ii) the product of (A) the
number of Underlying Shares issued in respect of conversions or as payment
of interest hereunder and then held by the Holder and (B) the Per Share
Market Value on the date prepayment is demanded or the date the full
prepayment price is paid, whichever is greater. The Holder need not
provide and the Company hereby waives any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and
remedies hereunder and all other remedies available to it under applicable
law. Such declaration may be rescinded and annulled by Holder at any time
prior to payment hereunder. No such rescission or annulment shall affect
any subsequent Event of Default or impair any right consequent thereon.
SECTION 4. CONVERSION.
(a) This Debenture shall be convertible into shares of Common
Stock at the option of the Holder in whole or in part as follows: (1) 33%
of the aggregate principal amount of Debentures purchased pursuant to the
terms of the Purchase Agreement may be converted pursuant to this Section
at any time and from time to time upon the earlier to occur of (A) the date
an Underlying Securities Registration Statement is declared effective by
the Commission and (B) the 120th day after the Original Issue Date, (2) an
additional 33% of the aggregate principal amount of Debentures purchased
pursuant to the terms of the Purchase Agreement may be converted at any
time prior to the 150th day after the Original Issue Date, and (3) the
balance of the principal amount of Debentures purchased pursuant to the
terms of the Purchase Agreement may be converted at any time after 150 days
after the Original Issue Date and prior to the close of business on the
Maturity Date. On the Maturity Date, the principal and accrued interest of
this Debenture, if not previously converted or paid in full as provided
herein, shall be fully converted as of such date, as if the Holder had
given a timely Conversion Notice, as defined below, to effect a conversion
on such date. The number of shares of Common Stock as shall be issuable
upon a conversion hereunder shall be determined by dividing the outstanding
principal amount of this Debenture to be converted, plus all accrued but
unpaid interest thereon, by the Conversion Price (as defined below), each
as subject to adjustment as provided hereunder. The Holder shall effect
conversions by surrendering the Debentures (or such portions thereof) to be
converted, together with the form of conversion notice attached hereto as
EXHIBIT A (a "CONVERSION NOTICE") to the Company. Each Conversion Notice
shall specify the principal amount of Debentures to be converted and the
date on which such conversion is to be effected, which date may not be
prior to the date such Conversion Notice is deemed to have been delivered
hereunder (a "CONVERSION DATE"). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that such
Conversion Notice is deemed delivered hereunder. Subject to Section 4(b)
hereof and Section 3.8 of the Purchase Agreement, each Conversion Notice,
once given, shall be irrevocable. If the Holder is converting less than
all of the principal amount represented by the Debenture(s) tendered by the
Holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall honor such conversion to
the extent permissible hereunder and shall promptly deliver to such Holder
(in the manner and within the time set forth in Section 4(b)) a new
Debenture for such principal amount as has not been converted.
(b) Not later than three Trading Days after the Conversion Date,
the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other
than those required by Section 3.1(b) of the Purchase Agreement)
representing the number of shares of the Common Stock being acquired upon
the conversion of Debentures (subject to reduction pursuant to Section 3.8
of the Purchase Agreement), (ii) Debentures in a principal amount equal to
the principal amount of Debentures not converted; (iii) a bank check in the
amount of all accrued and unpaid interest (if the Company has elected and
is permitted hereunder to pay accrued interest in cash), together with all
other amounts then due and payable in accordance with the terms hereof, in
respect of Debentures tendered for conversion and (iv) if the Company has
elected to pay accrued interest in shares of the Common Stock,
certificates, which shall be free of restrictive legends and trading
restrictions (other than those required by Section 3.1(b) of the Purchase
Agreement), representing such number of shares of the Common Stock as
equals such interest divided by the Conversion Price calculated on the
Conversion Date; PROVIDED, HOWEVER, that the Company shall not be obligated
to issue certificates evidencing the shares of the Common Stock issuable
upon conversion of the principal amount of Debentures until Debentures are
delivered for conversion to the Company or the Holder notifies the Company
that such Debenture has been mutilated, lost, stolen or destroyed and
complies with Section 9 hereof. If in the case of any Conversion Notice
such certificate or certificates, including for purposes hereof, any shares
of the Common Stock to be issued on the Conversion Date on account of
accrued but unpaid interest hereunder, are not delivered to or as directed
by the Holder by the third Trading Day after a Conversion Date, the Holder
shall be entitled by written notice to the Company at any time on or before
its receipt of such certificate or certificates thereafter, to rescind such
conversion (whether subject to a Holder or a Company Conversion Notice), in
which event the Company shall immediately return the Debentures tendered
for conversion. If the Company fails to deliver to the Holder such
certificate or certificates pursuant to this Section, including for
purposes hereof, any shares of the Common Stock to be issued on the
Conversion Date on account of accrued but unpaid interest hereunder, prior
to the fifth Trading Day after the Conversion Date, the Company shall pay
to such Holder, in cash, as liquidated damages and not as a penalty, $1,500
for each day thereafter until the Company delivers such certificates (such
amount shall be also be due for each Trading Day after the date that the
Holder may rescind such conversion until such date as the Holder shall have
received the return of the principal amount of Debentures relating to such
rescission). If the Company fails to deliver to the Holder such
certificate or certificates pursuant to this Section prior to the 15th day
after the Conversion Date, the Company shall, upon notice from the Holder,
prepay such portion of the aggregate of the principal amount of Debentures
then held by such Holder, as requested by such Holder, for the Mandatory
Prepayment Amount, in cash. If any portion of the Mandatory Prepayment
Amount pursuant to this Section is not paid within seven days after notice
therefor is deemed delivered hereunder, the Company will pay interest on
the Mandatory Prepayment Amount at a rate of 15% per annum (to accrue
daily), in cash to such Holder, accruing from such seventh day until the
Mandatory Prepayment Amount, plus all accrued interest thereon, is paid in
full.
(c) (i) The conversion price (the "CONVERSION PRICE") in effect
on any Conversion Date shall be the lesser of (A) $3.47 (the "INITIAL
CONVERSION PRICE") and (B) the Applicable Percentage (as defined in Section
6) multiplied by the Average Price calculated on the Conversion Date;
PROVIDED, THAT, if (a) an Underlying Securities Registration Statement is
not filed on or prior to the 45th day after the Original Issue Date, or (b)
the Company fails to file with the Commission a request for acceleration in
accordance with Rule 12d1-2 promulgated under the Securities Exchange Act
of 1934, as amended, within five (5) days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission
that an Underlying Securities Registration Statement will not be "reviewed"
or is not subject to further review or comment by the Commission, or (c)
the Underlying Securities Registration Statement is not declared effective
by the Commission on or prior to the 120th day after the Original Issue
Date, or (d) such Underlying Securities Registration Statement is filed
with and declared effective by the Commission but thereafter ceases to be
effective as to all Registrable Securities (as such term is defined in the
Registration Rights Agreement) for more than twenty (20) days at any time
prior to the expiration of the "Effectiveness Period" (as such term as
defined in the Registration Rights Agreement), without being succeeded by a
subsequent Underlying Securities Registration Statement filed with and
declared effective by the Commission within twenty (20) days, or (e)
trading in the Common Stock shall fail to be actively traded on the OTC
Bulletin Board or if the Common Stock shall be suspended or delisted from
trading on any Subsequent Market for any reason for more than five (5)
days, or (f) the conversion rights of the Holders of Debentures are
suspended for any reason or if the Holder is not permitted to resell
Registrable Securities under the Underlying Securities Registration
Statement, or (g) an amendment to the Underlying Securities Registration
Statement is not filed by the Company with the Commission within fifteen
(15) days of the Commission's notifying the Company that such amendment is
required in order for the Underlying Securities Registration Statement to
be declared effective (any such failure being referred to as an "EVENT,"
and for purposes of clauses (a), (c) and (f) the date on which such Event
occurs, or for purposes of clauses (b) and (e) the date on which such five
(5) day period is exceeded, or for purposes of clause (d) the date which
such twenty (20) day period is exceeded, or for purposes of clause (g) the
date on which such fifteen (15) day period is exceeded, being referred to
as "EVENT DATE"), the Company shall pay, in cash, as liquidated damages and
not as a penalty, on the Event Date and on the first day of each month
thereafter until the Event is cured, 1.5% of the aggregate principal amount
of Debentures then outstanding pro rata to the holders thereof in
accordance with their holdings thereof.
(ii) If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock or any other
equity or equity equivalent securities payable in shares of the Common
Stock, (b) subdivide outstanding shares of the Common Stock into a larger
number of shares, (c) combine outstanding shares of the Common Stock into a
smaller number of shares, or (d) issue by reclassification of shares of the
Common Stock any shares of capital stock of the Company, the Initial
Conversion Price shall be multiplied by a fraction of which the numerator
shall be the number of shares of the Common Stock (excluding treasury
shares, if any) outstanding before such event and of which the denominator
shall be the number of shares of the Common Stock outstanding after such
event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all holders of the Common
Stock (and not to Holders of Debentures) entitling them to subscribe for or
purchase shares of the Common Stock at a price per share less than the Per
Share Market Value of the Common Stock at the record date mentioned below,
the Initial Conversion Price shall be multiplied by a fraction, of which
the denominator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants plus the number of additional shares of the Common
Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of the Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price of
the total number of shares so offered would purchase at such Per Share
Market Value. Such adjustment shall be made whenever such rights or
warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants. However, upon the expiration of any right or warrant
to purchase shares of the Common Stock the issuance of which resulted in an
adjustment in the Initial Conversion Price pursuant to this Section, if any
such right or warrant shall expire and shall not have been exercised, the
Initial Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to
the price which it would have been (but reflecting any other adjustments in
the Initial Conversion Price made pursuant to the provisions of this
Section 4 after the issuance of such rights or warrants) had the adjustment
of the Initial Conversion Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or purchase
only that number of shares of the Common Stock actually purchased upon the
exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of the Common Stock (and not
to Holders of Debentures) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security, then in each such
case the Initial Conversion Price at which Debentures shall thereafter be
convertible shall be determined by multiplying the Initial Conversion Price
in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the Per Share Market Value of the Common Stock
determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value of the Common Stock on such
record date less the then fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of the Common Stock as determined by
the Board of Directors in good faith; PROVIDED, HOWEVER, that in the event
of a distribution exceeding ten percent (10%) of the net assets of the
Company, such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) (an
"APPRAISER") selected in good faith by the holders of a majority in
interest of Debentures then outstanding; and PROVIDED, FURTHER, that the
Company, after receipt of the determination by such Appraiser shall have
the right to select an additional Appraiser, in good faith, in which case
the fair market value shall be equal to the average of the determinations
by each such Appraiser. In either case the adjustments shall be described
in a statement provided to the holders of Debentures of the portion of
assets or evidences of indebtedness so distributed or such subscription
rights applicable to one share of the Common Stock. Such adjustment shall
be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock or
any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, the Holder of this
Debenture shall have the right thereafter to, at its option, (A) convert
the then outstanding principal amount, together with all accrued but unpaid
interest and any other amounts then owing hereunder in respect of this
Debenture only into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of the Common
Stock following such reclassification or share exchange, and the Holders of
the Debentures shall be entitled upon such event to receive such amount of
securities, cash or property as the shares of the Common Stock of the
Company into which the then outstanding principal amount, together with all
accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Debenture could have been converted immediately prior to
such reclassification or share exchange would have been entitled or (B)
require the Company to prepay, from funds legally available therefor at the
time of such prepayment, the aggregate of its outstanding principal amount
of Debentures, plus all interest and other amounts due and payable thereon,
at a price determined in accordance with Section 3(b). The entire
prepayment price shall be paid in cash. This provision shall similarly
apply to successive reclassifications or share exchanges.
(vi) All calculations under this Section 4 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Initial Conversion Price is adjusted
pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly mail
to each Holder of Debentures a notice setting forth the Initial Conversion
Price after such adjustment and setting forth a brief statement of the
facts requiring such adjustment.
(viii) If:
A. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
B. the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common
Stock; or
C. the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital
stock of any class or of any rights; or
D. the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock of the
Company, any consolidation or merger to which the
Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of
any compulsory share of exchange whereby the Common
Stock is converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up
of the affairs of the Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of the Debentures, and shall cause
to be mailed to the Holders of Debentures at their last addresses as they
shall appear upon the stock books of the Company, at least 30 calendar days
prior to the applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the
purpose of such dividend, distribution, redemption, rights or warrants, or
if a record is not to be taken, the date as of which the holders of the
Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on
which such reclassification, consolidation, merger, sale, transfer or share
exchange is expected to become effective or close, and the date as of which
it is expected that holders of the Common Stock of record shall be entitled
to exchange their shares of the Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; PROVIDED, HOWEVER, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in
such notice. Holders are entitled to convert Debentures during the 30-day
period commencing the date of such notice to the effective date of the
event triggering such notice.
(d) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued shares of the Common
Stock solely for the purpose of issuance upon conversion of the Debentures
and payment of interest on the Debentures, each as herein provided, free
from preemptive rights or any other actual contingent purchase rights of
persons other than the Holders, not less than such number of shares of the
Common Stock as shall (subject to any additional requirements of the
Company as to reservation of such shares set forth in the Purchase
Agreement) be issuable (taking into account the adjustments and
restrictions of Section 4(c)) upon the conversion of the outstanding
principal amount of the Debentures and payment of interest hereunder. The
Company covenants that all shares of the Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized, issued and
fully paid, nonassessable and, if the Underlying Securities Registration
Statement has been declared effective under the Securities Act, freely
tradeable.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of
the Common Stock, but may if otherwise permitted, make a cash payment in
respect of any final fraction of a share based on the Per Share Market
Value at such time. If the Company elects not, or is unable, to make such
a cash payment, the holder shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of the Common Stock
on conversion of the Debentures shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the Holder of such
Debentures so converted and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting
the issuance thereof shall have paid to the Company the amount of such tax
or shall have established to the satisfaction of the Company that such tax
has been paid.
(g) Any and all notices or other communications or deliveries to
be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed
to the Company, at 2855 Kifer Road, Suite 100, Santa Clara, California
95051 (facsimile number (408) 727-8778), attention Chief Financial Officer,
or such other address or facsimile number as the Company may specify for
such purposes by notice to the Holders delivered in accordance with this
Section. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed
to each Holder of the Debentures at the facsimile telephone number or
address of such Holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior
to 7:00 p.m. (New York City time), (ii) the date after the date of
transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section later than 7:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) four days after deposit in the United States
mail, (iv) the Business Day following the date of mailing, if send by
nationally recognized overnight courier service, or (v) upon actual receipt
by the party to whom such notice is required to be given.
SECTION 5. OPTIONAL PREPAYMENT.
(a) The Company shall have the right, exercisable at any time
upon thirty (30) Trading Days prior written notice to the Holders of the
Debentures to be prepaid (the "OPTIONAL PREPAYMENT NOTICE") given at any
time after the 90th day following the date the Underlying Securities
Registration Statement has been declared effective by the Commission
(provided that any Trading Days that the holders are prohibited from
utilizing such Underlying Securities Registration Statement to resell
Underlying Shares, despite their desire to do so, shall be added to such 90
day period), to prepay, from funds legally available therefor at the time
of such prepayment, all or any portion of the outstanding principal amount
of the Debentures which have not previously been repaid or for which
Conversion Notices have not previously been delivered hereunder, at a price
equal to the Optional Prepayment Price (as defined below). Any such
prepayment by the Company shall be in cash and shall be free of any claim
of subordination. The Holders shall have the right to tender, and the
Company shall honor, Conversion Notices delivered prior to the expiration
of the thirtieth (30th) Trading Day after receipt by the Holders of an
Optional Prepayment Notice for such Debentures (such date, the "OPTIONAL
PREPAYMENT DATE").
(b) If any portion of the Optional Prepayment Price shall not be
paid by the Company by the Optional Prepayment Date, the Optional
Prepayment Price shall be increased by 15% per annum (to accrue daily)
until paid (which amount shall be paid as liquidated damages and not as a
penalty). In addition, if any portion of the optional Prepayment Price
remains unpaid through the expiration of the Optional Prepayment Date, the
Holder subject to such prepayment may elect by written notice to the
Company to either (i) demand conversion in accordance with the formula and
the time period therefor set forth in Section 4 of any portion of the
principal amount of Debentures for which the Optional Prepayment Price,
plus accrued liquidated damages thereof, has not been paid in full (the
"UNPAID PREPAYMENT PRINCIPAL AMOUNT"), in which event the applicable Per
Share Market Value shall be the lower of the Per Share Market Value
calculated on the Optional Prepayment Date and the Per Share Market Value
as of the Holder's written demand for conversion, or (ii) invalidate AB
INITIO such optional redemption, notwithstanding anything herein contained
to the contrary. If the Holder elects option (i) above, the Company shall
within three (3) Trading Days such election is deemed delivered hereunder
to the Holder the shares of Common Stock issuable upon conversion of the
Unpaid Prepayment Amount subject to such conversion demand and otherwise
perform its obligations hereunder with respect thereto; or, if the Holder
elects option (ii) above, the Company shall promptly, and in any event not
later than three Trading Days from receipt of notice of such election,
return to the Holder new Debentures for the full Unpaid Prepayment
Principal Amount. If, upon an election under option (i) above, the Company
fails to deliver the shares of Common Stock issuable upon conversion of the
Unpaid Prepayment Principal Amount prior to the fifth Trading Day after
such election is deemed delivered hereunder, the Company shall pay to the
Holder in cash, as liquidated damages and not as a penalty, $1,500 per day
until the Company delivers such Common Stock to the Holder.
(c) The "OPTIONAL PREPAYMENT PRICE" for any Debentures shall
equal the sum of (i) the principal amount of Debentures to be prepaid, plus
all accrued and unpaid interest thereon, divided by the Conversion Price on
(x) the Optional Prepayment Date or (y) the date the Optional Prepayment
Price is paid in full, whichever is less, multiplied by the Average Price
on (x) the Optional Prepayment Date or (y) the date the Optional Prepayment
Price is paid in full, whichever is greater, and (ii) all other amounts,
expenses, costs and liquidated damages due in respect of such principal
amount.
SECTION 6. DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:
"APPLICABLE PERCENTAGE" means (i) 85% for any conversion honored
prior to the 120th day after the Original Issue Date, (ii) 82.5% for any
conversion honored on or after the 120th day and prior to the 150th after
the Original Issue Date, and (iii) 80% for any conversion honored on or
after the 150th day after the Original Issue Date. For purposes hereof, a
conversion is deemed to have been honored when the shares of Common Stock
issuable in respect of such conversion are received by the Holder in
accordance with the terms hereof.
"AVERAGE PRICE" on any date means the average Per Share Market
Value for the five (5) Trading Days immediately preceding such date.
"BUSINESS DAY" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in
the State of New York are authorized or required by law or other government
action to close.
"COMMON STOCK" means the Company's common stock, $.001 par value
per share, and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal the
sum of (i) the principal amount of Debentures to be prepaid, plus all
accrued and unpaid interest thereon, divided by the Conversion Price on (x)
the date the Mandatory Prepayment Amount is demanded or (y) the date the
Mandatory Prepayment Amount is paid in full, whichever is less, multiplied
by the Average Price on (x) the date the Mandatory Prepayment Amount is
demanded or (y) the date the Mandatory Prepayment Amount is paid in full,
whichever is greater, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of such Debentures.
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance
of any Debentures regardless of the number of transfers of any Debenture
and regardless of the number of instruments which may be issued to evidence
such Debenture.
"PER SHARE MARKET VALUE" on any particular date means (a) the
closing bid price per share of the Common Stock on such date as quoted by
Bloomberg Information Services, Inc. ("Bloomberg"), or similar
organizations or agencies succeeding to its functions of reporting prices,
or (b) if the Common Stock is no longer reported by Bloomberg, or such
similar organizations or agencies, such closing bid price per share shall
be determined by reference to "Pink Sheet" quotes for the relevant
conversion period as determined in good faith by the Holder or (c) if the
Common Stock is not then publicly traded, the fair market value of a share
of Common Stock as determined by an appraiser selected in good faith by the
Holders of a majority in interest of the Debentures.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Convertible Debenture Purchase
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from
time to time in accordance with its terms.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from
time to time in accordance with its terms.
"TRADING DAY" means (a) a day on which the Common Stock is traded
on the Nasdaq Stock Market or other stock exchange or market on which the
Common Stock has been listed, or (b) if the Common Stock is not listed on
the Nasdaq Stock Market or any stock exchange or market, a day on which the
Common Stock is traded on the over-the-counter market, as reported by the
OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC
Bulletin Board, a day on which the Common Stock is quoted on the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its
functions of reporting prices).
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance with
the terms hereof.
"UNDERLYING SECURITIES REGISTRATION STATEMENT" means a
registration statement meeting the requirements set forth in the
Registration Rights Agreement, covering among other things the resale of
the Underlying Shares and naming the Holder as a "selling stockholder"
thereunder.
SECTION 7. Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of, interest and
liquidated damages (if any) on, this Debenture at the time, place, and
rate, and in the coin or currency, herein prescribed. This Debenture is a
direct obligation of the Company. This Debenture ranks PARI PASSU with all
other Debentures now or hereafter issued under the terms set forth herein.
The Company may only voluntarily prepay the outstanding principal amount on
the Debentures in accordance with Section 5 hereof.
SECTION 8. This Debenture shall not entitle the Holder to any of
the rights of a stockholder of the Company, including without limitation,
the right to vote, to receive dividends and other distributions, or to
receive any notice of, or to attend, meetings of stockholders or any other
proceedings of the Company, unless and to the extent converted into shares
of Common Stock in accordance with the terms hereof.
SECTION 9. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu
of or in substitution for a lost, stolen or destroyed debenture, a new
Debenture for the principal amount of this Debenture so mutilated, lost,
stolen or destroyed but only upon receipt of evidence of such loss, theft
or destruction of such Debenture, and of the ownership hereof, and
indemnity, if requested, all reasonably satisfactory to the Company.
SECTION 10. This Debenture shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The Company hereby irrevocably submits to the
non-exclusive jurisdiction of the state and federal courts sitting in the
City of New York, borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not
to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, or that such
suit, action or proceeding is improper. The Company hereby irrevocably
waives personal service of process and consents to process being served in
any such suit, action or proceeding by receiving a copy thereof sent to the
Company at the address in effect for notices to it under this instrument
and agrees that such service shall constitute good and sufficient service
of process and notice thereof. Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.
SECTION 11. Any waiver by the Company or the Holder of a breach
of any provision of this Debenture shall not operate as or be construed to
be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the
Holder to insist upon strict adherence to any term of this Debenture on one
or more occasions shall not be considered a waiver or deprive that party of
the right thereafter to insist upon strict adherence to that term or any
other term of this Debenture. Any waiver must be in writing.
SECTION 12. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in
effect, and if any provision is inapplicable to any person or circumstance,
it shall nevertheless remain applicable to all other persons and
circumstances.
SECTION 13. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day (or, if such next succeeding Business
Day falls in the next calendar month, the preceding Business Day in the
appropriate calendar month).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the Company has caused this Debenture to be
duly executed by a duly authorized officer as of the date first above
indicated.
INNOVACOM, INC.
By:________________________________
Name:
Title:
Attest:
By:___________________________
Name:
Title:
EXHIBIT A
INNOVACOM, INC
NOTICE OF CONVERSION
AT THE ELECTION OF THE HOLDER
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert Debenture No. _-1 into shares of
Common Stock, $.001 par value per share (the "Common Stock"), of INNOVACOM,
INC. (the "Company") according to the conditions hereof, as of the date
written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions
as reasonably requested by the Company in accordance therewith. No fee
will be charged to the holder for any conversion, except for such transfer
taxes, if any.
Conversion calculations:
Date to Effect Conversion
Principal Amount of Debentures to be Converted
Number of shares of Common Stock to be Issued
Applicable Conversion Price
Signature
Name
Address
EXHIBIT 6-11
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of December 22, 1997, by and between InnovaCom, Inc. a
Nevada corporation (the "COMPANY") and JNC Opportunity Fund Ltd., a Cayman
Islands company (the "PURCHASER").
This Agreement is made pursuant to the Convertible Debenture
Purchase Agreement, dated as of the date hereof between the Company and the
Purchaser (the "PURCHASE AGREEMENT").
The Company and the Purchaser hereby agree as follows:
1. DEFINITIONS
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms
in the Purchase Agreement. As used in this Agreement, the following terms
shall have the following meanings:
"ADVICE" shall have meaning set forth in Section 3(o).
"AFFILIATE" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "CONTROL,"
when used with respect to any Person, means the possession, direct or
indirect, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms of "AFFILIATED,"
"CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing.
"BUSINESS DAY" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in
the state of New York generally are authorized or required by law or other
government actions to close.
"CLOSING DATE" shall have the meaning set forth in the Purchase
Agreement.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Company's Common Stock, par value $.001
per share.
"DEBENTURES" means Company's 7% Convertible Debentures due
December 22, 2002 issued to the Purchaser pursuant to the Purchase
Agreement.
"EFFECTIVENESS DATE" means the 120th day following the Closing
Date.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in
Section 2(a).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FILING DATE" means the 45th day following the Closing Date.
"HOLDER" or "HOLDERS" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section
5(c).
"INDEMNIFYING PARTY" shall have the meaning set forth in Section
5(c).
"LOSSES" shall have the meaning set forth in Section 5(a).
"NEW YORK COURTS" shall have the meaning set forth in Section
7(j).
"PERSON" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Registration Statement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
"REGISTRABLE SECURITIES" means the shares of Common Stock
issuable upon (a) conversion in full of the Debentures, (b) exercise of the
Warrants and (c) payment of interest in respect of the Debentures;
PROVIDED, HOWEVER that in order to account for the fact that the number of
shares of Common Stock that are issuable upon conversion of Debentures is
determined in part upon the market price of the Common Stock at the time of
conversion, Registrable Securities contemplated by clause (a) of this
definition shall be deemed to include not less than 200% of the number of
shares of Common Stock into which the Debentures are convertible, assuming
such conversion occurred on the Closing Date or the Filing Date (whichever
date yields a lower Conversion Price, as such term is defined in the
Debentures). The initial Registration Statement shall cover at least such
number of shares of Common Stock as equals the sum of (x) 200% of the
number of shares of Common Stock into which the Debentures are convertible,
assuming such conversion occurred on the Closing Date or the Filing Date
(whichever date yields a lower Conversion Price), (y) interest thereon and
(z) 500,000 shares of Common Stock in respect of the Warrants. The Company
shall be required to file additional Registration Statements to the extent
the actual number of shares of Common Stock into which Debentures are
convertible (together with interest thereon) and Warrants are exercisable
exceeds the number of shares of Common Stock initially registered in
accordance with the immediately prior sentence. The Company shall have 10
Business Days to file such additional Registration Statement after notice
of the requirement thereof, which the Holders may give at such time when
the number of shares of Common Stock as are issuable upon conversion of
Debentures exceeds 175% of the number of shares of Common Stock into which
Debentures are convertible, assuming such conversion occurred on the
Closing Date or the Filing Date (whichever yields a lower Conversion Price.
"REGISTRATION STATEMENT" means the registration statement
contemplated by Section 2(a) (covering such number of Registrable
Securities and any additional Registration Statements contemplated in the
definition of Registrable Securities), including (in each case) the
Prospectus, amendments and supplements to such registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits
thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
"RULE 158" means Rule 158 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or
any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or
any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SPECIAL COUNSEL" means one law firm acting as counsel to the
Holders, for which the Holders will be reimbursed by the Company pursuant
to Section 4.
"UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a
registration in connection with which securities of the Company are sold to
an underwriter for reoffering to the public pursuant to an effective
registration statement.
"WARRANTS" means the Common Stock purchase warrants issued to the
Purchaser on the Closing Date.
2. SHELF REGISTRATION
(a) On or prior to the Filing Date the Company shall prepare and
file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form SB-2
(or, if the Company is not permitted to register the resale of the
Registrable Securities on Form SB-2, the Registration Statement shall be on
such other appropriate form in accordance herewith as the Holders of a
majority in interest of the Registrable Securities may consent). The
Company shall use its best efforts to cause the Registration Statement to
be declared effective under the Securities Act as promptly as possible
after the filing thereof, but in any event prior to the Effectiveness Date,
and shall use its best efforts to keep such Registration Statement
continuously effective under the Securities Act until the date which is
three years after the date that such Registration Statement is declared
effective by the Commission or such earlier date when all Registrable
Securities covered by such Registration Statement have been sold or may be
sold without volume restrictions pursuant to Rule 144(k) promulgated under
the Securities Act, as determined by the counsel to the Company pursuant to
a written opinion letter to such effect, addressed and acceptable to the
Company's transfer agent (the "EFFECTIVENESS PERIOD"); PROVIDED, HOWEVER,
that the Company shall not be deemed to have used its best efforts to keep
the Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being
able to sell the Registrable Securities covered by such Registration
Statement during the Effectiveness Period, unless such action is required
under applicable law or the Company has filed a post-effective amendment to
the Registration Statement and the Commission has not declared it
effective.
(b) If the Holders of a majority of the Registrable Securities
so elect, an offering of Registrable Securities pursuant to the
Registration Statement may be effected in the form of an Underwritten
Offering. In such event, and if the managing underwriters advise the
Company and such Holders in writing that in their opinion the amount of
Registrable Securities proposed to be sold in such Underwritten Offering
exceeds the amount of Registrable Securities which can be sold in such
Underwritten Offering, there shall be included in such Underwritten
Offering the amount of such Registrable Securities which in the opinion of
such managing underwriters can be sold, and such amount shall be allocated
PRO RATA among the Holders proposing to sell Registrable Securities in such
Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will
administer the offering will be selected by the Holders of a majority of
the Registrable Securities included in such offering upon consultation with
the Company. No Holder may participate in any Underwritten Offering
hereunder unless such Person (i) agrees to sell its Registrable Securities
on the basis provided in any underwriting agreements approved by the
Persons entitled hereunder to approve such arrangements and (ii) completes
and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of
such arrangements.
3. REGISTRATION PROCEDURES
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement (and any additional Registration
Statements as may be required) in accordance with Section 2(a), and cause
the Registration Statement to become effective and remain effective as
provided herein; PROVIDED, HOWEVER, that not less than five (5) Business
Days prior to the filing of the Registration Statement or any related
Prospectus or any amendment or supplement thereto (including any document
that would be incorporated or deemed to be incorporated therein by
reference), the Company shall (i) furnish to the Holders, their Special
Counsel and any managing underwriters, copies of all such documents
proposed to be filed, which documents (other than those incorporated or
deemed to be incorporated by reference) will be subject to the review of
such Holders, their Special Counsel and such managing underwriters, and
(ii) cause its officers and directors, counsel and independent certified
public accountants to respond to such inquiries as shall be necessary, in
the opinion of respective counsel to such Holders and such underwriters, to
conduct a reasonable investigation within the meaning of the Securities
Act. The Company shall not file the Registration Statement or any such
Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities, their Special Counsel, or any
managing underwriters, shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may
be necessary to keep the Registration Statement continuously effective as
to the applicable Registrable Securities for the Effectiveness Period and
prepare and file with the Commission such additional Registration
Statements in order to register for resale under the Securities Act all of
the Registrable Securities; (ii) cause the related Prospectus to be amended
or supplemented by any required Prospectus supplement, and as so
supplemented or amended to be filed pursuant to Rule 424 (or any similar
provisions then in force) promulgated under the Securities Act; (iii)
respond as promptly as practicable to any comments received from the
Commission with respect to the Registration Statement or any amendment
thereto and promptly provide the Holders true and complete copies of all
correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply with the provisions of the Securities Act and
the Exchange Act with respect to the disposition of all Registrable
Securities covered by the Registration Statement during the applicable
period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in
such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters immediately (and, in
the case of (i)(A) below, not less than five (5) days prior to such filing)
and (if requested by any such Person) confirm such notice in writing no
later than one (1) Business Day following the day (i)(A) when a Prospectus
or any Prospectus supplement or post-effective amendment to the
Registration Statement is proposed to be filed; (B) when the Commission
notifies the Company whether there will be a "review" of such Registration
Statement and whenever the Commission comments in writing on such
Registration Statement (the Company shall provide true and complete copies
thereof and all written responses thereto to each of the Holders) and (C)
with respect to the Registration Statement or any post-effective amendment,
when the same has become effective; (ii) of any request by the Commission
or any other Federal or state governmental authority for amendments or
supplements to the Registration Statement or Prospectus or for additional
information; (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for
that purpose; (iv) if at any time any of the representations and warranties
of the Company contained in any agreement (including any underwriting
agreement) contemplated hereby ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement
made in the Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in
any material respect or that requires any revisions to the Registration
Statement, Prospectus or other documents so that, in the case of the
Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness
of the Registration Statement or (ii) any suspension of the qualification
(or exemption from qualification) of any of the Registrable Securities for
sale in any jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection
with an Underwritten Offering, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment to the Registration Statement such
information as such managing underwriters and such Holders reasonably agree
should be included therein and (ii) make all required filings of such
Prospectus supplement or such post-effective amendment as soon as
practicable after the Company has received notification of the matters to
be incorporated in such Prospectus supplement or post-effective amendment;
PROVIDED, HOWEVER, that the Company shall not be required to take any
action pursuant to this Section 3(e) that would, in the opinion of counsel
for the Company, violate applicable law or be materially detrimental to the
business prospects of the Company.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent
reasonably requested by such Person (including those previously furnished
or incorporated by reference) promptly after the filing of such documents
with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and
any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders and any underwriters in
connection with the offering and sale of the Registrable Securities covered
by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use
its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions as any Holder or
underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by a Registration Statement; PROVIDED, HOWEVER, that the Company
shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction
where it is not then so subject or subject the Company to any material tax
in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement,
which certificates shall be free of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and registered in
such names as any such managing underwriters or Holders may request at
least three Business Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed
to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither the Registration
Statement nor such Prospectus will contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on any securities
exchange, quotation system, market or over-the-counter bulletin board, if
any, on which similar securities issued by the Company are then listed as
and when required pursuant to the Purchase Agreement.
(l) In the case of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and
substance as is customary in Underwritten Offerings) and take all such
other actions in connection therewith (including those reasonably requested
by any managing underwriters and the Holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and whether or not an
underwriting agreement is entered into, (i) make such representations and
warranties to such Holders and such underwriters as are customarily made by
issuers to underwriters in underwritten public offerings, and confirm the
same if and when requested; (ii) obtain and deliver copies thereof to each
Holder and the managing underwriters, if any, of opinions of counsel to the
Company and updates thereof addressed to each selling Holder and each such
underwriter, in form, scope and substance reasonably satisfactory to any
such managing underwriters and Special Counsel to the selling Holders
covering the matters customarily covered in opinions requested in
Underwritten Offerings and such other matters as may be reasonably
requested by such Special Counsel and underwriters; (iii) immediately prior
to the effectiveness of the Registration Statement or at the time of
delivery of any Registrable Securities sold pursuant thereto (at the option
of the underwriters), obtain and deliver copies to the Holders and the
managing underwriters, if any, of "cold comfort" letters and updates
thereof from the independent certified public accountants of the Company
(and, if necessary, any other independent certified public accountants of
any subsidiary of the Company or of any business acquired by the Company
for which financial statements and financial data is, or is required to be,
included in the Registration Statement), addressed to each Person and in
such form and substance as are customary in connection with Underwritten
Offerings; (iv) if an underwriting agreement is entered into, the same
shall contain indemnification provisions and procedures no less favorable
to the selling Holders and the underwriters, if any, than those set forth
in Section 7 (or such other provisions and procedures acceptable to the
managing underwriters, if any, and holders of a majority of Registrable
Securities participating in such Underwritten Offering; and (v) deliver
such documents and certificates as may be reasonably requested by the
Holders of a majority of the Registrable Securities being sold, their
Special Counsel and any managing underwriters to evidence the continued
validity of the representations and warranties made pursuant to clause
3(l)(i) above and to evidence compliance with any customary conditions
contained in the underwriting agreement or other agreement entered into by
the Company.
(m) Make available for inspection by the selling Holders, a
representative of such Holders, an underwriter participating in any
disposition of Registrable Securities, and an attorney or accountant
retained by such selling Holders or underwriters, at the offices where
normally kept, during reasonable business hours, all financial and other
records, pertinent corporate documents and properties of the Company and
its subsidiaries, and cause the officers, directors, agents and employees
of the Company and its subsidiaries to supply all information in each case
requested by any such Holder, representative, underwriter, attorney or
accountant in connection with the Registration Statement; PROVIDED,
HOWEVER, that any information that is determined in good faith by the
Company in writing to be of a confidential nature at the time of delivery
of such information shall be kept confidential by such Persons, unless (i)
disclosure of such information is required by court or administrative order
or is necessary to respond to inquiries of regulatory authorities; (ii)
disclosure of such information, in the opinion of counsel to such Person,
is required by law; (iii) such information becomes generally available to
the public other than as a result of a disclosure or failure to safeguard
by such Person; or (iv) such information becomes available to such Person
from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act
and Rule 158 not later than 45 days after the end of any 12-month period
(or 90 days after the end of any 12-month period if such period is a fiscal
year) (i) commencing at the end of any fiscal quarter in which Registrable
Securities are sold to underwriters in a firm commitment or best efforts
Underwritten Offering and (ii) if not sold to underwriters in such an
offering, commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which
statement shall cover said 12-month period, or end shorter periods as is
consistent with the requirements of Rule 158.
(o) The Company may require each selling Holder to furnish to
the Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such
selling Holder as is required by law to be disclosed in the Registration
Statement and the Company may exclude from such registration the
Registrable Securities of any such Holder who unreasonably fails to furnish
such information within a reasonable time after receiving such request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (if such reference to such Holder by name
or otherwise is not required by the Securities Act or any similar Federal
statute then in force) the deletion of the reference to such Holder in any
amendment or supplement to the Registration Statement filed or prepared
subsequent to the time that such reference ceases to be required.
Each Holder agrees by its acquisition of such Registrable
Securities that (i) it will not offer or sell any Registrable Securities
under the Registration Statement until it has received copies of the
Prospectus as then amended or supplemented as contemplated in Section 3(g)
and notice from the Company that such Registration Statement and any post-
effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it will comply with the prospectus delivery
requirements of the Securities Act as applicable to it in connection with
sales of Registrable Securities pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the
occurrence of any event of the kind described in Section 3(c)(ii),
3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi), such Holder will forthwith
discontinue disposition of such Registrable Securities until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended
Registration Statement contemplated by Section 3(j), or until it is advised
in writing (the "ADVICE") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.
4. REGISTRATION EXPENSES
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall, except as and to the
extent specified in Section 4(c), be borne by the Company whether or not
pursuant to an Underwritten Offering and whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be
made with The Nasdaq Stock Market, Inc. and each other securities exchange
or market on which Registrable Securities are required hereunder to be
listed and (B) in compliance with state securities or Blue Sky laws
(including, without limitation, fees and disbursements of counsel for the
underwriters or Holders in connection with Blue Sky qualifications of the
Registrable Securities and determination of the eligibility of the
Registrable Securities for investment under the laws of such jurisdictions
as the managing underwriters, if any, or the Holders of a majority of
Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable
Securities and of printing prospectuses if the printing of prospectuses is
requested by the managing underwriters, if any, or by the holders of a
majority of the Registrable Securities included in the Registration
Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company and Special Counsel for the
Holders, in the case of the Special Counsel, to a maximum amount of $5,000,
(v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions
contemplated by this Agreement. In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with
the consummation of the transactions contemplated by this Agreement
(including, without limitation, all salaries and expenses of its officers
and employees performing legal or accounting duties), the expense of any
annual audit, the fees and expenses incurred in connection with the listing
of the Registrable Securities on any securities exchange as required
hereunder.
(b) If the Holders require an Underwritten Offering pursuant to
the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of
the Underwriters (including any underwriting commissions and discounts) and
their legal counsel and accountants. By way of illustration which is not
intended to diminish from the provisions of Section 4(a), the Holders shall
not be responsible for, and the Company shall be required to pay the fees
or disbursements incurred by the Company (including by its legal counsel
and accountants) in connection with, the preparation and filing of a
Registration Statement and related Prospectus for such offering, the
maintenance of such Registration Statement in accordance with the terms
hereof, the listing of the Registrable Securities in accordance with the
requirements hereof, and printing expenses incurred to comply with the
requirements hereof.
5. INDEMNIFICATION
(a) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold
harmless each Holder, the officers, directors, agents (including any
underwriters retained by such Holder in connection with the offer and sale
of Registrable Securities), brokers (including brokers who offer and sell
Registrable Securities as principal as a result of a pledge or any failure
to perform under a margin call of Common Stock), investment advisors and
employees of each of them, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act) and the officers, directors, agents and employees of each
such controlling Person, to the fullest extent permitted by applicable law,
from and against any and all losses, claims, damages, liabilities,
settlements, judgments, costs (including, without limitation, costs of
preparation and attorneys' fees) and expenses (collectively, "LOSSES"), as
incurred, arising out of or relating to any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement
thereto or in any preliminary prospectus, or arising out of or relating to
any omission or alleged omission of a material fact required to be stated
therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the
extent, but only to the extent, that such untrue statements or omissions
are based solely upon information regarding such Holder furnished in
writing to the Company by or on behalf of such Holder expressly for use
therein, or to the extent that such information relates to such Holder or
such Holder's proposed method of distribution of Registrable Securities and
was reviewed and expressly approved in writing by such Holder expressly for
use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto. The Company shall
notify the Holders promptly of the institution, threat or assertion of any
Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement.
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its directors,
officers, agents and employees, each Person who controls the Company
(within the meaning of Section 15 of the Securities Act and Section 20 of
the Exchange Act), and the directors, officers, agents or employees of such
controlling Persons, to the fullest extent permitted by applicable law,
from and against all Losses (as determined by a court of competent
jurisdiction in a final judgment not subject to appeal or review) arising
solely out of or based solely upon any untrue statement of a material fact
contained in the Registration Statement, any Prospectus, or any form of
prospectus, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the
statements therein not misleading to the extent, but only to the extent,
that such untrue statement or omission is contained in any information so
furnished in writing by such Holder to the Company specifically for
inclusion in the Registration Statement or such Prospectus or to the extent
that such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Holder expressly for use in the
Registration Statement, such Prospectus or such form of Prospectus. In no
event shall the liability of any selling Holder hereunder be greater in
amount than the dollar amount of the net proceeds received by such Holder
upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity
hereunder (an "INDEMNIFIED PARTY"), such Indemnified Party promptly shall
notify the Person from whom indemnity is sought (the "INDEMNIFYING PARTY")
in writing, and the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the
Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided, that the failure of any
Indemnified Party to give such notice shall not relieve the Indemnifying
Party of its obligations or liabilities pursuant to this Agreement, except
(and only) to the extent that it shall be finally determined by a court of
competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed
in writing to pay such fees and expenses; or (2) the Indemnifying Party
shall have failed promptly to assume the defense of such Proceeding and to
employ counsel reasonably satisfactory to such Indemnified Party in any
such Proceeding; or (3) the named parties to any such Proceeding (including
any impleaded parties) include both such Indemnified Party and the
Indemnifying Party, and such Indemnified Party shall have been advised by
counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in
which case, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to
assume the defense thereof and such counsel shall be at the expense of the
Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent,
which consent shall not be unreasonably withheld. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, effect
any settlement of any pending Proceeding in respect of which any
Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on
claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within 10 Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that
an Indemnified Party is not entitled to indemnification hereunder;
PROVIDED, that the Indemnifying Party may require such Indemnified Party to
undertake to reimburse all such fees and expenses to the extent it is
finally judicially determined that such Indemnified Party is not entitled
to indemnification hereunder).
(d) CONTRIBUTION. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then
each Indemnifying Party, in lieu of indemnifying such Indemnified Party,
shall contribute to the amount paid or payable by such Indemnified Party as
a result of such Losses, in such proportion as is appropriate to reflect
the relative fault of the Indemnifying Party and Indemnified Party in
connection with the actions, statements or omissions that resulted in such
Losses as well as any other relevant equitable considerations. The
relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material
fact or omission or alleged omission of a material fact, has been taken or
made by, or relates to information supplied by, such Indemnifying Party or
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable by a party as a result of any Losses
shall be deemed to include, subject to the limitations set forth in Section
5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by PRO RATA
allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section 5(d),
the Purchaser shall not be required to contribute, in the aggregate, any
amount in excess of the amount by which the proceeds actually received by
the Purchaser from the sale of the Registrable Securities subject to the
Proceeding exceeds the amount of any damages that the Purchaser has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any Person who was not guilty
of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties.
6. MISCELLANEOUS
(a) REMEDIES. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or
the Company, as the case may be, in addition to being entitled to exercise
all rights granted by law and under this Agreement, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement. The Company and each Holder agree that monetary damages would
not provide adequate compensation for any losses incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby further
agrees that, in the event of any action for specific performance in respect
of such breach, it shall waive the defense that a remedy at law would be
adequate.
(b) NO INCONSISTENT AGREEMENTS. Except as and to the extent
specifically set forth in SCHEDULE 6(B) attached hereto, neither the
Company nor any of its subsidiaries has, as of the date hereof, nor shall
the Company or any of its subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its securities that is
inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Except as and to the
extent specifically set forth in SCHEDULE 6(B) attached hereto, neither the
Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its
securities to any Person. Without limiting the generality of the
foregoing, without the written consent of the Holders of a majority of the
then outstanding Registrable Securities, the Company shall not grant to any
Person the right to request the Company to register any securities of the
Company under the Securities Act unless the rights so granted are subject
in all respects to the prior rights in full of the Holders set forth
herein, and are not otherwise in conflict or inconsistent with the
provisions of this Agreement.
(c) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent
specifically set forth in SCHEDULE 6(B) attached hereto, neither the
Company nor any of its security holders (other than the Holders in such
capacity pursuant hereto) may include securities of the Company in the
Registration Statement other than the Registrable Securities, and the
Company shall not enter into any agreement providing any such right to any
of its securityholders.
(d) PIGGY-BACK REGISTRATIONS. If at any time during the
Effectiveness Period there is not an effective Registration Statement
covering all of the Registrable Securities and the Company shall determine
to prepare and file with the Commission a registration statement relating
to an offering for its own account or the account of others under the
Securities Act of any of its equity securities, other than on Form S-4 or
Form S-8 (each as promulgated under the Securities Act) or their then
equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities
issuable in connection with stock option or other employee benefit plans,
then the Company shall send to each holder of Registrable Securities
written notice of such determination and, if within twenty (20) days after
receipt of such notice, any such holder shall so request in writing, the
Company shall include in such registration statement all or any part of the
Registrable Securities such holder requests to be registered. No right to
registration of Registrable Securities under this Section shall be
construed to limit any registration otherwise required hereunder.
(e) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions
hereof may not be given, unless the same shall be in writing and signed by
the Company and the Holders of at least a majority of the then outstanding
Registrable Securities; PROVIDED, HOWEVER, that, for the purposes of this
sentence, Registrable Securities that are owned, directly or indirectly, by
the Company, or an Affiliate of the Company are not deemed outstanding.
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the
rights of other Holders may be given by Holders of at least a majority of
the Registrable Securities to which such waiver or consent relates;
PROVIDED, HOWEVER, that the provisions of this sentence may not be amended,
modified, or supplemented except in accordance with the provisions of the
immediately preceding sentence.
(f) NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior
to 7:00 p.m. (New York City time) on a Business Day, (ii) the Business Day
after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in the
Purchase Agreement later than 7:00 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) the
Business Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the
party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
If to the Company: InnovaCom, Inc.
2855 Kifer Road, Suite 100
Santa Clara, California 95051
Facsimile No.: (408) 727-8778
Attn: Chief Financial Officer
With copies to: Bartel Eng Linn & Schroder
300 Capital Mall, Suite 1100
Sacramento, California 95814
Facsimile No.: (916) 442-3442
Attn: Scott Bartel
If to the Purchaser: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Alan Brown
With copies to: Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
-and-
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears
in the stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the
same manner, by such Person.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each
of the parties and shall inure to the benefit of each Holder. The Company
may not assign its rights or obligations hereunder without the prior
written consent of each Holder. The Purchaser may assign its respective
rights hereunder in the manner and to the Persons as permitted under the
Purchase Agreement.
(h) ASSIGNMENT OF REGISTRATION RIGHTS. The rights of a
Purchaser hereunder, including the right to have the Company register for
resale Registrable Securities in accordance with the terms of this
Agreement, shall be automatically assignable by such Purchaser to any
assignee or transferee of all or a portion of the Debentures, the Warrants
and other Common Stock warrants referenced in the definition of Registrable
Securities or Registrable Securities without the consent of the Company if:
(i) such Purchaser agrees in writing with the transferee or assignee to
assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment, (ii) the Company
is, within a reasonable time after such transfer or assignment, furnished
with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to such registration rights
are being transferred or assigned, (iii) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section,
the transferee or assignee agrees in writing with the Company to be bound
by all of the provisions of this Agreement, and (iv) such transfer shall
have been made in accordance with the applicable requirements of the
Purchase Agreement. The rights to assignment shall apply to the
Purchaser's (and to subsequent) successors and assigns.
(i) COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same
with the same force and effect as if such facsimile signature were the
original thereof.
(j) GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement
shall be governed by and construed in accordance with the laws of the State
of New York, without regard to principles of conflicts of law. Each party
hereby irrevocably submits to the non-exclusive jurisdiction of any New
York state court sitting in the Borough of Manhattan, the state and federal
courts sitting in the City of New York or any federal court sitting in the
Borough of Manhattan in the City of New York (collectively, the "NEW YORK
COURTS") in respect of any Proceeding arising out of or relating to this
Agreement, and irrevocably accepts for itself and in respect of its
property, generally and unconditionally, jurisdiction of the New York
Courts. The Company irrevocably waives to the fullest extent it may
effectively do so under applicable law any objection that it may now or
hereafter have to the laying of the venue of any such proceeding brought in
any New York Court and any claim that any such Proceeding brought in any
New York Court has been brought in an inconvenient forum. Nothing herein
shall affect the right of any Holder. Each party hereby irrevocably waives
personal service of process and consents to process being served in any
such suit, action or proceeding by receiving a copy thereof sent to such
party at the address in effect for notices to it under this Agreement and
agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.
(k) CUMULATIVE REMEDIES. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(l) SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction
to be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in
full force and effect and shall in no way be affected, impaired or
invalidated, and the parties hereto shall use their reasonable efforts to
find and employ an alternative means to achieve the same or substantially
the same result as that contemplated by such term, provision, covenant or
restriction. It is hereby stipulated and declared to be the intention of
the parties that they would have executed the remaining terms, provisions,
covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.
(m) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(n) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the
Company or its Affiliates (other than the Purchaser or transferees or
successors or assigns thereof if such Persons are deemed to be Affiliates
solely by reason of their holdings of such Registrable Securities) shall
not be counted in determining whether such consent or approval was given by
the Holders of such required percentage.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
INNOVACOM, INC.
By: ___________________________
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By: ___________________________
Name:
Title:
EXHIBIT 6-12
ESCROW AGREEMENT
ESCROW AGREEMENT (this "AGREEMENT"), dated as of December 22,
1997, by and among InnovaCom, Inc. (the "COMPANY"), JNC Opportunity Fund
Ltd. (the "PURCHASER"), and Robinson Silverman Pearce Aronsohn & Berman LLP
(the "ESCROW AGENT").
RECITALS
A. Simultaneously with the execution of this Agreement, the
Company and the Purchaser have entered into a Convertible Debenture
Purchase Agreement, dated as of the date hereof (the "PURCHASE AGREEMENT"),
pursuant to which the Company is selling to the Purchaser certain 7%
Convertible Debentures Due December 22, 2002 (the "DEBENTURES") and certain
of the Company's common stock purchase warrants (the "WARRANTS").
Capitalized terms that are used and not otherwise defined in this Agreement
that are defined in the Purchase Agreement shall have the meaning set forth
in the Purchase Agreement.
B. The Escrow Agent is willing to act as escrow agent pursuant
to the terms of this Agreement with respect to the receipt and then
delivery of the Purchase Price (as described in Section 1.1 of the Purchase
Agreement) to be paid for the Debentures pursuant to Section 1.1 of the
Purchase Agreement less any amounts the Purchaser is to be reimbursed by
the Company under the Purchase Agreement (the "PURCHASE PRICE") and the
delivery of the Debentures and the Warrants, together with the Ancillary
Closing Documents (as defined below) and the Purchase Price, the
"CONSIDERATION").
C. Upon the closing of the transaction contemplated by the
Purchase Agreement (the "CLOSING") and the occurrence of an event described
in Section 2 below, the Escrow Agent shall cause the distribution of the
Consideration in accordance with the terms of this Agreement.
NOW, THEREFORE, IT IS AGREED:
1. DEPOSIT OF CONSIDERATION.
a. Concurrently with the execution of this Agreement, each
Purchaser shall deposit with the Escrow Agent the portion of the Purchase
Price due for the Debentures and the Warrant to be purchased by it at the
Closing in accordance with Section 1.1(a)(ii) of the Purchase Agreement and
the Company shall deliver to the Escrow Agent the Debentures and the
Warrants, registered in the name of the appropriate Purchaser, in
accordance with Section 1.1(a)(ii) of the Purchase Agreement and wiring
instructions for transfer of the Purchase Price by the Escrow Agent into an
account specified by the Company for such purpose. In addition, the
Purchaser and the Company shall deposit with the Escrow Agent all other
certificates and other documents required under the Purchase Agreement to
be delivered by them at the Closing (such certificates and other documents
being hereinafter referred to as the "ANCILLARY CLOSING DOCUMENTS").
(i) The Purchase Price shall be delivered by the
Purchaser to the Escrow Agent by wire transfer to the following account:
Citibank, N.A.
153 East 53rd Street
New York, NY 10043
ABA No.: 021-000-089
For the Account of
Robinson Silverman Pearce Aronsohn
& Berman LLP
Attorney Trust Account
Account No.: 37-204-162
Attention: Alexis Laurenceau
Reference: InnovaCom, Inc. (10849-16)
(ii) The Debentures, Warrants and the Ancillary
Documents shall be delivered to the Escrow Agent at its address for notice
indicated in Section 5(a).
b. Until termination of this Agreement as set forth in
Section 2, all additional Consideration paid by or which becomes payable
between the Company and the Purchaser shall be deposited with the Escrow
Agent.
c. The Purchaser and the Company understand that all
Consideration delivered to the Escrow Agent pursuant to Section 1(a) shall
be held in escrow in the Escrow Agent's interest bearing business account
until the Closing. After the Purchase Price has been received by the
Escrow Agent and all other conditions of Closing are met, the parties
hereto hereby authorize and instruct the Escrow Agent to promptly effect
the Closing.
d. At the Closing, Escrow Agent is authorized and directed
to deduct from the Purchase Price (i) $100,000 which will be paid to
Cardinal Capital Management, Inc. ("CARDINAL"), $150,000 which will be paid
to CDC Consulting, Inc. ("CDC") and $50,000 which will be paid to Elizabeth
Hagopian or her assigns in accordance with the engagement letter among the
Company, Cardinal, CDC and Elizabeth Hagopian relating to the transactions
contemplated by the Purchase Agreement (the "ENGAGEMENT LETTER"), for
remittance in accordance with their instructions, (ii) $15,000 which will
be retained by the Escrow Agent in accordance with the Purchase Agreement
and (iii) $10,000, which will be remitted to or as directed by the
Purchaser pursuant to the Purchase Agreement. In addition, the portion of
the Purchase Price released to the Company hereunder shall be reduced by
all wire transfer fees incurred thereupon.
2. TERMS OF ESCROW.
a. The Escrow Agent shall hold the Consideration in escrow
until the earlier to occur of (i) the receipt by the Escrow Agent of the
Purchase Price, the Debentures, the Warrants and the Ancillary Closing
Documents and a writing instructing the Closing and (ii) the receipt by the
Escrow Agent of a written notice, executed by the Company or the Purchaser,
stating that the Purchase Agreement has been terminated in accordance with
its terms and instructing the Escrow Agent with respect to the Purchase
Price, the Debentures, the Warrants and the Ancillary Closing Documents.
b. If the Escrow Agent receives the items referenced in
clause (i) of Section 2(a) prior to its receipt of the notice referenced in
clause (ii) of Section 2(a), then, promptly thereafter, the Escrow Agent
shall deliver (i) the Debentures, the Warrants, any interest earned on
account of the Purchase Price through the Closing and the amounts payable
to the Purchaser pursuant to Section 1(d) on the Consideration to the
Purchaser entitled to the same, (ii) the Purchase Price (net of amounts
described under Section 1(d)) to the Company, (iii) the amounts payable to
Cardinal, CDC and Elizabeth Hagopian under the Engagement Letter in
accordance with their instructions, (iv) the amounts payable to the
Purchaser or as directed by Purchaser pursuant to the Purchase Agreement
and (v) the Ancillary Closing Documents to the party entitled to receive
the same. In addition, the Escrow Agent shall retain $15,000 of the
Purchase Price on account of its fees pursuant to the Purchase Agreement.
c. If the Escrow Agent receives the notice referenced in
clause (ii) of Section 2(a) prior to its receipt of the items referenced in
clause (i) of Section 2(a), then the Escrow Agent shall promptly upon
receipt of such notice return (i) the Purchase Price (together with any
interest earned thereon through such date) to the Purchaser, (ii) the
Debentures and Warrants to the Company and (iii) the Ancillary Closing
Documents to the party that delivered the same.
d. If the Escrow Agent, prior to delivering or causing to
be delivered the Consideration in accordance herewith, receives notice of
objection, dispute, or other assertion in accordance with any of the
provisions of this Agreement, the Escrow Agent shall continue to hold the
Consideration until such time as the Escrow Agent shall receive (i) written
instructions jointly executed by the Purchaser and the Company, directing
distribution of such Consideration, or (ii) a certified copy of a judgment,
order or decree of a court of competent jurisdiction, final beyond the
right of appeal, directing the Escrow Agent to distribute said
Consideration to any party hereto or as such judgment, order or decree
shall otherwise specify (including any such order directing the Escrow
Agent to deposit the Consideration into the court rendering such order,
pending determination of any dispute between any of the parties). In
addition, the Escrow Agent shall have the right to deposit any of the
Consideration with a court of competent jurisdiction pursuant to Section
1006 of the New York Civil Practice Law and Rules without liability to any
party if said dispute is not resolved within 30 days of receipt of any such
notice of objection, dispute or otherwise.
3. DUTIES AND OBLIGATIONS OF THE ESCROW AGENT.
a. The parties hereto agree that the duties and
obligations of the Escrow Agent are only such as are herein specifically
provided and no other. The Escrow Agent's duties are as a depositary only,
and the Escrow Agent shall incur no liability whatsoever, except as a
direct result of its willful misconduct.
b. The Escrow Agent may consult with counsel of its
choice, and shall not be liable for any action taken, suffered or omitted
by it in accordance with the advice of such counsel.
c. The Escrow Agent shall not be bound in any way by the
terms of any other agreement to which the Purchaser and the Company are
parties, whether or not it has knowledge thereof, and the Escrow Agent
shall not in any way be required to determine whether or not any other
agreement has been complied with by the Purchaser and the Company, or any
other party thereto. The Escrow Agent shall not be bound by any
modification, amendment, termination, cancellation, rescission or
supersession of this Agreement unless the same shall be in writing and
signed by the Purchaser and the Company, and agreed to in writing by the
Escrow Agent.
d. In the event that the Escrow Agent shall be uncertain
as to its duties or rights hereunder or shall receive instructions, claims
or demands which, in its opinion, are in conflict with any of the
provisions of this Agreement, it shall be entitled to refrain from taking
any action, other than to keep safely, all Considerations held in escrow
until it shall jointly be directed otherwise in writing by the Purchaser
and the Company or by a final judgment of a court of competent
jurisdiction.
e. The Escrow Agent shall be fully protected in relying
upon any written notice, demand, certificate or document which it, in good
faith, believes to be genuine. The Escrow Agent shall not be responsible
for the sufficiency or accuracy of the form, execution, validity or
genuineness of documents or securities now or hereafter deposited
hereunder, or of any endorsement thereon, or for any lack of endorsement
thereon, or for any description therein; nor shall the Escrow Agent be
responsible or liable in any respect on account of the identity, authority
or rights of the persons executing or delivering or purporting to execute
or deliver any such document, security or endorsement.
f. The Escrow Agent shall not be required to institute
legal proceedings of any kind and shall not be required to defend any legal
proceedings which may be instituted against it or in respect of the
Consideration.
g. If the Escrow Agent at any time, in its sole
discretion, deems it necessary or advisable to relinquish custody of the
Consideration, it may do so by giving five (5) days written notice to the
parties of its intention and thereafter delivering the consideration to any
other escrow agent mutually agreeable to the Purchaser and the Company and,
if no such escrow agent shall be selected within three days of the Escrow
Agent's notification to the Purchaser and the Company of its desire to so
relinquish custody of the Consideration, then the Escrow Agent may do so by
delivering the Consideration (a) to any bank or trust company in the
Borough of Manhattan, City and State of New York, which is willing to act
as escrow agent thereunder in place and instead of the Escrow Agent, or (b)
to the clerk or other proper officer of a court of competent jurisdiction
as may be permitted by law within the State, County and City of New York.
The fee of any such bank or trust company or court officer shall be borne
one-half by the Purchaser and one-half by the Company. Upon such delivery,
the Escrow Agent shall be discharged from any and all responsibility or
liability with respect to the Consideration and the Company and the
Purchaser shall promptly pay to the Escrow Agent all monies which may be
owed it for its services hereunder, including, but not limited to,
reimbursement of its out-of-pocket expenses pursuant to paragraph (i)
below.
h. This Agreement shall not create any fiduciary duty on
the Escrow Agent's part to the Purchaser or the Company, nor disqualify the
Escrow Agent from representing either party hereto in any dispute with the
other, including any dispute with respect to the Consideration. The
Company understands that the Escrow Agent has acted and will continue to
act as counsel to the Purchaser.
i. The reasonable out-of-pocket expenses paid or incurred
by the Escrow Agent in the administration of its duties hereunder,
including, but not limited to, all counsel and advisors' and agents' fees
and all taxes or other governmental charges, if any, shall be paid by one-
half by the Purchaser and one-half by the Company.
4. INDEMNIFICATION. The Purchaser and the Company, jointly and
severally, hereby indemnify and hold the Escrow Agent, its employees,
partners, members and representatives harmless from and against any and all
losses, damages, taxes, liabilities and expenses that may be incurred,
directly or indirectly, by the Escrow Agent and/or any such person, arising
out of or in connection with its acceptance of appointment as the Escrow
Agent hereunder and/or the performance of its duties pursuant to this
Agreement, including, but not limited to, all legal costs and expenses of
the Escrow Agent and any such person incurred defending itself against any
claim or liability in connection with its performance hereunder and the
costs of recovery of amounts pursuant to this Section 4.
5. MISCELLANEOUS.
a. All notices, requests, demands and other communications
hereunder shall be in writing, with copies to all the other parties hereto,
and shall be deemed to have been duly given when (i) if delivered by hand,
upon receipt, (ii) if sent by facsimile, upon receipt of proof of sending
thereof, (iii) if sent by nationally recognized overnight delivery service
(receipt requested), the next business day or (iv) if mailed by first-class
registered or certified mail, return receipt requested, postage prepaid,
four days after posting in the U.S. mails, in each case if delivered to the
following addresses:
If to the Company: InnovaCom, Inc.
2855 Kifer Road, Suite 100
Santa Clara, California 95051
Facsimile No.: (408) 727-8778
Attn: Chief Financial Officer
With copies to: Bartel Eng Linn & Schroder
300 Capital Mall, Suite 1100
Sacramento, California 95814
Facsimile No.: (916) 442-3442
Attn: Scott Bartel
If to the Purchaser: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Alan Brown
With copies to: Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
If to the Escrow Agent Robinson Silverman Pearce Aronsohn &
(the Escrow Agent shall Berman LLP
receive copies of all 1290 Avenue of the Americas
communications under New York, NY 10104
this Agreement) Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen, Esq.
or at such other address as any of the parties to this Agreement may
hereafter designate in the manner set forth above to the others.
(b) This Agreement shall be construed and enforced in
accordance with the law of the State of New York applicable to contracts
entered into and performed entirely within New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be signed the day and year first above written.
INNOVACOM, INC.
By: ___________________________
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By: ___________________________
Name:
Title:
ROBINSON SILVERMAN PEARCE
ARONSOHN & BERMAN LLP
By: ___________________________
A Member of the Firm
EXHIBIT 6-13
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY
LAWS.
INNOVACOM, INC.
WARRANT
Warrant No. 001 Dated: December 22, 1997
INNOVACOM, INC., a Nevada corporation (the "Company"), hereby
certifies that, for value received, JNC Opportunity Fund Ltd., or its
registered assigns ("Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company up to a total of 250,000 shares of
Common Stock, $.001 par value per share (the "Common Stock"), of the
Company (each such share, a "Warrant Share" and all such shares, the
"Warrant Shares") at an exercise price equal to $3.00 per share (as
adjusted from time to time as provided in Section 8, the "Exercise Price"),
at any time and from time to time from and after the date hereof and
through and including December 22, 2002 (the "Expiration Date"), and
subject to the following terms and conditions:
1. REGISTRATION OF WARRANT. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to
time. The Company may deem and treat the registered Holder of this Warrant
as the absolute owner hereof for the purpose of any exercise hereof or any
distribution to the Holder, and for all other purposes, and the Company
shall not be affected by notice to the contrary.
2. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) The Company shall register the transfer of any portion
of this Warrant in the Warrant Register, upon surrender of this Warrant,
with the Form of Assignment attached hereto duly completed and signed, to
the Company at the office specified in or pursuant to Section 3(b). Upon
any such registration or transfer, a new warrant to purchase Common Stock,
in substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be
issued to the transferee and a New Warrant evidencing the remaining portion
of this Warrant not so transferred, if any, shall be issued to the
transferring Holder. The acceptance of the New Warrant by the transferee
thereof shall be deemed the acceptance of such transferee of all of the
rights and obligations of a holder of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof
by the Holder to the office of the Company specified in or pursuant to
Section 3(b) for one or more New Warrants, evidencing in the aggregate the
right to purchase the number of Warrant Shares which may then be purchased
hereunder. Any such New Warrant will be dated the date of such exchange.
3. DURATION AND EXERCISE OF WARRANTS.
(a) This Warrant shall be exercisable by the registered
Holder on any business day before 5:30 P.M., New York City time, at any
time and from time to time on or after the date hereof to and including the
Expiration Date. At 5:30 P.M., New York City time on the Expiration Date,
the portion of this Warrant not exercised prior thereto shall be and become
void and of no value. This Warrant may not be redeemed by the Company.
(b) Subject to Sections 2(b), 6 and 11, upon surrender of
this Warrant, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Company at its address for notice set forth in
Section 11 and upon payment of the Exercise Price multiplied by the number
of Warrant Shares that the Holder intends to purchase hereunder, in lawful
money of the United States of America, in cash or by certified or official
bank check or checks, all as specified by the Holder in the Form of
Election to Purchase, the Company shall promptly (but in no event later
than 3 business days after the Date of Exercise (as defined herein)) issue
or cause to be issued and cause to be delivered to or upon the written
order of the Holder and in such name or names as the Holder may designate,
a certificate for the Warrant Shares issuable upon such exercise, free of
restrictive legends other than as required by the Purchase Agreement of
even date herewith between the Holder and the Company. Any person so
designated by the Holder to receive Warrant Shares shall be deemed to have
become holder of record of such Warrant Shares as of the Date of Exercise
of this Warrant.
A "Date of Exercise" means the date on which the Company
shall have received (i) this Warrant (or any New Warrant, as applicable),
with the Form of Election to Purchase attached hereto (or attached to such
New Warrant) appropriately completed and duly signed, and (ii) payment of
the Exercise Price for the number of Warrant Shares so indicated by the
holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant
Shares. If less than all of the Warrant Shares which may be purchased
under this Warrant are exercised at any time, the Company shall issue or
cause to be issued, at its expense, a New Warrant evidencing the right to
purchase the remaining number of Warrant Shares for which no exercise has
been evidenced by this Warrant.
4. PIGGYBACK REGISTRATION RIGHTS. During the term of this
Warrant, the Company may not file any registration statement with the
Securities and Exchange Commission (other than registration statements of
the Company filed on Form S-8 or Form S-4, each as promulgated under the
Securities Act of 1933, as amended, pursuant to which the Company is
registering securities pursuant to a Company employee benefit plan or
pursuant to a merger, acquisition or similar transaction including
supplements thereto, but not additionally filed registration statements in
respect of such securities) at any time when there is not an effective
registration statement covering the resale of the Warrant Shares and naming
the Holder as a selling stockholder thereunder, unless the Company provides
the Holder with not less than 20 days notice to each of the Holder and
Robinson Silverman Peace Aronsohn & Berman LLP, attention Eric L. Cohen,
notice of its intention to file such registration statement and provides
the Holder the option to include any or all of the applicable Warrant
Shares therein. The piggyback registration rights granted to the Holder
pursuant to this Section shall continue until all of the Holder's Warrant
Shares have been sold in accordance with an effective registration
statement or upon the expiration of this Warrant. The Company will pay all
registration expenses in connection therewith.
5. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the
exercise of this Warrant; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the registration of any certificates for Warrant Shares or
Warrants in a name other than that of the Holder, and the Company shall not
be required to issue or cause to be issued or deliver or cause to be
delivered the certificates for Warrant Shares unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for
all other tax liability that may arise as a result of holding or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
6. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of
and substitution for this Warrant, a New Warrant, but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or
destruction and indemnity, if reasonably satisfactory to it. Applicants
for a New Warrant under such circumstances shall also comply with such
other reasonable regulations and procedures and pay such other reasonable
charges as the Company may prescribe.
7. RESERVATION OF WARRANT SHARES. The Company covenants that
it will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it
to issue Warrant Shares upon exercise of this Warrant as herein provided,
the number of Warrant Shares which are then issuable and deliverable upon
the exercise of this entire Warrant, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holders
(taking into account the adjustments and restrictions of Section 8). The
Company covenants that all Warrant Shares that shall be so issuable and
deliverable shall, upon issuance and the payment of the applicable Exercise
Price in accordance with the terms hereof, be duly and validly authorized,
issued and fully paid and nonassessable.
8. CERTAIN ADJUSTMENTS. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to
adjustment from time to time as set forth in this Section 8. Upon each
such adjustment of the Exercise Price pursuant to this Section 8, the
Holder shall thereafter prior to the Expiration Date be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number
of Warrant Shares obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares
issuable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting from such
adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock (as defined
below) or on any other class of capital stock (and not the Common Stock)
payable in shares of Common Stock, (ii) subdivide outstanding shares of
Common Stock into a larger number of shares, or (iii) combine outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price
shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding after such event. Any adjustment made pursuant to this Section
shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision or combination, and shall apply to
successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another person, the
sale or transfer of all or substantially all of the assets of the Company
in which the consideration therefor is equity or equity equivalent
securities or any compulsory share exchange pursuant to which the Common
Stock is converted into other securities or property, then the Holder shall
have the right thereafter to exercise this Warrant only into the shares of
stock and other securities and property receivable upon or deemed to be
held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property of the Company's business combination partner equal to the amount
of Warrant Shares such Holder would have been entitled to had such Holder
exercised this Warrant immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange. The terms of any
such consolidation, merger, sale, transfer or share exchange shall include
such terms so as to continue to give to the Holder the right to receive the
securities or property set forth in this Section 8(b) upon any exercise
following any such reclassification, consolidation, merger, sale, transfer
or share exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to
holders of this Warrant) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those
referred to in Sections 8(a), (b) and (d)), then in each such case the
Exercise Price shall be determined by multiplying the Exercise Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the Exercise Price determined as of the record
date mentioned above, and of which the numerator shall be such Exercise
Price on such record date less the then fair market value at such record
date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as
determined by a nationally recognized or major regional investment banking
firm or firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial
statements of the Company) (an "Appraiser") mutually selected in good faith
by the holders of a majority in interest of the Warrants then outstanding
and the Company. Any determination made by the Appraiser shall be final.
(d) If, at any time while this Warrant is outstanding, the
Company shall issue or cause to be issued rights or warrants to acquire or
otherwise sell or distribute shares of Common Stock to all holders of
Common Stock for a consideration per share less than the Exercise Price
then in effect, then, forthwith upon such issue or sale, the Exercise Price
shall be reduced to the price (calculated to the nearest cent) determined
by dividing (i) an amount equal to the sum of (A) the number of shares of
Common Stock outstanding immediately prior to such issue or sale multiplied
by the Exercise Price, and (B) the consideration, if any, received or
receivable by the Company upon such issue or sale by (ii) the total number
of shares of Common Stock outstanding immediately after such issue or sale.
(e) For the purposes of this Section 8, the following
clauses shall also be applicable:
(i) RECORD DATE. In case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them
(A) to receive a dividend or other distribution payable in Common Stock or
in securities convertible or exchangeable into shares of Common Stock, or
(B) to subscribe for or purchase Common Stock or securities convertible or
exchangeable into shares of Common Stock, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(ii) TREASURY SHARES. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held
by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(g) If:
(i) the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a redemption
of its Common Stock; or
(iii) the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of
any rights; or
(iv) the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, or any compulsory
share exchange whereby the Common Stock is
converted into other securities, cash or
property; or
(v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the
affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, at least 30
calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken
for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y)
the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and
the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their shares of Common Stock for securities,
cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution,
liquidation or winding up; PROVIDED, HOWEVER, that the failure to mail such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be specified in such notice.
9. PAYMENT OF EXERCISE PRICE. The Holder may pay the Exercise
Price in cash or, in the event that a registration statement covering the
resale of the Warrant Shares and naming the holder thereof as a selling
stockholder thereunder is not effective for the resale of the Warrant
Shares at any time during the term of this Warrant, pursuant to a cashless
exercise, as follows:
(a) CASH EXERCISE. The Holder shall deliver immediately
available funds;
(b) CASHLESS EXERCISE. The Holder shall surrender this
Warrant to the Company together with a notice of cashless exercise, in
which event the Company shall issue to the Holder the number of Warrant
Shares determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to the
Holder.
Y = the number of Warrant Shares with respect to which
this Warrant is being exercised.
A = the closing sale prices of the Common Stock for the
Trading Day immediately prior to the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is
intended, understood and acknowledged that the Warrant Shares issued in a
cashless exercise transaction shall be deemed to have been acquired by the
Holder, and the holding period for the Warrant Shares shall be deemed to
have been commenced, on the issue date.
10. FRACTIONAL SHARES. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of
this Warrant. The number of full Warrant Shares which shall be issuable
upon the exercise of this Warrant shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of this Warrant
so presented. If any fraction of a Warrant Share would, except for the
provisions of this Section 10, be issuable on the exercise of this Warrant,
the Company shall, at its option, (i) pay an amount in cash equal to the
Exercise Price multiplied by such fraction or (ii) round the number of
Warrant Shares issuable, up to the next whole number.
11. NOTICES. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice
or communication is delivered via facsimile at the facsimile telephone
number specified in this Section, (ii) the business day following the date
of mailing, if sent by nationally recognized overnight courier service, or
(iii) upon actual receipt by the party to whom such notice is required to
be given. The addresses for such communications shall be: (1) if to the
Company, to 2855 Kifer Road, Suite 100, Santa Clara, California 95051, or
to Facsimile No.: (408) 727-8778 Attention: Chief Financial Officer, or
(ii) if to the Holder, to the Holder at the address or facsimile number
appearing on the Warrant Register or such other address or facsimile number
as the Holder may provide to the Company in accordance with this Section
11.
12. WARRANT AGENT.
(a) The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent.
(b) Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any
consolidation to which the Company or any new warrant agent shall be a
party or any corporation to which the Company or any new warrant agent
transfers substantially all of its corporate trust or shareholders services
business shall be a successor warrant agent under this Warrant without any
further act. Any such successor warrant agent shall promptly cause notice
of its succession as warrant agent to be mailed (by first class mail,
postage prepaid) to the Holder at the Holder's last address as shown on the
Warrant Register.
13. MISCELLANEOUS.
(a) This Warrant shall be binding on and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. This Warrant may be amended only in writing signed by the Company
and the Holder.
(b) Subject to Section 13(a), above, nothing in this
Warrant shall be construed to give to any person or corporation other than
the Company and the Holder any legal or equitable right, remedy or cause
under this Warrant; this Warrant shall be for the sole and exclusive
benefit of the Company and the Holder.
(c) This Warrant shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or
affect any of the provisions hereof.
(e) In case any one or more of the provisions of this
Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall
not in any way be affected or impaired thereby and the parties will attempt
in good faith to agree upon a valid and enforceable provision which shall
be a commercially reasonable substitute therefor, and upon so agreeing,
shall incorporate such substitute provision in this Warrant.
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[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated
above.
INNOVACOM, LTD.
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of
Common Stock under the foregoing Warrant)
To INNOVACOM, INC.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase
[___________] shares of Common Stock ("Common Stock"), $.001 par value per
share, of InnovaCom, Inc. and encloses herewith $________ in cash or
certified or official bank check or checks, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of
shares of Common Stock to which this Form of Election to Purchase relates,
together with any applicable taxes payable by the undersigned pursuant to
the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is
entitled to purchase in accordance with the enclosed Warrant, the
undersigned requests that a New Warrant (as defined in the Warrant)
evidencing the right to purchase the shares of Common Stock not issuable
pursuant to the exercise evidenced hereby be issued in the name of and
delivered to:
(Please print name and address)
Dated: _________,____ Name of Holder:
(Print)_______________
(By:) _______________
(Name:)
(Title:)
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
<PAGE>
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________ the right represented by
the within Warrant to purchase ____________ shares of Common Stock of
InnovaCom, Inc. to which the within Warrant relates and appoints
________________ attorney to transfer said right on the books of InnovaCom,
Inc. with full power of substitution in the premises.
Dated:
_______________, ____
_______________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
_______________________________________
Address of Transferee
_______________________________________
_______________________________________
In the presence of:
__________________________
<PAGE>
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY
LAWS.
INNOVACOM, INC.
WARRANT
Warrant No. 002 Dated: December 22, 1997
INNOVACOM, INC., a Nevada corporation (the "Company"), hereby
certifies that, for value received, JNC Opportunity Fund Ltd., or its
registered assigns ("Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company up to a total of 250,000 shares of
Common Stock, $.001 par value per share (the "Common Stock"), of the
Company (each such share, a "Warrant Share" and all such shares, the
"Warrant Shares") at an exercise price equal to $4.00 per share (as
adjusted from time to time as provided in Section 8, the "Exercise Price"),
at any time and from time to time from and after the date hereof and
through and including December 22, 2002 (the "Expiration Date"), and
subject to the following terms and conditions:
1. REGISTRATION OF WARRANT. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to
time. The Company may deem and treat the registered Holder of this Warrant
as the absolute owner hereof for the purpose of any exercise hereof or any
distribution to the Holder, and for all other purposes, and the Company
shall not be affected by notice to the contrary.
2. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) The Company shall register the transfer of any portion
of this Warrant in the Warrant Register, upon surrender of this Warrant,
with the Form of Assignment attached hereto duly completed and signed, to
the Company at the office specified in or pursuant to Section 3(b). Upon
any such registration or transfer, a new warrant to purchase Common Stock,
in substantially the form of this Warrant (any such new warrant, a "New
Warrant"),
EXHIBIT 6-14
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY
LAWS.
INNOVACOM, INC.
WARRANT
Warrant No. 003 Dated: December 22, 1997
INNOVACOM, INC., a Nevada corporation (the "Company"), hereby
certifies that, for value received, Cardinal Capital Management, Inc.,, or
its registered assigns ("Holder"), is entitled, subject to the terms set
forth below, to purchase from the Company up to a total of 250,000 shares
of Common Stock, $.001 par value per share (the "Common Stock"), of the
Company (each such share, a "Warrant Share" and all such shares, the
"Warrant Shares") at an exercise price equal to $2.43 per share (as
adjusted from time to time as provided in Section 8, the "Exercise Price"),
at any time and from time to time from and after the date hereof and
through and including December 22, 2002 (the "Expiration Date"), and
subject to the following terms and conditions:
1. REGISTRATION OF WARRANT. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to
time. The Company may deem and treat the registered Holder of this Warrant
as the absolute owner hereof for the purpose of any exercise hereof or any
distribution to the Holder, and for all other purposes, and the Company
shall not be affected by notice to the contrary.
2. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) The Company shall register the transfer of any portion
of this Warrant in the Warrant Register, upon surrender of this Warrant,
with the Form of Assignment attached hereto duly completed and signed, to
the Company at the office specified in or pursuant to Section 3(b). Upon
any such registration or transfer, a new warrant to purchase Common Stock,
in substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be
issued to the transferee and a New Warrant evidencing the remaining portion
of this Warrant not so transferred, if any, shall be issued to the
transferring Holder. The acceptance of the New Warrant by the transferee
thereof shall be deemed the acceptance of such transferee of all of the
rights and obligations of a holder of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof
by the Holder to the office of the Company specified in or pursuant to
Section 3(b) for one or more New Warrants, evidencing in the aggregate the
right to purchase the number of Warrant Shares which may then be purchased
hereunder. Any such New Warrant will be dated the date of such exchange.
3. DURATION AND EXERCISE OF WARRANTS.
(a) This Warrant shall be exercisable by the registered
Holder on any business day before 5:30 P.M., New York City time, at any
time and from time to time on or after the date hereof to and including the
Expiration Date. At 5:30 P.M., New York City time on the Expiration Date,
the portion of this Warrant not exercised prior thereto shall be and become
void and of no value. This Warrant may not be redeemed by the Company.
(b) Subject to Sections 2(b), 6 and 11, upon surrender of
this Warrant, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Company at its address for notice set forth in
Section 11 and upon payment of the Exercise Price multiplied by the number
of Warrant Shares that the Holder intends to purchase hereunder, in lawful
money of the United States of America, in cash or by certified or official
bank check or checks, all as specified by the Holder in the Form of
Election to Purchase, the Company shall promptly (but in no event later
than 3 business days after the Date of Exercise (as defined herein)) issue
or cause to be issued and cause to be delivered to or upon the written
order of the Holder and in such name or names as the Holder may designate,
a certificate for the Warrant Shares issuable upon such exercise, free of
restrictive legends other than as required by the Purchase Agreement of
even date herewith between the Holder and the Company. Any person so
designated by the Holder to receive Warrant Shares shall be deemed to have
become holder of record of such Warrant Shares as of the Date of Exercise
of this Warrant.
A "Date of Exercise" means the date on which the Company
shall have received (i) this Warrant (or any New Warrant, as applicable),
with the Form of Election to Purchase attached hereto (or attached to such
New Warrant) appropriately completed and duly signed, and (ii) payment of
the Exercise Price for the number of Warrant Shares so indicated by the
holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant
Shares. If less than all of the Warrant Shares which may be purchased
under this Warrant are exercised at any time, the Company shall issue or
cause to be issued, at its expense, a New Warrant evidencing the right to
purchase the remaining number of Warrant Shares for which no exercise has
been evidenced by this Warrant.
4. PIGGYBACK REGISTRATION RIGHTS. During the term of this
Warrant, the Company may not file any registration statement with the
Securities and Exchange Commission (other than registration statements of
the Company filed on Form S-8 or Form S-4, each as promulgated under the
Securities Act of 1933, as amended, pursuant to which the Company is
registering securities pursuant to a Company employee benefit plan or
pursuant to a merger, acquisition or similar transaction including
supplements thereto, but not additionally filed registration statements in
respect of such securities) at any time when there is not an effective
registration statement covering the resale of the Warrant Shares and naming
the Holder as a selling stockholder thereunder, unless the Company provides
the Holder with not less than 20 days notice to each of the Holder and
Robinson Silverman Peace Aronsohn & Berman LLP, attention Eric L. Cohen,
notice of its intention to file such registration statement and provides
the Holder the option to include any or all of the applicable Warrant
Shares therein. The piggyback registration rights granted to the Holder
pursuant to this Section shall continue until all of the Holder's Warrant
Shares have been sold in accordance with an effective registration
statement or upon the expiration of this Warrant. The Company will pay all
registration expenses in connection therewith.
5. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the
exercise of this Warrant; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the registration of any certificates for Warrant Shares or
Warrants in a name other than that of the Holder, and the Company shall not
be required to issue or cause to be issued or deliver or cause to be
delivered the certificates for Warrant Shares unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for
all other tax liability that may arise as a result of holding or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
6. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of
and substitution for this Warrant, a New Warrant, but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or
destruction and indemnity, if reasonably satisfactory to it. Applicants
for a New Warrant under such circumstances shall also comply with such
other reasonable regulations and procedures and pay such other reasonable
charges as the Company may prescribe.
7. RESERVATION OF WARRANT SHARES. The Company covenants that
it will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it
to issue Warrant Shares upon exercise of this Warrant as herein provided,
the number of Warrant Shares which are then issuable and deliverable upon
the exercise of this entire Warrant, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holders
(taking into account the adjustments and restrictions of Section 8). The
Company covenants that all Warrant Shares that shall be so issuable and
deliverable shall, upon issuance and the payment of the applicable Exercise
Price in accordance with the terms hereof, be duly and validly authorized,
issued and fully paid and nonassessable.
8. CERTAIN ADJUSTMENTS. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to
adjustment from time to time as set forth in this Section 8. Upon each
such adjustment of the Exercise Price pursuant to this Section 8, the
Holder shall thereafter prior to the Expiration Date be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number
of Warrant Shares obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares
issuable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting from such
adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock (as defined
below) or on any other class of capital stock (and not the Common Stock)
payable in shares of Common Stock, (ii) subdivide outstanding shares of
Common Stock into a larger number of shares, or (iii) combine outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price
shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding after such event. Any adjustment made pursuant to this Section
shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision or combination, and shall apply to
successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another person, the
sale or transfer of all or substantially all of the assets of the Company
in which the consideration therefor is equity or equity equivalent
securities or any compulsory share exchange pursuant to which the Common
Stock is converted into other securities or property, then the Holder shall
have the right thereafter to exercise this Warrant only into the shares of
stock and other securities and property receivable upon or deemed to be
held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property of the Company's business combination partner equal to the amount
of Warrant Shares such Holder would have been entitled to had such Holder
exercised this Warrant immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange. The terms of any
such consolidation, merger, sale, transfer or share exchange shall include
such terms so as to continue to give to the Holder the right to receive the
securities or property set forth in this Section 8(b) upon any exercise
following any such reclassification, consolidation, merger, sale, transfer
or share exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to
holders of this Warrant) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those
referred to in Sections 8(a), (b) and (d)), then in each such case the
Exercise Price shall be determined by multiplying the Exercise Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the Exercise Price determined as of the record
date mentioned above, and of which the numerator shall be such Exercise
Price on such record date less the then fair market value at such record
date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as
determined by a nationally recognized or major regional investment banking
firm or firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial
statements of the Company) (an "Appraiser") mutually selected in good faith
by the holders of a majority in interest of the Warrants then outstanding
and the Company. Any determination made by the Appraiser shall be final.
(d) If, at any time while this Warrant is outstanding, the
Company shall issue or cause to be issued rights or warrants to acquire or
otherwise sell or distribute shares of Common Stock to all holders of
Common Stock for a consideration per share less than the Exercise Price
then in effect, then, forthwith upon such issue or sale, the Exercise Price
shall be reduced to the price (calculated to the nearest cent) determined
by dividing (i) an amount equal to the sum of (A) the number of shares of
Common Stock outstanding immediately prior to such issue or sale multiplied
by the Exercise Price, and (B) the consideration, if any, received or
receivable by the Company upon such issue or sale by (ii) the total number
of shares of Common Stock outstanding immediately after such issue or sale.
(e) For the purposes of this Section 8, the following
clauses shall also be applicable:
(i) RECORD DATE. In case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them
(A) to receive a dividend or other distribution payable in Common Stock or
in securities convertible or exchangeable into shares of Common Stock, or
(B) to subscribe for or purchase Common Stock or securities convertible or
exchangeable into shares of Common Stock, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(ii) TREASURY SHARES. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held
by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(g) If:
(i) the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a redemption
of its Common Stock; or
(iii) the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of
any rights; or
(iv) the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, or any compulsory
share exchange whereby the Common Stock is
converted into other securities, cash or
property; or
(v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the
affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, at least 30
calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken
for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y)
the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and
the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their shares of Common Stock for securities,
cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution,
liquidation or winding up; PROVIDED, HOWEVER, that the failure to mail such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be specified in such notice.
9. PAYMENT OF EXERCISE PRICE. The Holder may pay the Exercise
Price in cash or, in the event that a registration statement covering the
resale of the Warrant Shares and naming the holder thereof as a selling
stockholder thereunder is not effective for the resale of the Warrant
Shares at any time during the term of this Warrant, pursuant to a cashless
exercise, as follows:
(a) CASH EXERCISE. The Holder shall deliver immediately
available funds;
(b) CASHLESS EXERCISE. The Holder shall surrender this
Warrant to the Company together with a notice of cashless exercise, in
which event the Company shall issue to the Holder the number of Warrant
Shares determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to the
Holder.
Y = the number of Warrant Shares with respect to which
this Warrant is being exercised.
A = the closing sale prices of the Common Stock for the
Trading Day immediately prior to the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is
intended, understood and acknowledged that the Warrant Shares issued in a
cashless exercise transaction shall be deemed to have been acquired by the
Holder, and the holding period for the Warrant Shares shall be deemed to
have been commenced, on the issue date.
10. FRACTIONAL SHARES. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of
this Warrant. The number of full Warrant Shares which shall be issuable
upon the exercise of this Warrant shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of this Warrant
so presented. If any fraction of a Warrant Share would, except for the
provisions of this Section 10, be issuable on the exercise of this Warrant,
the Company shall, at its option, (i) pay an amount in cash equal to the
Exercise Price multiplied by such fraction or (ii) round the number of
Warrant Shares issuable, up to the next whole number.
11. NOTICES. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice
or communication is delivered via facsimile at the facsimile telephone
number specified in this Section, (ii) the business day following the date
of mailing, if sent by nationally recognized overnight courier service, or
(iii) upon actual receipt by the party to whom such notice is required to
be given. The addresses for such communications shall be: (1) if to the
Company, to 2855 Kifer Road, Suite 100, Santa Clara, California 95051, or
to Facsimile No.: (408) 727-8778 Attention: Chief Financial Officer, or
(ii) if to the Holder, to the Holder at the address or facsimile number
appearing on the Warrant Register or such other address or facsimile number
as the Holder may provide to the Company in accordance with this Section
11.
12. WARRANT AGENT.
(a) The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent.
(b) Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any
consolidation to which the Company or any new warrant agent shall be a
party or any corporation to which the Company or any new warrant agent
transfers substantially all of its corporate trust or shareholders services
business shall be a successor warrant agent under this Warrant without any
further act. Any such successor warrant agent shall promptly cause notice
of its succession as warrant agent to be mailed (by first class mail,
postage prepaid) to the Holder at the Holder's last address as shown on the
Warrant Register.
13. MISCELLANEOUS.
(a) This Warrant shall be binding on and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. This Warrant may be amended only in writing signed by the Company
and the Holder.
(b) Subject to Section 13(a), above, nothing in this
Warrant shall be construed to give to any person or corporation other than
the Company and the Holder any legal or equitable right, remedy or cause
under this Warrant; this Warrant shall be for the sole and exclusive
benefit of the Company and the Holder.
(c) This Warrant shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or
affect any of the provisions hereof.
(e) In case any one or more of the provisions of this
Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall
not in any way be affected or impaired thereby and the parties will attempt
in good faith to agree upon a valid and enforceable provision which shall
be a commercially reasonable substitute therefor, and upon so agreeing,
shall incorporate such substitute provision in this Warrant.
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[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated
above.
INNOVACOM, LTD.
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of
Common Stock under the foregoing Warrant)
To INNOVACOM, INC.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase
[___________] shares of Common Stock ("Common Stock"), $.001 par value per
share, of InnovaCom, Inc. and encloses herewith $________ in cash or
certified or official bank check or checks, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of
shares of Common Stock to which this Form of Election to Purchase relates,
together with any applicable taxes payable by the undersigned pursuant to
the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is
entitled to purchase in accordance with the enclosed Warrant, the
undersigned requests that a New Warrant (as defined in the Warrant)
evidencing the right to purchase the shares of Common Stock not issuable
pursuant to the exercise evidenced hereby be issued in the name of and
delivered to:
(Please print name and address)
Dated: ____________,_____ Name of Holder:
(Print)_________________
(By:) _________________
(Name:)
(Title:)
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
<PAGE>
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________ the right represented by
the within Warrant to purchase ____________ shares of Common Stock of
InnovaCom, Inc. to which the within Warrant relates and appoints
________________ attorney to transfer said right on the books of InnovaCom,
Inc. with full power of substitution in the premises.
Dated:_______________, ____
_______________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
_______________________________________
Address of Transferee
_______________________________________
_______________________________________
In the presence of:
__________________________
EXHIBIT 21-1
SUBSIDIARY OF THE SMALL BUSINESS ISSUER
Sierra Vista Entertainment, Inc.
EXHIBIT 23-1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
InnovaCom, Inc., a Nevada corporation:
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated February 9, 1998, relating to the consolidated financial
statements of InnovaCom, Inc., a Nevada corporation. We also consent to the
reference to our firm under the caption "Experts" in the Prospectus.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 9, 1998
