U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to _______
Commission file number 0-23505
INNOVACOM, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0308568
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3400 Garrett Drive
Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
(408) 727-2447
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Number of shares of common stock outstanding as of May 1, 1998 was 20,561,897
Transitional Small Business disclosure format
Yes [ ] No [X]
<PAGE>2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS MARCH 31, 1998
------ ----------------
CURRENT ASSETS:
Cash $ 795,392
Accounts receivable - trade, net of allowance
for doubtful accounts of $34,300 35,907
Prepaid expenses and other 92,923
Due from related parties 35,531
-----------
Total current assets 959,753
Property And Equipment, net 1,448,264
Debt Issuance Costs, net of accumulated
amortization of $36,700 631,410
Deposits 42,200
-----------
TOTAL ASSETS $ 3,081,627
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Note payable - related parties $ 4,171,923
Accounts payable 1,324,684
Accrued liabilities 1,084,362
Liabilities in excess of assets of discontinued
operations 1,453
-------------
Total current liabilities 6,582,422
LONG-TERM DEBT, less unamortized discount of $910,575 4,089,425
------------
Total liabilities 10,671,847
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 50,000,000 shares
authorized, 20,563,897 shares issued and outstanding 20,562
Warrants 968,578
Additional paid-in capital 16,453,753
Deficit accumulated during development stage (25,033,113)
-----------
Total stockholders' equity (deficit) (7,590,220)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,081,627
===========
See accompanying notes to these condensed consolidated financial statements.
<PAGE>3
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 3, 1993
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
1998 1997 1998
-------------------- -----------------
REVENUES $ 45,082 $ 75,000 $ 194,082
---------------------- ----------------
COSTS AND EXPENSES
Cost of Goods Sold 22,263 21,151 74,801
Research and development 1,423,088 1,209,565 8,522,296
Production expense - - 36,235
Selling, general and
administrative 2,014,743 840,765 12,983,647
---------------------- ---------------
Total costs and expenses 3,460,094 2,071,481 21,616,979
---------------------- ---------------
OPERATING LOSS (3,415,012) (1,996,481) (21,422,897)
---------------------- ---------------
OTHER INCOME (EXPENSE):
Interest income 10,009 713 22,093
Interest expense (986,434) (4,466) (2,211,282)
Loss on disposal of property
and equipment - - (2,559)
Other income (expense) - - (31,490)
---------------------- --------------
Total other income (expense) (976,425) (3,753) (2,223,238)
---------------------- --------------
Loss from continuing
operations before income tax
expense and discontinued
operations (4,391,437) (2,000,234) (23,646,135)
Income tax expense 1,600 1,600 8,000
---------------------- ------------
Loss from continuing
operations (4,393,037) (2,001,834) (23,654,135)
----------------------- ------------
Loss on disposal of
discontinued operation (1,154,980) - (1,154,980)
Loss from operations of
discontinued operation, net
of $800 of income tax expense (223,998) - (223,998)
----------------------- ------------
Loss from discontinued
operations (1,378,978) - (1,378,978)
----------------------- ------------
Net Loss $(5,772,015)$(2,001,834) $(25,033,113)
======================== ==============
Basic and diluted net loss
per Common Share:
Continuing operations $ (.21)$ (.16)
Discontinued operations (.07) -
------------------------
Basic and diluted net loss
per common share $ (.28)$ (.16)
========================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 20,561,897 12,394,111
=========================
See accompanying notes to these condensed consolidated financial statements.
<PAGE>4
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
MARCH 3, 1993
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
1998 1997 1998
---------------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(4,393,037) $(2,001,834) $(23,654,135)
Adjustments to reconcile net loss
from continuing operations to net
cash used in operating activities:
Depreciation and amortization 128,913 21,503 566,067
Amortization of discount on
long-term debt 770,476 - 770,476
Loss on disposal of asset - - 2,559
Interest related to beneficial
conversion features of notes
payable and long-term liabilities 24,544 - 1,125,651
Compensation recognized upon issuance
of stock and stock options 209,607 168,695 5,368,339
Contribution of product license - - 1,275,000
Contribution of technology - - 500,000
Write-off acquisition costs 68,364 - 68,364
Write-off related party receivable - - 139,594
Write down of purchased incomplete
research and development - 500,000
Changes in operating assets and
liabilities:
Cash - restricted - 9,507 (8,481)
Accounts receivables (35,907) (6,000) (35,907)
Prepaid and other expenses 75,867 - (100,760)
Due from related parties (35,531) - (35,531)
Film rights and film cost inventory - - (27,500)
Deposits (3,418) - (93,297)
Accounts payable 636,784 186,901 1,328,031
Accrued liabilities 235,166 115,164 1,408,346
---------------------- ----------
Net cash used in operating activities
from continuing operations (2,318,172) (1,006,064) (11,403,184)
----------------------- ------------
Net loss from discontinued operations (1,378,978) - (1,378,978)
Loss from disposal of assets 40,744 - 40,744
Write down of film rights and film
cost inventory 277,500 - 277,500
Write down of goodwill 848,129 - 848,129
Change in liabilities in excess of
assets of discontinued operations 1,453 - 1,453
----------------------- -----------
Net cash used in operating activities
from discontinued operations (211,152) (211,152)
----------------------- ------------
<PAGE>5
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
MARCH 3, 1993
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
1998 1997 1998
---------------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition of
Sierra Vista - - 2,916,798
Advance to related party - - (139,594)
Cost incurred for organization of
joint venture - - (68,364)
Purchases of property and equipment (823,718) (216,105) (1,797,065)
Proceeds from sale of asset - - 3,500
--------------------- -----------
Net cash used in investing
activities (823,718) (216,105) 915,275
--------------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft - (8,046) -
Proceeds from sale of common stock - 665,000 2,897,670
Proceeds from notes payable - 565,215 4,087,990
Net proceeds from sale of debenture
with detachable warrants - - 4,608,593
Principal payments on notes payable - - (99,800)
-------------------- -----------
Net cash provided by financing
activities - 1,222,169 11,494,453
--------------------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS (3,353,042) - 795,392
CASH AND CASH EQUIVALENTS,
beginning of period 4,148,434 - -
--------------------- -------------
CASH AND CASH EQUIVALENTS, end
of period $ 795,392 $ - $ 795,392
===================== ============
See accompanying notes to these condensed consolidated financial statements.
<PAGE>6
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended December 31, 1997.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments considered necessary to present fairly the
Company's financial position at March 31, 1998, results of operations and cash
flows for the three months ended March 31, 1998 and 1997, and the period from
inception (March 3, 1993) to March 31, 1998. The results for the period ended
March 31, 1998, are not necessarily indicative of the results to be expected for
the entire fiscal year ending December 31, 1998.
Note 2 - Discontinued Operations
On June 15, 1998 (measurement date), the Company's Board of Directors decided to
discontinue the operations of Sierra Vista Entertainment, Inc. ("Sierra Vista"),
its wholly-owned subsidiary and entertainment segment of the business.
Accordingly, Sierra Vista is accounted for as a discontinued operations in the
accompanying condensed consolidated financial statements. All operations from
the measurement date to the date of disposal have been estimated and included in
the loss from discontinued operation at March 31, 1998. All assets have been
written down to their net realizable value as of March 31, 1998. It is the
Company's intention to sell the assets that it can, but will not incur
significant costs in doing so.
The net assets of Sierra Vista included in the accompanying consolidated balance
sheet as of March 31, 1998, consisted of the following:
<PAGE>7
Cash - restricted $ 8,480
Prepaid and other assets 7,992
---------------
Current assets of discontinued operations 16,472
Property and equipment 10,000
Deposits 51,097
--------------
Total assets of discontinued operations $ 77,569
==============
Accounts payable $ 3,347
Accrued liabilities 75,675
---------------
Total liabilities of discontinued operations $ 79,022
===============
The entertainment segment has never generated any revenues.
Note 3 - Subsequent Events
On June 5, 1998, Thomas E. Burke, the Company's president who had started with
the Company on May 1, 1998, resigned. On July 21, 1998, he filed a statement of
claim with the American Arbitration Association, San Francisco, California. Mr.
Burke is claiming the Company has breached his employment contract by failing to
pay him a lump-sum cash payment of $1 million, salary, bonuses, expenses and
other termination payments under his employment contract. The Company believes
that Mr. Burke has made certain misrepresentations and intends to vigorously
defend itself in this action. In the event Mr. Burke is successful in his
claims, this will have an adverse effect on the Company's business plan and
financial condition. See "Management's Discuss and Analysis or Plan of
Operation."
On May 21, 1998, Micro Technologies converted $4,181,422 of its line of credit
to the Company in exchange for 1,742,362 shares of Common Stock.
To provide for working capital, in June 1998, the Company issued 7% Convertible
Debentures in the aggregate principal amount of $2 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 $0.35
per share. The Debentures have a term of five years, expiring June 29, 2003, and
are secured by all of the assets of the Company. As part of the issuance of the
Debentures, the Company issued to the Debenture holders five year warrants to
purchase up to 500,000 shares of Common Stock at $.50 per share. In conjunction
with the issuance of the Debentures, Micro Technologies subordinated its lien on
the Company's assets to the Debenture holders.
On June 26, 1998, Micro Technologies converted its remaining balance on the
credit facility of $317,358 into 1,220,608 shares of common stock and terminated
the credit facility.
To provide for additional working capital, on or about August 28, 1998, the
Company issued additional Debentures in the aggregate principal amount of
$500,000, with the right to issue up to $1 million more Debentures in September
and/or October 1998 under the same terms. 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 (i) 125% of the five-day
average share price at the time of issuance and (ii) 80% for conversions prior
to 120 days after issuance, 77.5% for conversions 120-150 days after issuance,
<PAGE>8
and 75% thereafter. The Debentures have a term of five years, expiring August
28, 2003, and are secured by all of the assets of the Company. As part of the
issuance of the Debentures, the Company issued to the Debenture holders five
year warrants to purchase up to 75,000 shares of Common Stock at $.50 per share.
The Company was not in compliance with certain covenants under the terms of the
December 1997 and June 1998 Debenture and Warrant transaction documents.
Subsequent to March 31, 1998, the Company received a waiver with regard to those
items.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
With the exception of historical facts stated herein, the matters discussed in
this report are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to, statements regarding anticipated levels of future
revenues and earnings from operations of the Company. Factors that could cause
actual results to differ materially include, in addition to other factors
identified in this report, lack of revenues, substantial losses, need for
additional capital and limited operating history, and other risks factors
detailed in the Company's Securities and Exchange Commission ("SEC") filings
including the risk factors set forth in the Company's Registration Statement on
Form SB-2, SEC File No. 333-45875 and "Certain Consideration" section in the
Company's Form 10-KSB for the year ended December 31, 1997. Readers of this
report are cautioned not to put undue reliance on "forward looking" statements
which are, by their nature, uncertain as reliable indicators of future
performance. The Company disclaims any intent or obligation to publicly update
these "forward looking" statements, whether as a result of new information,
future events, or otherwise.
As discussed in "Item 5. Other Information," in June 1998, the Company
reevaluated its business and decided to focus the Company in the development of
video compression technology in the areas of digital television, communications,
and digital video disks. As a result of this emphasis, the Company has decided
to discontinue its ASIC design project, cancel a number of projects and reduce
personnel. See "Liquidity and Capital Resources - Management Plans." Therefore,
the results for the three months ended March 31, 1998, will not be indicative of
future operations.
Three Months Ended March 31, 1998, Compared to March 31, 1997.
Revenues
Revenues decreased to approximately $45,000 for the first quarter ended March
31, 1998, from approximately $75,000 for the first quarter ended March 31, 1997.
In the first quarter of 1997 three developer kits were sold to customers who
were considering purchase of the Company's single chip encoder product. There
were no developer kit sales in the same period of 1998, but sales of
pre-production system and board products partially offset this decline.
<PAGE>9
Cost of goods sold
Cost of goods sold was approximately $22,000 or 49% of revenue for the first
quarter ended March 31, 1998, compared to approximately $21,000 or 28% of
revenue for the first quarter ended March 31, 1997. This reflects the difference
in the cost structure of the developer kits sold in 1997 relative to the
pre-production products sold in 1998. Neither percentage is necessarily
representative of the cost of sales percentage that might be experienced at such
time, if any, that finished products begin to be shipped.
Research and development
Research and development was approximately $1,210,000 for the first quarter in
1997 as opposed to approximately $1,423,000 for the first quarter of 1998.
Expense in the first quarter of 1997 included $500,000 for the purchase of
certain technology, an expense that was not repeated in the same period in 1998,
but this was more than offset by expenditures in many areas but principally for
supplies and materials, consultants, and payroll that were higher in the first
quarter of 1998 than in 1997.
Selling, general and administrative
Selling, general and administrative expenses were approximately $2,015,000 for
the quarter ended March 31, 1998, compared to approximately $841,000 for the
quarter ended March 31, 1997. In the first quarter of 1998, the Company
experienced increased expenses required by public companies for SEC and public
reporting, legal expenses related to the Company's ongoing litigation, and costs
due to additional administrative personnel relative to the first quarter of
1997. In the first quarter of 1998, the Company' was preparing for the release
of new products, but was not doing so in the same period in 1997. This caused an
increase in marketing and sales expenses in the quarter ended March 31, 1998
relative to the same quarter in 1997.
Interest Income
Interest income was approximately $10,000 in the first quarter of 1998 as
compared to approximately $1,000 for the same quarter in 1997. Both amounts
reflect interest earned on short term investment of surplus cash. The Company
had more surplus cash in the first quarter of 1998 and earned correspondingly
more interest income.
Interest expense
Interest expense in the three months ended March 31, 1998 was approximately
$987,000 as compared to approximately $4,000 for the same period in 1997. At
December 31, 1997, and during the three months ended March 31, 1998, the Company
had a note payable and convertible debentures outstanding with a balance in
total in excess of $8,000,000. There were no corresponding liabilities at
December 31, 1996, or in the three months ended March 31, 1997. The stated
interest on these two items for the three months ended March 31, 1998 was
approximately $173,000. Amortization of the original discount of the convertible
debentures generated an additional interest expense in the first quarter of 1998
of approximately $777,000. These expenses were not present in the three months
ended March 31, 1997.
<PAGE>10
Loss from Continuing Operations Before Income Tax Expense and Discontinued
Operations
Loss from continuing operations before income tax expense and discontinued
operations increased from approximately $2,002,000 in the three months ended
March 31, 1997, to approximately $4,391,000 for the same period in 1998. This
increase reflects the substantial increases in expenses from 1997 to 1998.
Income Tax Expense
Income tax expense reflects the minimum state tax provision for the Company.
Liquidity and Capital Resources
Through March 31, 1998, the Company funded its operations primarily through the
sale of stock and placement of short and long term debt. On March 31, 1998, the
Company had a cash balance of approximately $795,000 and a working capital
deficit of approximately $5,623,000. This compares with cash of approximately
$4,148,000 and a working capital deficit of approximately $1,454,000 at December
31, 1997. The decrease in both cash and working capital is primarily due to the
operating losses of the Company, net of non-cash expenses, and to purchases of
fixed assets in the three month period ended March 31, 1998. Cash used by
operating activities from continuing operations for the Company totaled
approximately $2,318,000 and $1,006,000 for the three months ended March 31,
1998 and 1997, respectively. Cash used in investing activities consisted of
expenditures for the purchase of property and equipment. Such expenditures
increased to approximately $824,000 during the three months ended March 31,
1998, from approximately $216,000 during the prior year period. During the three
months ended March 31, 1997, cash provided by financing activities included
proceeds of $665,000 from the sale of common stock, and proceeds from notes
payable borrowings of $565,000
In May 1998, Micro Technologies converted $4,181,422 of its line of credit to
the Company in exchange for 1,742,362 shares of Common Stock.
To provide for working capital, in June 1998, the Company issued 7% Convertible
Debentures in the aggregate principal amount of $2 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 $0.35
per share. The Debentures have a term of five years, expiring June 29, 2003 (the
"Due Date"), and are secured by all of the assets of the Company. As part of the
issuance of the Debentures, the Company issued to the Debenture holders five
year warrants to purchase up to 500,000 shares of Common Stock at $.50 per
share. In conjunction with the issuance of the Debentures, Micro Technologies
subordinated its lien on the Company's assets to the Debenture holders.
On June 26, 1998, Micro Technologies converted its remaining balance on the
credit facility of $317,358 into 1,220,608 shares of common stock and terminated
the credit facility.
The Company continued to experience losses in the quarter ended June 30, 1998,
which forced the Company to expend essentially all its cash on hand at March 31,
1998, to borrow additional amounts from a number of lenders, and to carry an
increased level of accounts payable. In June of 1998, the Company reduced
headcount substantially, closed or curtailed a number of operations and
projects, suspended essentially all new purchases or commitments for capital
assets, and began to identify and sell surplus assets with the goal of reducing
its monthly cash usage rate by more than 50%. Management determined to
concentrate on those projects and
<PAGE>11
products that it anticipated would generate short-term revenue and cash flow,
and minimize future requirements for additional debt or equity placements.
To provide for additional working capital, on or about August 28, 1998, the
Company issued additional Debentures in the aggregate principal amount of
$500,000, with the right to issue up to $1 million more Debentures in September
and/or October 1998 under the same terms. 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 (i) 125% of the five-day
average share price at the time of issuance and (ii) 80% for conversions prior
to 120 days after issuance, 77.5% for conversions 120-150 days after issuance,
and 75% thereafter. The Debentures have a term of five years, expiring August
28, 2003, and are secured by all of the assets of the Company. As part of the
issuance of the Debentures, the Company issued to the Debenture holders five
year warrants to purchase up to 75,000 shares of Common Stock at $.50 per share.
In the event the company is unable to generate revenue, the Company will require
additional funding to finance its operations. There can be no assurance that the
Company will be successful in its efforts to internally generate the cash that
will be required to fund the Company's operations and to pay off the liabilities
incurred in prior periods. Traditionally, the Company has financed its
operations through the issuance of convertible debentures. However, no assurance
can be given that the Company will be able to secure additional financing or, if
it can, that it will be available on terms favorable to the Company.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's, or
its suppliers' and customers' computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The majority of the Company's operations are based on PC application and the
Company believes that its software is year 2000 compliant. The Company has not
yet identified any year 2000 problem but will continue to monitor the issues. No
assurances can be given that the year 2000 problem will not occur with respect
to the Company's computer systems.
Neither the Company nor its subsidiary have initiated formal communications with
significant suppliers and large customers to determine the extent to which those
third parties' failure to remedy their own Year 2000 Issues would materially
effect the Company and its subsidiaries. The Company has not received any
indication from its suppliers and large customers that the Year 2000 Issue may
materially effect their ability to conduct business and the Company has no
current plans to formally undertake such an assessment.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On July 21, 1998 Mr. Thomas E. Burke, the Company's former president, filed a
statement of claim with the American Arbitration Association, San Francisco,
California. Mr. Burke is claiming the Company has
<PAGE>12
breached his employment contract by failing to pay him a lump-sum cash payment
of $1 million, salary, bonuses, expenses and other payments under his employment
contract. The Company believes that Mr. Burke has made certain
misrepresentations and intends to vigorously defend itself in this action. In
the event Mr. Burke is successful in his claims, this will have a material
adverse effect on the Company's business plan and financial condition. See
"Management's Discussion and Analysis or Plan of Operation."
In August 1998, the Staff of the Division of Enforcement of the Securities and
Exchange Commission advised the Company that the Commission had issued a formal
order for private investigation. The investigation involves allegations that,
since January 1, 1995, certain of the Company's present or former officers,
directors, employees, business consultants, investment bankers, and/or certain
other persons or entities associated with the Company, may have employed
devices, schemes, or artifices to defraud, by, among other things, making
undisclosed payments to certain registered representatives relating to sales of
the Company's securities, and by manipulating the Company's stock price. The
Division of Enforcement has issued subpoenas in connection with the
investigation.
Item 2. Changes in Securities and Use of Proceeds. - Not Applicable.
Item 3. Defaults Upon Senior Securities. - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. - Not Applicable.
Item 5. Other Information.
On June 23, 1998, Frank J. Alioto was elected President and appointed to the
Company's board of directors. Mr. Alioto replaces Mr. Thomas E. Burke who
resigned as President and a director of the Company on June 5, 1998. Mr. Burke
resigned from the Company stating that the Company had breached his employment
contract. See "Item 1. Legal Proceedings." In the event that Mr. Burke is
successful in his employment claim against the Company, this will have an a
material adverse effect on the Company's operations. Further, in June 1998, Mr.
Peter Sprague resigned as a director. The board currently consists of six
members. Further, as part of the management restructuring, the Company and Mr.
Koz have mutually agreed to amend his employment contracts to provide for, among
other things, no severance upon termination. Mr. Koz still remains as chief
technology officer of the Company and Chairman of the board. Mr. Anderson has
resigned from his position as Director of Strategic Planning and President of
the Company's Entertainment Division, but still remains as a director of the
Company.
In light of the corporate restructuring and new president, the board of
directors decided to focus the Company on the development of video compression
technology products in the areas of digital television (DTV), communications and
digital video disks (DVD). As a result of this emphasis, the Company has decided
to discontinue and seek a buyer for the ASIC design project and to discontinue
Sierra Vista Entertainment. The Company has recognized a loss of approximately
$1,379,000 as a result of the discontinuance of Sierra Vista Entertainment. See
"Item 2. Management's Discussion and Analysis or Plan of Operation."
To provide for working capital, in June 1998, the Company issued 7% Convertible
Debentures in the aggregate principal amount of $2 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 $0.35
per share. The Debentures have a term of five years, expiring June 29, 2003 (the
"Due Date"), and are secured by all of the assets of the Company. As part of the
issuance of the Debentures, the Company issued to the
<PAGE>13
Debenture holders five year warrants to purchase up to 500,000 shares of Common
Stock at $.50 per share. Further, the Company issued warrants to purchase
400,000 shares at $.35 per share as finder's fee.
The Debentures were issued to an affiliate of JNC Opportunity Fund who also
purchased 7% convertible debentures in the aggregate amount of $5 million in
December 1997 (the "1997 Debentures"). Under the terms of the 1997 Debentures,
JNC Opportunity has the right to convert the 1997 Debentures into shares of
common stock of the Company at a conversion price equal to the lesser of (i)
$3.47 per share or (ii) 80% of the average closing bid price of a share of
common stock for the five trading days prior to conversion. As a result of the
Company's current trading price for a share of Common Stock, if JNC Opportunity
decides to convert the 1997 Debentures into shares of Common Stock, JNC
Opportunity will obtain substantial control of the Company.
To provide for additional working capital, on or about August 28, 1998, the
Company issued additional Debentures to the same affiliate of JNC Opportunity in
the aggregate principal amount of $500,000, with the right to issue up to $1
million more Debentures in September and/or October 1998 under the same terms.
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 125% of the average share price at the time of issuance and 80% for
conversions prior to 120 days after issuance, 77.5% for conversions 120-150 days
after issuance, and 75% thereafter. The Debentures have a term of five years,
expiring August 28, 2003, and are secured by all of the assets of the Company.
As part of the issuance of the Debentures, the Company issued to the Debenture
holders five year warrants to purchase up to 75,000 shares of Common Stock at
$.50 per share.
The Company was not in compliance with certain covenants under the terms of the
December 1997 and June 1998 Debenture and Warrant transaction documents.
Subsequent to March 31, 1998, the Company received a waiver with regard to those
items.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits.
10.22 Convertible Debenture Purchase Agreement dated as of
June 29, 1998 Between InnovaCom, Inc. and JNC Strategic
Fund Ltd.
10.23 Convertible Debenture Purchase Agreement dated as of
August 28, 1998 Between InnovaCom, Inc. and JNC Strategic
Fund Ltd.
10.24 Form of Debenture
10.25 Waiver Agreement dated as of September 18, 1998.
<PAGE>14
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INNOVACOM, INC.
(Registrant)
Date: September 23, 1998 FRANK J. ALIOTO
______________________________________
Frank J. Alioto, President and
Chief Executive Officer
Date: September 23, 1998 STANTON CREASEY
______________________________________
Stanton Creasey, Chief Financial Officer
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of June 29, 1998
(this "Agreement"), between InnovaCom, Inc., a Nevada corporation (the
"Company"), and JNC Strategic 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 $2,000,000 of the
Company's 7% Convertible Debentures, due June 29, 2003 (the "Debentures"), which
are convertible into shares of the Company's common stock, par value $.001 per
share (the "Common Stock");
WHEREAS, on June 15, 1998, the Purchaser made a loan to the Company in
the amount of $500,000 (the "Loan");
WHEREAS, the Loan is evidenced by that certain promissory Note (the
"Note") dated June 15, 1998, executed by the Company and payable to the order of
the purchaser in the original principal amount of $500,000; and
WHEREAS, in accordance with the terms of the Note, the Purchaser desires
to convert the Note into Debentures which are convertible into shares of 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
1.1 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
$2,000,000, which purchase price shall include the conversion of the Note into
Debentures. 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."
<PAGE>
(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 in the form of Exhibit E annexed hereto (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 $2,000,000, (2) a Common Stock Purchase Warrant in the form of Exhibit
D attached hereto (the "Warrant"), registered in the name of the Purchaser, (3)
the Security Agreement, dated as of the date hereof, between the Company and the
Purchaser in the form of Exhibit G annexed hereto (the "Security Agreement"),
and (4) the legal opinion of Bartel Eng Linn & Schroder, substantially in the
form of Exhibit C ("Legal Opinion"); (B) the Purchaser shall deliver (1)
$1,500,000 and (2) the original Note marked canceled; 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.
1.2 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
2.1 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
<PAGE>
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, the Security Agreement 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, Security Agreement 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
<PAGE>
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
<PAGE>
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
<PAGE>
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. Other than the Form 10-QSB for the quarter
ended March 31, 1998, the Company has filed all reports required to be filed by
it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
since December 12, 1997 (the foregoing materials being collectively referred to
herein as the "SEC Documents" and, together with the Schedules to this Agreement
furnished by or on behalf of the Company, 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, 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. All material agreements to which the Company is
a party or by which the property or assets of the Company is subject have been
filed as exhibits to the SEC Documents as required; the Company is not in breach
of any such agreement where such breach may have or result in a Material Adverse
Effect. The financial statements of the Company included in the SEC Documents
comply in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission with respect thereto as in
effect at the time of filing. Such financial statements have been prepared in
accordance with generally accepted accounting principles as in effect at the
time of filing applied on a consistent basis during the periods involved, except
as may be otherwise indicated 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 the date of the financial statements
included in the Company's Registration Statement on Form SB-2 (SEC File No.
333-45875) (the "Registration Statement"), there has been no event, occurrence
or development that has had a Material Adverse Effect which has not been
specifically disclosed in writing to the Purchaser by the Company. The Company
last filed audited financial statements with the Commission in the Registration
Statement, 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 warrants to be issued to Cardinal
Capital Management, 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
<PAGE>
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.
<PAGE>
(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
<PAGE>
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
<PAGE>
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 JUNE 29, 1998, 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 Acknowledgment 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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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)
<PAGE>
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.
-15-
<PAGE>
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 3.17(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 Security Documents. Simultaneously with the execution of this
Agreement, the Company and the Purchaser shall enter into the Security Agreement
pursuant to which the Company will pledge Collateral (as defined in the Security
Agreement) as security for the Obligations (as defined in the Security
Agreement).
ARTICLE IV
MISCELLANEOUS
4.1 Fees and Expenses. The Company shall pay the Purchaser at the
Closing $7,500.00 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
-16-
<PAGE>
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, the Security Agreement, the
Registration Rights Agreement 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.
3400 Garrett Drive
Santa Clara, CA 95054
Facsimile No.: (408) 727-8778
Attn: Stanton Creasey
With copies to: Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, CA 95814
Facsimile No.: (916) 442-3442
Attn: Scott Bartel
If to Purchaser: JNC Strategic Fund Ltd.
c/o Olympia Capital (Cayman) 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
<PAGE>
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 enforce ment 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.
-18-
<PAGE>
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]
<PAGE>
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 STRATEGIC FUND LTD.
By:___________________________
Name:
Title:
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of August 28, 1998
(this "Agreement"), between InnovaCom, Inc., a Nevada corporation (the
"Company"), and JNC Strategic 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 up to $1,500,000
of the Company's 7% Convertible Debentures, due August 28, 2003 (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 and adequacy of which are
hereby acknowledged, the Company and the Purchaser agree as follows:
ARTICLE I
PURCHASE AND SALE OF DEBENTURES; CLOSINGS
1.1 The Closings.
(a) Initial Closing. (i) Upon the execution of this Agreement or
at such later time or date as the parties shall agree, the Company shall issue
and sell to the Purchaser and the Purchaser shall purchase $500,000 principal
amount of Debentures (the "Initial Debentures") for an aggregate purchase price
of $500,000. The closing of the purchase and sale of the Initial Debentures (the
"Initial Closing") shall take place at the offices of Robinson Silverman Pearce
Aronsohn & Berman LLP ("Robinson Silverman"), 1290 Avenue of the Americas, New
York, New York 10104. The date of the Initial Closing is hereinafter referred to
as the "Initial Closing Date."
(ii) At the Initial Closing the parties shall deliver or
shall cause to be delivered the following: (A) the Company shall deliver (1) the
Initial Debentures, registered in the name of the Purchaser, (2) a Common Stock
purchase warrant in the form of Exhibit C (the "Purchaser Warrant"), registered
in the name of the Purchaser, entitling the holder thereof to acquire from time
to time on the terms set forth therein, up to 75,000 shares of Common Stock for
an exercise price (subject to adjustment as set forth therein) of $.50 per
share, (3) against exchange of the Opportunity Warrants (as defined below), a
Common Stock purchase warrant in the form of Exhibit C, registered in the name
of JNC Opportunity Fund Ltd. ("Opportunity") (such warrant, together with the
Purchaser Warrant, the "Warrants"), entitling the holder thereof to acquire from
time to time on the terms set forth therein, up to 500,000 shares of Common
Stock for an exercise price (subject to adjustment as set forth therein) of $.50
per share, (4) an executed Amendment (as defined in Section 3.15), and (5) all
other executed instruments,
Convertible Debenture Purchase Agreement
<PAGE>
agreements and certificates as are required to be delivered by the Company at
the Initial Closing, including without limitation, an executed Registration
Rights Agreement, dated as of the Initial Closing Date, between the Purchaser
and the Company in the form of Exhibit B (the "Registration Rights Agreement"),
and the Irrevocable Transfer Agent Instructions, in the form of Exhibit D,
delivered to and acknowledged by the Company's transfer agent (the "Transfer
Agent Instructions"); (B) the Purchaser shall deliver (1) $500,000 by wire
transfer of immediately available funds to an account designated in writing by
the Company for such purpose prior to the Initial Closing, (2) all other
executed instruments, agreements and certificates as are required to be
delivered by the Purchaser at the Initial Closing, including without limitation,
an executed Registration Rights Agreement and executed Amendment.
(b) Subsequent Closings. (i) Subject to the terms and conditions
set forth in this Agreement, the Company shall have the right, exercisable on
two occasions upon, in each instance, ten (10) days written notice to the
Purchaser (each, a "Subsequent Closing Notice"), to require the Purchaser to
purchase Debentures in such aggregate principal amount up to $500,000 as the
Company may designate in such Subsequent Closing Notice. The Company may deliver
the first Subsequent Closing Notice no earlier than the expiration of the tenth
(10th) day after the Initial Closing Date and no later than September 15, 1998.
The Company may deliver a second Subsequent Closing Notice no earlier than the
later of (x) the tenth (10th) day following the first Subsequent Closing (as
defined below) and (y) September 25, 1998, and no later than October 5, 1998.
Subject to the terms and conditions set forth herein, the closing of the
purchase of Debentures following a Subsequent Closing Notice (each, a
"Subsequent Closing") shall occur at the offices of Robinson Silverman no later
than the tenth (10th) day following receipt by the Purchaser of a Subsequent
Closing Notice. The date of each Subsequent Closing is referred to herein as a
"Subsequent Closing Date." Notwithstanding the foregoing, the time periods set
forth in this Section 1.1(b) may be modified upon the mutual consent of the
parties.
(ii) At each Subsequent Closing the parties shall deliver
or shall cause to
be delivered the following: (A) the Company shall deliver (1) Debentures,
registered in the name of the Purchaser, with an aggregate principal amount of
up to the lesser of (x) the principal amount indicated in the Subsequent Closing
Notice for such Subsequent Closing and (y) $500,000, and (2) all other executed
instruments, agreements and certificates as are required to be delivered by the
Company at such Subsequent Closing, including without limitation, executed and
acknowledged Transfer Agent Instructions; and (B) the Purchaser shall deliver
(1) the amount, in U.S. dollars, equal to the amount contemplated in clause
(A)(1) above by wire transfer of immediate funds to an account designated by the
Company for such purpose prior to such Subsequent Closing and (2) all executed
instruments, agreements and certificates as are required to be delivered by the
Purchaser at such Subsequent Closing.
1.2 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
Convertible Debenture Purchase Agreement
<PAGE>
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. "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. "Opportunity Warrants" means the Common Stock purchase
warrants, Warrant Nos. 001 and 002, each registered in the name of Opportunity,
entitling the holder thereof to acquire up to an aggregate of 500,000 shares of
Common Stock.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 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 Debentures, the Warrants, the Security Agreement or the
Registration Rights Agreement (collectively, 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,
Convertible Debenture Purchase Agreement
<PAGE>
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"). Subject to the compliance by the Company to amend its articles of
incorporation to increase the number of authorized and available shares of
Common Stock pursuant to Section 3.5(a) hereof, 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
Convertible Debenture Purchase Agreement
<PAGE>
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." Subject to the compliance
by the Company to amend its articles of incorporation to increase the number of
authorized and available shares of Common Stock pursuant to Section 3.5(a)
hereof, 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) subject to the
compliance by the Company to amend its articles of incorporation to increase the
number of authorized and available shares of Common Stock pursuant to Section
3.5(a) hereof, 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 Required Approvals, 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 the Registration Rights Agreement, (iv) the filing of a Form D with the
Commission, (v) the filings necessary to satisfy the Company's obligations under
Section 3.5(a), and (vi) 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
Convertible Debenture Purchase Agreement
<PAGE>
(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 specified in Schedule
2.1(g) or 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. Other than the Form 10-QSB for the quarter
ended March 31, 1998, since December 12, 1997 the Company has filed all reports
required to be filed by it under the Exchange Act, including pursuant to Section
13(a) or 15(d) thereof (the foregoing materials being collectively referred to
herein as the "SEC Documents" and, together with the Schedules to this Agreement
furnished by or on behalf of the Company, 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, 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. All material agreements to which the Company is
a party or by which the property or assets of the Company is subject have been
filed as exhibits to the SEC Documents as required;
Convertible Debenture Purchase Agreement
<PAGE>
the Company is not in breach of any such agreement where such breach may have or
result in a Material Adverse Effect. The financial statements of the Company
included in the SEC Documents comply in all material respects with applicable
accounting requirements and the published rules and regulations of the
Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with generally accepted
accounting principles as in effect at the time of filing applied on a consistent
basis during the periods involved, except as may be otherwise indicated 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 the date of the financial statements included in the
Company's Registration Statement on Form SB-2 (SEC File No. 333-45875) (the
"Registration Statement"), there has been no event, occurrence or development
that has had a Material Adverse Effect which has not been specifically disclosed
in writing to the Purchaser by the Company. The Company last filed audited
financial statements with the Commission in the Registration Statement, 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 warrants to be issued to Cardinal
Capital Management, 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
Convertible Debenture Purchase Agreement
<PAGE>
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 notified the Purchaser on August 25, 1998 that it has been notified by
the Commission of the existence of a private investigation by the Commission
into certain activities by the Company, the Company's management and certain of
the Company's registered representatives (such investigation is the subject of
the second item of Schedule 2.1 (g)).
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 and
the Registration Rights 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
Convertible Debenture Purchase Agreement
<PAGE>
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 pre sent 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.
Convertible Debenture Purchase Agreement
<PAGE>
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 to a fund under common investment management with the Purchaser, or
any transfers among any such Affiliates or funds 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 or other 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.
Underlying Shares shall not contain the legend set forth above (or any
other legend) if the conversion of Debentures, exercise of the 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
Convertible Debenture Purchase Agreement
<PAGE>
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 Acknowledgment 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 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.
Convertible Debenture Purchase Agreement
<PAGE>
3.5 Increase in Authorized Shares. (a) The Company shall, no later than
ninety (90) days following the Initial Closing Date, amend its articles of
incorporation in order to increase the number of authorized and available shares
of Common Stock to a minimum of 75,000,000 shares of Common Stock.
(b) 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.
3.6 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. The Purchaser
understands that the Company does not currently meet the requirements for
initial listing of the Common Stock on either the Nasdaq National Market or the
Nasdaq SmallCap Market. If the Common Stock hereafter is listed for trading on
the Nasdaq National Market, Nasdaq SmallCap Market, American Stock Exchange or
New York Stock Exchange (each, a "Subsequent Market"), 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.
Convertible Debenture Purchase Agreement
<PAGE>
3.7 Conversion Procedures. The Transfer Agent Instructions, Conversion
Notice (as defined in Exhibit A) and Notice of Exercise under the Warrants set
forth the totality of the procedures with respect to the conversion of the
Debentures and exercise of the Warrants, 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 and Opportunity, as the case may be, to convert Debentures and
exercise the Warrants as contemplated therein.
3.8 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 Common Stock is not Actively Traded (as defined herein) (or, if
after the Initial Closing Date, the Common Stock is listed for trading on any
Subsequent Market, if the Common Stock is delisted or suspended from trading on
such Subsequent Market, other than as a result of the suspension of trading in
securities on such Subsequent Market generally, or temporary suspensions pending
the release of material information), 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. As used herein, "Actively Traded" shall mean that (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 $80,000 and (b) there are no fewer than ten (10) market makers actively
making a market in the Common Stock.
3.9 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 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.
Convertible Debenture Purchase Agreement
<PAGE>
3.10 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.
3.11 Conversion and Exercise 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.
3.12 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 later to occur of the
second Subsequent Closing Date or the tenth (10th) day after the date that the
Company is precluded hereunder from delivering a Subsequent Closing Notice,
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 2.1(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
Convertible Debenture Purchase Agreement
<PAGE>
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.
3.13 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.
Convertible Debenture Purchase Agreement
<PAGE>
3.14 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 3.14(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.
3.15 Security Documents. Simultaneously with the execution of this
Agreement, the Company and the Purchaser shall amend (the "Amendment") the
Security Agreement, dated as of June 29, 1998, by and between the Company and
the Purchaser to provide that the obligations of the Company pursuant to the
Transaction Documents will be deemed to be part of the Obligations (as defined
in such Security Agreement) of the Company thereunder. Promptly after the
Initial Closing Date, the Company shall file all UCC Financing Statements and
other evidences of the Obligations (as so amended) as the Purchaser shall
reasonably request.
ARTICLE IV
CONDITIONS
4.1 Conditions Precedent to the Obligation of the Purchaser to
Purchase Debentures in a Subsequent Closing. The obligation of the Purchaser to
acquire and pay for Debentures pursuant to a Subsequent Closing Notice is
subject to the satisfaction or waiver by the Purchaser, at or before the
applicable Subsequent Closing Date of each of the following conditions:
(i) Initial Closing. The Initial Closing shall have
occurred;
(ii) Accuracy of the Company's Representations and
Warranties. The representations and warranties of the Company contained herein
and in the Registration Rights Agreement shall be true and correct in all
material respects as of the date when made and as of the applicable Subsequent
Closing Date as though made on and as of such date;
(iii) Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required
Convertible Debenture Purchase Agreement
<PAGE>
by this Agreement and the Registration Rights Agreement to be performed,
satisfied or complied with by the Company;
(iv) No Injunction. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court of governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement relating to
the issuance or conversion of any of the Debentures or exercise of the Warrants;
(v) Litigation. No material litigation shall have been
instituted or threatened against the Company between the Initial Closing Date
and the applicable Subsequent Closing Date;
(vi) Active Trading. The Common Stock shall be
Actively Trading;
(vii) Reservation of Shares of Common Stock. The
Company shall have duly reserved the number of Underlying Shares required by
this Agreement to be reserved for issuance upon conversion of Debentures and
payment of interest thereon and exercise of the Warrants;
(viii) Delivery of Debentures. The Company shall have
delivered to the Purchaser or its designee the Debentures, registered in the
name of the Purchaser or its designee, each in form satisfactory to the
Purchaser;
(ix) Purchase Orders, Sales or Contracts. The Company
shall have delivered to the Purchaser evidence satisfactory to the Purchaser of
one or more sales, purchase orders or contracts, each subsequent to the Initial
Closing Date, by or between the Company and one or more third parties
unaffiliated with the Company, of goods or for services or licensing fees, as
the case may be, in an aggregate amount equal to or in excess of $100,000; and
(x) Officer's Certificate. The Company shall deliver
to the Purchaser an Officer's Certificate dated the applicable Subsequent
Closing Date and signed by an executive officer of the Company confirming the
accuracy of the Company's representations, warranties and covenants as of the
applicable Subsequent Closing Date and confirming the compliance by the Company
with the conditions precedent set forth in this Section 4.1 as of the applicable
Subsequent Closing Date.
ARTICLE V
MISCELLANEOUS
5.1 Fees and Expenses. The Company shall pay the Purchaser (a) at
the Initial Closing, $7,500 for its legal fees and disbursements in connection
with the preparation and
Convertible Debenture Purchase Agreement
<PAGE>
negotiation of the Transaction Documents and for its due diligence expenses and
disbursements in connection therewith and (b) at each Subsequent Closing, $2,000
for its legal and due diligence expenses in connection with such Subsequent
Closing. 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.
5.2 Entire Agreement; Amendments. This Agreement, together with
the Exhibits and Schedules hereto, the Debentures, the Security Agreement, the
Registration Rights Agreement 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.
5.3 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.
3400 Garrett Drive
Santa Clara, CA 95054
Facsimile No.: (408) 727-8778
Attn: Stanton Creasey
With copies to: Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, CA 95814
Facsimile No.: (916) 442-3442
Attn: Scott Bartel
If to Purchaser: JNC Strategic Fund Ltd.
c/o Olympia Capital (Cayman) Ltd.
Convertible Debenture Purchase Agreement
<PAGE>
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Director
With copies to: Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Managing Member
-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.
5.4 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.
5.5 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.
5.6 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 not 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.
Convertible Debenture Purchase Agreement
<PAGE>
5.7 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 Opportunity, who is entitled to rely on
the truth and accuracy of the Company's representations and warranties set forth
herein and to enforce the agreements of the Company set forth in Article III,
and to permitted assignees under Section 5.6, is not for the benefit of, nor may
any provision hereof be enforced by, any other person.
5.8 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 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.
5.9 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.
5.10 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.
5.11 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]
Convertible Debenture Purchase Agreement
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Convertible 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 STRATEGIC FUND LTD.
By:___________________________
Name:
Title:
Convertible Debenture Purchase Agreement
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
JUNE 29, 1998, 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. B-1 U.S. $500,000
INNOVACOM, INC.
7% SECURED CONVERTIBLE DEBENTURE DUE JUNE 29, 2003
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 June 29, 2003 (the "Debentures"), in an aggregate principal amount of
$2,000,000.
FOR VALUE RECEIVED, the Company promises to pay to JNC Strategic Fund
Ltd., or registered assigns (the "Holder"), the principal sum of Five Hundred
Thousand Dollars ($500,000), on or prior to June 29, 2003 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 September 30, 1998, 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
<PAGE>
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. All amounts due hereunder
other than such interest shall be paid in cash. 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,
<PAGE>
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, the Security
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;
<PAGE>
(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 150th 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
<PAGE>
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 at any time and from time
to time after the Original Issue Date and prior to the close of business on the
Maturity 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
<PAGE>
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 $0.35; provided, that, if (a) an Underlying
Securities Registration Statement is not filed on or prior to the 30th 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 90th 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
(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
3400 Garrett Drive, Santa Clara, California 95054 (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
<PAGE>
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:
"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.
<PAGE>
"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.
<PAGE>
"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
<PAGE>
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).
Section 14. The payment obligations under this Debenture and the
obligations of the Company to the Holder arising upon the conversion of all or
any of the Debentures in accordance with the provisions hereof are secured
pursuant to that certain security agreement dated as of the date hereof between
the Company and the original Holder hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
<PAGE>
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:
<PAGE>
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. B-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
Waiver Agreement
September 17, 1998
VIA FACSIMILE TRANSMISSION (original via mail)
JNC Strategic Fund Ltd.
JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Re: InnovaCom, Inc. 7% Convertible Debentures
Dear Ladies and Gentlemen:
Reference is made to the Convertible Debenture Purchase Agreement dated
as of December 22, 1997 (the "December 22nd Agreement") and related Convertible
Debentures (the "December 22nd Debentures") and Warrants (the "December 22nd
Warrants," and collectively with the December 22nd Agreement and December 22nd
Debentures, the "December 22nd Transaction Documents") made by and between
InnovaCom, Inc., a Nevada corporation (the "Company"), and JNC Opportunity Fund
Ltd. ("JNC Opportunity"), and the Convertible Debenture Purchase Agreement dated
as of June 29, 1998 (the "June 29th Agreement", and together with the December
22nd Agreement, the "Agreements") and related Convertible Debentures (the "June
29th Debentures", and together with the December 22nd Debentures, the
"Debentures"), the Warrants (the "June 29th Warrants, and together with the
December 22nd Warrants, the "Warrants"), and Registration Rights Agreement (the
"June 29th Registration Rights Agreement", and together with the June 29th
Agreement, the June 29th Debentures, and the June 29th Warrants, the "June 29th
Transaction Documents; together, the December 22nd Transaction Documents and
June 29th Transaction Documents will be referred to herein as the "Transaction
Documents"), made by and between the Company and JNC Strategic Fund Ltd. ("JNC
Strategic", and together with JNC Opportunity, "JNC"). The capitalized terms
used and not otherwise defined herein shall have the same meanings as ascribed
to them in the respective above-referenced Transaction Documents.
<PAGE>
JNC Strategic Fund Ltd.
JNC Opportunity Fund Ltd.
September 17, 1998
Page 2
The Company has, in the past, breached and/or defaulted under the
provisions of the Transaction Documents described herein, which past breaches
and/or defaults, subject to the terms hereof, JNC has now agreed to waive in
accordance with the terms hereof. Now, therefore, for good and valuable
consideration, JNC and the Company hereby agree as follows:
1. Reservation of Shares.
(a) Under Section 2.1(d) of the December 22nd Agreement, the Company
represented that it would maintain a reserve of duly authorized shares of Common
Stock in the sum of at least two times the number of shares of Common Stock as
would be issuable upon conversion in full of the December 22nd Debentures,
assuming such conversion were effected on the Original Issue Date or the Filing
Date, whichever yields a lower Conversion Price, (ii) the number of shares of
Common Stock as are issuable as payment of interest on the December 22nd
Debentures, and (iii) the number of shares of Common Stock as are issuable upon
exercise in full of the December 22nd Warrants. Under Section 4(d) of the
December 22nd Debentures, the Company covenanted to reserve and keep available
not less than the number of shares of Common Stock as would be issuable upon the
conversion of the outstanding principal amount of the December 22nd Debentures
and payment of interest thereunder. Under Section 7 of the December 22nd
Warrants, the Company covenanted to reserve and keep available the number of
Warrant Shares which are then issuable and deliverable upon the exercise of the
December 22nd Warrants. The Company has reserved 5,500,000 shares of Common
Stock in connection with the December 22nd Transaction Documents, which number
of shares, because of the decline in the share price since the Original Issue
Date, is now inadequate if the full outstanding principal amount of December
22nd Debentures were converted to shares of Common Stock and all December 22nd
Warrants exercised for Warrant Shares. Subject to Section 1(b) hereof, for a
period of one year and one day from the date stated above, JNC Opportunity
hereby waives and relinquishes its rights and remedies under the December 22nd
Transaction Documents relating to the Company's past breaches or defaults under
the December 22nd Transaction Documents with respect to the Company's failure to
reserve the requisite number of shares of Common Stock. Furthermore, subject to
the Company's compliance with Section 1(b) of this Agreement, JNC Opportunity
shall forbear from exercising any of its rights or remedies under the December
22nd Transaction Documents relating to continuing breaches and defaults of the
Company after the date
<PAGE>
JNC Strategic Fund Ltd.
JNC Opportunity Fund Ltd.
September 17, 1998
Page 3
hereof and prior to the earlier of November 30, 1998 and the date such defaults
are cured in full (the "Section 1(a) Cure Date") with respect to the Company's
failure to reserve the requisite number of shares of Common Stock; provided,
that nothing contained herein shall be construed to be a waiver of any rights or
remedies under the December 22nd Transaction Documents in respect of any further
defaults under the Sections specified in this Section 1(a) that occur after the
Section 1(a) Cure Date.
(b) The Company shall prepare and mail to the shareholders of the
Company proxy materials requesting authorization to amend the Company's Articles
of Incorporation to increase the number of shares of Common Stock which the
Company is authorized to issue in order to comply with its obligations
respecting conversion, exercise, and reservation of shares as set forth in the
December 22nd Transaction Documents. In connection therewith, the Board of
Directors shall (a) adopt proper resolutions authorizing an increase in the
number of authorized and available shares of Common Stock to a minimum of
75,000,000 shares of Common Stock , (b) make an appropriate recommendation to
stockholders 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) and (c) by November 30, 1998, file an appropriate amendment
to the Company's Articles of Incorporation in order to increase the number of
authorized and available shares of Common Stock to a minimum of 75,000,000
shares of Common Stock, and simultaneously amend its share reservation order
with its transfer agent so that the Company will be in compliance with the
Sections of the December 22nd Agreement, the December 22nd Debentures, and the
Debenture 22nd Warrants specified in Section 1(a) above. In the event the
Company fails to obtain the required stockholder approval or otherwise fails to
timely amend its Articles of Incorporation or amend its share reservation order
as provided herein, then notwithstanding anything to the contrary set forth in
this Waiver Agreement, the waiver contemplated in Section 1(a) of this Waiver
Agreement shall be null and avoid ab initio and JNC Opportunity shall be
entitled to exercise all of its rights and remedies under the December 22nd
Transaction Documents arising as a result of the Company's defaults specified in
Section 1(a) above.
2. SEC Documents.
(a) Under Section 3.3 of the Agreements, the Company covenanted to
timely file (or obtain extensions in respect thereof and file within the
applicable grace period) all reports required
<PAGE>
JNC Strategic Fund Ltd.
JNC Opportunity Fund Ltd.
September 17, 1998
Page 4
to be filed by the Company after the date hereof pursuant to Section 13(a) of
the Exchange Act. The Company is in default of these provisions because it has
been late in filing its Form 10-QSB for the quarters ending March 31, 1998, and
June 30, 1998. Subject to the Company's compliance with its obligations under
Section 2(b), for a period of one year and one day from the date stated above,
JNC hereby waives and voluntarily relinquishes its rights and remedies under the
Transaction Documents relating to the Company's failure to timely file its Form
10-QSB for the quarters ending March 31, 1998, and June 30, 1998.
(b) As soon as reasonably practicable, and in any event prior to
September 25, 1998 with respect to the Form 10-QSB for the quarter ending March
31, 1998, and prior to October 30, 1998 with respect to the Form 10-QSB for the
quarter ending June 30, 1998, the Company shall file with the Commission its
Quarterly Reports Form 10-QSB for the quarters ending March 31, 1998 and June
30, 1998.
3. Trading Volume.
(a) Under Section 3.11 of the Agreements, if at any time while JNC owns
any Securities, the average value 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, then, at JNC's option, the Company would be required to
repay the entire principal amount of the then outstanding Debentures (and all
accrued and unpaid interest thereon) and redeem all then outstanding Underlying
Shares then held by JNC, in the therein designated amount. In addition, under
the terms of the Debentures, the Company may not issue shares of Common Stock in
payment of interest on the principal amount of the Debentures if, among other
things, the shares are not "actively traded" (as defined in the Debentures).
Currently, the average value of Common Stock traded on the OTC Bulletin Board in
each week, measured over a four week period, is substantially less than
$750,000. For a period of one year and one day from the date stated above, JNC
hereby waives its rights and remedies under Section 3.11 of the Agreements and
waives enforcement of the relevant provisions of the August 28th Debentures
relating to the Company's past failure to maintain "actively traded" Common
Stock as provided in the Transaction Documents.
<PAGE>
JNC Strategic Fund Ltd.
JNC Opportunity Fund Ltd.
September 17, 1998
Page 5
(b) Under Section 3.8 of the Convertible Debenture Purchase Agreement
by and among the Company and JNC Strategic dated as of August 28, 1998 (the
"August 28th Agreement"), if at any time while JNC Strategic owns any Securities
(as defined therein), the average value 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 $80,000, then, at JNC's option, the Company would be
required to repay the entire principal amount of then outstanding Convertible
Debentures dated as of August 28, 1998 (the "August 28th Debentures") (and all
accrued and unpaid interest thereon) and redeem all then outstanding Underlying
Shares then held by JNC, in the therein designated amount. In addition, under
the terms of the August 28th Debentures, the Company may not issue shares of
Common Stock in payment of interest on the principal amount of the August 28th
Debentures if, among other things, the shares are not "actively traded", meaning
having a trading volume as stated in Section 3.8 of the August 28th Agreement.
The average value of Common Stock traded on the OTC Bulletin Board in each week,
measured over a four week period, is currently less than $80,000. For a period
of one year and one day from the date stated above, JNC hereby waives its rights
and remedies under Section 3.8 of the August 28th Agreement and waives
enforcement of the relevant provisions of the August 28th Debentures relating to
the Company's past failure to maintain "actively traded" Common Stock as stated
above.
4. Payment of Interest. Under the terms of the Debentures, the Company
is required to pay seven percent (7%) interest on a quarterly basis on the
outstanding principal amount of the Debentures. Since the issuance of the
Debentures, the Company has not paid any interest to JNC, either in shares of
Common Stock or in cash, with respect to any of the Debentures. Without waiving
its right to receive unpaid accrued interest on the Debentures, for a period of
one year and one day from the date stated above, JNC waives its rights and
remedies under Section 3(a)(i) of the Debentures with respect to past defaults
by the Company of its obligation to pay interest on the Debentures; provided
that any late interest charges applicable to such failure under the Debentures
shall continue to accrue and be payable as to such late interest payments.
5. Registration Statement.
(a) Under the June 29th Registration Rights Agreement, the Company was
required to file a Registration Statement within thirty (30) days following the
June 29th Closing Date, and such
<PAGE>
JNC Strategic Fund Ltd.
JNC Opportunity Fund Ltd.
September 17, 1998
Page 6
Registration Statement was to be effective within ninety (90) days following the
Closing Date. Section 4(c) of the Debentures provides for various penalties in
the event the Registration Statement is not filed on or prior to the Filing
Date, or is not declared effective by the Effectiveness Date. For a period of
one year and one day from the date hereof, JNC hereby agrees to waive and
voluntarily relinquish its rights and remedies arising as a result of the past
default by the Company under the June 29th Debentures and the June 29th
Registration Rights Agreement with respect to both the filing and effectiveness
of a Registration Statement. Furthermore, subject to the Company's compliance
with Section 6(b) hereof, JNC shall forbear from exercising any of its rights or
remedies under the June 29th Debentures and June 29th Registration Rights
Agreement relating to breaches or defaults occurring after the date hereof with
respect to the Company's failure to timely file or have declared effective the
Registration Statement.
(b) The Filing Date and the Effectiveness Date under the June 29th
Registration Statement shall be amended to correspond with the Filing Date
(October 27, 1998) and the Effectiveness Date (December 28, 1998) under that
certain Registration Statement dated as of August 28, 1998 between JNC Strategic
and the Company. In the event the Company breaches its obligation under this
Section 6(b), then notwithstanding the agreement of waiver and forbearance given
hereunder, JNC Strategic shall be entitled at that time to exercise all of its
rights and remedies under the June 29th Debentures and June 29th Registration
Rights Agreement arising as a result of the Company's failure to timely file or
have declared effective the Registration Statement.
6. Except for the specific waivers granted herein, JNC shall
not be deemed to have waived any rights or remedies under, or the enforcement of
any provision of, the Transaction Documents. Except as may be specifically
indicated herein, any waivers granted herein shall be limited as set forth
herein. No further waivers are to be implied herein and any waiver given shall
be subject to the limitations set forth in Section 4.4 of the Purchase
Agreements.
[the remainder of this page has been intentionally left blank]
<PAGE>
JNC Strategic Fund Ltd.
JNC Opportunity Fund Ltd.
September 17, 1998
Page 7
6. Counterparts. This Agreement may be executed in one or more
counterparts (by facsimile signature or otherwise) which together shall
constitute one and the same instrument.
EXECUTED as of the date first written above.
Very truly yours,
INNOVACOM, INC.
By:___________________
Frank Alioto, President
AGREED TO AND ACCEPTED as of the date first written above.
JNC STRATEGIC FUND LTD.
By:______________________________________
Name:___________________________________
Title:____________________________________
JNC OPPORTUNITY FUND LTD.
By:______________________________________
Name:___________________________________
Title:____________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED BY THE
10-QSB FOR THE PERIOD ENDED MARCH 31, 1998 FOR INNOVACOM, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 795,392
<SECURITIES> 0
<RECEIVABLES> 70,207
<ALLOWANCES> 34,300
<INVENTORY> 0
<CURRENT-ASSETS> 959,753
<PP&E> 1,733,229
<DEPRECIATION> 284,965
<TOTAL-ASSETS> 3,081,627
<CURRENT-LIABILITIES> 6,582,422
<BONDS> 0
0
0
<COMMON> 20,562
<OTHER-SE> (7,569,658)
<TOTAL-LIABILITY-AND-EQUITY> 3,081,627
<SALES> 45,082
<TOTAL-REVENUES> 45,082
<CGS> 22,263
<TOTAL-COSTS> 3,460,094
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 986,434
<INCOME-PRETAX> (4,391,437)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (4,393,037)
<DISCONTINUED> (1,378,978)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,772,015)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
